Dy. Cit, Special Range 18 vs Reliance Industries Ltd. on 23 October, 2003

ORDER

R.V. Easwar, Member (J)

1. The following question has been referred to the Special Bench by the Hon’ble President, Income Tax Appellate Tribunal, for decision :-

“Whether, on the facts and in the circumstances of the case and in law the assessee-company is justified in its claim that the Sales Tax incentive allowed to it during the previous year in terms of the relevant Government Order constitutes capital receipt and is not to be taken into account in computation of total income.”

2. The question came to be referred to the Special Bench in the following circumstances. One of the grounds of appeal in the appeal filed by the asessee in ITA No. 3890/Bom/91 for the assessment year 1986-87 is that the CIT(A) erred in “not directing the learned Dy CIT to consider the appellant’s claim for an amount of Rs 17, 70, 40, 220 being the amount exempted from payment to the Government of Maharashtra as part of subsidy quantified for setting up a new Industrial Unit in the Specified Backward Area, being Patalganga at Raigad District pursuant to the eligibility certificate issued under the 1979 scheme. The appellant submits that the said subsidy is of capital nature and is a grant which is not actually repayable by the appellant, but represents the incentives provided by the Government of Maharashtra with relation to the cost of the project.” This appeal in which there were various other grounds also was consolidated with the appeal filed by the department in ITA No. 4045/Bom/91 and both the appeals were posted for hearing. At this stage, the CIT-3, Mumbai by letter dated 27.1.2003 addressed to the Hon’ble President, ITAT, made a request for constituting a Special Bench. The relevant portion of the letter is reproduced below :-

Sub : Request for constitution of Special Bench -Appeal before the ITAT in the case of M/s . Reliance Industries Ltd. – A.Y. 1986-87 – reg.

Ref : ITA No. 4045 and 3896/N/91

Kindly refer to above.

The revenue’s appeal in the case of M/s . Reliance Industries Ltd. for A.Y. 86-87 is pending before the Hon’ble ITAT “J” Bench, Mumbai. The main issue relates to the claim of notional sales-tax as capital receipt by the assessee company.

In terms of the Incentive Scheme the company is not required to pay sales-tax to the State Government. In the statement of computation, the assessee claims these amounts as capital receipts. For A. Yrs. 84-85 and 85-86 this issue was decided by the ITAT in favour of the assessee. Against these orders the Department has filed a reference to the Bombay High Court and the same is pending.

In a recent decision in the case of M/s . Bajaj Auto Ltd. (ITR 49/Bom/91 and 1101/Bom/1991) dated 31.12.2002 the Id. ITAT ‘D’ Bench, Bombay has virtually over-ruled the decision taken by the ITAT in the case of M/s . Reliance Industries Ltd. for A.Y. 85-86.

In view of the importance of the issue and its very huge revenue implications, I, the undersigned, under the direction of CC-II, Bombay request you to kindly consider constituting a Special Bench for hearing the appeal in the case of M/s . Reliance Industries Ltd. for A.Y. 86-87 considering the decision in the case of M/s . Bajaj Auto Ltd., over-ruling the view taken in the case of the assessee for A.Y. 85-86. The case is posted for hearing on 4.3.2003.”

The Hon’ble President, accepting the request, was pleased to consititute a Special Bench to decide the question which has been reproduced above.

3. Before deciding the question, it is necessary to refer to certain facts constituting the background of the matter. We are concerned with the assessment year 1986-87. The assessee is a company deriving income from the manufacture of yarn, synthetic fabrics, etc. During the year, the assessee also commenced manufacture of polyester staple fibre in its unit in Patalganga, In the return of income filed by the assessee for the year under consideration, a copy of which is at pages 47 to 57 of the assessee’s paperbook No. 1, the assesssee commenced the computation of the income from the net profit of Rs. 71, 33, 74, 748 and claimed deduction of Rs. 14, 70, 40, 220 with the following narration :-

“Less : Notional Sales tax Liability in respect of sales of finished Goods and purchase of Raw material by PFY Unit for 1985 being nature of subsidy, hence Capital receipt not liable to tax.”

While completing the assessment u/s. 143(3) of the Act by order dated 30.3.1989, the above claim was dealt with by the Assessing Officer as follows:-

“(iii) Notional sales-tax liability

The assessee company in its computation of income has claimed deduction on account of Notional sales-tax liability of Rs. 14, 70, 40, 220/-. The notional sales-tax liability is claimed in respect of sales on different goods and purchase of raw-material by PFY Unit for 195 being in the nature of SubsiDy.

It has been claimed by the assessee that the subsidy is a capital receipt and not liable to tax.

The Patalganga unit of the assessee is located in Notified Backward Area. The sales-tax liability of the assessee has been exempted by the State Government. Under the scheme of incentive, the assessee is not required to pay any sales-tax to the Government. The assessee has contended that non-payment of sales-tax should be considered indirectly as subsidy by the government, which is of capital nature. The claim of the assessee is that notional sales-tax liability should be deducted from income of the assessee being a capital receipt.

The Learned CIT(A) in his order for the assessment year 1984-85 has held that the assessee has already got remission by way of exemption from sales-tax and there is no ground for taking notional sales-tax liability as capital receipt and exempt the same, which could mean double benefit which is not warranted under the Scheme of the I.T. Act. Therefore, the deduction claim of the assessee is not allowed for the reasons discussed in the assessment for the assessment year 1984-85 and also as held by the Learned C.I.T. (Appeals) in his order for the assessment year 1984-85.”

It will be seen from the above extract that the Assessing Officer has followed the assessment proceedings for the assessment year 1984-85 where the above claim was rejected by the AO and whose view was upheld by the CIT(Appeals).

4. The assessee appealed to the CIT (Appeals) against the assessment, in which various other additions and disallowances were also made. As far as the above claim is concerned, the assessee contended that the subsidy was of capital nature and hence capital receipt, that it was given to encourage the setting up of new industrial units during a particular period in certain backward areas of Maharashtra which needed huge capital investment, that since the State Government cannot give subsidy in cash, it has been granted to the assessee by allowing it to retain the sales tax payable to the State Government and that the AO went wrong in his conclusion that accepting the assessee’s claim would amount to double benefit, since the subsidy has been included in the total income of the assessee which is subjected to tax. The CIT (Appeals) disposed of the above contentions of the assessee in the following words (paragraph 11.2 of his order):-

“11.2 I have gone through the detailed submissions given by the learned counsel and also through the appellate orders of my learned predecessor in the appellant’s own case for a.y. 1984-85 and 1985-86. It is not considered necessary to repeat the facts all over again, but for the detailed reasons given in para 10 of the appellate order for a.y. 1985-86 and the conclusion given in para 10.9 on page 33 of the said order, I am inclined to reject the appellant’s submission in this regard.”

It will be seen from the above extract that the CIT (Appeals) simply followed the appellate order for the assessment year 1985-86 in the assessee’s own case.

5. The assessee is in further appeal to the Tribunal and as already stated, the issue has been placed before the Special Bench for decision.

6. It is now necessary for us to take a look at the position vis-a-vis the issue referred to the Special Bench, in the assessment years 1984-85 and 1985-86. In both the years, the matter had reached the Tribunal in ITA No. 1418/Bom/88 and ITA No. 7554/Bom/89 respectively. In the order passed by the Tribunal for the A.Y. 1984-85 on 27.4.1994, this issue has been discussed in paragraphs 20 to 34 of the Tribunal’s order. In that year, the assessee has claimed deduction of Rs 4, 40, 71, 858 in respect of notional sales tax liability as capital receipt. A perusal of these paragraphs shows the following factual position :-

A. The assessee set up a unit in Patalganga which is a notified backward area and became eligible for the incentives announced by the Govt. of Maharashtra. The unit commenced commercial production in November, 1982.

B. The incentive was in the form of exemption from liability for payment of sales tax for a period of 5 years commencing from 8.6.1983 and ending on 7.6.1988.

C. The assessee’s claim was that the quantum of the sales tax liability could be claimed as deduction on the basis that it is a capital receipt or on the basis that it should be treated as liability under the sales tax law, but since it was exempted from payment of sales tax, the same should be treated as paid within the meaning of section 43b so as to be adjusted against the amount of subsidy, which the assessee would have received from the State Government.

D. In that year, the assessee was exempted from the payment of purchase tax of Rs 10, 82, 175 and sales tax of Rs. 4, 29, 89, 686 making the total Rs. 4, 40, 71, 858.

E. The Assessing Officer rejected the assessee’s claim on various grounds :-

(i) Under the scheme announced by the State Govt., the assessee was not required to charge any sales tax from its customers and to pay any purchase tax on its purchases.

(ii) No amount of subsidy either in cash or in kind had been given by the Government.

(iii) In the invoices, the assessee did not charge any amount separately under the head “sales tax”.

(iv) Under the scheme, at no point of time, was the assessee required to pay any sales tax to the Government, and

(v) The assessee did not maintain any separate sales tax account, any separate incentive account nor has shown any amount as outstanding liability under the head.

After noticing the above reasons given by the Assessing Officer which were confirmed by the CIT (Appeals), the Tribunal proceeded to consider the various arguments advanced before it and the decisions cited by both the sides. Ultimately it came to the following conclusions :-

(1) The amount determined as sales tax by the Sales-tax officer would bear the character of subsidy which is capital in nature.

(2) A perusal of the scheme and the purpose for which it was framed by the State shows that the incentive was given for bringing about necessary infrastructure in processing/developing the backward area and thus the incentive would be in the capital field and therefore cannot be taxed as revenue receipt.

(3) The incentive is based on the amount of investment in fixed assets. It is to induce or motivate the businessman to move and take a risk when the State has placed its stake.

(4) The judgment of the Bombay High Court in CIT v. Elys Plastics Pvt. Ltd. (188 ITR 11) covers the issue.

7. After coming to the above conclusions, the Tribunal proceeded to consider the question whether any amount was received by the assessee “so as to brand the receipt as either capital or revenue in nature” and the further question as to whether “if the amount is received where does it appear in the books of account.” This question was considered in paragraph 27 of the Tribunal’s order. Once of the objections raised by the Tax authorities was that the assessee did not separately charge sales tax in the invoice, but the Tribunal held that his aspect was not relevant because it is not necessary to show in the sales invoices a separate charge for sales tax. The Tribunal proceeded to record a finding that even before the exemption was granted to the assessee and the assessee was liable to pay sales tax, it was not showing sales tax as a separate charge in the invoices. The same position was noticed to have been continued subsequent to the exemption. In this connection, the Tribunal referred to rule 46A of the Bombay Sales Tax Rules which provided for bifurcation of the gross invoice figure into sales and the sales tax chargeable thereon. This rule has been applied in order to get over the situation caused by the assessee not separately charging sales tax in the invoice. The sales tax is statutorily determined and charged. The Tribunal referred to the letter dated 18.12.1986 issued by the State industrial and Investment Corporation of Maharashtra (SICOM), which is the implementing agency, permitting the assessee to adjust its price so as to include therein the sales tax element which otherwise could be fastened on the assessee and recovered, in the absence of any exemption from the payment of tax. The Tribunal also adverted to section 41 of the Bombay Sales Tax Act, which empowered the Commissioner of Sales Tax to exempt any dealer from payment of sales tax either wholly or partially. The Tribunal also referred to the Sales Tax assessment order for the calendar year 1983, wherein at page 3, the assessing authority (Sales Tax) stated as under :-

” The dealer has into maintained tax collection accounting ledger as tax is not separately charged in sales bills. The sales bills are inclusive of taxes, except sales of Methanol and scrap.”

After referring to the above facts, the relevant provisions of the Bombay Sales Tax Act and the other documentation, the Tribunal concluded as follows :-

So what the assessee has obtained from the State Government is exemption from the payment of tax under the Bombay Sales Tax Act and Central Sales Tax and other Rules there under. Now what is the amount for which the exemption from payment to the State Government is granted? The amount additionally payable on assessment, but for notification u/s. 41 as long as it is in force. This amount otherwise payable under the Sales Tax Act is not recovered from the assessee by virtue of exemption under section 41 of the Act. Why it is no recovered, the answer is simple. Because the assessee is to be granted/disbursed incentive in the form us subsidy under scheme framed by the Government. Therefore, this amount determined and referred to as notional sales-tax liability should have been reduced from the revenue receipts as it is embedded in such receipts, though having character of subsidy. Section 41(1) of Bombay Sales Tax Act states that subject to such condition as it may impose, the State Government may, if it is necessary in public interest, by notification exempt any specified class of sales/purchases from payment of whole or any part of any tax payable under the provisions of the Act. This amount as claimed should have been transferred to the separate account of subsidy. But as stated earlier the entries in the book of account are not sacrosanct and if the true nature of the receipt or payment is different then the same has to be evaluated on the basis of substance of the transaction and in accordance with the law applicable to such transaction. This is what the Commissioner (Appeals) has done in A.Y. 1989-90 after reviewing earlier appellate orders (page 479 of paperbook). From this discussion it will be amply clear that the amount of notional liability determined bears the character of subsidy, the amount which otherwise would have been paid to the Sales Tax Department. ”

8. Before the Tribunal, the assessee had also raised an alternative contention to the effect that the sales-tax liability, ascertained and determined to be payable but not paid because of the exemption u/s. 41 of the Bombay Sales Tax Act, should be treated as having been paid and adjusted against the amount of subsidy receivable from the State Government. This alternative contention was raised presumably to overcome the view, if one is taken, that the amount determined as sales tax collected by the assessee and payable to the Government, would be a revenue receipt or a trading receipt on the basis of the judgment of the Supreme Court in Chowringee Sales Bureau Pvt. Ltd. (87 ITR 542). This alternative contention took care of the situation which would result if such a view is taken. If the alternative contention is accepted, it would reduce the income by an identical amount to be deducted as liability towards sales tax, thus neutralising the effect of the addition. In paragraph 28, the Tribunal dealt with this argument and held as follows :-

“The consequence is same because what the assessee wants really is that the amount of liability under the Sales Tax Act as determined by the Sales Tax authority should be treated as an amount received by way of subsidy from the State Government. We accept this alternative contention also since it leads to the same result on the same facts, though on different reasoning.”

9. An argument that was put forth before the Tribunal on behalf of the Department was that since the assessee could not demand sales tax from the buyer of its goods, it could not collect any amount by way of sales tax. This argument was dealt with by the Tribunal in Paragraph 30.1 of its order .The Tribunal noted that it was not necessary to collect from he buyer the amount of sales tax so as to be liable to pay sales tax. The Tribunal further noted from the evidence that the assessee is obliged to specifically state in the invoice that it is exempt from payment of sales tax and it is only with this specific knowledge that the buyer purchases the goods of the assessee, knowing fully well that when he resells the goods in turn, he would be liable to pay sales tax. The Tribunal held that considering this position it appears that what was given to the assessee in the form of incentive by way of subsidy is recovered from another dealer by way of sales tax. That is why, according to the Tribunal, the assessee’s claim that it was granted exemption only from the payment of tax gains further weightage.

10. In paragraph 32.1, the Tribunal proceeded to consider the factual position regarding sales tax before the date of exemption notification, during the period of operation of the exemption notification and after the expiry of the exemption period and it found that the position was as follows :-

“(a) Before the date of notification under section 41 of the Bombay Sales Tax Act granting exemption qua certain class of goods from the payment of sales-tax, on each unit of turnover valuing Rs. 100/- there was embedded on sales receipts amount of Rs. 4/- by way of sales-tax liability and, therefore, the assessee was offering Rs. 96/- for the purpose of income-tax.

(b) During the period of exemption for the same unit of turnover valuing Rs. 100/- the assessee has offered Rs. 96/- for income-tax, it appropriates Rs. 4/- against subsidy, If the revenue’s stand is accepted then the assessee should be offering sum of Rs. 100/- as taxable receipt.

(c) Even after the exemption period when the circumstances or the manner in which the bills are raised continue the same way, the position is just like that given in (a) i.e. Rs. 96/- being offered for taxation.

32.2. From the above it will be seen that before exemption, during exemption and after exemption, the assessee is offering an amount of Rs. 96/0 by way of taxable receipts.”

11. The Tribunal then proceeded to consider the impact of the demand of sales tax raised by SICOM on the ground that there was a violation of the terms and conditions upon which the eligibility certificate was granted, inasmuch as the assessee’s production had crossed the limit of 10, 000 tons and therefore it was liable to pay sales tax in respect of the excess production which was sold during the period. Dealing with this aspect of the matter, the Tribunal noted that the assessee has charged the same price for its goods whether the sale was from the production below 10, 000 tons or above the said limit, but still the SICOM had demanded the sales tax and ultimately the assessee had also agreed to pay. According to the Tribunal, this indicated that the amount which, in the absence of exemption could be recovered from the assessee, is not recovered but disbursed as subsidy.

12. Coming now to the 1979 Scheme of the Govt. of Maharashtra under which the assessee was given the incentive, the Tribunal noted that various types of sales tax incentives were envisaged. It could be an incentive (a) either as an outright refund, or (b) as an interest-free unsecured loan repayable after 12 years, or (c) exemption from payment of sales tax. New units would ordinarily be entitled to exemption from payment of sales tax, purchase tax, Central Sales Tax etc. The quantum of the incentive would be equal to the sales tax liability. According to the Tribunal, these envisaged that the quantum of subsidy in each year would be equal to the sales tax liability of each year subject to maximum limit. The tribunal also perused the compromise agreement between the assessee and SICOM in relation to 1979 Scheme, under which the assessee agreed to refund the excess amount of sales tax incentive (above the limit of 10, 000 tons) together with interest and held that this clarified that the assessee had retained money belonging to the Government. As regards the impact of the eligibility certificate issued by SICOM, the Tribunal noticed section 2(12B) of the Bombay Sales Tax Act which defined “eligibility certificate” as meaning a certificate granted by SICOM under the Package Scheme of incentives designed by the State Government for promoting industrialization of the backward areas of the State of Maharashtra. The Tribunal held that this showed that the intention of the State legislature was clear that the incentive was only in the capital filed. In the absence of the certificate, the assessee was liable to pay the amount of tax determined. According to the Tribunal, the effect of the eligibility certificate was to free the assessee from payment and treat it as subsidy from Government.

13. It was pointed out before us on behalf of the assessee that the aforesaid order of the Tribunal has become final since the Reference Application filed by the Department in R.A. No. 689/Bom/1994 filed u/s. 256(1) of the I.T. Act was rejected by order dated 4.3.1996 and according to instruction, the Department has not preferred an application u/s. 256(2) of the Act to the High Court, A copy of the said order has been placed at pages 200 to 214 of paperbook NO. 1. The question proposed by the CIT in this Reference Application was as under :-

“5. Whether on the facts and in the circumstances of the case the Tribunal was right in allowing assessee’s claim for deduction of Rs. 4, 40, 71, 858/- in respect of notional sales tax liability holding it as capital subsidy?”

14. It is now necessary for us to refer to the Tribunal’s order for the A.Y. 1985-86 passed on 25.7.2002 in ITA No. 7554/BOM/1989. In this order, the Tribunal has elaborately dealt with the same question, as to whether the amount of Rs. 13, 98, 53, 584 representing the amount exempted from payment of sales tax to the Government of Maharashtra for setting up a new industrial unit in the specified backward area, of Patalganga in Raigad District, should be treated as capital receipt in the hands of the assessee and accordingly excluded from the assessee’s total income chargeable to tax, from paragraphs 48 to 118 of the order. A copy of this order has been filed at pages 216 to 345 of the paperbook No. 1. We have carefully gone through these paragraphs. In that year, the basic facts were the same as those in the assessment year 1984-85. The assessee was exempt from payment of sales tax to the Government of Maharashtra under the 1979 Scheme. In that year also, the assessee claimed that the incentive given in the form of non-payment of the sales-tax amount should be excluded from the total income either on the basis that the same was a capital receipt or, alternatively, that it should be treated as liability under the sales-tax law and deemed to have been paid by the assessee within the meaning of section 43B of the Act. The reasons given by the Assessing Officer for rejecting the assessee’s claim were the same as the reasons given in the assessment order for the A.Y. 1984-85. The CIT (Appeals), following the view taken by him in the appeal for the A.Y. 1984-85, rejected the assessee’s claim agreeing with the Assessing Officer. The CIT(Appeals) also entertained a view that sales tax exemption was placed in a category separate from the capital subsidy which an eligible unit was entitled to, that the AO was right in saying that there was no actual payment of sales tax to the Government, that the sale tax collected on sales made was a part of the turnover, and deduction was available to the assessee only if the same was actually paid to the Government and that the turnover was merely exempt from the levy of sales tax for specified period and therefore, the assessee’s contention that it was entitled to the exemption of the income cannot be accepted.

15. The matter reached the Tribunal at the instance of the assessee. The assessee inter alia contended that the issue was fully covered by the earlier order of the Tribunal for the A.Y. 1984-85 (discussed above) and that in that order the Tribunal had relied on the judgment of the jurisidicational High Court in the case of Elys Plastics Pvt. Ltd. (188 ITR 11) which has been approved by the Supreme Court in CIT v. P.J. Chemicals Ltd. (210 ITR 830) and therefore there should be no deviation from the earlier decision that the sale tax incentive was a capital receipt. As in the assessment year 1984-85, the assessee also took up the alternative claim that even assuming that the incentive was a revenue receipt, deduction should be allowed to the same extend under sec. 43B. On behalf of the Revenue, the arguments put forth were as under :-

(a) The findings given by the Tribunal for the A.Y. 1984-85 were erroneous.

(b) The assessee did not collect sales tax separately, but collected it as price of the goods by charging a composite amount. The provisions of section 37 read with section 46 of the Bombay Sales Tax Act provide that a dealer who did not pay sales tax because of some exemption cannot collect any amount as sales tax and if the dealer did collect the tax, it was liable to be forfeited. The fact that the assessee did not collect anything as sales tax was lost sight of by the Tribunal in its order.

(c) Since the sales tax was not to be paid to the Government, it cannot be considered as deemed payment in view of sections 37 read with section 46 and this aspect was lost sight of by the earlier Tribunal.

(d) the finding of the earlier Tribunal that sales tax incentive was in the nature of a capital receipt was incorrect and no longer tenable in view of the judgment of the Supreme court in Sahney Steel & Press Works Ltd. & Ors. v. CIT ( 2002-Taxindiaonline-11-SC-IT) contended by the department that in this case the contention of the assessee that the subsidy was of capital nature as the same had been given for the purpose of stimulating the setting up and expansion of industries in the State, was not accepted because it was only when the assessee has set up the industry and commenced production that the various incentives were given for a limited period of 5 years. It was contended that the subsidy granted to the assessee in the present case was similarly for production and any subsidy relating to production could not be anything but revenue receipt.

(e) The 1969 Scheme, the 1973 Scheme and the 1976 Scheme were all production based schemes for incentives and similarly the 1979 Scheme, under which the assessee received the subsidy related to sales tax or purchase tax that would have been payable on the sale of finished products or purchase of raw materials and thus the exemption was related to the assessee’s production activity, that the modification made in July 1982 to the Scheme with reference to gross fixed capital investment was only for the purpose of monitoring, but the essential condition relating to production continued and therefore the assessee’s case fell within the ratio laid down by the Supreme Court in Sahney Steel (supra).

(f) The eligibility certificate issued by SICOM on 6.6.1983 made it a condition that the assessee should remain in normal production and in case the production was stopped or went below the normal level, the exemption would be forfeited.

(g) The judgment of the Bombay High Court in the case of Elys Plastics Pvt. Ltd (supra) relied upon by the earlier Tribunal was on a different question and was not relevant to the present controversy.

(h) The line of reasoning adopted by the Tribunal in its order for the A.Y. 1984-85 was influenced by the fact that the objective of the State Government in granting the subsidy was the development of backward regions of the State. This is erroneous. Various judgments were cited before the Tribunal on behalf of the Department to prove this point, notably the judgment of the Supreme Court in Sahney Steel (supra) and another judgment of the Supreme Court in CIT v. Rajaram Maize Products (251 ITR 427). On the basis of these judgments, it was pointed out to the Tribunal that the earlier order can no longer be considered correct.

16. In reply to the aforesaid arguments of the department, the assessee strongly relied on the various clauses of the 1979 scheme announced by the Government of Mahrashtra, Resolution dated 5.1.1980 and submitted that the earlier incentive schemes were fine-tuned so as to make them more effective, employment oriented and to encourage employment-oriented units in backward areas. It was then submitted that the incentive schemes right from 1964 were geared to the following four objects :-

(1) Development of the backward regions of the State of Maharashtra.

(2) Dispersal of the industries.

(3) Promotion of the industries for employment oriented units.

(4) Providing local employment to Scheduled Castes/Tribes.

Two leading judgments of the House of Lords, taking different view on the question, were cited on behalf of the assessee before the Tribunal. These are – (I) The Seaham Harbour Dock Co. v. Crook (16 Tax Cases 333) and

(ii) Ostime v. Pontipridd & Rhondda Joint Water Boat (28 Tax Cases 261). It was pointed out that in the former case the purpose of the grants was the creation of employment and not to fill in or augment the profits of the recipient whereas in the latter case, the subsidies went to fill in the hole in the profits. In the former case the subsidy would be exempt, but not in the latter. The submission was that the assessee’s case would be covered by Seaham Harbour Dock Co. and not by Pontipridd. It was then pointed out on behalf of the assessee that both the Andhra Pradesh High Court and the Supreme Court in the case of Sahney Steel (supra) , were concerned with an altogether different scheme which was hardly similar to the scheme in the case of the assessee before us. The distinction was pointed out to the Tribunal and this distinction, it was submitted, was also noticed by the Andhra Pradesh High Court itself in CIT v. Godavari Plywoods Ltd. (168 ITR 632). In this case, it was held that any subsidy given for the purpose of bringing about rapid industrial growth in the State with particular attention to the backward taluks and blocks would be capital in nature. the observations of Hon’ble Justice Jeevan Reddy in this case were specifically relied upon to contend that the fact that the subsidy was granted after the industry was set up and went into regular production was not the operative or decisive factor in coming to the conclusion as to whether the receipt was revenue or capital and that the most decisive factor was the object with which the incentive was given. The further submission was that Hon’ble Justice Jeevan Reddy who wrote the judgment of the Andhra Pradesh High Court in Sahney Steel which was upheld by the Supreme Court in appeal, himself viewed the Scheme in Godavari Plywoods differently in view of the material distinctions between the two schemes.

While in Sahney Steel the object of the scheme was to strenghen the unit financially for officient and profitable running of the industry, the purpose in Godavari Plywoods was to provide a recompense for setting up the industry in a backward area. Various other contentions were also raised before the Tribunal explaining the judgments, especially the judgment of the Supreme Court in Sahney Steel (supra). The attention of the Tribunal was drawn to page 263 of Sahney Steel ( 2002-Taxindiaonline-11-SC-IT) where it was held as follows: –

“For example, in the Scheme was that the assessee will be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward areas, the entire subsidy must be held to be a capital receipt in the hands of the assessee.”

The attention of the Tribunal was also drawn to two judgments of the Bombay High Court – (i) CIT v. Menezes Farmaco (236 ITR 780) and CIT v. Govind Poy Oxygen Ltd. (239 ITR 543) – in which both the Supreme Court judgments in the P.J. Chemicals Ltd. (supra) and Sahney Steel (supra) were considered and reconciled.

17. After noticing and considering the above arguments of both the sides in great detail, the Tribunal proceeded to record their conclusions from paragraph 74 onwards. These conclusions, very briefly, are as follows :-

(1) No fresh material was brought before the Tribunal or in the orders of the departmental authorities to displace the finding of the earlier Tribunal (asst.year 84-85) that the assessee did not simply enjoy an exemption from payment of sales tax and that it actually received, by way of an incentive or subsidy, the amount of sales tax payable by it. The argument of the Revenue that the assessee did not collect any sales tax in the first instance and had it done so, the sales tax collected would have been forfeited, was held not to be of much force because rule 46A of the Bombay Sales Tax Rules has been considered by the earlier Tribunal and it has been held that the rule took care of such a situation by providing a formula for segregating the amount of sales tax out of the composite sale price shown in the invoice. The sales tax authorities had also determined the notional sales tax liability of the assessee in their written orders. Therefore, the non-payment of the sale tax liability constituted incentive received by the assessee from the Govt. of Maharashtra. It was not just an exemption from payment of sales tax, but an incentive of which the sales tax exemption was only a modality. In other words, the Tribunal in substance held that on this point there was no justification for taking a view different from the view taken by the Tribunal in its i order for the assessment year 84-85.

(2) The assessee’s case fell under the principle of the decision of the House of Lords in Seaham Harbour Dock Co. (supra) and not under the principle of Pontypridd & Rhondda (supra). These decision shave been discussed in great detail in paragraphs 76 to 85 of the order. Three broad principles have been culled out from these judgments and they are :-

(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.

(3) In Sahney Steel (supra), both the House of Lords decisions were referred to and it was held that the ultimated decision would depend upon the salient features of the scheme. If it is given as a general assistance to the assessee to carry on his business or trade, it would be a trading receipt, but if the object of the subsidy, irrespective of its source, is to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be a capital receipt and i will not be open to the revenue to contend that the subsidy paid in the form of refund of sales tax paid on raw materials of finished products must be treated as revenue receipt. However, if the monies are given to the assessee for assisting him in the carrying out of the business operations and it is given only after and conditional upon the commencement of production, they must be treated as revenue receipt.

(4) The Tribunal held that in the judgment in the case of P.J. Chemicals (supra), the Supreme Court had noticed the divergence of views between the various High court on the treatment to be given to the “10% Central Outright grant or subsidy” and have also taken into consideration the two Circulars No. 142 and No. 190 issued by the CBDT. It was finally held (by the Supreme Court) that the incentive granted at the prescribed percentage of fixed capital investment in backward districts was an incentive to encourage entrepreneurs to move to the backward areas to establish industries and was not a payment to meet any portion of the actual cost of fixed assets u/s. 43(1) of the Act. The Tribunal did not accept the contention of the Revenue that the Supreme Court was not concerned with the question as to the revenue or capital nature of the incentive. It held that there was no dispute in P.J. Chemicals that the nature of the incentive in the hands of the assessee was otherwise capital and the only question that came to be considered was whether or not the subsidy could be considered as going to reduce the actual cost of the asset to the asse. According to the Tribunal, it was common ground between the parties in P.J. Chemicals that otherwise the subsidy constituted a capital receipt in the hands of the recipient.

(5) The Tribunal thereafter examined in detail the scheme under which the assessee obtained the subsidy for incentive. This was the 1979 package scheme of incentives outlined under Government of Maharashtra Resolution dated 5.31.1980. The Tribunal noticed that both in Sahney Steel and P.J. Chemicals, the Supreme Court stressed that the nature of the receipt would depend upon the scheme under which the subsidy was given. Not only did the Tribunal examine the 1979 scheme of the Govt. of Maharashtra in great detail, tracing the background of the subsidy from the year 1964 when it was given first, but also examined each and every scheme formulated by the State Government thereafter and also proceeded to compare the 1979 scheme (with all its modifications made subsequently) with the Andhra Pradesh Scheme, which was the subject matter of the judgment in the case of Sahney Steel (supra), and also with the MP scheme with was also considered in the judgment of the Supreme Court in Sahney Steel (supra) while overruling the judgment of the Madhya Pradesh High Court in Dusad Industries (162 ITR 784). The Tribunal after a detailed analysis of all the three schemes in paragraphs 90 to 117 came to the conclusion that the Maharashtra Scheme was materially different from the Andhra Pradesh and Madhya Pradesh Schemes which were similar to one another. For the sake of brevity, the detailed reasoning of the Tribunal is not reproduced here, but we shall refer to the same at the appropriate juncture. suffice here to notice, briefly, that the Tribunal held that the Maharshtra Schema unlike the Andhra Pradesh and MP Scheme was completely focused on the location of the industry and the amount of fixed capital investment and that these twin objectives were sought to be achieved by an elaborate scheme of incentives with a view to alluring prospective investors to make large scale fixed capital investment in the interior backward areas of the State. It was further observed by the Tribunal that under the Scheme an investor did not have to wait to set up the industry first, commence production and complete a year of accounting thereafter. He could enter into negotiations with the Government at the blue print stage itself. He could gradually increase his level of entitlement, after setting up the industry, as and when further investment in the fixed capital assets is made. Thus the Maharashtra Scheme, according to the Tribunal, should be considered as a fixed capital investment incentive whereas the Andhra Pradesh Scheme can be considered as an ‘operational subsidy”. In paragraph 115, the Tribunal summed up the major areas of difference between the Andhra Pradesh and Madhya Pradesh Schemes on the one hand and the Mahrashtra Scheme on the other. According to the Tribunal the thrust of Mahrashra Scheme was the industrial development of the backward districts as well as generation of employment, direct nexus with investment in fixed capital assets and the entitlement of the industrial unit to claim eligibility for the incentive while still in the process of being set up. According to the Tribunal, the 1979 Scheme of Maharashtra was oriented towards and is subservient to the investment in fixed capital assets in the specified districts of the State. There was direct nexus between the incentive and the fixed capital investment. the sales tax incentive has been envisaged as an alternative to cash disbursement and by its very nature would be available to the assessee only after the production had commenced. the condition that it was available after commencement of production, According to the Tribunal, made great sense from the point of view of the State to ensure that the incentive was given only to genuine projects and not to paper projects.

(6) The Tribunal also noticed the judgment of the Supreme Court in CIT v. Rajaram Maize Products (251 ITR 427) which reversed the judgment of the Madhya Pradesh High Court holding that the subsidy was a capital receipt. the Tribunal held on a perusal of the judgment, that the issue in that case did no pertain to any subsidy granted in terms of fixed capital assets. It was a power subsidy which obviously went to reduce the cost of an expenditure incurred by the asessee on revenue account. Thus the Tribunal held that this judgment did to have any bearing on the present issue.

18. The main reason for constituting the Special Bench is the submission of the CIT in his letter addressed to the Hon’ble President of the Tribunal to the effect that the view taken by the Tribunal in the aforesaid order in the assessee’s own case for the assessment year 1985-86 has been “virtually overruled” by the subsequent decision of the Tribunal in the case of M/s . Bajaj Auto Ltd. (ITA No. 49/Bom/91 and 1101/Bom/91) dated 31.12.2002. It is therefore incumbent upon us to examine the order of the Tribunal in Bajaj Auto Ltd. a copy of which has been placed at pages 346 to 375 of the paperbook No. 1, to find out whether the claim of the Revenue is correct. Paragraphs 27 to 48 of the order in the case of Bajaj Auto Ltd. deal with this issue. In that case, the assessee received a sum of Rs. 3, 56, 48, 643/- as sales tax incentive in respect of the Aurangabad unit at Waluj and the question was whether the receipt constituted capital or revenue. The factory started production on 15.5.1985. It was located in a notified backward area. The sales tax incentive was granted to the assessee under the Package Scheme of Incentives announced by the Govt. of Maharashtra vide resolution No. IDL-1028/(4077)-IND-8, dated 4th May, 1983. The assessee obtained an eligibility certificate under the scheme for the period effective from 1.2.1986. In the sales tax assessment order dated 20.2.1988, notional sales tax liability was determined at Rs. 3, 56, 48, 643. Before the Assessing Officer the assessee relied on the judgment of the Madhya Pradesh High Court in CIT v. Dusad Industries (162 ITR 784) (supra) in support of its claim that the aforesaid amount was capital in nature and cannot be assesses. The Assessing Officer took the view that the incentive was not given for capital investment, that it was not in the form of a subsidy, that it was by way of addition to the profits, that any sales tax collected by the assessee which it did not pay over to the Govt. was part of the assessee’s trading receipts on the basis of the judgments of the Supreme Court in Chowringee sales Bureau (87 ITR 542) (supra) and Sinclair Murray & Co. Ltd. (97 ITR 615) and that as and when the sale tax was paid over to the Government deduction u/s. 43B would be allowed. The CIT (Appeals) upheld the view taken by the Assessing Officer. The assessee carried the matter in appeal before the Tribunal. Before the Tribunal it was contended on behalf of the assessee that the incentive was received for promotion of industries in backward area and therefore it should be held to be capital in nature in view of the judgments of the Madhya Pradesh High Court in Dusad Industries (supra) and Gadia v. CIT (178 ITR 596). Reliance was also placed by the assessee also on the order of the Tribunal dated 25.7.2002 rendered in the case of Reliance Industries Ltd. v. DCIT in ITA No. 755/Bom/1989 A.Y. 1985-86), which is the order which we have discussed in the preceding paragraphs.

19. The Tribunal rejected the assessee’s claim that the incentive was a capital receipt on various grounds which are not relevant for our purpose. What is however relevant are the Tribunal’s observations regarding the order of the Tribunal in the case of the assessee before us for the A.Y. 1985-86 since that is the basis of the requiest made by the CIT for constituting a Special Bench. The following remarks were made by the Tribunal vis-a-vis the order of the Tribunal in the case of Reliance Industries Ltd. for the A.Y. 1985-86 :-

(a) In the case of Reliance Industries Ltd., the Tribunal, while comparing the Andhra Pradesh Scheme with the Mahrashtra Scheme, had “laid stress on the form, not on the substance of the scheme”.

(b) The reliance placed by the earlier Tribunal in CIT v. Balarampur Chini Mills Ltd. )238 ITR 445) (cal) is not appropriate since in the case before the Calcutta High Court, the assessee had received incentive for repayment of a loan taken for expansion of plant and machinery, whereas in the present case (i.e. Bajaj Auto Ltd. ), the incentive has not been given for acquiring any capital asset.

(c) In the case of Reliance Industries Ltd., the Tribunal “considered the incentive as capital receipt in view of the CBDT circular NO. 142”. According to the order of the Tribunal in the case of Bajaj Auto Ltd., this Circular pertains to subsidy given for helping the growth of industries and not for supplementing their profits, that it concerns itself only with subsides which are intended to contribute to capital outlay of the industrial unit and that the circular “has got no relevance with the facts of the present case”. It was further observed that “just going to backward area is not a reason, alliunde to which relief can be claimed”.

(d) “The Tribunal was not correct in the case of Reliance Industries Ltd. to give a different interpretation to the decision in Sahney Steel and Press Works Ltd. ‘s case and applying the ratio of P.J. Chemicals Ltd. in which the facts were totally different.” (para 43 of the Tribunal’s order in Bajaj Auto Ltd. )

20. Considering the main reason for constituting the Special Bench, it has become necessary for us now to embark upon the somewhat embarrassing task of answering the question: Do the observations made in Bajaj Auto Ltd. vis-a-vis the order of the Tribunal in the present assessee’s case for the assessment year 1985-86 amount to “virtually over-ruling” the decision? The enquiry cannot be avoided because, as we shall presently show, the question posed before us, though broadly worded without any reference to the order in the case of Bajaj Auto Ltd., is otherwise governed by the two earlier orders of the Tribunal in the assessee’s own case for the assessment years 84-85 and 85-86 and again, as we shall show presently, no fresh material or fact or a change in the legal position has been brought to our notice in the course of the arguments before us or in the orders of the departmental authorities justifying our taking a different view of the matter. Judicial consensus in the field of income-tax law, as in other branches of law, has always been that if a Bench is of the view that an earlier order of a Bench of equal strength in the same assessee’s case requires reconsideration in the light of a change in the factual or legal position, the Bench shall not itself take a different view, but the proper course would be to place the matter before the Hon’ble President of the Tribunal with a request to constitute a Special Bench consisting of three or more Members. In CIT v. Goodlass Nerolac Paints Ltd. (188 ITR 1 at page 5), the Bombay High Court held as under:-

“Before parting with this question, we consider it desirable to mention that the Income-tax Appellate Tribunal is a final judge of facts. The High Court, in reference, does not interfere with the findings of fact unless such a finding is perverse or is such that no reasonable person can come to such a finding. This will be so even when the High Court feels that it would have come to a different conclusion, if it was sitting in appeal. In that sense, when the High Court declines to interfere with a finding of fact given by the Tribunal in an earlier year, it may not mean that the High Court had approved of such a finding. This, however, does mean that a subsequent Bench of the Tribunal should come to a conclusion totally contradictory to the conclusion reached by the earlier Bench of the Tribunal in the same case for an earlier year on a similar set of facts. Such a thing may not be in the larger public interest as it is likely to shake the confidence of the public in the system. It is therefore, desirable that in case a subsequent Bench of the Tribunal in earlier year requires reappraisal either because the appreciation, it its view, was not quite correct or inequitable or some new facts have come to light justifying reappraisal or reappreciation of the evidence on record, it should have the matter placed before the President of the Tribunal so that the case can be referred to a larger Bench of the Tribunal for adjudication and for which there is a provision in the Income-tax Act.”

There may also arise a situation, as it has happened in the present case, where a later Bench may have occasion to doubt the correctness of the decision of an earlier Bench of equal strength rendered in a different case. In such a situation, the proper course for the later Bench would be to place the matter before the Hon’ble President of the Tribunal with a request to constitute a Special Bench consisting of three or more Member. As to the course to be followed by the later Bench in such a situation, we may refer to the Supreme Court judgments in Union of India & Ors. v. Godfrey Philips India Ltd. (158 ITR 574) and Union of India& Raghubir Singh (178 ITR 548). IN UOI v. Godfrey Philips (supra), a Bench of three Hon’ble Judges of the Supreme Court found that a decision of the Supreme Court in Jeetram v. State of Haryana (1980) 3 SCR 689 expressed its disagreement with the observations of the earlier judgment of the Supreme Court in Motilal Padampat Sugar Mills case (118 ITR 326), a decision rendered by a Bench of equal strength and observed as follows (158 ITR 574 590):-

” We find it difficult to understand how a Bench of two judges in Jeetram’s case, could possibly overturn or disagree with what was said by another Bench of two judges in Motilal Padampat Sugar Mills case. If the Bench of two judges in Jeetram’s case found themselves unable to agree with the law laid down in Motilal Padampat Sugar Mills case, they could have referred Jeetram’s case to a larger Bench, but we do not think it was right on their part to express their disagreement with the enunciation of the law by a co-ordinate Bench of the same court in Motilal Padampat Sugar Mills’ case (1979) 118 ITR 326 (SC)”.

In UOI v. Raghubir Singh (supra), it was observed as under at page 567 of the report :-

“It is in order to guard against the possibility of inconsistent decisions on points of law by different Division Benches that the rule has been evolved, in order to promote consistency and certainly in the development of the law and its contemporary status, that the statement of the law by a Division Bench is considered binding on a Division of the same or lesser number of judges. This principle has been followed in India for several generations by judges. This court also laid down in Acharya Maharaj Shri Narendra Prasad Anandprasadji Maharaj v. State of Gujarat (1975) 2 SCR 317, that even where the strength of two differing Division Benches consisted of the same number of judges, it was not open to one Division Bench to decide the correctness or otherwise of the views of the other. The principle was reaffirmed in UOI v. Godfrey Philips India Ltd. [1986] 158 ITR 574 (SC); [1985] 4 SCC 369, which noted that a Division Bench of two judges of this court in Jit Ram Shiv Kumar v. State of Haryana [1984] 3 SCR 689, had different from the view taken by an earlier Division Bench of two judges in Motilal Padampat Sugar Mills Co Ltd. v State of U.P. [1979] 118 ITR 326; [1979] 2 SCR 641, on the point whether the doctrine of promissory estoppel could be defeated by invoking the defence of executive necessity, and, holding, that to do so was wholly unacceptable, reference was made to the well accepted and desirable practice of the later Bench referring the case to a large Bench when the learned judges found that the situation called for such reference. ”

In this light, it would have been in order for the Bench which heard the appeal of Bajaj Auto Ltd., when it entertained doubts about the correctness of the Tribunal’s order in Reliance Industries Ltd. for the asst. year 1985-86, to have invoked the powers of the Hon’ble President to form a Special Bench. If on the other hand, the facts obtaining in the case of Reliance Industries Ltd. were found to be difficult from the facts of Bajaj Auto Ltd. there was obviously no need to make the observations vis–vis the Tribunal’s order, more so when both the Benches were of co-equal strength.

21. Two aspects of the matter fall for consideration now. The first is whether the order in Bajaj Auto can be said to have “virtually overruled” the order in Reliance Industries Ltd. (RIL) for the A.Y. 1985-86. In our opinion, there can be no question of a Bench “overruling” another Bench of equal strength. As the judgments of the Supreme Court referred to in the preceding paragraphs would show, to permit a Bench to differ from or overrule another Bench of equal strength would be contrary to the established norms of the judicial system of the country.

22. The second aspect to be considered is whether is whether the remarks of the Tribunal in Bajaj Auto Ltd. vis–vis the other in RIL were justified even on merits. Considerable reliance was placed on this order on behalf of the department in the course of the arguments before us. We have already noticed that there were four broad remarks made in Bajaj Auto Ltd. vis–vis the order in RIL. Let us proceed to examine them seriatim. The first remark was in para 35 of the order in Bajaj Auto, where it was said that the Tribunal, while comparing the A.P. scheme with the Maharashtra Scheme in its order in RIL, laid stress on the form and not on the substance of the scheme. We are of the view, with great respect, that this remark does not do justice to the great detail. The Tribunal in RIL where the Tribunal had compared the Schemes in great detail. The Tribunal has devoted paragraphs 91 to paragraph 108 -18 paragraphs where the Maharashtra and A.P. Schemes have been discussed threadbare. In particular, in paragraph 108, the major points of distinction between the two have been listed under six broad heads. It appears to us that in the case of RIL, the Tribunal has taken great pains to examine the Maharashtra and Andhra Pradesh Schemes and in the light of such a detailed analysis of the Schemes, the observation made in Bajaj Auto Ltd. that the Tribunal laid more stress on the form and not on the substance of the Schemes, tends to overlook the same. The observation of the Tribunal in Bajaj Auto Ltd. is not supported by reasons as to why it was felt that the earlier order of the Tribunal in RIL referred only to the form of the Schemes and not their substance. In paragraph 108 of the order in RIL, the Tribunal found that in the Andhra Pradesh Scheme, the object was to stimulate rapid industrialization throughout the State whereas under the Maharashtra Scheme, the aim was to disperse the industries outside the Bombay-Thane-Pune belt and to hasten the pace of industrialization in the developing regions of the State. Under the Maharashtra Scheme, no incentive was available to industries in the development areas of the State. The second point of difference related to quantum of sales tax incentive which was uniform to all eligible units under the Andhra Pradesh Scheme, but not so under the Maharashtra Scheme under which the quantum depended on the area in which the industry was located. The third point of distinction was that in the Andhra Pradesh Scheme, the incentive was in the form of refund of sales tax subject to a maximum of the equity capital, whereas in the Maharashtra Scheme was either in the form of sales exemption or interest free unsecured loan. Further, the incentives under the Maharashtra Scheme were subject to monetary ceilings directly related to fixed capital investment. The fourth point of distinction was an elaboration of the third point of distinction.

The fifth point of distinction related to the period of eligibility which was fixed at 5 years for all units under the Andhra Scheme, whereas it varied depending on whether the unit was new or existing or a pioneer unit or resource based unit. The period of entitlement was also noticed to be directly connected to the gross fixed capital investment. The period of eligibility could be connected to the gross fixed capital investment. The period of eligibility could be curtailed if the investment was likely to fall short of the sales tax liability. The sixth and last point of difference was that under the Andhra Pradesh Scheme, the units were required to apply every year for the subsidy after being set up and going into production, whereas under the Maharashtra Scheme, and intending entrepreneur could apply for incentive immediately after taking the initial effective steps such as taking possession of the land, making an application to DGTD for registration, etc. and the implementing agency, which is the SICOM could process the application without waiting for the completion of the setting up of the unit and could issue a letter of intent/provisional eligibility certificate from SICOM and the letter of entitlement from the Commissioner of Sales Tax could however be granted only after commencement of production.

23. After listing out the 6 points of difference between the Andhra Pradesh and Maharashtra Schemes, the Tribunal concluded as follows :-

” We find that Maharashtra Scheme, unlike Andhra Scheme, has been completely focused on the location of industry and the amount of fixed capital investment. These twin objectives have been sought to be archived by an elaborate and cleverly drafted scheme of incentive with a view to allure the prospective investors to make large scale fixed capital investment in the backward interiors of the State. Under the Scheme, the investor did not have to wait to set up the industry first, commence production and complete and year of accounting thereafter. The entrepreneur could enter into negotiations with the Government at the blue-print stage itself. Moreover even after having set up the industry the entrepreneur could gradually increase his level of entitlement as and when further investment in the fixed capital assets was made. In this view of the matter, while the Andhra Scheme came to be considered as an “operational subsidy”, the Maharashtra Scheme is in a different class altogether and should be treated as a fixed capital investment incentive.”

In the light of such a detailed discussion and comparison of the two Schemes, it cannot be said that the Tribunal laid more stress on the form of the Schemes and not on their substance.

24. The second remark made by the Tribunal in Bajaj Auto Ltd. which is at paragraph 38 of the order is that in RIL, the Tribunal relied on the judgment of the Calcutta High Court in CIT v Balarampur Chini Mills Ltd. (238 ITR 445), where the incentive was received for repayment of a load taken for expansion of plant & machinery which were capital assets, whereas in the case of Bajaj Auto Ltd., the incentive was not given for acquiring any capital asset. It was therefore held in Bajaj Auto Ltd. that the ratio laid down in the above judgment cannot be applied to the facts of Bajaj Auto Ltd. Actually, the effect of this observation in Bajaj Auto is merely that the facts in the case before the Calcutta High Court were different from the facts in Bajaj Auto and nothing more. The reference to the fact that the Calcutta High Court judgment was relied on by the Tribunal in the case of RIL is neither here nor there. Surely, it could not have been the intention to convey that the Tribunal erroneously relied on the Calcutta High Court judgment while deciding the case of RIL, because what the Tribunal in Bajaj Auto Ltd. actually said was that the facts of Bajaj Auto Ltd. were different from the facts in Balarampur Chinni Mills Ltd. (supra). Merely because the facts in Bajaj Auto Ltd. were different from the facts before the Calcutta High Court in Balarmapur Chini Mills Ltd. (supra), which was relied on by the Tribunal in the case of RIL and in the absence of any express finding in Bajaj Auto Ltd. that the Tribunal in RIL’s case erroneously relied on Balarmapur Chini Mills Ltd., it cannot be said that Bajaj Auto Ltd. has “virtually overruled” the Tribunal’s order in RIL. At best, it can only be a matter of debate whether the Tribunal by implication held Balarmapur Chini Mills (supra) was erroneously relied upon by the Tribunal in RIL’s case.

25. The third remark appears in paragraph 40 of the order in Bajaj Auto Ltd. It has been stated that the Circular No. 142 issued by CBDT, which has been relied on by the Tribunal in the case of RIL to hold that the incentive was a capital receipt, concerns only with those subsidies which are intended to contribute to capital outlay of the industrial unit and has no relevance to the facts of the “present case”, meaning thereby the case of Bajaj Auto Ltd. In the next sentence, it has been stated that “just going to backward area is not a reason alliunde to which relief can be claimed”. These observations in our humble understanding do not have the effect of “overruling” the order of the Tribunal in RIL. Circular No. 142 has been referred to by the Tribunal in RIL’s order in several places. However, the Circular has been considered by the Tribunal only in the context of discussing the judgment of the A.P. High Court in Sahney Steel and the judgment of the Supreme Court in P.J. Chemicals. It does not appear accurate to state that the Circular formed the basis of the order of the Tribunal in the case of RIL. It is not doubt true that in the course of the arguments before the Tribunal the Circular was referred to. The Id. counsel for the assessee would appear to have submitted that the Circular and P.J. Chemicals (supra) indirectly supported the asessee’s case, whereas the Id. counsel for the Revenue appears to have contested the claim made on behalf of the assessee by contending that P.J. Chemicals was decided in the context of the applicability of section 43(1) and the question whether the subsidy was capital or revenue was not decided in P.J. Chemicals at all. Now the Tribunal while discussing the cases of P.J. Chemicals and the judgment of the Andhra Pradesh High Court in Sahney Steel did refer to the Circular but not as constituting the basis of its decision, but only for the purpose of explaining its understanding of the judgments. The Tribunal no doubt took the view that in the case of P.J. Chemicals, though the question was whether the subsidy given by the Government would reduce the actual cost of the assets for purposes of depreciation, it was common ground between the parties in those appeals that the nature of the subsidy in the hands of the recipients was otherwise capital, but it is not correct to say that the Tribunal considered the incentive as capital receipt only because of the Circular. In this connection, it is important to refer to paragraph 75 of the Tribunal’s order in RIL. Referring to Circular Nos. 142 and 190, the Tribunal even at the outset noticed that these Circulars reveal the “general approach of the Department in respect of this kind of incentives, subsidies or concessions granted by the Central Government as well as various State Governments” and further expatiated as under :-

” We have referred to these Board’s Circular because they indicate Revenue’s understanding of the matter before various Court’s pronouncements. Further, these Circulars have been referred to in some of the important judgments. Circular No. 142 has been reproduced and discussed in the judgment of Hon’ble Andhra Pradesh High Court in the case of CIT v. Sahney Steel & Press Works Ltd. (152 ITR 39) (AP) which has been finally affirmed by Hon’ble Supreme Court in 228 ITR 253 (SC). Circular No. 190 has been considered by Hon’ble Supreme Court itself in their judgment in the case of CIT v P.J. Chemicals Ltd. (supra)”

Thus, after going through the relevant portions of the Tribunals’s order in the case of RIL for the A.Y. 1985-86, we are inclined to hold that the Tribunal did not rest its decision on the Circular No. 142. If anything, this Circular was considered to indirectly support the assessee’s case, which stood accepted on the basis of various other grounds, both of facts and of law.

26. The fourth and last remark of the Tribunal in Bajaj Auto Ltd. vis–vis the order of the Tribunal in the case of RIL is the most important. It has been stated in paragraph 43 of the Tribunal’s order in Bajaj Auto as follows:-

“43. In the present case, the incentives were given conditional upon commencement of production. There is no dispute on his point. The Sales Tax exception was given to the assessee for assisting him in carrying out the business operations. It was not given for the purpose of setting up business or to complete a project. This decision applies on all fours to the facts of the present case. The Tribunal was not correct in the case of Reliance Industries Ltd. to give a different interpretation to the decision in Sahney Steel and Press Works Ltd. ‘s case and applying the ratio of P.J. Chemicals Ltd. in which the facts were totally different.” (emphasis supplied).

In order to appreciate the above observation in Bajaj Auto Ltd., it is necessary to examine as to how the Tribunal in the case of RIL understood the judgment of the Supreme Court in Sahney Steel (supra).

27. It was argued before the Tribunal on behalf of the Department that the earlier order of the Tribunal for the A.Y.1984-85 in which it was held that the sales tax incentive was in the nature of a capital receipt was incorrect and no longer tenable in view of the judgment of the Supreme Court in the case of Sahney Steel (Supra). After referring to the observations of the Supreme Court at page 257 of the report, it was argued on behalf of the department that the Supreme Court did not accept the contention of the assessee to the effect that any subsidy given for the purpose of stimulating the setting up and expansion of industries in the State was capital in nature, because the Supreme Court found that it was only when the assessee (in the case before the Supreme Court) had set up its industry and commenced production that various incentives were given for a limited period of 5 years. Attention of the Tribunal was drawn to the Supreme Court’s observation that the endeavour of the State was to provide the newly set up industries a helping hand for five yeas to enable them to be viable and competitive. It was submitted by the department that the subsidy granted to the assessee (RIL) by the Government of Maharashtra was also for production, that it was based on the sales made by the assessee and since the Supreme Court had held in Sahney Steel that any subsidy related to production could only be revenue receipt, the subsidy in the present case is revenue receipt in the hands of RIL. The salient features of the 1979 Scheme of the Government of Maharashtra were pointed out to the Tribunal on behalf of the Revenue. The contention on behalf of the assessee, inter alia was that the Andhra Pradesh High Court and the Supreme Court in Sahney Steel (supra) were concerned with a Scheme different from the Government of Maharashtra Scheme of 1979 and therefore the judgment of the Supreme Court in Sahney Steel was not applicable to the case of RIL. It was pointed out that under the Scheme, the object was to more effectively serve the purpose of bringing about industrial growth in all parts of the State with particular attention to backward areas, that the subsidy was given at a specified percentage of the cost of fixed assets, such as land, building, plant and machinery, etc. and that the fact that the subsidy was granted after the industry was set up and went into regular production was not the operative or decisive factor in coming to the conclusion as to whether the receipt was revenue or capital. It was emphasized that the decisive factor was the object with which the incentive was given. It was in this connection that various judgments including the judgments of the Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. (168 ITR 632), the Bombay High Court judgment in CIT v. Elys Plastics Pvt. Ltd. (188 ITR 11), CIT v. P.J. Chemicals Ltd. (210 ITR 830) (SC) and so on and so forth were referred to on behalf of the assessee. With reference to the judgment of the Supreme Court in Sahney steel, relied on by the Revenue, it was submitted on behalf of the assessee that in this judgment the Supreme Court itself noted, with reference to the scheme before it, that the Scheme did not involve the payment of any subsidy directly or indirectly for the setting up of the industries, that the power subsidy given to the assessee before the Supreme Court was related to the power consumed for production, that the supreme Court itself observed that “if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given” and that at page 259 the Supreme Court observed that the endeavour of the State “was to provide the newly set up industries a helping hand for five years to enable them to be viable and competitive”. It was argued by the assessee that these observations of the supreme Court in Sahney Steel would themselves show that there is a distinction between the subsidy given with the object of encouraging the industrial growth and for setting up industries in backward areas and the subsidy given with the object of assisting industries for a limited period after they are set up and to lend them a helping hand. The following observations of the Supreme Court in Sahney Steel at page 262-263 were strongly relied upon:-

“If any subsidy is given, the character of the subsidy in the hands of the recipient- whether revenue or capital – will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial.

For example, if the scheme was that the assessee will be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the Revenue to contend that the refund of sales tax paid on raw materials or finished products must be treated as revenue receipt in the hands of the assessee. In both the cases, the Governments paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co. ‘s case [1931] 16 TC 333 (HL), the monies must be treated as having been received for a capital purpose. But if the monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.”

28. The question for consideration is whether the Tribunal in the case of RIL had correctly appreciated and interpreted and interpreted the ratio of the decision of the Supreme Court in Sahney Steel. On a careful reading of the order of the Tribunal in the case of RIL, it appears to us that the ratio of the judgment in Sahney Steel (SC) has been correctly interpreted and appreciated by the Bench. It may be recalled that the assessee before the Supreme Court received the amount as subsidy under the Andhra Pradesh Scheme, one of the salient features of which, as noted by the Supreme Court at page 257 of the report, was that “the scheme was not to make any payment directly or indirectly for the setting up of the industries”. Under the Andhra Scheme, it was only after the industries had been set up and production had been commenced that the incentives were to be given by way of refund of sales tax and by way of subsidy on power consumed for production. At page 261, the Supreme Court noticed that in the case before them, “payments were made only after the industries have been set up” and in the very next sentence observed that “payments are not being made for the purpose of setting up of the industries”. The contrast between the two has been brought out in this paragraph. The Supreme Court also noted that the power subsidy under the Andhra Scheme was confined to the power that was consumed for production and if any power is consumed for setting up the plant and machinery, the incentive was not to be given. The supreme Court held that such subsidies were operational subsidies and were given “to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable”. It is in this background that we will have to consider the further observations of the Supreme Court at pages 262-263 of the report, which we have extracted in the preceding paragraph. These observations, in our humble understanding of the judgment, constitute the ratio of the judgment. It is here that the Supreme Court has laid down the following principles:-

(1) The character of the subsidy (whether revenue or capital) in the hands of the recipient will have to be determined by having regard to the purpose for which the subsidy is given.

(2) If the subsidy is given as assistance to the assessee in the carrying on of his trade or business, it is a trading receipt.

(3) In determining the character of the subsidy, the source of the fund is immaterial.

The Supreme Court itself gave an example to demonstrate how the ratio is to be applied. The supreme Court supposed that if under the scheme, the assessee obtained a refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy would be capital receipt. This example demonstrates the applicability of the first principle viz., that it is the object or purpose for which the subsidy is given that is determinative of its character in the assessee’s hands. The object of the subsidy, in the example given, being for a capital purpose, the subsidy also fell to be considered as capital receipt. The first principle was emphasized again by the Supreme court by referring to the judgment of the House of Lords in Seaham Harbour Dock Co’s case (supra) and by giving that case as example, where the subsidy was given with the object of helping the assessee to sept up its business or complete a project. Since this is a capital purpose, the subsidy was held to be capital. The third principle that the source of the fund was not determinative of the question was demonstrated by the Supreme Court in the same example. It noted that both in the case of refund of sales tax paid on raw materials and finished products, the Government was paying out of publice funds to the assessee for a definite purpose, viz., the expansion of its capacity. Thus, the Supreme court demonstrated the principle that it is the object of the subsidy that must be given primacy over the source of the fund. The second principle was demonstrated by observing that if any monies are given to the assessee for assisting him in carrying out the business operations and where the money is given only after and conditional upon commencement of production, it should be treated as revenue receipt. The Scheme framed by the Govt. of Maharashtra in 1979 and formulated by its Resolution dated 5.1.1980 has been analysed in detail by the Tribunal in its order in RIL for the A.Y. 1985-86 which we have already referred to in extenso. On an analysis of the Scheme, the Tribunal has come to eh conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the notified backward area. The Tribunal has, at more than one place stated that the thrust of the Maharashtra Scheme was the industrial development of the backward district as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even whole the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sales tax incentive was envisaged only as an alternative to the cash disbursement and by this very nature was to be available only after production commence. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee fro assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area.

29. Thus, the interpretation of the Tribunal, of the ratio laid down in the judgment of the Supreme Court in Sahney Steel (supra) cannot be stated to be erroneous. The Tribunal did recognise, as the Supreme Court in self recognised, that the object with which the subsidy was given ins decisive. It did recognised, following the distinction pointed out by the Supreme Court that if the subsidy is given for setting up or expansion of the industry in a backward area, it will be capital, irrespective of the modality or the source of funds through of from which it is given and that if monies are given for assisting the assessee in carrying out the business operations only after, and conditional upon, the commencement of production, it would be revenue. It was only for the purpose of bringing out this distinction that the Tribunal had analysed the features of the Maharashtra Scheme of 1979 and had come to the conclusion that the subsidy given under the Scheme had a direct nexus with the fixed capital investment and that it could not be said that the subsidy was given with the object of assisting or lenging a helping hand to the assessee in its business operations. The Tribunal also took the view that since the Madhya Pradesh Scheme was found by the Supreme Court in Sahney Steel to be more or less in the same genre as the Andhra Pradesh Scheme, it observed at page 267 of the report (228 ITR), vis-a-vis the Madhya Pradesh Scheme and while overruling the judgment of the M.P. High court in CIT v. Dusad Industries (supra), that mere setting up of the industry did not qualify an industrialist for getting any subsidy and that the subsidy was given as help not for setting up of the industry which was already three, but as an assistance after the in duty commenced production. This aspect of the matter has been noted by the Tribunal in RIL’s case in para 112 of its order. In the same paragraph , it has also been noted by the Tribunal that Dusad Industries (assessee before the Madhya Pradesh High Court) had commenced production on 5.1.1973, much before the Government Memorandum sanctioning the Scheme had been issued on 30.8.1973. The Tribunal has further noted that under the M.P. Scheme, an assessee could seek eligibility only after having commenced production, whereas under the Maharashtra Scheme, an assessee could seek eligibility immediately upon having taken some initial steps towards setting up of the industrial unit.

30. The Tribunal was thus aware of the distinction between the subsidy given with the object of setting up the industry and the subsidy given after the industry commences production and conditional upon the commencement of production. Factually, the Tribunal found that the assessee as case which fell under the Maharashtra, Scheme was a cases where the subsidy was given for the purpose of facilitating the assessee to set up an industry in Patalganga, Raigad District, which is a notified area. The actual disbursement took place after the assessee commenced production, but, according to the Tribunal, it was only a mode of disbursement and had nothing to do with the object for which the subsidy was given. In paragraph 115 at the bottom of page 121 of its order (pages 336 of the paperbook No. 1), the Tribunal observed as follows :-

“On a detailed consideration of various schemes of Government of Maharashtra and 1979 Scheme in particular, we find that the investment in fixed capital assets is not merely a measure of the amount of incentive. The entire Scheme of incentive has been oriented and is subservient to investment in fixed capital assets in the specified districts of the State. The importance of this aspect has been emphasised in the judgment of Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd. itself at page 263 in the following words….”

Thus, we find that the Tribunal did notice the crucial observations of the Supreme Court in Sahney Steel (supra) which gave primacy to the object of the subsidy over the fact that it was given after the commencement of production.

31. In the same paragraph, in page 123 of the order (page 338 of the paperbook No. 1), the Tribunal noted as under :-

“In our view, the mere fact that the amount of incentive was allowed to the assessee after the purchase and installation of plant and not before had cannot deflect from the essential position of the Maharashtra Scheme, that the payment is by virtue of and to the extent of investment made in the fixed assets. It is a fact of life of the setting up of industries in the modern era that the cost of machinery and plant, etc., are generally defrayed by way of repayment of borrowings from out of the internal accruals of the industry during the course of its business operations. Even the assessee before us in its application dated 16.12.80 submitted to SICOM that the aggregate cost of project estimated at Rs. 66.21 crores was proposed to be met by the following means of finance :-

   Share Capital and Internal Cash Accruals	1.350
Rupees Loans/Debventures 			2.576
Foreign Currency Loan				2.695
					       ------
		Total				6.621
					       ====== 
 

Sales Tax incentive which has been envisaged in the Maharashtra Scheme as an alternative to cash disbursement, by its very nature could be available to the assessee only after the production had commenced. Secondly, it obviously made great sense from the point of view of the State to ensure that the incentive was given to a genuine project and not merely to the projects on paper only."
 

32. In the very next paragraph, i.e. in paragraph 116, the Tribunal again referred to the observations in Sahney Steel at pages 260-261 of the report and held ad follows :-
  

“116. We are of the view that the fact that the assessee before us applied for incentive at the stage of blueprint of the project and obtained from the State Government a Letter of Intent indicating implementing agency’s willingness to grant incentive to the assessee goes a long way to establish that the assessee applied for and abstained the incentive on account of its fixed capital investment. We find strong support to this finding from the following observations of Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd. At page 260-261 :-

“Mr. Ganesh strongly relied on Seaham Harbour Dock Co. ‘s case (1931) 16 TC 33 (HL) which does not come to the assistance of his contention in any way. In that case application for assistance was made even before the work of expansion of dock commenced. The Money was for extension of the docks of the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given for the express purpose which was named. It was found by the House of Lords that it had nothing to do with the trading of the company.”

33. The above observations of the Tribunal made on the basis of the observations of the Supreme Court in Sahney Steel also how that the Tribunal was alive to the distinction between the character of the subsidy given with the object of promoting industrial growth in a particular area and the subsidy given conditional upon the commencement of production and after actual commencement of production. In our opinion also, it is not correct to understand the judgment as laying down the broad proposition that wherever the subsidy is given after the commencement of production and condition upon the same, it should be treated as a revenue receipt in the hands of the assessee, irrespective of the object for which the subsidy was granted. The object for which the subsidy is granted, in our opinion also, takes primacy over the fact that it was given after the commencement of production and conditional upon the same. That the Supreme Court itself recognised this position has been amply made clear in its observations made at pages 262-263 of the report.

34. With great respect, we are therefore unable to share the opinion expressed in Bajaj Auto ltd. That the Tribunal in its order in the case of RIL for the A.Y. 1985-86 did not correctly interpret the ratio laid down by the Supreme Court in Sahney Steel (supra)

35. Coming to the facts of the case, they have all been adverted to in the Tribunal’s orders, both for the A.Ys. 1984-85 and 1985-86. When the assessee applied for the subsidy on 16.12.1980, it did not have any industrial unit in the State of Mahrashtra, but was running a synthetic textile mill at Naroda, Ahmedabad. It has been observed by the Tribunal that the assessee had taken possession of the land in June, 1980 in Patalganga Industrial area and spent Rs. 1.40 crores for that purpose. It has also obtained registration from the Ministry of Industry, Government of India, for the manufacture of polyester filament yarn with licenced annual capacity of 10, 000 tons. The assessee informed the implementing agency (SICOM) that the estimated cost of the project was Rs. 66.21 crores and it was proposed to be met by various means of finance. On 27.1.1981, SICOM issued a letter of intent in which the assessee was directed to ensure that the unit commenced commercial production on or before 26.1.1984. When the first phase of the unit had commenced production on 24.3.1983, SICOM issued eligibility certificate on 6.6.1983 under the 1979 Scheme which was valid for a period of 5 years from 8.6.1983 to 7.6.1988. Since the unit had undergone huge expansion, another eligibility certificate was issued on 22.10.1983 which was valid upto 30.9.1993 by way of deferral and from 1.10.1993 to 3.06.1997 by way of exemption. It has been found by the Tribunal that the incentive was thus given in several installments depending on the setting up and expansion of the industrial unit. It was also one of the conditions of the eligibility certificate originally issued that in the matter of employment of personnel for the unit, candidates from Scheduled Castes and Scheduled Tribes and local people should be given preference. All these facts have not been disputed before us. The departmental authorities have relied on the assessment and appellant order for the earlier agreement; they have not brought any new fact or material on record. Even before us, with respect to counsel who appeared for both the sides, no new arguments were advanced other than the arguments which had been advanced by the assessee and the department before the Tribunal in the appeal for A.Y. 1985-86. The preliminary argument of the department before us that the assessee did not collect any sales tax and therefore there is no question of any exemption or incentive being given is an argument which has been advanced before the Tribunal both in the A. Ys. 1984-85 and 1985-86. In fact, in paragraph 74 of its order for the A.Y. 1985-86, the Tribunal has referred to this aspect of the matter and after noting that the argument has already been found against the department in the order for the A.Y. 1984-85, further observed that no fresh material was brought to their notice either in the course of the arguments or in the orders of the departmental authorities. The position before us, with respect, is the same. Even with regard to the other question as to whether the Tribunal erroneously interpreted the judgment of the Supreme Court in Sahney Steel, the arguments of the department were the same in the sense that even in the appeal before the Tribunal for the A.Y. 1985-86, as we find from the order of the Tribunal, the arguments were focused upon the pivotal point that the ratio laid down by the Supreme court in Sahney Steel (supra) was that if the subsidy is received after and conditional upon the commencement of production, irrespective of the object for which the subsidy is given, it constitutes a revenue receipt in the assessee’s hands. This argument has been rejected by the Tribunal in its order for the A.Y. 1985-1986 for reasons which we have already discussed in some detail and the same arguments have been pressed into service before us also. Additionally, the order of the Tribunal in Bajaj Auto Ltd. (supra) was also heavily relied upon. We have already expressed our inability to share the view expressed in Bajaj Auto Ltd. that the Tribunal is the case of RIL for the A.Y. 1985-86 erroneously interpreted or appreciated the ratio laid down in Sahney Steel (supra). We have also given reason for our view. Therefore, no separate discussion of the arguments on this point before us is considered necessary.

36. However, some recent discussions which were cited before us on behalf of the department require to be considered. The first is the judgment of the Madras High Court in Tamil Nadu Sugar Corporation Ltd. v. CIT (2003) 130 Taxman 348. In this case, the assessee, a sugar factory owner, received purchase tax subsidy equivalent to the quantum of purchase tax, from the State Government for a period of 5 years from the date of commencement of production. It returned the subsidy as business income for the A.Ys. 1986-87 and 1987-88 but later filed revision applications before the CIT u/s. 264 of the Income-tax Act contending that the subsidy should be treated as capital receipt. The applications were rejected by the CIT, against which the assessee moved the Madras High Court by way of Writ Petitions. The Madras High Court held that a fair reading of the Government order showed that the subsidy was given by way of assistance to the sugar factories on the commencement or production and not for the setting up of the factories and it was given only to tide over the difficulties that might be experienced by the management in the actual running of the sugar factories. It was further held up that though the amount of subsidy is equivalent to the quantum of purchase tax, the object behind the grant of the subsidy is not to set up a new sugar factory, but to run the factory efficiently. In other words, the subsidy is given so that the management may not be in trouble in running the factories in the initial year. In this background of facts, the Madras High Court applied the decision of the Supreme Court in Sahney Steel. In doing so, the High Court noted that in Sahney Steel’s case, the payments were made directly or indirectly not for the setting up of the industries, but were made only after the production was commenced. It was therefore held, applying the ruling of the Supreme Court, that the subsidy received by the assessee, which was not for the setting up of the sugar factory, is a revenue receipt. In the other judgment, which is of the Madhya Pradesh High Court in CIT v. S. Kumar’s Tyre Manufacturing Co., the subsidy was expressly given to meet expenditure on power. The Madhya Pradesh High Court held, following the judgment of the Supreme Court in Sahney Steel (supra) and in CIT v. Rajaram Maize Products (supra) that since the subsidy is given for the purpose of meeting a part of the expenditure on power, it was revenue receipt in the assessee’s hands. In both the cases, the object of the subsidy was not to encourage the setting up of factories or for industrialization of any particular area of the State. The object was to assist or lend a helping hand to the concerned assessee after they commenced production so that they tide over the initial difficulties in running the factories. The subsidy in both the cases was an operational subsidy. The facts in these two cases being different from the facts of the present case, they are not applicable.

37. In the paperbook filed by the department containing the above judgments, we noticed a judgment of the Madras High Court in CIT v. Ponni Sugars & Chemicals Ltd. (260 ITR 605). In this case, the assessee received two types of subsidies. One was under a scheme of the Government framed with the object of augmenting indigenous sugar production and to provide incentives to new sugar factories and expansion products. The scheme enabled the entrepreneur to initially fund the capital cost by obtaining loans from public financial institutions and discharging them with the help of the incentives after the commencement of production. The incentives were provided exclusively for the purpose of repayment of loans for meeting the capital costs. These incentives were held by the High Court to be capital in nature. The other type of incentives was the subsidy which was linked to the purchase tax was in no way linked to the expenditure incurred in setting up the sugar industry. The object of the subsidy was to give a concession to the assessee for meeting the cost of running the business after production. There was also no condition to the effect that the subsidy shall be used for a particular purpose only. In these circumstances, the High Court held that this subsidy was a trading receipt in the hands of the assessee. This case emphasises that the object with which the subsidy is given is the prime or foremost consideration while determining the nature of the receipt. The High Court held as under:-

“The nature of the receipt of the incentive, therefore, as to be examined in the light of that object. Law has to keep up with the newer devices and methods adopted in the world of business as also in the several schemes that policy makers draw up from time to time to ensure the development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the scheme for discharging such loans, it cannot be said that the incentive given being post production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payments is subsequent to the commencement of production would not in the larger perspective make a difference. as observed by the Supreme Court in the case of K.C.P. Ltd. v. CIT [2000] 245 ITR 421, it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling with the capital field or out of it.

If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production not be allowed to stand in the way of its proper treatment as a receipt in the capital filed meant to meet a capital cost. The line separating “capital” from “revenue” is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital or in the revenue filed.

The purpose and object of the scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-determine the outcome of another case merely on the ground that post production receipts are normally regarded as trading receipts.”

The Madras High Court also referred to the judgment of the Supreme Court in Sahney Steel (supra) and held that the Supreme Court “clearly recognised the possibility of the payments being made not directly but indirectly for the setting up of the industries” and that since in the case before the Supreme Court the payments “had been made post production and were in no way linked to the steps that had been taken by the assessee therein in setting up the industry, it was observed that the incentives had been given only after production had commenced.” These observations of the Madras High Court (at page 612 of the report) recognise the possibility, depending upon the nature and object of the scheme, of even post-production payments being linked, albeit indirectly, to the steps taken by the assessee to set up the industry. The High Court also observed earlier at page 611 of the report, which we have extracted above, that what is of vital significance is the purpose and object of the scheme and that the decided cases which turn upon the special facts cannot predetermine the outcome of another case merely on the ground that post-production receipts are normally regarded as trading receipt. In other words, the High Court has held that merely because the monies are received after production commences, it cannot be said, irrespective of the purpose and object of the scheme, that the receipt is of revenue nature. This observation of the Madras High Court and the manner in which the judgment of the Supreme Court in Sahney Steel (supra) has been explained at page 612 of the report also show that the Tribunal in the case of RIL for the A.Y. 1985-86 correctly interpreted the judgment of the Supreme Court in Sahney Steel (supra). The observations of the Madras High Court lend support to the view that the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy was received after the commencement of production or conditional upon it. Therefore, in our view and with respect, the Tribunal in the case of RIL had correctly interpreted and understood the ratio of the judgment of the Supreme Court in Sahney Steel (supra).

38. In this view of the matter, we answer the question referred to us in the affirmative. Since there are other grounds in the appeal of the assessee and since there is also an appeal by the department, they will go back to the Division Bench for being disposed of in accordance with law.