Commissioner of Income Tax vs Kisan Sahkari Chini Mills Ltd.

Prafulla C. Pant, J.—This appeal, preferred u/s 260A of the Income Tax Act, 1961, is directed against the judgment and order dated 31-1 -2006, passed by Income Tax Appellate Tribunal, Delhi Bench ''E'', New Delhi, whereby the said Tribunal has allowed the I.T.A. No. 1048/Delhi/ 2002 partly.

Heard learned counsel for the parties.

Questions of law involved in this appeal are as under:

(i) Whether on the facts and in the circumstances of the case, Income Tax Appellate Tribunal has erred in law in holding that permitting the assessee to sell higher percentage of levy free sugar is not in the nature of revenue receipt.

(ii) Whether on the facts and in the circumstances of the case, Income Tax Appellate Tribunal has erred in law in upholding the order of Commissioner of Income Tax (Appeals) that production incentive bonus was deductible expenditure for computing the taxable income.

Brief facts of the case are that respondent/assessee is a co-operative society, who is engaged in business of manufacturing and selling sugar and its byproducts. The assessee filed its return for the assessment year 1998-99, showing loss of Rs. 1,09,76,830. The return was processed by the Assessing Officer u/s 143 of Income Tax Act, 1961, who disallowed the deduction among other things on the production incentive bonus to the tune of Rs. 35,07,196 and added to income excess realization of incentive to the tune of Rs. 1,96,84,098. Aggrieved by said order of the Assessing Officer dated 23-3-2001, the assessee (present respondent) filed appeal before Commissioner of Income Tax (Appeals) II, Dehradun [hereinafter referred as ''CIT(A)'']. The said appeal was registered as Appeal No. 23/KSP/CIT(A)/DDN/2001-02 and after hearing the parties decided on 1-1-2002, setting aside the disallowance on account of production incentive bonus and addition made in the income, on account of excess realization of incentive by the Assessing Officer. Aggrieved by said order, passed by CIT(A), I.T.A. No. 1048/Delhi/2002 was preferred by the revenue before Income Tax Appellate Tribunal (hereinafter referred as ''ITAT''), New Delhi. The ITAT after hearing the parties upheld the view taken by the CIT(A) on the deduction allowed on production incentive bonus and addition relating to excess realization of incentive. Hence this appeal by the revenue.

Answer to Question of Law No. (1) - Learned counsel for the appellant/revenue drew attention of this Court to the case of M/s. Sahney Steel and Press Works Ltd., Hyderabad etc. etc. Vs. Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad, , wherein, following the view taken by the Division Bench of Calcutta High Court in the case of Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, , it is held that the subsidy given by the Government to the assessee for carrying on business cannot be said to be capital outlay of the industry and it can only be recorded as revenue receipt. In said case, the amount of incentive given by the Government of Andhra Pradesh by way of refund of sales tax and subsidy on power consumed to the assessee of said case, were held to be taxable revenue. Following said judgment of Sahney Steel & Press Works Ltd.''s case (supra) in Commissioner of Income Tax Vs. Rajaram Maize Products, , the Apex Court has again held that the subsidy given to an assessee are not exempted from tax as deductible income.

In reply, Ms. Puja Banga, learned counsel for the respondent/assessee argued that the incentive given to the assessee only for the purposes of repayment of term loan taken from Central Government or the financial institutions cannot be said to be revenue income, but the income of the nature of capital receipts. In this connection, she referred the case of Commissioner of Income Tax Vs. Balarampur Chini Mills Ltd., , in which Division Bench of Calcutta High Court has held that where the incentive has been received by the assessee for payment of loan, which was taken for expansion of sugar factory, the amount so received is capital revenue and cannot be said to be part of taxable revenue.

The Assessing Officer while making addition of Rs. 1,96,84,098 in the income shown in the return of the assessee, on account of excess realization of incentive in the present case has observed as under:

It is noticed that assessee society has received a sum of Rs. 1,96,84,098.75 incentive on sale of additional release of free sugar but the assessee has treated it as Capital receipt though it is clearly in the nature of revenue receipt. In the light of Supreme Court''s decision in the case of M/s. Sahney Steel and Press Works Ltd. wherein it has been held that any subsidy received to assist the running business will be in the nature of operational subsidy and is liable to tax. I hold that it is revenue receipt. In assessee''s own case in the last years case also receipt has been treated as revenue receipt and it is also observed that the additions made by the Assessing Officer in many other cases such as Dhampur Sugar Mills assessment year 1995-96 have been confirmed by CIT(A), Bareilly. Hence amount of Rs. 1,96,84,098 is added towards income of the assessee.

CIT(A) in its order dated 1-1-2002, while setting aside the addition directed to be made by the Assessing Officer has observed as under:

In ground No. 2 the appellant has objected to an addition of Rs. 1,96,84,098 representing an incentive received under Sampath Incentive Scheme. The appellant had claimed these receipts as capital receipts on the basis of certain judicial pronouncement. However, the Assessing Officer treated these receipt as of revenue nature and included the same into the taxable income of the appellant. During the course of hearing the Ld. A.R. argued that appellant had rightly claimed the incentive on sale of additional release of sugar under Sarnpath Inventive Scheme as capital receipt. In support of this stand reliance was placed on following judicial pronouncements

(1) CIT v. Balrampur Chini Mills Ltd. 238 ITR 145.....

The learned counsel had further pointed out that learned CIT(A), Bareilly in his order in appellant''s own case for assessment years 1991-92 and 1994-95 had held that incentive received under Sarnpath Incentive Scheme was of capital nature. On the basis of above judicial pronouncement and CIT(A)''s order the learned A.R. pleaded that the amount of incentive received under Sampath Incentive Scheme should be treated as of capital nature.

I have carefully considered the facts and decision submitted on the point and have perused the appellate order of learned CIT(A), Bareilly for assessment year 1994-95. I agree with the learned counsel and the incentive on sale of additional release of free sugar under Samptath Incentive Scheme is held to be in nature of capital receipt. The Assessing Officer is directed to treat it as a capital receipt.

The ITAT has affirmed the view taken by the C1T(A) on the ground that the Tribunal, for the assessment year 1996-97, has taken the same view in its order dated 3-3-2005 in I.T.A. No. 1915/Delhi/2003. We have considered the case laws, mentioned above, referred on behalf of the parties and having gone through the same, we are of the view that where incentive has been given to an assessee only for expansion of the plant and machinery of the industry, run by the assessee, or for the purposes of payment of term loan received by the assessee from the Government of India or financial institutions, the amount of incentive is nothing, but a capital receipt. However, if such amount received by the assessee is permissible to be used, or used in day-to-day business of the assessee, the receipts earned by the assessee by selling the additional quantity of the levy sugar as free sugar cannot be said to be capital receipt and the same is nothing but revenue receipt of the assessee. Accordingly, the question of law No. (1) stands answered.

Answer to Question of Law No, (2) - So far as the disallowance of production incentive bonus to the tune of Rs. 35,07,196 by the Assessing Officer, which is set aside by C1T(A) and not interfered by ITAT is concerned, it is brought to our notice that Division Bench of this Court in CIT v. Kichha Sugar Co. Ltd. IT Appeal No. 16 of 2004 vide its judgment and order dated 27-4-2007 has held that the production incentive bonus is liable to be deducted but only to be allowed when the payment of bonus is made in the assessment year in question. The Division Bench of this Court in said case has discussed the provisions of Section 36, Section 37 and Section 43B of the Income Tax Act, 1961, and held that production incentive bonus is deductible. It appears that said view of the Division Bench of this Court is not disturbed so far. In the circumstances, we reiterate the same view in this appeal and answer, the question of law No. (2) accordingly.

For the reasons as discussed above, the appeal stands disposed of with the observation that the amounts in question relating to question No. (1) can be examined afresh by the Assessing Officer in the light of the observations made above to see as to whether the incentive is used for the payment of the loans or expansion of the plant or not.

The impugned order of ITAT and CIT(A), so far as it relates to production incentive bonus is not interfered with.