THE COMMISSIONER OF INCOMETAX HYD V. THE NIZAM SUGARS LTD HYD

ITTA/6/2002

AI Insights

The case involves an appeal by the Department of Income Tax against the respondent, a sugar factory, concerning the taxability of a central subsidy and the deductibility of social overheads for the assessment years 1992-93 and 1993-94. The primary legal questions were whether the central subsidy should be considered a revenue receipt liable to tax and whether the expenditure on social overheads was fully deductible. The Tribunal had previously ruled in favor of the respondent, which the Department challenged in this appeal. The court referenced the Supreme Court's decision in Ponni Sugars and Chemicals Ltd. to support the view that the subsidy is a capital receipt. The court also noted the lack of specific provision supporting the Department's partial disallowance of social overheads, leading to the dismissal of the appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 769327 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 22-07-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Ponni Sugars and Chemicals Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A V KOWNDINYA
• Assessee Lawyers: J V PRASAD
• Keywords: Capital receipt; Revenue receipt; Taxable income; Central subsidy; Social overheads
• Section: 37; 260-A

Judgement Text

"THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.6 of 2002 JUDGMENT: (Per LNR,J) This appeal under Section 260-A of the Income Tax Act, 1961 (for short ‘the Act’) is filed by the Department feeling aggrieved by the common order, dated 09.08.2001 passed by the Hyderabad Bench of the Income Tax Appellate Tribunal in I.T.A.Nos.105&106/H/97. The subject matter is the returns filed by the respondent for the assessment years 1992-93 and 1993-94. The respondent is a sugar factory and is assessed to tax. In the returns filed for the two assessment years referred to above, various items were mentioned. The items that are relevant for the purpose of this appeal are the claims pertaining to central subsidy and the expenditure incurred under social overheads. The assessing authority disallowed both the claims. On an appeal preferred by the respondent, the Commissioner (Appeals) allowed the claims, following the orders passed by the Tribunal in the appeals preferred by the respondent itself in the previous assessment years. Thereupon, the appellant filed appeals before the Tribunal and through the order under appeal, they were dismissed. The following substantial questions of law were framed: 1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in following its earlier order holding that there was a diversion of income by overriding title? 2. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the amount received as Central subsidy is not a revenue receipt liable to tax? 3. whether on the facts and in the circumstances of the case, the Tribunal is correct in law and on facts in deleting the addition of 1/3rd of expenditure on account of social overheads? In fact, the first question is ancillary to the second one. Sri J.V.Prasad, learned Standing Counsel for the Department submits that the central subsidy is in the form of revenue receipt and there is hardly any element of capital in it and as such it was liable to be taxed. As regards social overheads, learned counsel submits that the expenditure therefor was equally taxable, since it was not within the purview of the regime of exemptions under the Act. Sri A.V.Krishna Kowndinya, learned counsel for the respondent, on the other hand, submits that the central subsidy is an addition to the capital and in that view of the matter, it cannot be subjected to tax. He has placed reliance upon the judgment of the Hon’ble Supreme Court in Commissioner of Income Tax vs. Ponni Sugars and Chemicals Ltd.[1] in support of his conclusion. He further submits that the respondent has adopted a Village by name Shankar Nagar, as part of its social obligation and it is an allowable deduction under Section 37 of the Act. The appeal covers two separate items. The first is about central subsidy and the second is about the expenditure incurred under social overheads. The question as to whether any amount received by an industrial establishment as subsidy can be treated as revenue receipt, or capital receipt, was put at rest by the Hon’ble Supreme Court through its judgment in Ponni Sugars and Chemicals Ltd’s case (1 supra). Their lordships took the view that such of the subsidy received from the State agency, which has the effect of reducing the capital of an industrial establishment, needs to be treated as part of capital and thereby not liable to tax. Added to that, in the previous assessment years, the Tribunal took similar view vis-à- vis the respondent itself. Therefore, question Nos.1 and 2 are answered against the appellant. Coming to the second aspect, covered by question No.3, the assessing authority permitted deduction of the amount incurred towards social overheads only to the extent of 3/4th and disallowed the remaining 1/3rd. No specific provision was referred to in support of such conclusion. It is a matter of record that in relation to the assessment of the respondent for the year earlier to 1992-93, the amounts so incurred were allowed in their entirety, without any restriction. In the absence of any authoritative pronouncement from a Court of law, the best practice is to ensure consistency at the level of Tribunal itself. Therefore, question No.3 is also answered against the appellant. The appeal is accordingly dismissed. The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 22.07.2014 JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.6 of 2002 Date: 22.07.2014 JSU [1] (2008) 306 ITR 0392 "