Rectification of mistake — Whether power subsidy received by an assessee is revenue receipt or capital receipt has to be decided on the facts of each case after examining the scheme of subsidy and therefore cannot be a subject matter of rectification on t

The appellant, engaged in the business of manufacture of
potassium chlorates, had its factory in the Union Territory of Pondicherry. The
appellant received power subsidy for two years, which it initially offered as
revenue receipt in its return of income. In the petition filed u/s.264 of the
Act, the assessee pleaded that the subsidy amount was a capital receipt, hence
not liable to be taxed, and accordingly, it sought revision of the assessment
orders for the A.Ys. 1993-94 and 1994-95. In the revision petitions, the
appellant had pleaded that the subsidy amount was a capital receipt, and for
that purpose, it relied upon the judgment of the Supreme Court in the case of
CIT v. P. J. Chemicals Ltd. reported in (1994) 210 ITR 830. The revision
petitions filed by the appellant u/s.264 of the Act stood allowed by the
Commissioner of Income-tax by order dated April 30, 1997. Subsequent to the said
order, on September 19, 1997, the Supreme Court in the case of Sahney Steel and
Press Works Ltd. (1997) 228 ITR 253 held that incentive subsidy admissible to
Sahney Steel and Press Works Limited was a revenue receipt, and hence, it was
liable to taxed u/s.28 of the Act. This decision was based on a detailed
examination of the subsidy scheme formulated by the Government of Andhra
Pradesh. It stated that incentives would not be available unless and until
production had commenced. In that matter, the Supreme Court found that
incentives were given by refund of sales tax and by subsidy on power consumed
for production. In short, on the facts and circumstances of that case, the
Supreme Court had come to the conclusion that the incentives were production
incentives in the sense that the assessee was entitled to incentives only after
entering into production. It was also clarified that the scheme was not to make
any payment directly or indirectly for setting up the industries.

Following the said judgment of the Supreme Court in the case
of Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, delivered on September
19, 1997, the Commissioner of Income-tax passed an order of rectification dated
March 30, 1998. The only ground on which the rectification was sought to be made
by the Commissioner of Income-tax was that power tariff subsidy given to the
appellant herein was admissible only after commencement of production.
Consequently, according to the Commissioner of Income-tax, power tariff subsidy
constituted operational subsidies, they were not capital subsidies, and in the
circumstances, applying the ratio of judgment of this Court in the case of
Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, the Commissioner of
Income-tax sought to rectify its earlier order dated April 30, 1997, by invoking
S. 154 of the Act. Aggrieved by the said order, the appellant filed writ
petitions before the Madras High Court, which took the view that, in view of the
subsequent decision of this Court, in the case of Sahney Steel and Press Works
Ltd. (1997) 228 ITR 253, the Department was entitled to invoke S. 154 of the Act
and that the Commissioner was right in treating the receipt of subsidies as a
revenue receipt. This decision of the learned single Judge was affirmed by the
Division Bench of the Madras High Court.

On appeal by special leave, the Supreme Court held that on
the facts of the present case, it was of the view that the present case involved
change of opinion. The Supreme Court observed that the Government grants
different types of subsidies to the entrepreneurs. The subsidy in Sahney Steel
and Press Works Ltd. (1997) 228 ITR 253 (SC) was an incentive subsidy linked to
production. In fact, in Sahney Steel and Press Works Ltd. (1997) 228 ITR 253
(SC) (at page 257), the Court categorically stated that the scheme in hand was
an incentive scheme and it was not a scheme for setting up the industries. In
the said case, the salient features of the scheme were examined and it was
noticed that the scheme formulated by the Government of Andhra Pradesh was
admissible only after the commencement of production. The Supreme Court held
that in income-tax matters, one has to examine the nature of the item in
question, which would depend on the facts of each case. In the present case, it
was concerned with power subsidy, whereas in the case of CIT v. Ponni Sugars
and Chemicals Ltd. reported in (2008) 306 ITR 392, the subsidy given by the
Government was for repaying loans. Therefore, in each case, one has to examine
the nature of subsidy. This exercise cannot be undertaken u/s.154 of the Act.
There is one more reason why S. 154 in the present case was not invokable by the
Department. Originally, the Commissioner of Income-tax, while passing orders
u/s.264 of the Act on April 30, 1997, had taken the view that the subsidy in
question was a capital receipt not taxable under the Act. After the judgment of
the Supreme Court in Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, the
Commissioner of Income-tax took the view that the subsidy in question was a
revenue receipt. Therefore, according to the Supreme Court, the case before it
was a classic illustration of change of opinion.