Commnr. of Income
Tax, Madras Vs. M/S. Ponni Sugars & Chemicals Ltd.  INSC 1565 (16
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. 5694 of 2008 (arising
out of S.L.P.(C) No. 7926/04) Commissioner of Income Tax, Madras ...
Appellant(s) versus Ponni Sugars & Chemicals Ltd. ... Respondent(s) with
Civil Appeal No. 5695/08 (arising out of S.L.P.(C) No. 12355/06), Civil Appeal
No. 5696/08 (arising out of S.L.P.(C) No. 21064/06), Civil Appeal No. 5697/08
(arising out of S.L.P.(C) No. 6557/08), Civil Appeal No. 5698/08 (arising out
of S.L.P.(C) No. 9823/08), Civil Appeal No. 5699/08 (arising out of S.L.P.(C)
No. 18442/04), Civil Appeal No. 5700/08 (arising out of S.L.P.(C) No. 11787/06),
Civil Appeal No. 5701/08 (arising out of S.L.P.(C) No. 12778/06), Civil Appeal
No. 5702/08 (arising out of S.L.P.(C) No. 12958/06), Civil Appeal No. 5703/08
(arising out of S.L.P.(C) No. 15099/06), Civil Appeal No. 5704/08 (arising out
of S.L.P.(C) No. 573/07), Civil Appeal No. 5705/08 (arising out of S.L.P.(C)
No. 3948/07), Civil Appeal No. 5706/08 (arising out of S.L.P.(C) No. 6658/07),
Civil Appeal No. 5707/08 (arising out of S.L.P.(C) No. 3112/06), Civil Appeal
No. 5708/08 (arising out of S.L.P.(C) No. 11963/07), Civil Appeal No. 5709/08
(arising out of S.L.P.(C) No. 14407/07), Civil Appeal No. 5710/08 (arising out
of S.L.P.(C) No. 14050/07), Civil Appeal No. 5711/08 (arising out of S.L.P.(C)
No. 8290/07), Civil Appeal No. 5712/08 (arising out of S.L.P.(C) No. 6686/08),
Civil Appeal No. 5713/08 (arising out of S.L.P.(C) No. 7643/08), Civil Appeal
No. 5714/08 (arising out of S.L.P.(C) No. 9584/08) and Civil Appeal No. 5715/08
(arising out of S.L.P.(C) No. 17149/08) 2
S. H. KAPADIA, J.
the above batch of civil appeals, based on the arguments addressed before us,
we are mainly concerned with the following two questions, namely:
(i) Whether the
incentive subsidy received by the assessee is a capital receipt not includible
in the total income? (ii) Whether the assessee was entitled to exemption under
Section 80 P(2)(a)(i) of the Income Tax Act, 1961 in respect of interest
received from the members of the society?
the outset, it may be noted that this batch of civil appeals covers four
incentive subsidy Schemes of 1980, 1987, 1988 and 1993. All the four schemes
are almost identical. They are different in matter of details.
However, in 1980 and
1987 Schemes there is an additional benefit by way of rebate in respect of
payment of excise duty which is not there in the remaining two Schemes of 1988
the above preface, we refer to the facts in the case of Salem Cooperative Sugar
Mills Ltd (civil appeal arising out of SLP (C) No. 12355/06).
matter concerns the 1980 Scheme. The dispute pertains to Assessment Year
1986-87. In this matter both the above questions arises for determination. The
incentives conferred under that Scheme were twofold.
First, in the nature
of a higher free sale sugar quota and second, in allowing the manufacturer to
collect excise duty on the sale price of the free sale sugar in excess of the
normal quota, but pay to the Government only the excise duty payable on the
price of levy sugar. In that connection, we quote clause 7 of the Scheme, which
reads as under:
beneficiaries of the incentive scheme shall ensure that the surplus funds
generated through sale of the incentive sugar are utilized for the repayment of
term loans, if any, outstanding from the Central Financial institutions. The
sugar factories should submit utilization certificates annually from
Chartered/Cost Accountant, holding certificate of practice. Utilisation
certificate in respect of each sugar season during the incentive period should
be furnished on or before the 31st December of the succeeding year. Failure to
submit utilization certificate within the stipulated time may result not only
in the termination of release of incentive free sale quota, but also in the
recovery of the incentive free sale releases 4 already made, by resorting to
adjustment from the free sale releases of future years."
this stage, we may again note that the 1980 and 1987 Schemes are similar to
each other. In the case of Salem Cooperative Sugar Mills Ltd. we are concerned
with the Scheme of 1980.
the first question, namely, whether the incentive subsidy received by the
assessee is a capital receipt, Shri P.V. Shetty, learned senior counsel
appearing on behalf of the Department (appellant) submitted that the additional
revenue generated by higher free sale sugar quota cannot be considered to be a
capital receipt in the hands of the assessee (respondent herein) as held by the
High Court. He further contended that similarly retention of the collective
excise duty on the sale price of free sale sugar in excess of the normal quota
and paying to the Government only the excise duty payable on the price of levy
sugar resulted in revenue generation in the hands of the assessee which
contention of the Department has been erroneously rejected by the High Court.
According to the learned counsel, under the Scheme, there were two distinct
concepts, namely, the concept of accrual of income in the hands of the assessee
and the concept of application of additional funds generated thereunder.
According to the learned counsel, application of additional funds is neither
material nor 5 relevant for deciding the character of the incentive subsidy.
In this connection, learned counsel placed reliance on the judgment of this
Court in the case of Sahney Steel and Press Works Ltd. and Ors. v. CIT reported
in (1997) 228 ITR 253.
Ganesh, learned senior counsel appearing on behalf of the assessee submitted
that the benefits were conferred on the assessee under the 1980 and 1987
Schemes, namely, additional price by reason of enhancement of free sale sugar
quota, which resulted in the benefit of additional price, which price had to be
utilized only for repayment of loans taken by the assessee to establish a new
unit or for expanding the existing unit. The said Schemes were not meant for a
running unit. The second benefit, according to the learned counsel, lay in the
rebate of excise duty under which the assessee was required to pay excise duty
on the manufacture of additional quota of free sale sugar. According to the learned
counsel, in judging the character of the incentive, the "purpose
test" is applicable. In other words, according to the learned counsel, the
character of the receipt in the hands of the assessee had to be determined with
respect to the purpose for which the subsidy was given and that the point of
time at which it is paid or its source or its form was irrelevant. In this
connection, 6 learned counsel also places reliance on the same judgment of
this Court in the case of Sahney Steel and Press Works Ltd. (supra).
key question which arises for determination is: what is the character of the
incentive subsidy under the said Schemes?
the outset, it may be stated that during the relevant year in question, on
account of economic factors, namely, high cost, the new sugar factories could
not come up as it was not economically viable. Due to high cost, the financial
institutions did not come forward to advance loans to the entrepreneurs of new
sugar factories. Secondly, the tempo of establishing new sugar factories
received a serious set back, therefore, the Government appointed a Committee
known as Sampat Committee to examine the question relating to economic
viability of new sugar factories. One of the terms of reference suggested was
to work out various incentives for making new sugar factories economically
viable units. The increase of the cost of the project during the relevant years
was on account of the increase in the cost of Plant and Machinery. The said
Committee gave its Report in which the Committee recommended that the economic
viability of a factory would mean that the unit should not break even after
meeting the working 7 expenses, interest on borrowings, depreciation on Plant
and Machinery, but it should also be able to declare a reasonable dividend on
the equity capital.
According to the
Committee, the factory should be able to generate sufficient funds to repay the
instalments of the term loans. Under Para 21.0 the said Committee stated that
five possible incentives for making a sugar plant economically viable unit
could be provided for, namely, capital subsidy, allowing a larger percentage of
free sale sugar, high levy sugar price, allowing rebate on excise duty and
remission of purchase tax. In this case, we are concerned with allowability of
a larger percentage of free sale sugar and rebate on excise duty. Following the
said Report of the Sampat Committee, the above Schemes came to be formulated.
have examined in this case the 1980 and 1987 Schemes.
Essentially all the
four schemes are similar except in the matter of details.
Four factors exist in
the said Schemes, which are as follows:
(i) Benefit of the
incentive subsidy was available only to new units and to substantially expanded
units, not to supplement the trade receipts.
(ii) The minimum
investment specified was Rs. 4 crores for new units and Rs. 2 crores for
8 (iii) Increase in
the free sale sugar quota depended upon increase in the production capacity. In
other words, the extent of the increase of free sale sugar quota depended upon
the increase in the production capacity.
(iv) The benefit of
the scheme had to be utilized only for repayment of term loans.
important aspect may also be noted that in the case of Salem Cooperative Sugar
Mills Ltd. we are concerned with Notification dated 15.11.1980. It indicates
the above factors of the Scheme. The important point to be noted is that
Government of India, financial institutions as well as the sugar industries are
parties to the scheme in the sense that but for the scheme the financial
institutions would not have given term loans to set up new units/expansion of
the existing units.
main controversy arises in these cases because of the reason that the
incentives were given through the mechanism of price differential and the duty
differential. According to the Department, price and costs are essential items
that are basic to the profit making process and that any price related
mechanism would normally be presumed to be revenue in nature. In other words,
according to the Department, since incentives were given through price and duty
differentials, the character of the impugned incentive 9 in this case was
revenue and not capital in nature. On the other hand, according to the
assessee, what was relevant to decide the character of the incentive is the
purpose test and not the mechanism of payment.
our view, the controversy in hand can be resolved if we apply the test laid
down in the judgment of this Court in the case of Sahney Steel and Press Works
Ltd. (supra). In that case, on behalf of the assessee, it was contended that
the subsidy given was up to 10% of the capital investment calculated on the basis
of the quantum of investment in capital and, therefore, receipt of such subsidy
was on capital account and not on revenue account. It was also urged in that
case that subsidy granted on the basis of refund of sales tax on raw materials,
machinery and finished goods were also of capital nature as the object of
granting refund of sales tax was that the assessee could set up new business or
expand his existing business. The contention of the assessee in that case was
dismissed by the Tribunal and, therefore, the assessee had come to this Court
by way of a special leave petition. It was held by this Court on the facts of
that case and on the basis of the analyses of the Scheme therein that the
subsidy given was on revenue account because it was given by way of assistance
in carrying on of trade or business. On the facts of that case, it was held
that the subsidy given was to 10 meet recurring expenses. It was not for
acquiring the capital asset. It was not to meet part of the cost. It was not
granted for production of or bringing into existence any new asset. The
subsidies in that case were granted year after year only after setting up of
the new industry and only after commencement of production and, therefore, such
a subsidy could only be treated as assistance given for the purpose of carrying
on the business of the assessee.
contentions raised on behalf of the assessee on the facts of that case stood
rejected and it was held that the subsidy received by Sahney Steel could not be
regarded as anything but a revenue receipt.
matter was decided against the assessee. The importance of the judgment of this
Court in Sahney Steel case lies in the fact that it has discussed and analysed
the entire case law and it has laid down the basic test to be applied in
judging the character of a subsidy. That test is that the character of the
receipt in the hands of the assessee has to be determined with respect to the
purpose for which the subsidy is given. In other words, in such cases, one has
to apply the purpose test. The point of time at which the subsidy is paid is
not relevant. The source is immaterial. The form of subsidy is immaterial. The
main eligibility condition in the scheme with which we are concerned in this
case is that the incentive must be utilized for repayment of loans taken by the
assessee to set up new units or for 11 substantial expansion of existing
units. On this aspect there is no dispute. If the object of the subsidy scheme
was to enable the assessee to run the business more profitably then the receipt
is on revenue account. On the other hand, if the object of the assistance under
the subsidy scheme was to enable the assessee to set up a new unit or to expand
the existing unit then the receipt of the subsidy was on capital account.
Therefore, it is the object for which the subsidy/assistance is given which
determines the nature of the incentive subsidy. The form of the mechanism
through which the subsidy is given is irrelevant.
the decision of House of Lords in the case of Seaham Harbour Dock Co. v. Crook
(1931) 16 TC 333 the Harbour Dock Co. had applied for grants from the
Unemployment Grants Committee from funds appropriated by Parliament. The said
grants were paid as the work progressed the payments were made several times
for some years. The Dock Co. had undertaken the work of extension of its docks.
The extended dock was for relieving the unemployment. The main purpose was
relief from unemployment. Therefore, the House of Lords held that the financial
assistance given to the company for dock extension cannot be regarded as a
trade receipt. It was found by the House of Lords that the assistance had
nothing to do with the trading of the company because the work undertaken 12
was dock extension. According to the House of Lords, the assistance in the form
of a grant was made by the Government with the object that by its use men might
be kept in employment and, therefore, its receipt was capital in nature. The
importance of the judgment lies in the fact that the company had applied for
financial assistance to the Unemployment Grants Committee.
The Committee gave
financial assistance from time to time as the work progressed and the payments
were equivalent to half the interest for two years on approved expenditure met
out of loans. Even though the payment was equivalent to half the interest
amount payable on the loan (interest subsidy) still the House of Lords held
that money received by the company was not in the course of trade but was of
capital nature. The judgment of House of Lords shows that the source of payment
or the form in which the subsidy is paid or the mechanism through which it is
paid is immaterial and that what is relevant is the purpose for payment of
assistance. Ordinarily such payments would have been on revenue account but
since the purpose of the payment was to curtail/obliterate unemployment and
since the purpose was dock extension, the House of Lords held that the payment
made was of capital nature.
more aspect needs to be mentioned. In Sahney Steel and Press Works Ltd. (supra)
this Court found that the assessee was free to use the 13 money in its
business entirely as it liked. It was not obliged to spend the money for a
particular purpose. In the case of Seaham Harbour Dock Co.
(supra) assessee was
obliged to spend the money for extension of its docks.
This aspect is very
important. In the present case also, receipt of the subsidy was capital in
nature as the assessee was obliged to utilize the subsidy only for repayment of
term loans undertaken by the assessee for setting up new units/expansion of
the above tests to the facts of the present case and keeping in mind the object
behind the payment of the incentive subsidy we are satisfied that such payment
received by the assessee under the Scheme was not in the course of a trade but
was of capital nature. Accordingly the first question is answered in favour of
the assessee and against the Department.
to the second question, namely, whether the assessee was entitled to exemption
under Section 80 P(2)(a)(i) of the Income Tax Act, 1961 ("1961 Act")
in respect of interest received from the members of the society, we find that
none of the authorities below, including the High Court, have examined the Memorandum
of Association filed by Salem Co-operative Sugar Mills Ltd., Madurantakam
Co-operative Sugar Mills Ltd., Ambur Co-operative Sugar Mills Ltd., Dharampuri
District 14 Co-operative Sugar Mills Ltd., Vellore Co-operative Sugar Mills
Ltd., Attur Agricultural. Producers Co-operative Society Ltd. and Modern
Engineers Construction Co-operative Society Ltd.. Under Section 80 P(1)
deduction in respect of income of co-operative societies is provided for. Under
Section 80 P(1), where the gross total income of a co-operative society
includes any income referred to in sub-section (2) then the sums specified in
sub-section (2) shall be deducted from the gross total income to arrive at the
total income of the assessee-society. In order to earn exemption under Section
80 P(2) a co-operative society must prove that it had engaged itself in
carrying on any of the several businesses referred to in sub-section (2). In
that connection, it is important to note that under sub-section (2), in the
context of co-operative society, Parliament has stipulated that the society
must be engaged in carrying on the business of banking or providing credit
facilities to its members. Therefore, in each case, the Tribunal was required
to examine the Memorandum of Association, the Articles of Association, the
Return of Income filed with the Department, the status of business indicated in
such Returns etc.. This exercise had not been undertaken at all.
the aforestated reasons, we set aside the impugned judgments of the High Court
and remit the matters to the Tribunal for de novo 15 consideration in
accordance with law. All the contentions on both sides are expressly kept open.
addition to the above two questions, one more question arises for consideration
in the civil appeal arising out of SLP (C) No. 573/07 [CIT, Salem v. Dharampuri
District Co-operative Sugar Mills Ltd.] filed by the Department is: whether the
area development funds collection by sugar mills would be trading receipt? 21.
In view of the judgment of the Bombay High Court in CIT v. Chhatrapati Sahakari
Sakhar Karkhana Ltd. reported in (2000) 245 ITR 498 the matter is remitted to
the Tribunal for de novo consideration in accordance with law and in accordance
with the directions given therein.
the appeals filed by the Department are partly allowed with no order as to
(B. Sudershan Reddy)