Gujarat Water Resources Devlopment Corporation Ltd., V. The Jt. CIT., Spl. Range,

ITA 168/AHD/2004

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0269 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-09-2009
• Assessment Year: 1998-1999
• Appeal Filed On: 27-01-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJEEV AGARWAL
• Assessee Lawyers: M K PATEL
• Keywords: Capital asset; Depreciation; Capital receipt
• Section: 64

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD A BENCH (BEFORE S/SHRI R.V.EASWAR, VICE-PRESIDENT AND D.C. AGRAWAL, ACCOUNTANT MEMBER) ITA NO.167 AND 168/AHD/2004 [ASSTT.YEAR : 1996-1997 AND 1998-1999] GUJARAT WATER RESOURCES DEVELOPMENT CORPORATION LTD. SECTOR 10-A, GANDHINAGAR. VS. JCIT, SPL.RANGE GANDHINAGAR. ASSESSEE BY : SHRI M.K.PATEL REVENUE BY : SHRI RAJEEV AGARWAL O R D E R PER R.V.EASWAR, VICE-PRESIDENT : THESE ARE TWO APPEALS FILED BY THE ASSESSEE RELATING TO THE ASSESSMENT YEARS 1996- 97 AND 1998-99. THE ASSESSEE IS A HUNDRED PERCENT STATE GOVERNMENT UNDE RTAKING. IT IS A COMPANY IN WHICH THE ENTIRE SHARE CAPITAL IS HELD BY THE GO VERNMENT OF GUJARAT. IN THESE APPEALS THE COMMON ISSUE INVOLVED IS WHETHER SUBSID Y RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT OF GUJARAT FOR THE SPECIFIC PUR POSE OF REPAYMENT OF LOANS TAKEN FOR THE PURPOSE OF CONSTRUCTION OF TUBE WELLS AND LIFT-IRRIGATION SCHEMES AND THE INTEREST CAPITALIZED DURING THE CONSTRUCTIO N PERIOD IS A CAPITAL RECEIPT OR INCOME CHARGEABLE TO TAX. 2. WE TAKE UP THE ASSESSMENT YEAR 1996-97 FOR THE P URPOSE OF EXAMINING THE FACTS. IN THE BALANCE SHEET OF THE ASSESSEE AS ON 31-3-1996 FILED WITH THE RETURN OF INCOME, THE ASSESSEE SHOWED RS.12,97,46,0 00/- AS SUBSIDY RECEIVED TO ENABLE THE ASSESSEE TO REPAY THE LOANS TAKEN FOR TH E PURPOSE OF CONSTRUCTION OF TUBE WELLS. ANOTHER SUM OF RS.1 CRORE WAS ALSO SHO WN AS CAPITALISED INTEREST ON THE LOANS. THUS A TOTAL AMOUNT OF RS.13,97,46, 000/- WAS SHOWN UNDER THE HEAD RESERVES AND SURPLUS IN THE BALANCE SHEET. 3. THE ASSESSING OFFICER TOOK THE VIEW THAT THE SUB SIDY REPRESENTED INCOME IN THE HANDS OF THE ASSESSEE ON THE BASIS OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SAHANEY STEEL AND PRES S WORKS LTD. AND OTHERS PAGE - 2 ITA NO.167 AND 168/AHD/2004 -2- VS. CIT, 228 ITR 253. THE ASSESSEE HOWEVER SUBMITT ED THAT THE AFORESAID JUDGMENT DID NOT APPLY TO ITS CASE AND IN THE DETAI LED WRITTEN SUBMISSIONS DATED 9-3-1999 RAISED THE FOLLOWING POINTS: A) THE PROJECTS FOR CONSTRUCTION OF TUBE-WELLS AND LIF T IRRIGATIONS SCHEME ARE PART OF THE DEVELOPMENTAL ACTIVITIES OF THE STATE OF GUJARAT. B) THE PROJECTS ARE TO BE SANCTIONED BY THE STATE GOVE RNMENT. THE FINANCIAL COSTS ARE TO BE BORNE BY THE STATE GOVERN MENT. SINCE SANCTION OF FINANCE MAY TAKE SOMETIME, BRIDGING ARR ANGEMENTS WERE MADE TO THE EFFECT THAT ANY BORROWINGS MADE BY THE ASSESSEE IN THE INTERREGNUM WOULD BE REPAID BY THE GOVERNMEN T AND THAT IS THE FORM IN WHICH THE SUBSIDY WOULD BE GRANTED. C) PURSUANT TO THE ABOVE ARRANGEMENT THE ASSESSEE ENTE RED INTO AN AGREEMENT FOR LOAN WITH NABARD UNDER WHICH LOANS WE RE TO BE GIVEN TO THE ASSESSEE FOR WHICH THE STATE GOVERNMEN T STOOD GUARANTEE. D) THERE IS A CLEAR STIPULATION BY THE STATE GOVERNMEN T THAT THE LOANS HAVE TO BE UTILISED ONLY FOR THE PURPOSE OF CONSTRU CTING TUBE-WELLS AND LIFT IRRIGATION SCHEMES. THE AMOUNT SPENT WAS TO BE CAPITALIZED. E) THE STATE GOVERNMENT MAKES NECESSARY PROVISION IN T HE BUDGETARY ALLOCATION AND SANCTIONS THE REPAYMENT OF THE LOANS THROUGH SUBSIDY. RELEVANT GOVERNMENT RESOLUTIONS A RE PASSED. F) THE INTEREST ON THE LOAN ACCRUING DURING THE CONSTR UCTION PERIOD IS CAPITALIZED. THEREFORE, REPAYMENT OF THE INTEREST BY WAY OF SUBSIDY IS ALSO A CAPITAL RECEIPT. INTEREST CHARGED SUBSEQUENT TO THE CONSTRUCTION PERIOD IS HOWEVER TREATED AS REVEN UE EXPENDITURE AND ACCORDINGLY THE SUBSIDY RECEIVED TOWARDS THE SA ME IS TREATED AS INCOME IN THE ACCOUNTS OF THE ASSESSEE. PAGE - 3 ITA NO.167 AND 168/AHD/2004 -3- 4. THE AO WAS NOT CONVINCED WITH THE VALIDITY OF TH E AFORESAID SUBMISSIONS. HE OPINED THAT IT IS THE BUSINESS OF THE ASSESSEE TO CONSTRUCT TUBE WELLS AND LIFT IRRIGATION SCHEMES AND THE SUBSIDY I S THEREFORE INCIDENTAL TO ITS BUSINESS. HE FURTHER REASONED THAT HAD THE ASSESSE E NOT RECEIVED THE SUBSIDY FROM THE STATE GOVERNMENT IT WOULD HAVE HAD TO MEET THE LIABILITY TOWARDS THE REPAYMENT OF THE LOAN AND THE INTEREST THEREON OUT OF ITS PROFITS. THE SUBSIDY WAS ALSO NOT TO BE RETURNED TO THE STATE GOVERNMENT . IT WAS NOT ATTRIBUTABLE TO ANY EXPANSION OF THE PROJECTS OF THE ASSESSEE, BUT WAS REFERABLE TO THE CARRYING ON OF THE DAY-TO-DAY ACTIVITIES OF THE ASSESSEE VIZ . THE PUTTING UP OF THE TUBE WELLS AND LIFT IRRIGATION SCHEMES. FOR THESE REAS ONS HE REJECTED THE ASSESSEES SUBMISSIONS AND ADDED RS.13,97,46,000/- TO THE INCO ME OF THE ASSESSEE. 5. IN THE ASSESSMENT YEAR 1998-99 FOR SIMILAR REASO NS, THE AO ADDED THE SUBSIDY OF RS.1,48,15,000/- AS THE INCOME OF THE AS SESSEE. 6. THE CIT(A) HAVING AGREED WITH THE AO THAT THE SU BSIDY WAS RIGHTLY TREATED AS THE ASSESSEES INCOME FOR BOTH THE YEARS , THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 7. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED T HAT THE VIEW TAKEN BY THE DEPARTMENTAL AUTHORITIES IS WRONG AND THAT THE SUBSIDY WAS GIVEN FOR CAPITAL PURPOSES AND CAN NEVER BE ASSESSED AS INCOME. HE P OINTED OUT THAT IT IS RELEVANT TO CONSIDER THE OBJECT FOR WHICH THE SUBSI DY WAS GIVEN AND IT HAS ALSO BEEN RECOGNISED TO BE THE CORRECT LEGAL POSITION IN THE JUDGMENT OF THE SUPREME COURT CITED ABOVE AS ALSO IN THE RECENT JUDGMENT OF THE SUPREME COURT IN CIT VS. PONNI SUGARS, (2008) 306 ITR 392. HE DREW OUR ATTENTION TO THE ACCOUNTING TREATMENT GIVEN TO THE SUBSIDY AND IN TH IS CONNECTION REFERRED TO THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE AS SESSEE FOR THE YEAR ENDED 31- 3-1996 AT PAGES 5, 7, 8, 9, 16 AND 45 OF THE PAPER BOOK. HE ALSO FILED A COPY OF THE GOVERNMENT RESOLUTION DATED 6-3-1996 AS A SPECI MEN AND POINTED OUT THAT PARA-2 CONTAINED A CLEAR STIPULATION THAT THE GRAN TS RELEASED SHOULD ONLY BE PAGE - 4 ITA NO.167 AND 168/AHD/2004 -4- UTILISED FOR THE PURPOSE MENTIONED ABOVE. HE SUBM ITTED THAT A SIMILAR STIPULATION WAS PROVIDED FOR IN ALL THE GOVERNMENT RESOLUTIONS/CIRCULARS AUTHORISING THE SUBSIDY. IT WAS FURTHER CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE DEPARTMENTAL AUTHORITIES WERE WRO NG IN SAYING THAT THE SUBSIDY WAS REFERABLE TO THE DAY-TO-DAY OPERATIONS OF THE A SSESSEE AND WAS HENCE TO BE TREATED AS INCOME. HE SUBMITTED THAT THE BUSINESS OF THE COMPANY WAS TO PROVIDE WATER AT A SUBSIDISED RATE FOR THE PURPOSE OF IRRIGATION ALL ACROSS THE GUJARAT. THE ASSESSEE COLLECTED WATER CHARGES FROM THE FARMERS FOR SUPPLY OF WATER. IT IS ERRONEOUS TO SAY THAT THE CONSTRUCTIO N OF TUBE WELLS AND LIFT IRRIGATION SCHEMES WHICH FORMED THE INFRASTRUCTURE OR THE APPARATUS FROM WHICH THE WATER WAS SUPPLIED TO THE FARMERS, WAS THE BUSI NESS OF THE ASSESSEE OR ITS DAY-TO-DAY OPERATIONS. THE TUBE WELLS AND LIFT IRR IGATION SCHEMES CONSTITUTED CAPITAL ASSETS IN THE ASSESSEES HANDS AND WERE TRE ATED AS SUCH IN ITS ACCOUNTS. ANY SUBSIDY RECEIVED FOR PUTTING UP CAPITAL ASSETS CANNOT BE CONSIDERED AS INCOME. THEREFORE, ACCORDING TO THE LEARNED COUNSE L NEITHER THE SUBSIDY GRANTED FOR REPAYMENT OF THE LOANS TAKEN FROM NABAR D FOR THE PURPOSE OF PUTTING UP TUBE WELLS OR LIFT IRRIGATION SCHEMES NO R THE INTEREST ATTRIBUTABLE TO THE CONSTRUCTION PERIOD AND CAPITALISED IN THE ACCO UNTS OF THE ASSESSEE CAN BE TREATED AS INCOME IN THE ASSESSEES HANDS. IT IS A LSO POINTED OUT THAT THE INTEREST ATTRIBUTABLE TO THE PERIOD AFTER THE TUBE WELL OR I RRIGATION SCHEME COMMENCES OPERATIONS IS TREATED AS REVENUE IN THE ASSESSEES HANDS. IT IS THUS CONTENDED THAT THE SUBSIDY SHOULD BE TREATED AS CAPITAL RECEI PT. 8. THE LEARNED CIT-DR ON THE OTHER HAND STRONGLY UR GED THAT ANY SUBSIDY REFERABLE TO THE BUSINESS OF THE ASSESSEE IS TO BE TREATED AS ITS INCOME AS IT IS A RECEIPT INCIDENTAL TO THE BUSINESS. IT IS SUBMITTE D THAT THE ASSESSEE HAD SUBMITTED BEFORE THE AO THAT THE SUBSIDY WAS CREDIT ED TO THE DEFERRED INCOME ACCOUNT AND IF THAT IS SO IT CAN BE SAID THAT THE A SSESSEE ITSELF TREATED THE SUBSIDY AS ITS INCOME. AS REGARDS THE ASSESSMENT YEAR 1998 -99 IT WAS POINTED OUT THAT THE GRANT OR SUBSIDY WAS GIVEN WHEN THERE WAS NO LO AN OUTSTANDING AND THIS PAGE - 5 ITA NO.167 AND 168/AHD/2004 -5- SHOWED THAT THE SUBSIDY SHOULD BE TREATED AS INCOME . THE LEARNED CIT-DR, BESIDES THE ABOVE SUBMISSIONS, STRONGLY RELIED ON P ARA-3.6 OF THE ORDER OF THE CIT(A). 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND THE FACTS. IT NEEDS TO BE CLARIFIED THAT IN THE ASSESSMENT YEAR 1 998-99, THOUGH BEFORE THE AO, THE ASSESSEE IN ITS LETTER DATED 13-12-2000 STA TED THAT THE SUBSIDY WAS CREDITED TO THE DEFERRED INCOME ACCOUNT IN ITS BOOK S, IT IS A FACTUALLY ERRONEOUS STATEMENT AS CAN BE SEEN FROM PAGE 3 OF THE STATEME NT OF FACTS FILED BEFORE THE CIT(A) FOR THAT YEAR. IN ITS LETTER FILED BEFORE T HE AO THE ASSESSEE DID STATE THAT THE AMOUNT OF RS.148.15 LAKHS IS CREDITED TO DEFERRED INCOME ACCOUNT WHICH IS SUBJECT TO REASSESSMENT TO THE EXTENT REFU ND OF THE SAME TO THE GOVERNMENT OF GUJARAT. HOWEVER, IN THE NEW PARAGR APH IN PAGE 3 OF THE STATEMENT OF FACTS FILED BEFORE THE CIT(A), THE ASS ESSEE HAS STATED THAT SINCE THE AMOUNT WAS RECEIVED FROM THE PROMOTERS THE APPE LLANT TRANSFERRED THE SAME TO THE CAPITAL RESERVE ACCOUNT. THE STATEMENT MAD E BY THE ASSESSEE IN THE STATEMENT OF FACTS FILED BEFORE THE CIT(A) HAS NOT BEEN CHALLENGED. IN FACT IT ACTUALLY ACCORDS WITH ACCOUNTS OF THE ASSESSEE. WE MAY REFER TO PAGE 7 OF THE PAPER BOOK RELATING TO THE ASSESSMENT YEAR 1998-99 FILED BY THE ASSESSEE. THE BALANCE SHEET AS ON 31-3-1998 AT PAGE 2 SHOWS THE R ESERVES AND SURPLUS AT RS.70,11,83,728 AND THE BREAK-UP FOR THE SAME IS SH OWN IN SCHEDULE-2 TO THE BALANCE SHEET AT PAGE 7 OF THE PAPER BOOK. HERE TH E OPENING BALANCE OF THE CAPITAL RESERVE IS SHOWN AT RS.4,50,38,267/- TO WHI CH THE SUBSIDY OF RS.1,48,15,000/- RECEIVED DURING THE YEAR HAS BEEN ADDED. THE ACCOUNTING TREATMENT THUS CLEARLY SHOWS THAT THE STATEMENT OF THE ASSESSEE BEFORE THE AO WAS FACTUALLY WRONG AND THAT THE SUBSIDY WAS ACTUAL LY ADDED TO THE CAPITAL RESERVE ACCOUNT AND NOT CREDITED TO THE DEFERRED IN COME ACCOUNT. 10. HAVING CLARIFIED THE MATTER WE PROCEED TO A CON SIDERATION OF THE QUESTION AS TO WHETHER THE SUBSIDY HAS BEEN RIGHTLY TREATED AS INCOME. THE ASSESSEE IS A PAGE - 6 ITA NO.167 AND 168/AHD/2004 -6- STATE GOVERNMENT OWNED COMPANY AND ITS BUSINESS IS TO PROVIDE WATER AT SUBSIDISED RATES FOR THE PURPOSE OF IRRIGATION ALL ACROSS GUJARAT. FOR THE SUPPLY OF WATER IT COLLECTS WATER CHARGES AND THESE ARE CR EDITED TO ITS PROFIT AND LOSS ACCOUNT AS SHOWN IN PAGE 5 OF THE PAPER BOOK FOR TH E ASSESSMENT YEAR 1996-97 AND PAGE 4 OF THE PAPER BOOK FOR THE ASSESSMENT YEA R 1998-99. TO PROVIDE WATER IT IS NECESSARY FOR THE ASSESSEE TO PUT UP TU BE WELLS AND LIFT IRRIGATION SCHEMES. THESE ASSETS CONSTITUTE CAPITAL ASSETS IN THE HANDS OF THE ASSESSEE FROM WHICH WATER IS SUPPLIED ON DAY-TO-DAY BASIS TO THE FARMERS FOR IRRIGATION PURPOSES. THE SUBSIDY GIVEN FOR PUTTING UP THE CAP ITAL ASSETS CANNOT BE CONSIDERED AS INCOME. WE MAY REFER TO THE JUDGMENT S CITED BEFORE US. IN THE CASE OF SAHANEY STEELS (SUPRA) IT WAS HELD THAT THE CHARACTER OF SUBSIDY IN THE HANDS OF THE RECIPIENT, WHETHER REVENUE OR CAPITAL, WILL HAVE TO BE DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. REFERRING WITH APPROVAL TO THE JUDGMENT OF THE BOMBAY HIGH COURT I N SADICHHA CHITRA VS. CIT, (1991) 189 ITR 774 WHERE IT WAS HELD THAT IF A SUBSIDY WAS RELEASED TO THE ASSESSEE SO AS TO ASSIST HIM TO ACQUIRE A NEW CAPIT AL ASSET SO AS TO MEET PART OF THE COST OF THE NEW ASSET, IT WAS CAPITAL RECEIPT I N THE HANDS OF THE ASSESSEE, THE SUPREME COURT NOTICED THAT THE PURPOSE OF THE GRANT OF THE SUBSIDY WAS RELEVANT (PAGE 266 OF 228 ITR). AT THE SAME PAGE THE SUPREM E COURT ALSO NOTICED THAT IN THE CASE BEFORE THEM THE SUBSIDIES WERE NOT GRAN TED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW ASSET AND THEREFORE IT COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE AND HENCE REVENUE IN CHARACTER. THE DECISION IN SAHNEY STEEL THUS TURNED ON THE PURPOSE FOR WHICH THE SUBSIDY WAS GRANTED. THE SUPR EME COURT FURTHER OBSERVED IN THE SAME PAGE THAT THE VIEW TAKEN BY TH E BOMBAY HIGH COURT IN THE ABOVE JUDGMENT AND THE VIEW TAKEN BY THE KERALA HIGH COURT IN CIT VS. UDAYA PICTURES P. LTD., (1997) 225 ITR 394 WAS CORR ECT AND ACCORDS WITH THE PRINCIPLE LAID DOWN IN SEAHAM HARBOUR DOCK CO.S CA SE (1931) 16 TC 333 (HL) THAT ASSISTANCE GIVEN BY THE GOVERNMENT FOR CO MPLETION OF A PROJECT MUST BE OF CAPITAL NATURE. IT WILL THUS BE SEEN THAT T HE PURPOSE FOR WHICH THE PAGE - 7 ITA NO.167 AND 168/AHD/2004 -7- SUBSIDY IS GRANTED IS RELEVANT AND DECISIVE. APPLY ING THE JUDGMENT OF THE SUPREME COURT IN SAHANEY STEELS (SUPRA) AND SEAHAM HARBOUR DOCK (SUPRA) THE SUPREME COURT HELD IN CIT VS. PONNI SUGARS & CH EMICALS LTD. (SUPRA) THAT . THE IMPORTANCE OF THE JUDGMENT OF THIS COURT I N 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 JU DGING THE CHARACTER OF A SUBSIDY. THAT TEST IS THAT THE CHARACTER OF THE RE CEIPT IN THE HANDS OF THE ASSESSEE HAS TO BE DETERMINED WITH RESPECT TO THE P URPOSE FOR WHICH THE SUBSIDY IS GIVEN. IN OTHER WORDS, IN SUCH CASES, O NE HAS TO APPLY THE PURPOSE TEST. THE POINT OF TIME AT WHICH THE SUBSI DY IS PAID IS NOT RELEVANT. THE SOURCE IS IMMATERIAL. THE FORM OF SUBSIDY IS IMMATERIAL. THE MAIN ELIGIBILITY CONDITION IN THE SCHEME WITH W HICH WE ARE CONCERNED IN THIS CASE IS THAT THE INCENTIVE MUST B E UTILIZED FOR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SET UP NEW UNITS OR FOR SUBSTANTIAL EXPANSION OF EXISTING UNITS. ON THIS A SPECT THERE IS NO DISPUTE. IF THE OBJECT OF THE SUBSIDY SCHEME WAS T O ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY THEN THE RECEIP T IS ON REVENUE ACCOUNT. ON THE OTHER HAND, IF THE OBJECT OF THE A SSISTANCE 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 SU BSIDY 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 OR THE MECHANISM THROUGH WHICH THE SUBSIDY IS GIVEN AR E IRRELEVANT. 11. IF THE PURPOSE TEST IS APPLIED TO THE PRESENT CASE, IT IS SEEN THAT THE SUBSIDY WAS GRANTED TO THE ASSESSEE TO MEET THE COS T OF THE TUBE WELLS AND LIFT IRRIGATION SCHEMES. IT MAY BE ADDED THAT THE WHENE VER THE STATE GOVERNMENT GAVE GRANTS DIRECTLY TO THE ASSESSEE FOR MEETING TH E COST, THE SAME WAS ACCEPTED BY THE DEPARTMENT TO BE A CAPITAL RECEIPT IN THE HA NDS OF THE ASSESSEE AND THE DISPUTE ARISES ONLY IN CASES WHERE THE SUBSIDY IS G RANTED TO THE ASSESSEE TO ENABLE TO REPAY THE BORROWINGS FROM NABARD. THE TR IPARTITE AGREEMENT BETWEEN NABARD, THE ASSESSEE AND THE STATE GOVERNME NT (SPECIMEN COPY) IS AT PAGES 64 TO 81 OF THE ASSESSEES PAPER BOOK FOR THE ASSESSMENT YEAR 1996-97. THE CONTENTS OF THE TRIPARTITE AGREEMENT ARE NOT IN DISPUTE AND THEREFORE THERE IS NO NEED TO DISCUSS THEM IN DETAIL. IT IS AGREED TH AT UNDER THE AGREEMENT NABARD HAS TO PROVIDE THE FINANCE TO THE ASSESSEE T O ENABLE THE ASSESSEE TO PAGE - 8 ITA NO.167 AND 168/AHD/2004 -8- EXECUTE PROJECTS COMPRISING SCHEMES FOR CONSTRUCTIO N OF DEEP TUBE WELLS, LYING OF PIPELINES AND OTHER ALLIED WORKS IN THE STATE OF GUJARAT. THE STATE GOVERNMENT UNDERTOOK TO GIVE GRANTS TO THE ASSESSEE TO ENABLE THE ASSESSEE TO REPAY THE LOANS. THE RELEVANT GOVERNMENT RESOLUTI ONS AND CIRCULARS CLEARLY STATED THAT THE GRANTS SHOULD BE UTILISED ONLY FOR THE PURPOSE FOR WHICH THEY WERE GIVEN. THIS CONDITION HAS BEEN COMPLIED WITH BY THE ASSESSEE AND IT IS NOT IN DISPUTE. IN THE ACCOMPANIMENT STATEMENT T O THE GOVERNMENT CIRCULAR DATED 6-3-1996, THERE IS REFERENCE TO SUBSIDY TO TH E ASSESSEE FOR REPAYMENT OF LOAN OF RS.2 CRORES TAKEN FOR THE PURPOSE OF PUTTIN G UP 103 BORE WELLS. SIMILARLY, IN THE ACCOMPANIMENT STATEMENT TO THE CIRCULAR DATED 3-2-1996, THERE IS REFERENCE TO THE GRANT OF RS.19.28 CRORES TO THE ASSESSEE FOR CAPITALISATION OF INTEREST. IN ANOTHER MEMORANDUM ISSUED BY THE OFFICE OF THE SUPERINTENDING ENGINEER, AHMEDABAD IRRIGATION PROJE CT CIRCLE, ON 30-3-1996 RELATING TO BUDGET GRANT FOR THE ACCOUNTING YEAR 19 95-96, THE ASSESSEE WAS GRANTED SUBSIDY OF RS.1297.46 LAKHS FOR REPAYMENT O F THE LOAN FOR TUBE WELLS AND RS.100 LAKHS AS GRANT OF CAPITALISATION OF INTE REST. THESE GRANTS HAVE BEEN TAKEN TO THE CAPITAL RESERVE ACCOUNT. THE BALANCE SHEET AS ON 31-3-1996 SHOWS THAT THE TOTAL SUBSIDY OF RS.13,97,46,000/- HAS BEE N ADDED TO THE OPENING BALANCE OF THE CAPITAL RESERVE. THERE IS PROPER A CCOUNTING AND CONTROL OF THE UTILISATION OF THE GRANTS ALSO. THIS IS CLEAR FROM PAGES 8 AND 9 OF THE PAPER BOOK FOR THE ASSESSMENT YEAR 1996-97. THIS IS A SCHEDU LE WHICH SHOWS THE UTILISATION OF THE CAPITAL GRANT FOR THE CONSTRUCTI ON OF THE TUBE WELLS. THE OPENING BALANCE IS FIRST BROUGHT DOWN TO WHICH THE CAPITAL OUTLAY IS ADDED. FROM THIS FIGURE, THE COST OF FAILED TUBE WELLS (RS .14,00,777/- FOR THIS YEAR) IS DEDUCTED. THERE IS A SEPARATE COLUMN SHOWING UNUTI LISED GRANTS RECEIVED FOR WORKS. IN THE SCHEDULE EXPLAINING THE SECURED LOAN S, THE ASSESSEE HAS ALSO SHOWN A SUM OF RS.4,37,88,269/- AS TERM LOANS FROM BANKS SECURED BY FIRST CHARGE ON THE LAND ACQUIRED, TUBE WELLS AND LIFT IR RIGATION SCHEME ETC. AND IT HAS ALSO BEEN STATED THEREIN THAT THE TERM LOANS ARE GU ARANTEED BY THE GOVERNMENT OF GUJARAT. THE PRINCIPAL AMOUNT AND THE INTEREST ACCRUED DUE ARE SEPARATELY PAGE - 9 ITA NO.167 AND 168/AHD/2004 -9- SHOWN. THE SCHEDULE 5 TO THE BALANCE SHEET WHICH EX PLAINS THE FIXED ASSETS (PAGE 10 OF THE PAPER BOOK FOR THE ASSESSMENT YEAR 1996-97) SHOWS THE TUBE WELLS AND LIFT IRRIGATION SCHEMES AS THE ASSESSEES FIXED ASSETS AND THE DETAILS SUCH AS THE OPENING BALANCE, ADDITIONS, CLOSING BAL ANCE, THE DEPRECIATION PROVIDED AND THE NET BALANCE ARE ALL SEPARATELY SHO WN. SUB-SCHEDULE 3.1 SHOWING THE BREAK UP OF THE SECURED LOANS AT PAGE 1 6 OF THE PAPER BOOK SHOWS REPAYMENT OF THE LOANS MADE DURING THE YEAR IN THE AMOUNT OF RS.14,32,82,385/-. IT IS SEEN FROM THE ABOVE DETAI LS FILED IN THE PAPER BOOKS FOR THE ASSESSMENT YEAR 1996-97 AND SIMILAR DETAILS FIL ED IN THE PAPER BOOKS FOR BOTH THE YEAR THAT THERE IS COMPLETE CONTROL OF THE UTILISATION OF THE SUBSIDY OR GRANT RECEIVED FROM THE STATE GOVERNMENT TOWARDS RE PAYMENT OF THE MONIES BORROWED FROM THE NABARD FOR THE PURPOSE OF CONSTRU CTING TUBE WELLS AND LIFT IRRIGATION SCHEMES. 12. THE PURPOSE OF THE GRANT OR THE SUBSIDY BEING F OR THE CONSTRUCTION OF THE CAPITAL ASSETS VIZ. THE TUBE WELLS AND LIFT IRRIGAT ION SCHEMES, WHICH CONSTITUTE THE PERMANENT APPARATUS FROM WHICH THE ASSESSEE DER IVES INCOME BY WAY OF WATER CHARGES, THE SUBSIDY HAS TO BE HELD TO CONSTI TUTE CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE APPLYING, WITH RESPECT, THE PURPOSE TEST EVOLVED BY THE SUPREME COURT IN SAHANEY STEEL (SUPRA) AND PONNI SU GARS (SUPRA). WE HOLD ACCORDINGLY AND ALLOW GROUND NO.6 FOR THE ASSESSMEN T YEAR 1996-97 AND GROUND NO.7 FOR THE ASSESSMENT YEAR 1998-99. 13. GROUND NO.1 TO 5 IN THE APPEAL FOR THE ASSESSME NT YEAR 1996-97 RELATING TO THE DISALLOWANCE OF THE COST OF FAILED TUBE WELL S, PREVIOUS YEARS EXPENSES AND DEPRECIATION ON THE TUBE WELLS ARE DISMISSED AS NOT PRESSED. SIMILARLY, IN THE APPEAL FOR THE ASSESSMENT YEAR 1998-99 GROUND N OS.1 AND 3 TO 6 QUESTIONING SIMILAR DISALLOWANCES ARE ALSO DISMISSED AS NOT PRE SSED. IN THIS YEAR, THE ASSESSEE HAS ALSO TAKEN GROUND NO.2 QUESTIONING THE DECISION OF THE AO IN NOT PAGE - 10 ITA NO.167 AND 168/AHD/2004 -10- CONSIDERING THE REVISED STATEMENT OF INCOME FILED I N RESPONSE TO NOTICE UNDER SECTION 139(9). THIS GROUND IS ALSO DISMISSED AS N OT PRESSED. 14. IN THE RESULT BOTH THE APPEALS ARE PARTLY ALLOW ED. NO COSTS. ORDER PRONOUNCED IN THE OPEN COURT 16 TH OCTOBER, 2009. SD/- SD/- (D.C. AGRAWAL) ACCOUNTANT MEMBER (R.V.EASWAR) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 16-10-2009 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR, ITAT, AHMEDABAD