ORDER
J. Kathuria, Accountant Member
1. This appeal by the assessee pertains to assessment year 1986-87.
2. Ground No. 1, which is against the confirmation of addition of Rs. 2,04,019 on account of undervaluation of closing stock, was not pressed by the learned counsel for the assessee because a similar issue was decided by the Tribunal against the assessee vide order dated 26-5-1992, in I.T.A. Nos. 735 and 736 of 1987 for assessment years 1982-83 and 1983-84 in the assessee’s own case. This ground is accordingly treated as dismissed.
3. Ground No. 2, which is the only ground which survives for discussion in the instant appeal, is against the treatment of subsidy of Rs. 14,43,876 as a revenue receipt. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had credited a sum of Rs. 14,43,876 under the head “Electrical tariff subsidy” which had been received in four instalments on 21-8-1984 (Rs. 37,936), on 21-8-1984 (Rs. 4,70,792), on 15-10-1984 (Rs. 4,36,286) and on 11-3-1985 (Rs. 4,98,862). The aforesaid amount was shown in the balance sheet on the liability side under the heading “Reserve and surplus”.
The assessee did not show it as a trading receipt nor was this amount reduced from the cost of assets for the purposes of depreciation and investment allowance. With the help of the aforesaid subsidy, the assessee had purchased a crane for Rs. 11,64,986 and a K. V. A. Station for Rs. 2,78,890. After getting the reply from the assessee and after studying the subsidy scheme, the Assessing Officer mentioned in passing that the subsidy represented a revenue receipt but, in effect, reduced the amount of subsidy from the actual cost of assets for purposes of depreciation and investment allowance.
4. The assessee preferred an appeal before the learned CIT(A) who, without issuing an enhancement notice, held the subsidy as a revenue receipt but agreed with the assessee that the amount of subsidy could not be reduced from the actual cost of the assets for purposes of depreciation and investment allowance as there was no nexus between the purchase of assets and the amount of subsidy. The revenue appears to have accepted the decision of the 1d. CIT(A) but the assessee has come up in further appeal before the Tribunal.
5. Shri Subhash Aggarwal, the 1d. counsel for the assessee, placed before us a copy of the Notification dated 21-3-1979 issued by the Department of Industries, Punjab Government and submitted that subsidy was given to various industries including power-based industry by way of an incentive for new industries set up in the State of Punjab after 1-4-1978. It was pointed out that according to Rule 5.1 of the said Scheme, subsidy equal to 25% of the power tariff, as may be fixed by the State Electricity Board, was admissible to the units in respect of power-based industries for a period of five years from the date of power connection. Inviting our attention to the letter dated 10-10-1984 issued by the Director of Industries, Punjab, it was submitted that the amount of subsidy was to be utilised for the “furtherance of industrial activities” in the existing factory and the disbursing authority was asked to send a utilisation report through proper channel. It was also submitted that with the help of subsidy, the assessee purchased a crane worth Rs. 11,64,986 and a K. V. S. Station for Rs. 3,12,283. Thus, according to the 1d. counsel, the assessee spent a total amount of Rs. 14,77,269 out of the component of subsidy amounting to Rs. 14,43,876. The 1d. counsel elaborated that the subsidy was given as an incentive to industries located at Focal Point in Ludhiana on the basis of electricity consumption bills. According to the 1d. counsel, the consumption of electricity bill was for quantification of the subsidy and the subsidy was not received by way of profits to the assessee. It was vehemently argued that though the Assessing Officer had merely reduced the amount of subsidy from the actual cost of the assets for purposes of depreciation and investment allowance, the 1d. CIT(A) without issuing a notice of enhancement had, however, treated the entire amount of subsidy of Rs. 14,43,876 as a revenue receipt and subjected it to tax.
6. It was submitted that the 1d. CIT(A) had rightly held that the amount of subsidy could not be reduced from the actual cost of assets for purposes of depreciation and investment allowance and the position of law stood indicated by the recent decision of the Supreme Court in the case of CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830. The grievance of the 1d. counsel, however, was that there was absolutely no justification on the part of 1d. CIT(A) to have held the subsidy as a revenue receipt.
7. The 1d. counsel for the assessee placed reliance on the decision of the Tribunal in the case of Gupta Mines & Minerals v. ITO [ 1991] 19 ITC 378. That was a case where the assessee-firm had received certain amount as electricity subsidy and as capital subsidy. The Tribunal repelled the contention of the revenue that both the subsidies represented revenue receipts. The Tribunal, on the other hand, held that the subsidies represented capital receipts which could not be subjected to tax. The 1d. counsel also referred to the Tribunal’s decision (Hyd. Bench) in the case of Tirumalesa Bricks & Tiles Factory v. ITO [1986] 15 ITD 703, and pointed out the subtle difference between the purpose for which a subsidy is given and the condition under which the subsidy would be given. It was submitted that the purpose for which the subsidy is given qualifies its nature whereas the conditions imposed could be safeguards to see that the subsidy is properly utilised. It was submitted that if a subsidy is given to recoup revenue expenditure, it will take the same colour and will be deemed to be the revenue-receipt in the hands of the assessee. But if it is for the purpose of furtherance of industrial activities, it will be treated as a capital receipt. The sum and substance of the 1d. counsel’s submissions was that the subsidy received by the assessee was a capital receipt and that the same could not be subjected to tax as a trading profit.
8. The 1d. Departmental Representative relied on the Punjab and Haryana High Court decision in the case of Ludhiana Central Co-operative Consumers ‘Stores Ltd. v. CIT [1980] 122 ITR 942 for the proposition that it is the character of the receipt that has to be considered and that if a subsidy is given to recoup revenue expenditure, it will take the same colour and will be deemed to be revenue receipt in the hands of the assessee. It was pointed out that in the cited case, the subsidy was given to meet the managerial and rental expenses and it was held to be a revenue receipt. On the same parity of reasoning, it was argued that in the instant case, the subsidy was received in the shape of 25% deduction in the electricity bill which, in effect, meant that the assessee had been able to recoup its expenditure to that extent and, hence, the receipt was revenue in nature.
9. The 1d. Departmental Representative also relied on the Supreme Court decision in V. S. S. V. Meenakshi Achi v. CIT [1966] 6O ITR 253 in which the amounts paid against the expenditure incurred for maintaining the rubber plantations and producing the rubber were held to be revenue receipts liable to be included in the assessable income. The 1d. D. R. also placed reliance on the Andhra Pradesh High Court decision in Panyarn Cements & Mineral Industries Ltd. v. Addl CIT [1979] 117 ITR 770 for the proposition that a subsidy in respect of power tariff, as a matter of well-defined policy of the Government, arose as a receipt from business and was, therefore, exigible to tax as profits and gains of business. That was a case where concessional rate of tariff was given to the assessee and the rebate in power charges was held to be exigible to tax as profits and gains of business Under Section 41(1) of the Income-tax Act.
10. It was, therefore, vehemently argued by the 1d. Departmental Representative that the aforesaid amount of subsidy was a revenue receipt in the hands of the assessee and it was immaterial whether the same was shown in the profit and loss account or taken directly to the balance sheet. It was submitted that the treatment given by an assessee to a particular transaction in its books of account was not determinative of the true nature and character of the receipt.
11. We have carefully considered the submissions of both the sides and have also perused the salient features of the Scheme of incentive under which the subsidy was given by the Punjab Government to the power-based industries including the assessee. The order of 1d. CIT(A) could be assailed on the ground that no enhancement notice was given but even on merits the order of the 1d. CIT(A) appears to be based on a weak wicket. As held by the jurisdictional High Court of Punjab and Haryana in the case of Ludhiana Central Co-operative Consumers ‘Stores Ltd. (supra) it is the character of the receipt that has to be considered. In the instant case, the assessee has got incentive on the basis of actual power consumption in the preceding years. The power consumption, therefore, is a measure for quantifying the subsidy to be granted to the assessee. It is not that the subsidy has been given to recoup the expenditure incurred by the assessee or a concessional electric tariff has been charged to give concession to the assessee. What the assessee has received is a subsidy for setting up new industries in certain areas. The aforesaid decision of the Punjab and Haryana High Court, therefore, is distinguishable on facts because in that case the subsidy was given to recoup certain managerial and rental expenses. The Supreme Court decision in the case of V. S. S. V. Meenakshi Achi (supra) is also distinguishable on facts because in that case, an expenditure had been incurred for maintaining the rubber plantations and producing the rubber and the amount received to recoup such expenses was held to be assessable to tax.
12. In the case of Panyam Cements & Mineral Industries Ltd. (Supra), the assessee got a concessional rate of tariff and, thus, the rebate received by the assessee was held to be chargeable to tax as profits and gains of business Under Section 41(1) of the Income-tax Act. Evidently, the facts of that case are also distinguishable vis-a-vis the facts of the instant case.
13. Indore Bench of the Tribunal in the case of Gupta Mines & Minerals (supra) has held that electricity subsidy and capital subsidy received from the Madhya Pradesh Government as an incentive for setting up industries in backward areas were capital receipts. The facts of that case are more or less akin to the facts of the instant case. The subsidy received by the assessee was based on power consumption. Power consumption, however, was only a measure for quantifying the subsidy and the subsidy was not given either for the specific purpose of recoupment of expenses or by way of a rebate from the tariff or for the specific purpose of meeting any portion of the cost of fixed assets. The very fact that with the help of the subsidy the assessee purchased a crane and a K. V. S. Station shows that the subsidy was utilised for the furtherance of industrial activities in the existing factory.
14. Considering the totality of the facts and circumstances of the case, we have no hesitation in holding that the subsidy received by the assessee was a capital receipt and not by way of addition to the trading profits of the assessee which could not be subjected to tax in the hands of the assessee. We hold and direct accordingly. This ground is, therefore, allowed.
15. In the result, the appeal is partly allowed.