M/s J. K. Transport Co Malviya Nagar V. Commissioner Of Income Tax Central Revenue

TAXC/11/2015

AI Insights

The case revolves around the classification of subsidies received by M/s. J.K. Transport Co. under a government scheme aimed at promoting the construction of cinema halls. The core legal issue was whether these subsidies should be classified as 'capital subsidies', which are excluded from taxable income, or as 'revenue subsidies', which are taxable. The Income Tax Department argued that the subsidies were intended to promote the business of the assessee and thus should be treated as revenue subsidies. However, the assessee contended that the subsidies were strictly for the construction of cinema halls, qualifying them as capital subsidies. The High Court, referencing Supreme Court decisions, concluded that the subsidies were indeed capital in nature, focusing on the purpose of the subsidies rather than the timing of their disbursement.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 756625 (HC-CHHATTISGARH)
• Appeal Type: Others
• Pronouncement Date: 24-07-2019
• Assessment Year: misc
• Other Referred Cases: Sahney Steel & Press Works Ltd. Hyderabad v. Commissioner of Income Tax, AP-1, Hyderabad; (1997) 7 SCC 764, Commissioner of Income Tax, Madras v. Ponni Sugar and Chemicals Limited; (2008) 9 SCC 337, Commissioner of Income Tax-1, Kolhapur v. M/s. Chaphalkar Brothers, Pune; AIR 2018 SC 132
• Laws Referred To: Madhya Pradesh Naye Cinemagharon Ke Nirman Ko Protsahan Yojna Ke Sahayata Anudan Niyam, 1982
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NAUSHINA ALI
• Assessee Lawyers: S RAO; MK SINHA
• Keywords: Capital Subsidy; Income Tax; Revenue Subsidy; Film industry; Cinema hall construction
• Section: 5

Judgement Text

"1 AFR HIGH COURT OF CHHATTISGARH, BILASPUR Tax Case No. 10 of 2015 {Arising out of Order dated 15.12.2014 passed by the Income Tax Appellate Tribunal, Raipur Bench, Raipur in ITA No. 396/Nag/97} M/s. J.K. Transport Co. Malviya Nagar, Durg (Chhattisgarh) ----Appellant Versus Commissioner of Income-Tax, Central Revenue Building, Civil Lines, Raipur, Chhattisgarh. ---Respondent AND Tax Case No. 11 of 2015 {Arising out of Order dated 15.12.2014 passed by the Income Tax Appellate Tribunal, Raipur Bench, Raipur in ITA No. 85/Nag/2003} M/s. J.K. Transport Co. Malviya Nagar, Durg (Chhattisgarh) ----Appellant Versus Commissioner of Income-Tax, Central Revenue Building, Civil Lines, Raipur, Chhattisgarh. ---Respondent AND Tax Case No. 12 of 2015 {Arising out of Order dated 15.12.2014 passed by the Income Tax Appellate Tribunal, Raipur Bench, Raipur in ITA No. 306/Nag/99} M/s. J.K. Transport Co. Malviya Nagar, Durg (Chhattisgarh) ----Appellant Versus Commissioner of Income-Tax, Central Revenue Building, Civil Lines, Raipur, Chhattisgarh. ---Respondent For Appellant/Assessee : Shri S. Rajeshwar Rao and Shri M.K.Sinha, Advocates For Respondent/Revenue: Ms. Naushina Afrin Ali, Advocate on behalf of Shri Amit Choudhary, Advocate. 2 Hon'ble Shri P.R. Ramachandra Menon, Chief Justice Hon'ble Shri Parth Prateem Sahu, Judge Judgment on Board Per P.R. Ramachandra Menon, Chief Justice 24/07/2019 1. Whether the subsidy paid to the Assessee pursuant to a scheme formulated and implemented by the Government for promotion of construction of Cinema Halls and support the film industry, subject to satisfaction of the requirements as mentioned therein, is to be treated as 'capital subsidy', excluding it from the purview of assessment or should it be treated as the 'revenue subsidy' so as to be subjected to assessment, is the point for consideration in these cases. 2. According to the Appellant-Assessee, the Assessee satisfied all the requirements of the Madhya Pradesh Naye Cinemagharon Ke Nirman Ko Protsahan Yojna Ke Sahayata Anudan Niyam, 1982 (for short 'the Rules'). The construction of the Cinema Hall was effected accordingly and the subsidy flowing from the said Rules was given, the measure which was worked out in terms of Rule 5 of Annexure A/2 Rules. 3. According to the Income Tax Department, the act of the Assessee treating it 'capital subsidy' was not correct and it ought to have been reckoned as 'revenue subsidy' in view of the fact that the same was provided only to promote the business of the Assessee and not for construction of the Cinema House. Further, the scheme was introduced in the year 1982, whereas the exhibition was started in the cinema hall of the Assessee only from April, 1992. 4. The sequence of events reveals that the Appellant, who is doing some business in the field of transportation had also ventured into the cinema field by constructing a theater by name \"Swaroop Theater\" in Durg, 3 Chhattisgarh. It is stated that as per the Annexure A/2 scheme, providing for payment of subsidy to promote the construction of Cinema Houses, the Appellant put forth a claim and the same was sanctioned granting subsidy for the assessment years 1994-1995, 1995-1996 and 1996-1997, amounting to Rs. 9,34,120/-, 7,00,591/- and 7,00,591/- respectively. Since the above amounts were disbursed towards 'capital subsidy', it was never included as part of the turnover in the returns filed by the Assessee. However, the Assessing Officer was of the view that it was to be included as part of the 'revenue subsidy' and accordingly, the assessment was finalised as per order dated 11.12.1996 (Annexure A/4) fixing the tax liability accordingly. 5. Met with the situation, the Assessee took up the matter by way of appeal before the Commissioner of Income tax (Appeals-1) Raipur, who considered the matter and held that the order passed by the Assessing Officer was not liable to be sustained, as the disputed amount was liable to be treated as 'capital subsidy'. It was accordingly that Annexure A/6 order dated 28.02.1997 came to be passed, which, however came to be reversed in the second appeal, by the Appellate Tribunal, as per Annexure A/8 order dated 07.08.2001. 6. The matter was taken up in appeal before this Court by the Assessee. Meanwhile, in respect of the subsequent assessment years, the factual aspect, particularly as to the 'purpose' of the subsidy was got ascertained and the Tribunal finalised the proceedings in favour of the Assessee, treating the amount of subsidy as 'capital subsidy' and not as revenue subsidy. This aspect was brought to the notice of this Court and taking note of the conflicting decisions passed by the Tribunal, the orders under challenge were set aside and the matter was remanded to the Tribunal for fresh consideration, in light of the law declared by the Supreme Court in Sahney Steel & Press Works Ltd. Hyderabad v. Commissioner of 4 Income Tax, AP-1, Hyderabad; (1997) 7 SCC 764, wherein it was clearly held that the nature, object and purpose of the subsidy was liable to be looked into and not the point of release of the said subsidy. The matter was considered by the Tribunal, however, on a misconception of the law declared by the Apex Court on the point, reiterated its stand holding that the subsidy given to the Assessee was liable to be treated as 'revenue subsidy'. The appeals preferred by the Assessee came to be dismissed, which made the Assessee to approach this Court by way of these appeals. 7. On 19.09.2017, when these matters came up for consideration before this Court, substantial questions of law were raised in the following terms: \"(i) Did the Income Tax Appellate Tribunal act in accordance with law in holding that an amount of Rs.7,00,591/- received by the Appellant as subsidy under the Madhya Pradesh Naye Cinemagharon Ke Nirman Ko Protshahan Yojana Ke Sahayata Anudan Niyam, 1982 is treated directly linked with the revenue business? (ii) Whether the Tribunal had acted in accordance with law and in conformity with the directions issued by this Court in Income Tax Appeal No.08 of 2006? (iii) Whether on the facts and in the circumstances of the case the Tribunal committed error of law by not invoking the purpose test for determining the character of subsidy as laid down by the Hon'ble Supreme Court in the case of CIT v. Ponni Sugars & Chemicals Ltd. (2008) 219 CTR (SC) 105?” 8. We have heard Shri S. Rajeshwar Rao, learned counsel for the Appellant- Assessee and Ms. Naushina Afrin Ali, learned Standing Counsel for the Respondent-Revenue, with reference to the substantial questions of law and other incidental aspects involved. 9. The learned counsel for the Appellant submits that the nature and purpose of the scheme is discernible from Annexure A/2 Rules; which was only for promoting the construction of new cinema theaters, so as to provide help in the film field and never for promoting the running business of the Appellant. 5 This, however was sought to be rebutted by the learned Standing Counsel for the Respondent, particularly with reference to the various provisions in Annexure A/2 Rules, and in particular, the relevant clauses as contained in Rule 5([k). The learned Standing Counsel also submits that in view of the specific observation made by the Apex Court in Sahney Steel & Press Works Ltd. (supra), in particular, paragraphs 10, 13, 17, 18, 19, 23, 24, 27, 31 and 33, the money given to the Assessee for assisting him was virtually for carrying out the business operation. Hence, such money given much after commencement of the operation could be treated only as an assistance for the purpose of trade and was liable to be treated as part of the 'revenue subsidy', which is liable to be reckoned for fixation of tax. 10. The learned counsel for the Assessee, submits that there is no dispute with regard to the declaration of law by the Apex Court in Sahney Steel & Press Works Ltd. (supra) and that the particular scheme which was considered by the Supreme Court in the said case which obviously was for the purpose of promotion of business, which is not the position in the instant case. The law declared by the Supreme Court is that, the crucial aspect to be looked into is the nature and purpose of the scheme for granting subsidy and not the time of disbursement or the quantum of disbursement. It is further pointed out that, there is nothing against the Assessee so as to support the case of the Revenue as contained in Annexure A/2 Rules, to infer that the nature and purpose of the subsidy was to promote the running business of the Appellant. On the other hand, it was only to promote the construction of the Cinema Hall. 11. The Appellant Assessee satisfied all the requirements as mentioned under Rule 4 of the said Rules. As per Annexure A/2 Rules, the benefit is available only in respect of the Cinema Halls which were constructed on or after 14.01.1980. It would be worthwhile to note the requirements to be satisfied 6 as contained in Rule 4, which reads as under: \"4- lgk;rk vuqnku dh ik=rk& bu fu;eksa ds vUrxZr vuqnku dsoy ,sls LFkk;h] flusek?kjksa dks fn;k tkosxk%& ¼d½ ftudk fu;ekuqlkj fuekZ.k] fnukad 14 tuojh 1980 ;k mlds i'pkr~ izkjaHk dj iw.kZ fd;k gks( rFkk ¼[k½ izn'kZu dh frfFk ls yxkrkj ,d o\"kZZ rd ¼,d yk[k ;k mlls vf/kd tula[;k okys 'kgjksa esa½ ;k nks o\"kZ rd ¼,d yk[k ls de tula[;k okys 'kgjksa esa½ izos'k njsa bl izdkj j[kh xbZ gksa fd os ml 'kgj esa fLFkr vU; flusek?kjksa dh fofHkUu Jsf.k;ksa dh U;wure njksa ls de rFkk vf/kdre njksa ls vf/kd u gksa( rFkk ¼x½ ftuds Lokfe;ksa us fu;e 7 rFkk 8 ¼x½ esa fofgr 3 o\"kZ ds yxkrkj izn'kZu ds fy;s djkjukek fu\"ikfnr fd;k gksA\" 12. Coming to the scope of Rule 5, it is necessary to have the said Rule also extracted, which is as follows: \"5- lgk;rk vuqnku dh ek=k& ,sls flusek?kjksa ds Lokeh@Lokfe;ksa dks fuEukuqlkj lgk;rk vuqnku fn;k tkosxk%& ¼d½ izns'k ds ftu 'kgjksa dh tula[;k ,d yk[k ;k mlls mij gks ogka uofufeZr flusek?kj esa izn'kZu izkjaHk gksus dh frfFk ls mlds }kjk ,d o\"kZ rd tks euksjatu 'kqYd rFkk vfrfjDr dj ¼;fn dksbZ gks½ iVk;k x;k gks mlds cjkcj /kujkf'k] ¼[k½ ftu 'kgjksa dh tula[;k ,d yk[k ls de gks ogka uofufeZr flusek?kj esa izn'kZu izkjaHk gksus dh frfFk ls nks o\"kZ rd tks euksjatu 'kqYd rFkk vfrfjDr dj ¼;fn dksbZ gks½ iVk;k x;k gks mlds cjkcj /kujkf'k- Li\"Vhdj.k&**Lokeh** 'kCn dk rkRi;Z fdlh O;fDr fo'ks\"k] O;fDr;ksa ds lewg] fdlh QeZ ;k lkslk;Vh ;k la;qDr iawth daiuh ls tks flusek?kj dk ekfyd gks] ls gSA\" With reference to Rule 5([k) of the Rules, the learned Standing Counsel submits that the Appellant is not entitled to get the benefit as it could only be inferred that the benefit was given to the Assessee for promotion of the trade/business, more so, in view of the observations made by the Supreme Court in paragraph 18 of Sahney Steel & Press Works (supra) as mentioned above. We find it difficult to accept the said proposition for more reasons than one. 7 13. It will be worthwhile to note the contents of paragraph 15 of the judgment passed by the Apex Court in Sahney Steel & Press Works Ltd. (supra) for understanding the facts situation and hence, it is reproduced below: \"15. In the case before us, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee could not use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like extension of docks as in the Seaham Harbour Dock Co. case. \" A specific inference was drawn in the case considered by the Apex Court, that the payments were made to assist the new industries at their commencement of the business and to carry on their business. It was in the said circumstance, that an observation was made in paragraph 19, that the Government was paying out of public funds to the assessee for a definite purpose and if the purpose was to help the assessee to set up its business or complete a project, the monies must be treated as to have been received for the 'capital purpose'. But if the monies are given to an assessee for assisting him for carrying out the business operation and the money is given only after and conditional upon commencement of the production, such subsidies must be treated as assistance for the purpose of trade. Applying the said legal position to the given case, the purpose of the scheme as evident from Annexure A/2, and in particular Rule 1, is obviously for promoting the construction of new Cinema Theaters. The effective date is given under Rule 3, as '14.01.1980'. The eligibility conditions are mentioned in Rule 4 and Rule 5 stipulates the 'measure of subsidy', which could be aspired by the assessee. 14. Going by the said Rules, it is quite clear that the extent of benefit payable to an Assessee by way of subsidy is quantified with reference to the 8 entertainment tax as specified under Rule 5([k). But for fixing the extent of benefit payable, Annexure A/2 does no where mention that the purpose of subsidy is to promote the trade or business. On the other hand, it is explicitly clear that the said scheme was introduced by the Government to promote the construction of new cinema theaters in the State and as such, the contention raised by the learned Standing Counsel for the Department to the contrary can only be repelled. 15. The Apex Court had further occasion to consider the scope of the disputed question in Commissioner of Income Tax, Madras v. Ponni Sugar and Chemicals Limited; (2008) 9 SCC 337. The Apex Court made reference to the law declared in Sahney Steel & Press Works Ltd. (supra) as well. There is no deviation with regard to the law already declared in this regard; which, virtually is to the effect that the nature and purpose of the subsidy is the conspicuous aspect to be looked into. This is evident from the observations in 'paragraph 14' and elsewhere of the said verdict highlighting the need and necessity to apply the \"purpose test\". It is also brought to the notice of this Court by the learned counsel for the Appellant that the basic issue, whether the subsidy given for construction was to be treated as capital subsidy or revenue subsidy was considered by the Apex Court recently in Commissioner of Income Tax-1, Kolhapur v. M/s. Chaphalkar Brothers, Pune; AIR 2018 SC 132, as well. It has been categorically declared therein that the subsidy in the given circumstance will definitely constitute 'capital subsidy' and it is to be excluded from assessment of tax under the provisions of the Income Tax Act. 16. Coming to the verdict passed by the Tribunal, it is relevant to note that the Tribunal has has very much adverted to the law declared by the Apex Court in Sahney Steel & Press Works Ltd. (supra) and the necessity to give importance to the 'purpose test' as discussed in paragraph 4 and 9 elsewhere. The Tribunal also observed that, as per the verdict passed by the Apex Court, \"the character of the receipt in the hands of the Assessee, whether revenue or capital, has 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, its 'source' or its 'form' were irrelevant. If the object of the subsidy was to enable the assessee to run the business more profitably then the receipt is on the 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\". After making such a reference, while giving effect to the law declared by the Supreme Court, the Tribunal appears to have taken a somersault and simply proceeded to hold that the subsidy given in the instant case was to be treated as 'revenue subsidy' exigible to tax, in turn fixing the liability accordingly. 17. We are of the view that the course pursued by the Tribunal is per se wrong and unsustainable in all respects. The finding is not supported by reasoning. It stands contrary to the law declared by the Apex Court as discussed above. For the said reasons, Annexure A/1 stands set aside. 18. Appeals stand allowed. No costs. Sd/- Sd/- ( P.R. Ramachandra Menon) (Parth Prateem Sahu) CHIEF JUSTICE JUDGE Amit "