Capital or Revenue — If the object of the subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account — if the object of the assistance under subsidy scheme is to enable the assessee to set up a new unit

[CIT v. Ponni Sugars and Chemicals Ltd. (and other
connected appeals), (2008) 306 ITR 392 (SC)]

 

Co-operative Society — Deduction u/s.80P — Assessing
Authority should examine as to whether the society is engaged in its business
of banking or providing credit facilities to its members.

 

The Supreme Court was mainly concerned with the following
two questions in a batch of civil appeals, namely :

(i) Whether the incentive subsidy received by the
assessee is a capital receipt not includible in the total income ?

(ii) Whether the assessee was entitled to exemption
u/s.80P(2)(a)(i) of the Income-tax Act, 1961, in respect of the interest
received from the members of the society ?

 

For convenience the Supreme Court considered the 1980
scheme which was almost identical to 1987, 1988 and 1993 schemes. The dispute
pertained to the A.Y. 1986-87. In matter considered by the Supreme Court both
the above questions arose for determination. The incentives conferred under
that scheme were two-fold. First, in the nature of a higher free-sale sugar
quota and, second, in allowing the manufacturer to collect excise duty on the
sale price of the free-sale sugar in excess of the normal quota, but pay to
the Government only the excise duty payable on the price of levy sugar.

 

The Supreme Court observed that four factors existed in the
said schemes, which were as follows :

(i) Benefit of the incentive subsidy was available only
to new units and to substantially expanded units, not to supplement the
trade receipts.

(ii) The minimum investment specified was Rs.4 crores for
new units and Rs.2 crores for expansion units.

(iii) Increase in the free-sale sugar quota depended upon
increase in the production capacity.

(iv) The benefit of the scheme had to be utilised only
for repayment of term loans.

 

The main controversy arose in these cases because of the
reason that the incentive were given through the mechanism of price
differential and the duty differential. According to the Department, price and
costs are essential items that are basic to the profit making process and any
price related mechanism would normally be presumed to be revenue in nature. On
the other hand, according to the assessee, what was relevant to decide the
character of the incentive was the purpose test and not the mechanism of
payment.

 

According to the Supreme Court, the above controversy could
be resolved if it applied the test laid down in its judgment in the case of
Sahney Steel and Press Works Ltd. According to the Supreme Court the test to
be applied was that the character of the receipt in the hands of the assessee
had to be determined with respect to the purpose for which the subsidy was
given. The point of time at which the subsidy is paid is not relevant. The
source is immaterial. The form of subsidy is immaterial. If the object of the
subsidy scheme was to enable the assessee to run the business more profitably
then the receipt is on revenue account. On the other hand, if the object of
the assistance under subsidy scheme was to enable the assessee to set up a new
unit or to expand the existing unit then the receipt of the subsidy was on
capital account.

 

The Supreme Court referred to the decision of the House of
Lords in the case of Seaham Harbour Dock Co. v. Crook, (1931) 16 TC
333. In that case the Harbour Dock Co. had applied for grants from the
Unemployment Grants Committee from funds appropriated by Parliament. The said
grants were paid as the work progressed. The payments were made several times
for some years. The Dock Co. had undertaken the work of extension of its
docks. The extended dock was for relieving the unemployment. The main purpose
was relief from unemployment. Therefore, the House of Lords held that the
financial assistance given to the company for dock extension cannot be
regarded as a trade receipt.

 

The Supreme Court observed that the aforesaid judgment of
the House of Lords showed that the source of payment or the form in which the
subsidy is paid or the mechanism through which it is paid is immaterial and
what is relevant is the purpose for payment of assistance.

 

Applying the above tests to the facts of the present case
and keeping in mind the object behind the payment of the incentive subsidy,
the Supreme Court was satisfied that payment received by the assessee under
the scheme was not in the course of a trade, but was of capital nature.