Challa Kodanda Ram, J.@mdashThe revenue is in appeal filed under Section 260A of the Income Tax Act, 1961 (for short, ''the Act'') raising the following questions of law said to be arising from the order dated 12.10.2001 passed by the Income Tax Appellate Tribunal (for short, ''the Tribunal'') in I.T.A. No. 535/Hyd/2000 (Hyderabad-A).
"1. "Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the refund of customs duty amount as part of incentive measures by the Government of India, is liable to be treated as capital receipt in the hands of the assessee and not revenue in nature?"
2. "Whether the Appellate Tribunal is correct in holding that the rent paid with reference to guest house or transit house as the case may be, is liable to be deducted from the income in spite of Section 37(4)&(5) of the I.T. Act?""
2. So far as question No. 2 is concerned, it is submitted by the learned counsel for the revenue and conceded by the learned counsel for the assessee that the question is required to be answered in favour of the revenue and against the assessee in view of the judgment of the Supreme Court reported in
3. Accordingly, the question No. 2 is answered in favour of the revenue and against the assessee.
4. So far as the question No. 1 is concerned, the issue is relating to whether the refund of customs duty received by the assessee on the imported components/machinery for their fertilizer plant pursuant to the notification of the Ministry of Fertilizers & Chemicals, Government of India is to be treated as a capital receipt or as a revenue receipt. For the assessment year 1995-96, the assessee received certain amounts towards refund of customs duty involved in imported components/machinery for the fertilizer plant. This refund was relatable to notification of the Government of India, Ministry of Chemicals and Fertilizers, Department of Fertilizers No. 4/14/92(E) FDA-I dated 27.02.1993. The Assessing Officer in its assessment orders treated the said amount as a reimbursement of the taxes paid on behalf of the assessee and treated the same as bringing down the cost of the imported components/machinery and thus reduced the depreciation on the same. Assessee contended before the Assessing Officer that the amount received representing the customs duty paid is in fact an incentive/subsidy given to the assessee to bring down the cost of establishing the fertilizer plant which in turn would enable the assessee to sell then-products at competitive price. Thus, as the amount received from the Central Government has gone to reduce the cost of establishment the said amount has to be treated as a capital receipt and not as a revenue receipt. The Assessing Officer rejected the claim of the assessee and treated the same as a revenue receipt on the ground the purpose of Central Government reimbursing the customs duty was in fact to bring down the cost of production of the fertilizers and also to make indigenous fertilizer industry more competitive. In other words, the support given by the Central Government was only to enable the assessee to sell the fertilizers at competitive prices and as such the same is required to be treated as a revenue receipt.
5. Citing the judgment of the Supreme Court in
6. Sri S.R. Ashok, learned Senior Counsel appearing on behalf of the appellant department by drawing attention to the judgment of the Supreme Court in Sahney Steel Case (2 supra) submits that the broad test laid down by the Supreme Court is to consider the nature of the receipt particularly the purpose for which the amount has been paid. Neither the utilisation of the amount nor the method and manner of the payment of the said amount would determine the character of the receipt. The very notification of the Government of India is clear to the effect that the incentive is given "with a view to bring down the cost of fertilizers, as also bringing about increased competitiveness of indigenous fertilizer industry".
7. He pointed out that the purpose of the subsidy was to reduce the cost of production and therefore it was a revenue receipt. Further by pointing out that the said amount was infact paid directly to the financial institutions, which in fact had gone to reduce the loans, he contends that the Commissioner Appeals rightly treated the same as revenue receipt. He contends that the refund of customs duty is akin to the subsidy given by way of sales tax incentive given in Sahney Steel Case (2 supra).
8. On the other hand, Sri A.V. Krishna Koundinya, learned Senior Counsel appearing on behalf of the assessee by referring to the judgment of the Supreme Court in
9. As held by this Court in
10. Two leading judgments of the House of Lords in the cases of The Seaham Harbour Dock Co. Vs. Crook (16 Tax Cases 333) and Ostime Vs. Pontipridd & Rhondda Joint Water Boat (28 Tax Cases 261), culled out the broad principles as under:
a) It is the purpose for which the subsidy or incentive is given that would define the character of receipt in the hands of the recipient;
b) The mere mode of payment would not alter the character of the sums received; and
c) It would be quite irrelevant whether the money, when received, was applied for capital purposes or for revenue purpose, in the absence of any special allocation in the grant itself.
11. The above principles have been accepted and laid down in series of judgments starting from Sahney Steel case (2 supra) to latest judgment in the case of Ponni Sugars (4 supra). Applying the principle laid down as above to the facts of the case we need to analyse the scheme under which the assessee has been made over an amount equivalent to the customs duty paid on machinery and plant. The incentive came to be issued under Notification No. 4/14/92(E) FDA-I, dated 27.02.1993 of the Central Government, the scheme of relief / incentive is off-shoot of report of the Joint Committee on Fertiliser Pricing submitted to the Parliament on 02.08.1992. The committee had reported as under:
"The existing customs duty is 15% on project imports and 85% on imported equipments for revamping/ rehabilitation of the old fertiliser plants. The Committee note that there was no customs duty for capital goods for fertiliser plants during 1985-87. By way of incentive to modernisation of old plants, the committee recommended abolition of customs duty on imported equipments for revamping/rehabilitation of the old fertiliser plants. The Committee also recommended elimination of customs and excise duties on capital goods, to make new units viable and to attract fresh investments in fertiliser section."
12. After a detailed analysis of the principles, the orders of the Commissioner of Income Tax (Appeals) V (Central) and CIT appeals and the facts on record and the central scheme in detail, the Tribunal concurred with the finding recorded by the Commissioner that the amount received has gone into the reduction of capital expenditure in the establishment/expansion of the fertiliser units. This finding of fact as recorded by the Commissioner was not challenged before the Tribunal, and in fact the Tribunal had accepted the same. There is no contra material brought before this Court to take a view different from the view taken by the Tribunal on this aspect. The Tribunal also took note of the fact that the Sahney Steel case (2 supra) was distinguished by this Court in Godavari Plywoods case (5 Supra) which in fact came to be approved by the Supreme Court in P.J. Chemicals case (3 Supra). Considering the crucial aspect, the Tribunal had found that the subsidy received by the assessee in fact had gone into reduction of the capital expenditure, we do not find any reason to take a contra view. The fact that incidentally on account of reduction in the capital cost the assessee''s product would be more competitive in the market thereby increasing their revenues would not in any way alter the position that the subsidy received as a matter of fact had gone to reduce the cost of the capital. In that view of the matter, the finding of the Tribunal that the amounts received by the assessee from the Central Government by way of refund of customs duty of the capital receipts cannot be found fault. Accordingly, the question No. 1 is answered in favour of the assessee and against the revenue.
13. Accordingly, the appeal is partly allowed by answering the question No. 1 in favour of the assessee and against the revenue and the question No. 2 in favour of the revenue and against the assessee. There shall be no order as to costs.
