42 Section 4 – Income – revenue or capital receipt – Where Government gave grant-in-aid to a company wholly-owned by Government, facing acute cash crunch, to keep company floating, even though large part of funds were applied by company for salary and provident funds, grant received was capital receipt

Pr.
CIT vs. State Fisheries Development Corporation Ltd.; [2018] 94 taxmann.com 466
(Cal); Date of order : 14^th May, 2018A. Y.: 2006-07:

The
assessee was a company wholly-owned by the State Government. The assessee was
engaged in business of pisciculture. The assessee received an amount as
grants-in-aid. Out of that, certain sum was received for payment of salary to
its employees, certain sum for payment of Provident Fund dues and certain sum
for the purpose of flood relief. The assessee claimed deduction of said sum
from its income on plea that same constituted capital receipt. The Assessing
Officer found that the fund was applied for items which were revenue in nature.
He recorded that such receipts were consistently treated in the past by the
assessee as revenue receipt. Thus, same could not be allowed for deduction as
capital receipt.

The
Tribunal did not solely rely on the nature of application of the funds received
through grant-in-aid. The Tribunal examined the character of the assessee as a
Government company as well as the character of grantor, being the State
Government itself, the financial status of the assessee and certain other
factors. The Tribunal accepted the assessee’s claim that grant-in-aid towards
provident fund dues constituted capital receipts.

On appeal
by the Revenue, the Calcutta High Court upheld the decision of the Tribunal and
held as under:

“i)  The fundamental principle for distinguishing
capital receipt from revenue receipt in relation to Government grant has been
laid down by the Supreme Court in the case of Sahney Steel & Press Works
Ltd. vs. CIT [1997] 94 Taxman 368/228 ITR 253. That was a case involving
government subsidy in the form of certain time bound incentives and facilities.
These incentives and facilities included refund of sales tax on raw materials,
machineries and finished goods. The Supreme Court found that the incentives and
facilities under a subsidy scheme to enable the assessee to acquire new plant
or machinery for expansion of manufacturing capacity or set up new industrial
undertaking could constitute capital receipt. In that case, however, the scheme
contemplated for refund of sales tax on purchase of machinery and raw
materials, subsidy or power consumption and certain other exemptions on
utilities consumed. The Supreme Court rejected the plea of the assessee for
treating such facilities and incentives as capital receipt on the reasoning
that such subsidy could only be treated as assistance given for the purpose of
carrying on the business of the assessee.

ii)   So far as assessee’s case in this appeal is
concerned, Rs. 3.60 crores was received as grant-in-aid in the relevant
previous year towards salary and provident fund dues. On surface test, receipt
under these heads no doubt has the attributes of revenue receipt. But there are
two factors which distinguish the character of the grant-in-aid which the
assessee wants to be treated as capital receipt. Said sum was not on account of
any general subsidy scheme. Secondly, the sum was given by the State to a
wholly-owned company which was facing acute cash crunch. Financial status of
the company appears from the submission of the assessee’s representative
recorded in the order of the first Appellate Authority and there is no denial
of this fact in any of the materials placed.

iii)  In the case of the assessee, though it is not
a grant from a parent company to a subsidiary company, the grant is from the
State Government, which was in effect, hundred per cent shareholder of the
assessee. Rs. 3.60 crores was meant for payment of staff salaries and provident
fund dues. As already observed, these item heads may bear the label of revenue
receipt on the surface, it is apparent that the actual intention of the State
was to keep the company, facing acute cash crunch, floating and protecting
employment in a public sector organization. There is no separate business
consideration on record between the grantor, that is the State Government and
the recipient thereof being the assessee. The principle of law as laid down in
the case of Siemens Public Communication Network (P.) Ltd. vs. CIT [2017] 77
taxmann.com 22/244 Taxman 188/390 ITR 1 (SC) is that voluntary payments
made by the parent company to its loss making Indian subsidiary can also be
understood to be payments made in order to protect the capital investment of
the assessee-company. Though the grant-in-aid in this case was received from
public funds, the State Government being 100 per cent shareholder, its position
would be similar to that of, or at par with a parent company making voluntary
payments to its loss making undertaking. No other specific business
consideration on the part of the State has been demonstrated in this appeal.
The assistance extended appears to be measures to keep the assessee-company
floating, the assessee being, for all practical purposes an extended arm of the
State. Though large part of the funds were applied for salary and provident
fund dues, the object of extension of assistance, to ensure survival of the
company.

iv)  As regards the funds extended for flood
relief, the same cannot constitute revenue receipt. Flood relief does not
constitute part of business of the assessee.

v)  Accordingly, the question is answered in
favour of the assessee and confirm the finding of the Tribunal.”