CIT, KARNAL V. SIYA RAM GARG

ITA/679/2010

AI Insights

The case revolves around two main issues concerning the taxability of subsidies and the application of Section 40A(2) of the Income Tax Act, 1961. The assessee, engaged in yarn manufacturing, received a subsidy from the Haryana Government, which was claimed to be tax-exempt as a capital receipt. The Assessing Officer initially disallowed this claim, but both the CIT(A) and the Tribunal reversed this decision, supporting the assessee's view based on the purpose and nature of the subsidy. The second issue pertained to the disallowance made under Section 40A(2) due to alleged excess payments made to a sister concern for purchases. The Tribunal found that the payments were not higher than normal rates and thus upheld the deletion of the disallowance.

• Counselvise Citation: [2010] 140 COUNSELVISE.COM (IT) 690052 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 14-12-2010
• Assessment Year: misc
• Other Referred Cases: Sawhni Steel & Press Work Ltd. Vs. CIT, CIT Vs. Raja Ram Maize Products, CIT Vs. Abhishek Industries Ltd., CIT v. Ponni Sugars and Chemicals Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: YOGESH PUTNEY
• Keywords: Backward Area; Excess payment; Industrial Unit; Sister concern; Agro based subsidy; Tax free capital receipt
• Section: 40A(2); 260-A

Judgement Text

"IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.679 of 2010 Date of decision: 14.12.2010 The Commissioner of Income Tax. -----Appellant. Vs. Siya Ram Garg HUF. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Yogesh Putney, Sr.Standing counsel for the Revenue. --- ADARSH KUMAR GOEL, J. 1. This appeal has been preferred by the revenue under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order of the Income Tax Appellate Tribunal, New Delhi dated 16.10.2009 in I.T.A. No.4403/Del/2007 claiming following substantial questions of law:- “i) Whether on the facts, and circumstances of the case, the ITAT was justified in deleting the addition of Rs.12,16,090/- by treating the Agro based subsidy received by the assessee as tax free capital receipt, ignoring direct decisions of the Hon’ble Apex Court iin the case of Sawhni Steel & Press Work Ltd. Vs. CIT 228 ITR 253 (SC) and CIT Vs. Raja Ram Maize Products (2001) 251 ITR 427 (SC) as also CIT Vs. Abhishek Industries Ltd. 286 ITR 1 (P&H)? I.T.A. No.679 of 2010 ii) Whether on the facts, and circumstances of the case, the ITAT was justified in deleting the addition of Rs.7,16,511/- on account of excess payment made to sister concern on account of purchases within the meaning of provisions of sec.40A(2) of the IT Act?” 2. The assessee is engaged in manufacture of yarn. It received subsidy of `12,16,090/- from Haryana Government and claimed to be exempt from tax on the ground that the same was capital receipt. The Assessing Officer disallowed the claim of the assessee by holding that subsidy was granted on 27.1.1995 while operations of the assessee commenced on 16.11.1994. Reliance has been placed on judgment of the Hon’ble Supreme Court in Sahney Steels & Press Works Ltd. & others v. CIT 228 ITR 253 and judgment of this Court in CIT v. Abhishek Industries Ltd. 286 ITR 1. The CIT(A) allowed the appeal of the assessee holding that the subsidy was for setting up of industrial unit in backward area of Haryana and same has to be treated as capital receipt. The Tribunal affirmed the said view as follows:- “7. Having heard the parties and having perused the material on record, we find that the subsidy in question has indeed been given for setting up an agro based industrial unit in a backward area in the State of Haryana. The subsidy is determined with regard to capital investment. In “Ponni Sugars & Chemicals” (supra) relied upon by the department, it has been held that the test to determine as to whether incentive subsidy received by the sugar mills was a capital receipt of a revenue receipt, is that the character of 2 I.T.A. No.679 of 2010 the receipt in the hands of the assessee is to be determined with respect to the purpose for which the subsidy is given; that the point of time at which the subsidy is paid, the source of the subsidy and even the form thereof are immaterial; that the main eligibility condition is that the incentive must be utilized; that if the object of the subsidy was to enable the assessee to set up a new unit, the subsidy was capital in nature. 8. “Ponni Sugars & Chemicals (supra), therefore, aids the assessee rather than the department. Admittedly, the subsidy granted to the present assessee has been granted for setting up of agro based industrial unit in a backward area in the state of Haryana. This fact situation is squarely covered by “Ponni Sugars & Chemicals” (supra). 9. Apropos “Sahni Steel & Press Work Ltd. Vs. CIT” (supra) and “CIT vs. Raja Ram Maize Products” (supra), these decisions also do not take anything away from the case of the assessee, as has been observed by the ld CIT(A) in as much as therein, the issue was as to what is a revenue subsidy which is taxable. It was held, inter alia, that subsidy granted for setting up of industry is not of revenue nature. That being so, there is no force in the allegation of the department that the ld CIT(A) ignored “Sahni Steel & Press Work Ltd. Vs. CIT” (supra) and “”CIT vs Raja Ram Maize Products” (supra).” 3. We have heard learned counsel for the appellant. 4. It is clear from the findings recorded by the CIT(A), as affirmed by the Tribunal that the subsidy was given for setting up 3 I.T.A. No.679 of 2010 of industrial unit in backward area of Haryana and was to be determined with reference to capital investment. In such a situation, the plea of the assessee was supported by the view taken by the Hon’ble Supreme Court in CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 which has been followed by the Tribunal and the view taken in Sahney Steels & Press Works Ltd. & others and Abhishek Industries Ltd. was distinguishable. 5. As regards question (ii), the assessee made addition under Section 40A(2) of the Act on the ground that the assessee had paid higher rate to its sister concern while purchasing cotton and waste. The CIT(A) upheld the plea of the assessee that the payment was not higher than the normal rate. It was held that the goods purchased at lesser rate were of inferior quality. The Tribunal affirmed the said finding as under:- “15. On this issue, we find that indeed, the details filed by the assessee showed that its sister concerns were being taxed at the same rate at which the assessee was being taxed, proving that there was no reason for the assessee to show higher rate purchases made by the assessee from its sister concerns. The assessee’s sister concern had offered their income from such sales, which fact has not been disputed. Therefore, the AO erred in invoking the provisions of S.40A(2) of the Act and the ld CIT(A) has correctly deleted the disallowance.” 4 I.T.A. No.679 of 2010 6. The above finding being a finding of fact and not being perverse, we do not find any ground to interfere with the same. 7. No substantial question of law arises. 8. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE December 14, 2010 ( AJAY KUMAR MITTAL ) ashwani JUDGE 5 "