JUDGMENT
V.B. Gupta, J.
1. The Income-tax Appellate Tribunal, Delhi Bench ‘A’ (in short as Tribunal’) has referred the following question under Section 256(1) of the IT Act, 1961 (in short ‘Act’) for opinion of this Court:
Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 272.94 lacs received by the assessed Corporation from the Government of India constituted the income of the assessed for the assessment year in question under the provisions of Section 41 of the IT Act, 1961?
2. The brief facts of this case are that the assessed Corporation was formed by the Government of India with the main object of assisting and nurturing the small scale sector industries in the country. The main function of this Corporation is to provide finance to the small scale industrial units. The assessed Corporation is to import machinery from abroad on credit and sell such machinery on hire purchase basis to small scale entrepreneurs. An agreement was entered with a German company who was to advance the money to the assessed Corporation. Accordingly, the machinery was imported. Owing to fluctuation in the exchange rates, the assessed Corporation incurred losses. Such losses accumulated to a sum of Rs. 273 lacs over a period of seven years commencing from the asst. yr. 1973-74. A question then arose, as to who should bear this loss, which arose on account of fluctuation in exchange rates. On a representation being made to the Government by the board of assessed Corporation, it was agreed that the Government will bear these exchange losses and as a consequence, neither the assessed Corporation nor the entrepreneurs would be asked to bear the exchange losses. As a result of this decision, the Government paid to the assessed Corporation a sum of Rs. 272.94 lacs in the year under appeal by way of reimbursement of these exchange losses.
3. Then a question arose as to how this reimbursement should be treated for the purposes of income-tax assessment. The assessed Corporation claimed that this was on the capital account, not a part of assessed’s trading operations or receipts. However, the AO took the view that since this amount was paid in reimbursement of the losses already suffered by the assessed Corporation in the past and it was claimed by the assessed as a deduction in computing the income in those years, the entire amount was taxable as income of the assessed under Section 41 of the Act. The AO further held that by whatever name the amount received by the assessed was called, the object being the reimbursement of the losses, it was the amount received in the course of assessed’s business and fully satisfied the requirement to Section 41 of the Act and, therefore, taxable.
4. Aggrieved against the order of AO, the assessed Corporation appealed to CIT(A) and raised the contention that this was not taxable under Section 41 of the Act. The CIT(A) did not agree and held that the inclusion of this sum as part of the assessed’s income was justified under provisions of Section 41 of the Act.
5. The matter was further taken by way of an appeal before the Tribunal and the Tribunal held that the assessed Corporation received this amount to meet the losses which it had incurred on account of fluctuation in exchange rates, which was on revenue account. If the amount was received, thus on revenue account, it became taxable under Section 41 of the Act and thus, the Tribunal dismissed the appeal of the assessed.
6. It has been contended by learned Counsel for the assessed that the sum of Rs. 272.94 lacs received by the Corporation was on capital account and it was not a part of the assessed’s trading operations or receipts. Further, this subsidy received from the Government was to cover up the losses resulting from exchange variation and is, thus, not taxable and this sum received by way of subsidy was not a part of the assessed’s trading receipts. Learned Counsel for the assessed in support of his contention has cited a decision of the Kerala High Court in CIT v. Ruby Rubber Works Ltd. and decision of Madras High Court in CIT v. Kanyakumari District Cooperative Spinning Mills Ltd. .
7. On the other hand, it has been contended by learned Counsel for the Revenue that since this amount was paid in reimbursement of the losses already suffered by the assessed in the past and which were claimed by the assessed as a deduction in computing the income in those years, the entire amount is taxable as income of the assessed under Section 41 of the Act and a bare reading of Section 41 of the Act will show that this amount is taxable as received by the assessed.
8. Learned Counsel for the Revenue in support of her contention has cited a decision of apex Court in Polyflex (India) (P) Ltd. v. CIT .
9. The hire purchase agreement placed on record specifically provides that the hirer (the small scale entrepreneurs) will pay the additional rupees cost because of exchange variation. When the assessed has received reimbursement of the losses from the Government, that reimbursement constituted its income under Section 41 of the Act. By whatever name it is called, either subsidy or bounty, the object being to reimburse the losses, it was the amount received in the assessed’s course of business and, therefore, taxable.
10. Now, coming to Section 41 of the Act, it says:
Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessed, and subsequently during any previous year the assessed has obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession (and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession) in respect of which the allowance or deduction has been made is in existence in that year or not.
11. This section seeks to bring to tax, the sums which have been allowed as deductions, in respect of loss or expenditure or trading liability if in subsequent years events have so taken place that there was reimbursement of loss and expenditure in any manner whatsoever. In the present case, the assessed has received cash in respect of loss or expenditure incurred by him and was allowed to it as an allowance or deduction in the earlier years. The reimbursement has nothing to do with the trading liability because in the transaction, there was no trading liability incurred by the assessed Corporation, vis-a-vis, this amount was concerned. Under these circumstances, it cannot be said that the assessed Corporation incurred a trading liability with the German party and this amount has been rightly brought to tax under Section 41 of the Act.
12. In Kanyakumari District Co-operative Spinning Mills Ltd. (supra) the assessed was a co-operative society. The Director of Handlooms and Textiles requested the Government of Tamil Nadu to sanction certain amount for recruitment of 70 Adi Dravida workers in the assessed’s mill under the special component plan and on that basis, the sum of Ks. 10.50 lacs was sanctioned in favor of assessed. The assessed also recruited 70 additional workers from Adi Dravida community. It was held that, the Government order sanctioning the amount clearly showed that it had framed a special component plan for employment of persons from Adi Dravida community and the amount received by the assessed has nothing to do with the trade or business of the assessed. The amount received by way of subsidy under the scheme was held to be capital in nature. This case law is not applicable at all to the facts of the present case.
13. In Ruby Rubber Works Ltd. (supra) there was a subsidy scheme framed by the Rubber Board for payment of subsidy to growers of rubber plants for replanting rubber plants. The scheme was intended to encourage growers to plant good variety of rubber plants and this subsidy scheme was held not to be a revenue receipt.
Again, the facts of this case are altogether different and this decision is not applicable to the facts of the present case.
The apex Court in Polyflex (India) (P) Ltd. (supra) has held that:
Section 41(1) of the Act applies if the following conditions and circumstances are satisfied:
In the assessment for the relevant year an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by the assesscc. This is the first step. Coming to the next step the assessed must have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof. In case either of these events happen, the deeming provision enacted in the closing part of Sub-section (1) comes into play. Accordingly, the amount obtained by the assessed or the value of benefit accruing to him is deemed to be profits and gains of business or profession and it becomes chargeable to income-tax as the income of that previous year.
14. So, we are of the view that the amount has rightly been brought to tax under Section 41 of the Act and as such the reference is answered in the affirmative in favor of the Revenue and against the assessed.
The reference is disposed of accordingly.