JUDGMENT
Ajit K. Sengupta, J.
1. As many as eight questions of law–four at the instance of the assessee and four at the instance of the Revenue–for the
assessment year 1972-73 have been referred to this court. Counsel for the parties are agreed that all the questions but two are covered either by the decisions of this court or of the Supreme Court. We do not, therefore, propose to set out the facts in respect of such questions. We, however, propose to answer the questions which are admittedly covered by the decisions of this court or of the Supreme Court, as the case may be. Be it mentioned that we have rearranged the questions for convenience :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the cash subsidy on controlled cloth of Rs. 52,87,267 was liable to tax under the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the benefit of Rs. 14,48,604 received by the assessee-company under the Export Incentive Scheme is taxable under the Income-tax Act, 1961 ?”
2. In view of the decisions of this court in Kesoram Industries and Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 ; Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 and Bharat General and Textile Industries Ltd. v. CIT [1985] 153 ITR 747, the aforesaid two questions (which are questions Nos. (ii) and (iii), respectively, in the statement of case referred at the instance of the assessee) are answered in the affirmative and in favour of the Revenue and against the assessee.
“3. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of Sections 80A(2), 80B(5), 80K and 80H of the Income-tax Act, 1961, the Tribunal was justified in holding that the relief allowable under Sections 80K and 80M was not allowable on gross dividend but could be allowed only after setting off the carried forward unabsorbed depreciation ?”
3. In view of the decisions of this court in CIT v. Bengal Assam Steamship Co. Ltd. [1985] 155 ITR 26 and in CIT v. North Koshalpur Colliery Co. P. Ltd. [1986] 161 ITR 756, the aforesaid question (question No. (iv) at the instance of the assessee) is answered in the affirmative and in favour of the Revenue and against the assessee.
“4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in treating the sum of Rs. 2,07,548 received on transfer of import entitlements as capital gains and in directing the Income-tax Officer to determine the capital gains earned by the assessee on transfer of import entitlements in accordance with law after ascertaining necessary information from the assessee ?”
4. In view of the decision of this court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 139 ITR 865, the aforesaid question (being the first question at the instance of the Revenue) is answered in the negative and in
favour of the Revenue and against the assessee. In other words, the sum received on transfer of import entitlements has to be assessed as revenue profits.
“5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income-tax authorities should have taken into account the value of the fixed assets acquired during the accounting period relevant to the assessment year 1972-73 as well as borrowed capital for the purpose of computing capital employed in new units as contemplated under Section 80J of the Income-tax Act, 1961, and in directing the Income-tax Officer to compute capital employed afresh accordingly ?”
5. In view of the decision of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, the aforesaid question (being the second question at the instance of the Revenue) is answered in the negative and in favour of the Revenue and against the assessee.
“6. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee’s claim for deduction of the amounts spent on maintenance of various transit bungalows in their entirety ?”
6. The facts relating to this question are that, in maintaining transit bungalows at its cement, rayon and refractory factories, the assessee incurred expenditure of Rs. 91,402 and claimed the same as an allowable expenditure. The Income-tax Officer disallowed the assessee’s claim on the ground that the same related to the guest houses maintained by the assessee. In appeal, after considering the rival submissions of the parties, the Appellate Assistant Commissioner allowed Rs. 26,150 and sustained the disallowance of the balance amount. He recorded the submission of counsel and observed as follows :
“Shree Choudhury argued that the transit bungalows were in remote villages and there were no arrangements for hotels ; nor was there any facility for private accommodation. The touring staff and customers had to be provided with accommodation during business travels. Learned counsel urged that these bungalows should not be treated as guest houses.
The appellant’s factories were at Tribeni (rayon unit), Bansberia (spun pipe unit) and Basantnagar (cement unit). These were in remote localities where proper accommodation was not available for persons visiting the factories. The appellant had to make arrangements for their stay and food. Hence, the need for guest houses in remote interior places. They should not be equated with guest-houses in towns and cities. On a perusal of the analysis of expenses furnished for their maintenance, I find that no recoveries were made by the appellant from the customers.”
7. Taking into account the overall business done and other factors, the Appellate Assistant Commissioner held that 50% of the expenses should be taken to be in the nature of guest house expenses as contemplated by Section 37(4). On appeal to the Tribunal, the Tribunal, however, did not sustain the disallowances affirmed by the Appellate Assistant Commissioner for the maintenance of guest houses situated at various places where facility of ordinary hotel accommodation is not available, in view of the order of the Tribunal in the case of Orient Paper Mills Ltd. (I. T. A. No. 2406 (Cal.) of 1974-75 dated May 28, 1976), wherein an identical point was considered by the Tribunal in favour of the assessee. The Tribunal, therefore, held that the assessee would be entitled to deduction of the entire amount spent on the maintenance of various guest houses. The Income-tax Officer was, therefore, directed to modify the assessment accordingly.
8. Our attention has been drawn to the decision of this court in C/T v. Parshva Properties Ltd. [1987] 164 ITR 673. In that case, it was found that the bungalow was situated in Pipridih which was situated in a remote corner of the district of Rohtas in the State of Bihar. Employees of the company, auditors, mining engineers and other Government officials went there on duty and stayed there temporarily for doing their work. Expenses were incurred on the stay of such persons at the bungalow. No one went to this bungalow for entertainment or relaxation. The Tribunal held that it could not envisage a situation where the guests of the assessee could be normally taken to that place and be entertained gratuitously or at a concessional rate. It was also found that no daily allowance was paid to the employees of the assessee who went to Pipridih on duty and stayed in the bungalow. On these facts, the Tribunal concluded that the maintenance of the bungalow cannot be held to be maintenance of a guest house within the meaning of Section 37(4)(ii). There, the court observed (p. 675) :
“The guest house envisaged in that provision is a place where the guests are received and entertained gratuitously or at a concessional rate. A hotel cannot be deemed to be a guest house within the meaning of the aforesaid provision. In our opinion, the Tribunal correctly concluded that, on the facts mentioned above, the bungalow in question cannot be treated as a guest house within the meaning of the aforesaid provision of Section 37 and, hence, the expenses could not be disallowed on the ground that the amount was used for maintenance of the guest house.”
9. Our attention has been drawn also to a decision of this court in CIT v. Orient Paper Mills Ltd. [1988] 171 ITR 181. In that case, the assessee provided accommodation at places where no accommodation of any kind was available. The same was not meant for entertainment or relaxation. Further, the persons availing of the accommodation had been paying charges covering almost the entire expenditure. It was held that such accommodation
facilities could not be treated as a guest house so as to attract the provisions of Section 37(4).
10. The facts of the instant case, however, are different. We have already extracted the findings of the Appellate Assistant Commissioner which have not been disputed before the Tribunal. There is no dispute that the asses-see was maintaining guest houses in remote interior places. It is found that no recoveries were made by the assessee either from the customers or from the employees who were provided with accommodation in those guest houses. It is nobody’s case that the guest houses were maintained exclusively for the use of the employees as holiday homes. On the other hand, we have already indicated that the assessee had made arrangements for stay and food of the persons visiting the factories, employees as well as the customers and no recoveries were made from them.
11. In order to place an effective check on lavish expenditure on maintenance of guest houses, Section 37(4) was inserted by the Finance Act, 1970, for disallowance altogether of expenditure incurred after February 28, 1970, on the maintenance of guest houses other than “holiday homes”, in computing the profits and gains of business or profession. The provision covers not only the establishment and other charges for running the guest house but also depreciation on building where that is owned by the assessee, and rent paid for the accommodation where it is taken on hire or lease. Depreciation on assets such as air-conditioners, refrigerators, cooking ranges, furniture and fittings, etc., in the guest house is also to be disallowed under these provisions. Where any charges are recovered from persons using the guest house, these are to be deducted from the expenditure on maintenance and depreciation, and only the balance is to be disallowed in computing the profits of the business or profession. The provision does not, however, apply to “holiday homes” maintained by an assessee employing in his business or profession not less than 100 whole-time employees throughout the relevant year, where the “holiday home” is intended for the exclusive use of such employees while on leave.
12. In our view, a guest house is a guest house whatever may be the category of the guests to which it caters and whatever may be the standard of comforts and amenities provided and no matter whether the intention of the party is merely to provide them with shelter and food or to entertain and amuse or gratify the visitors.
13. For the foregoing reasons, it must be held that the transit bungalows are guest houses and, accordingly, the assessee was not entitled to any deduction. We, therefore, answer the question (being the third question at the instance of the Revenue) by saying that the Tribunal was not justified in allowing in part the assessee’s claim for deduction of the amount spent on the maintenance of the transit bungalows.
“7. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provision for gratuity liability made on the basis of actuarial valuation based on the services of the employees for the earlier years up to 31st March, 1971, was an allowable deduction in computing the assessee’s total income for the assessment year 1972-73 ?”
14. Although the question is concluded by the decision of this court regarding the allowability of gratuity ascertained on actuarial valuation, it is necessary to set out the facts as regards the quantum in view of the contentions raised in the reference for the subsequent years which we have heard along with the present reference. The facts are that the Income-tax Officer, in his order for the assessment year 1972-73, rejected the claim of the assessee for deduction of provision for gratuity in the following words :
“Provision for gratuity Rs. 32,12,704. Above amount represents provision for gratuity of the year made on actuarial basis. The provisions for gratuity can be allowed only if the conditions laid down in Section 36(1)(v) are fulfilled. As no approved gratuity fund has been created under an irrevocable trust, deductions as claimed cannot be allowed. In the return, the assessee has claimed an amount of Rs. 2,23,05,255 being amount of gratuity as per actuary’s certificates including that of earlier years. The claim cannot be entertained for the reasons stated above. The actual payments made which have been included in salary, wages, etc., account are allowed. Hence, added Rs. 32,12,704.”
15. The Appellate Assistant Commissioner found that of the total gratuity of Rs. 2,42,72,502, a sum of Rs. 19,67,247 was already allowed in the assessment year 1971-72. Hence, the assessee claimed allowance of Rs. 2,23,05,255 in the instant assessment. Against this liability actuarially valued, only a sum of Rs. 32,12,704 was provided in the account for the assessment year 1972-73. Then it was found that the liability for the year in question was Rs. 32,12,704, whereas the liability of the earlier years, inclusive of the year in question was Rs. 2,42,72,412. The Appellate Assistant Commissioner found that, out of Rs. 2,42,72,412, Rs. 19,67,247 had already been allowed in the year 1971-72, leaving a balance of Rs. 2,23,05,255. Out of the said sum in the cement units, there was no statutory liability for Rs. 8,77,258. Thus, the balance was Rs. 2,14,28,011 (Rs. 2,23,05,255–Rs. 8,77,244). Accordingly, the question was whether the sum of Rs. 2,14,27,997 could be allowed as deduction. The Appellate Assistant Commissioner allowed the said claim to the extent of Rs. 2,14,27,997. The Tribunal upheld the allowance of the deduction of Rs. 2,14,27,997. Thus, the entire liability up to and inclusive of the assessment year 1972-73 was allowed.
16. We may mention that, in the subsequent year, i.e., 1973-74, the assessee had written back the provision for gratuity of Rs. 32,12,704 relating to
the assessment year 1972-73 in the profit and loss account. The assessee is entitled to deduction of the provision made in this year on actuarial valuation which included the sum of Rs. 32,12,704 being the liability of the year in question. Whether or not this amount will be assessed under Section 41(1) will fall for consideration in the assessment year 1973-74.
17. In view of the decision of this court in CIT v. Eastern Spinning Mills Ltd, [1980] 126 ITR 686, the aforesaid question (being the fourth question at the instance of the Revenue) is answered in the affirmative and in favour of the assessee.
18. The only other question which remains to be considered and which was referred at the instance of the assessee is as follows :
“8. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the incentive scheme G. 0, No. 1225 dated 31st December, 1968, as modified by G. O. Ms. No. 455 dated 3lst May, 1971, drawn up by the Industries and Commerce Department of the State of Andhra Pradesh, the incentive of Rs. 13,02,782 received by the assessee-company from the Government of Andhra Pradesh was a capital receipt or a revenue receipt liable to tax under the Income-tax Act, 1961 ?”
19. The facts relating to this question are that the assessee installed” a cement factory costing about Rs. 7 crores in the State of Andhra Pradesh. Under an Incentive Scheme drawn up by the Industries and Commerce Department of the State of Andhra Pradesh (G. O.Ms. No. 1225 dated December 31, 1968, as modified by G. O. Ms. No. 455 dated May 31, 1971), the assessee was entitled to refund of sales tax on raw materials, machinery and finished goods levied by the State Government subject to a maximum of 10% of the equity capital paid up in the case of public limited companies. Under the said scheme, the assessee received Rs. 13,02,782 by way of incentive from the Government of Andhra Pradesh.
20. Before the Income-tax Officer, the assessee claimed that the same was not exigible to tax. The Income-tax Officer, while computing the total income of the assessee, included Rs. 13,02,782 in the following manner :
“Add: (1) Incentive Rs. 13,02,782.
As mentioned by the auditor in his note at item 18 of schedule 16, incentive received represents amount received under a scheme of the Government of Andhra Pradesh for the development of industries in the State. This amount has been received by the assessee for development of the cement industry which business is being carried on by the assessee in that State. The assessee has offered this amount for assessment by its letter dated 7th March 1975. Hence added. The assessee’s subsequent letter dated 10th March 1975, withdrawing the earlier letter dated 7th March, 1975, is not accepted.”
21. Before the Appellate Assistant Commissioner, the assessee once again urged that Rs. 13,02,782 was a casual and non-recurring receipt and, therefore, was not includible in its total income. The Appellate Assistant Commissioner, however, came to the conclusion that the incentive received by the assesseee was “very much a business receipt and was not exempt under Section 10(3) of the Act.”
22. Before the Tribunal, learned counsel for the assessee once again pressed for the exclusion of Rs. 13,02,782 from the total income of the assessee. The Tribunal, after considering the rival submissions of the parties as well as the aforesaid schemes and circular, upheld the action of the income-tax authorities, for the following reasons :
“We entirely agree with the submissions made on behalf of the Revenue that there is a difference between the Central scheme and the State scheme with which we are concerned in the present appeal. Under the Central scheme, the quantum of subsidy is determined with reference to the fixed capital while, under the State scheme, an entity is granted refund of sales tax on raw materials, machinery and finished goods levied by the State Government ‘subject to maximum of 10% of the equity capital’. In other words, the equity capital is used only as a measure in determining the refund of sales tax to an entity. Again, we find from the incentive scheme issued by the State of Andhra Pradesh that, primarily, the incentive is given to ‘small scale industries’ with a capital investment of not more than Rs. 7.5 lakhs. In the present case, as stated above, the investment runs into over Rs. 7 crores. Further, we find from the order of the Appellate Assistant Commissioner that the assessee had received similar incentive in the subsequent year also. In other words, the receipt of the incentive from the State Government is incidental to the carrying on of the business by the assessee. In this view of the matter, it is difficult to hold that the incentive received by the assessee from the Government of Andhra Pradesh was of casual and non-recurring nature as was urged on behalf of the assessee. We, accordingly, uphold the order of the Appellate Assistant Commissioner on this point”
23. Before us, the contentions as urged before the Tribunal have been reiterated. The nature of the subsidy has to be considered in the light of the relevant Government orders. It appears that, having regard to the slow pace of industrialisation in Andhra Pradesh and with a view to stimulating rapid industrialisation throughout the State, the Government of Andhra Pradesh had offered facilities and incentives for new industrial units to be set up in Andhra Pradesh. There are several incentives, e.g., (a) refund of sales tax on raw materials, machinery and finished goods, (b) subsidy on power consumed for production, (c) exemption from payment of water
rate, (d) refund of water rate (e) exemption from liability on account of assessment of land revenue or taxes on land used for establishment of an industry.
24. It has been provided that subsidies, refunds and other financial concessions granted shall be deemed to be a development grant for each unit which shall be used wholly and solely for the development of the unit. Mis-utilisation will, apart from other consequences, entail loss of eligibility and other financial concessions for future years and the subsidies, refunds and financial concessions already granted might be summarily recovered.
25. It was the contention of the assessee that the incentive was referable to the fixed capital assets and not profits. It was also the contention that there was no difference between the subsidy granted by the Central Government under the Central scheme and the incentives granted by the Andhra Pradesh Government under the State scheme and as such, this should be treated as a capital receipt in the hands of the assessee.
26. The contention of learned counsel for the Revenue, however, is that, under the Central Government scheme, the quantum of subsidy was determined with reference to the fixed capital while, under the State scheme, incentive was given with reference to the sales tax paid by the assessee and not with reference to the fixed capital. At this stage, we may mention that the only subsidy with which we are concerned in this case is the refund of sales tax on raw material, machinery and finished goods.
27. This court, in Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448, was considering a case of cash subsidy. There, this court observed as follows (p, 455):
“It is true that how the recipient has treated the amount may be a relevant piece of evidence. It is true. But as to how a party had treated the amount was not determinative to ascertain the character of a particular sum. It must be determined by the true character or legal principle and not merely by the conduct of the party, in whichever way the party might have treated the sum. Therefore, it was submitted, whether the sum was given as cash assistance to the exporters to meet their losses or whether it was given to promote the export industries or not, must be determined on the general nature because one assessee might have treated it as a compensation for losses suffered and another might have treated it differently. We are inclined to accept this contention of the assessee that it must be determined on the true basis and character of the cash assistance and the true nature of the receipt. It is, therefore, necessary for us to determine what is the true character of the receipt.”
28. Thereafter, this court considered how the expression “subsidy” has been defined in the dictionary. The Supreme Court in Shri Ambica Mills Ltd. v. Textile Labour Association, referred to various definitions of subsidy as follows (pp. 1083, 1084) :
“Webster’s New World Dictionary, 1962 :–‘a grant of money, specifically (a) … (b) a government grant to a private enterprise considered of benefit to the public.’
“Shorter Oxford English Dictionary .—‘Help, aid, assistance . . . Financial aid furnished by a state or a public corporation in furtheranpe of an undertaking or the upkeep of a thing …’
“Chambers’ Twentieth Century Dictionary, Revised Edn.–‘assistance, aid in money … a grant of public money in aid of some enterprise, industry, etc., or to keep down the price of a commodity
The Reader’s Digest Great Encyclopaedic Dictionary, Vol. II (M-Z) :–‘2. Financial aid given by government towards expenses of an undertaking or institution held to be of public utility, money paid by government to producers of a commodity so that it can be sold to consumers at a low price …’
In addition, our attention has been drawn to the definition given in ‘Words and Phrases, Permanent Edition, Vo. 40’, where subsidy is described as follows :
‘A subsidy is a grant of funds or property from a government, as of the state or municipal corporation to a private person or company to assist the establishment or support of an ‘enterprise deemed advantageous to the public ; a subvention’.
Reference is made to 60 Corpus Juris, Corpus Juris Secundutn, Vol. 83, page 760, gives the following under the heading of subsidy :
‘Something, usually money, donated or given or appropriated by the Government through its power agencies, a grant of funds or property from a Government, as of the state or a municipal corporation, to a private person or company to assist in the establishment or support of an enterprise deemed advantageous to the public ; a subvention.
Pecuniary premiums offered by the Government to persons enlisting in the public service, or engaging in particular industries, or performing specified services for the public benefit are treated in Bounties’.”
29. In Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448, this court quoted with approval the observations of Viscount Simon in the case of Pontypridd and Rhondda Joint Water Board v. Ostime (H.M. Inspector of Taxes) [1946] 14 ITR (Suppl.) 45 (HL). There, Viscount Simon observed as follows (at p. 457) :
“The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker’s trade or business
are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains under Case I of Schedule D. It is sufficient to cite the decision of this House in the sugar-beet case (Lincolnshire Sugar Co. v. Smart [1937] 20 TC 643 (HL)) as an illustration.
The second proposition constitutes an exception. If the undertaker is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevents any question of profits arising ; see, for example, Lord Buckmaster’s explanation in Inland Revenue Commissioners v. Forth Conservancy Board [1931] 16 TC 103 (HL), and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills [1932] 16 TC 430 (HL).”
30. In our view, the principle laid down in the aforesaid decision of this court would equally apply to the facts of this case. What is decisive in these matters is the nature of business, the nature of income and the nature of the right to receive and also the relation inter se, that is the key to resolve the issue in the light of the general principles, which are to be followed in such cases.
31. The receipt of the incentives from the State Government in this case is incidental to the carrying on of the business by the assessee. Such subsidies have been received year after year. The assessee received refund of sales tax. The sales tax liability is a trading liability and to the extent the assessee obtained refund of sales tax, it received a benefit in the course of its business. This benefit is incidental to its business. Our attention has been drawn to the decision of the Andhra Pradesh High Court in Panyam Cements and Mineral Industries Ltd. v. Addl. CIT [1979] 117 ITR 770. In that case, the assessee, engaged in the manufacture of cement, had claimed deduction in respect of electrical charges paid by it. Thereafter, the State Government issued an order approving the recommendation of a committee constituted by it, directing that concession should be granted on power tariff in respect of certain industries, including the assessee’s industry, which were to be entitled to concessional rate of power tariff (ranging between 25% and 50%) upto March 31, 1966, from the date of commencement of’production. The assessee was granted 20% rebate in respect of its second plant. In accordance with the said scheme, the assessee received a sum of Rs. 1,54,561 and Rs. 51,821 for two assessment years. Rejecting the plea of the assessee that it was a windfall and not a rebate in tariff, the Income-tax Officer included the same in the income of the assessee. On appeal, the Appellate Assistant Commissioner and, on further appeal, the Tribunal also, affirmed the inclusion of the same.
32. There, it was held that a perusal of the Government Orders issued by the Government indicate that the subsidy in respect of power tariff was
granted to the assessee by the Government as a matter of well-defined policy. The assessee got the benefit because the screening committee constituted for the purpose recommended the assessee for grant of concession and the same was approved by the Government by a Government Order. Hence, the concession granted by the Government in respect of power tariff cannot be said to be either a windfall income or a casual or a non-recurring receipt. Even assuming that it is a casual and non-recurring receipt under Section 10(3), if such a receipt arises from business, then it can be included in the income of the assessee. The assessee would not have got the concessional rate of tariff but for the fact that it was carrying on the business of manufacture of cement. Therefore, the rebate in power charges received by the assessee is exigible to tax as profits and gains of business under Section 41(1) of the Income-tax Act
33. The Andhra Pradesh High Court considered in detail the very scheme in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39 : .
34. In that case, the assessee received refunds of sales tax on purchase of machinery and raw materials and on the sale of finished goods under a Government Order issued by the State Government of Andhra Pradesh. The Government Order had been issued with a view to speed up the industrial development of the State. The amount refunded had to be used specifically for development of the industry and could not be distributed as profits. The Income-tax Officer assessed the receipt but the Tribunal held that the development subsidy was in the nature of a capital receipt and it was not also assessable under Section 41(1). On a reference, it was contended on behalf of the assessee that the amounts were not of the nature of “income” at all and in any case it was a voluntary contribution.
35. It was held that it was not necessary for a receipt to constitute income that it must necessarily be in the nature of a return. It may be that there is no consideration for the benefits extended to the assessee in terms of the Government Order in the common law sense. But it cannot be said that it is an act of generosity on the part of the State. The State is interested in its industrial development; it wants to attract industries to enhance the employment potential, economic prosperity and the income of the State. It is to attract new entrepreneurs that the Government had come forward with the said incentives. The payments could not be considered to be voluntary contributions. The assessee and for that matter any other person setting up an industry in the State of Andhra Pradesh was entitled to the facilities and incentives provided by the said Government Order as a matter of right which, if denied, he could enforce in a court of law. The fact that the Government reserved to itself the power to withdraw the Government Order or to amend it, did not mean that so long as the Government Order was in operation, the persons concerned did not have a right to enforce the same. The source as well as the payments were both certain and definite.
36. The payments were inseparably connected with the business carried on by the assessee. The benefits were available only from the date the new industrial undertaking commenced production and for a period of five years therefrom. The refund or the subsidy, as it may be called, was dependent upon the industry continuing in production. There was no room or basis for dissociating the subsidy from the business of the assessee, inasmuch as the subsidy was given for development of the business and not for any unrelated purposes. The payment was not a subsidy for setting up the plant but a subsidy given for the efficient and profitable running of the industry and its growth. The receipt was, therefore, of a revenue nature. All the three items comprised in the payment constituted income of the assessee. It was also held that the refund of sales tax on purchases of raw materials and on sale of finished goods fell within Section 41(1) and was assessable as gains of business.
37. The subsidy, in the instant case, is not intended to be a contribution towards capital outlay of the industrial unit. The subsidy was received by the assessee from the Government regularly. It was given with the object of enabling the assessee to carry on its business, although the purpose behind it was to encourage industrialisation.
38. Considering the facts and circumstances of the case and having regard to the object and purpose of the scheme, we are of the view that the payment or refund, as the case may be, is closely and inseparably connected with the business carried on by the assessee. Benefits are available only from the date of the new industrial undertaking commencing production. As rightly observed by the Andhra Pradesh High Court in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39, the amount in question was refunded to the assessee because he had set up a new industrial undertaking and had commenced producing goods and continued in production. It is not possible to divorce the said payment from the character of the business carried on by the assessee.
39. For the reasons aforesaid, we answer the aforesaid question (being the first question referred at the instance of the assessee) in the affirmative and in favour of the Revenue.
40. There will be no order as to costs.
K.M. Yusuf, J.
41. I agree.