Delhi High Court

R.B. Narain Singh Sugar Mills Ltd. vs Dy. Cit on 10 December, 2002

Equivalent citations: 2003 85 ITD 552 Delhi

ORDER

R.S. Syal, A.M.

This appeal by the assessed emanates from the order passed by the Commissioner (Appeals) on 22-11-1995 in relation to the assessment year 1990-91. The following three effective grounds read as under :

1. That the learned Commissioner (Appeals) has erred in not allowing the interest payable of Rs. 97.07 lakhs to the Central Government at the rate of 14 per cent per annum on the loan of Rs. 693.39 lakhs as a revenue expenditure.

2. That the learned Commissioner (Appeals) has erred in not holding that the subsidy of Rs. 97.071 lacs granted by the Central Government by adjustment of interest as exempt from tax.

3. That the learned Commissioner (Appeals) has erred in concluding that grant of subsidy equivalent to the interest payable is a waiver.

2. The facts concerning this appeal are that the assessed had debited a sum of Rs. 97,07,460 to its Profit & Loss account as "Provision for Interest" and claimed deduction thereof. While framing the assessment under section 143(3) the assessing officer called upon the assessed to explain as to why this sum be not disallowed. It was stated on behalf of the assessed that it had provided for Rs. 97.07 lakhs towards interest at the rate of 14 per cent on the loan amounting to Rs. 6,93,39,000 outstanding on the date when the undertaking was handed over to it by the government. It was further stated that as per letter No. 14/3/86-NSU/Sugar-Desk-I dated 25-10-1989 of the Department of Food, Ministry of Food and Civil Supplies, the interest on loan was liable to be treated as Capital Subsidy to enable the assessed unit to rehabilitate and improve its functioning. The learned assessing officer observed that the assessed was not liable to pay any interest on the outstanding government loan and in fact it had received a Capital Subsidy of the equivalent amount. The claim of deduction for Rs. 97.07 lakhs was jettisoned as in the opinion of the assessing officer the assessed had neither incurred any expenditure nor there was any liability to pay in this regard. The book entries made by the assessed claiming deduction were held to be irrelevant for the purpose of computing the taxable income. The first appeal did not change the fortune of the assessed.

3. Before us the learned counsel for the assessed contended that both the authorities below had erred in appreciating the factual aspect in its entirety. It was stated that the assessed was originally engaged in the business of manufacture and sale of sugar and management of the undertaking was taken over temporarily by the Government of India on 2-2-1979 under the Sugar Undertaking (Taking Over of Management) Act, 1978. It was explained that on 1-2-1986 the undertaking was again handed over to the assessed and at that time the company owed a loan of Rs. 693.39 lakhs to the government. The interest liability on the aforesaid loan till 31-1-1986 was waived by the Government of India. It was further stated that in respect of the interest payable after 1-2-1986, the government agreed to grant subsidy equivalent to the interest liability on the outstanding loan for a period of five years. While referring to pages 42 onwards, being the agreement of the assessed with the government, it was stated that the rate of interest during the period of moratorium of five years was settled at at the rate of per cent per annum and it was agreed that this interest would be credited as subsidy to the assessed mill by the government. It was, therefore asserted that the liability for payment of interest at the rate of 14 per cent was very much there and hence there was no question of not granting deduction on this count. A further reference was made to page 11 of the paper book, being a letter from Ministry of Food, Government of India to the Manager, Indian Bank, New Delhi, showing that interest at 14 per cent on loan of Rs. 693.39 lakhs was to be charged and given back as subsidy through book adjustment. It was therefore urged that the learned Commissioner (Appeals) had not appreciated the facts in conforming the addition which was wrongly made by the assessing officer. A strong objection was taken to the finding of the learned Commissioner (Appeals) in holding that there was a waiver of interest by the government. It was asserted that there was in fact no waiver rather the liability to pay interest was there but the same was directed towards the assessed in the shape of subsidy for rehabilitation purposes.

4. A further submission was advanced to the effect that the Capital Subsidy was given to the assessed for the purposes of addition to the plant and machinery and in the modernization etc. of the mill. Our attention was drawn towards the correspondence of the assessed with the Government of India and the replies given on behalf of the government placed at pages 50 to 55 of the Paper Book. It was contended that the perusal of these letters clearly revealed that the subsidy granted was capital in nature enabling the assessed company to improve its functioning by modernization and expansion etc. It was contended that the claim of the assessed before the authorities below was that the assessed was liable to deduction for Rs. 97.07 lakhs being the interest liability incurred by the assessed and also no amount of this count was taxable in view of the fact that the subsidy was capital in nature. While referring to the decision of Honble Andhra Pradesh High Court in the case of CIT v. Chitra Kalpa (1989) 177 ITR 540 (AP) and that of Bombay High Court in the case of Sadichha Chitra v. CIT (1991) 189 ITR 774 (Bom) it was pointed out that the subsidy granted by the government in connection with the capital assets could not be taxed. A further reliance was placed on the decision of the Honble Supreme Court in the case of Sahney Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253 (SC) to assert that only the subsidy received on account of revenue expenses was liable to be taxes and not otherwise. It was contended that the purpose of this subsidy was to modernize its plant and machinery and further augment the installed capacity by purchasing new machinery and hence the same could not be taxed as revenue receipt. While referring to page 105 of the Paper Book, being the certificate issued by the Chartered Accountant, it was contended that the entire amount of Rs. 97,07 lakhs was actually spent on expansion work. This certificate was stated to be furnished to the Ministry of Food in compliance with the terms and conditions of utilization of the capital subsidy. It was therefore urged that the order of the learned Commissioner (Appeals) was not in consonance with the settled legal view and deserved to be overturned.

5. In the oppugnation the learned Departmental Representative strongly supported the order passed by the Commissioner (Appeals). It was vehemently contended that no interest was actually paid by the assessed to the Government of India, which was ultimately adjusted in the shape of subsidy. It was stated that the entries passed by way of book adjustments were nothing but a mere eyewash to claim deduction for Rs. 97.07 lakhs without offering the same amount for taxation. It was contended, relying upon the case of Colaba Central Cooperative Consumers Wholesale & Retail Stores Ltd. v. CIT (1998) 229 ITR 209 (Bom) that there was in fact a waiver of interest by the government during the moratorium period of 5 years and as such no deduction could be claimed. A further submission was advanced to the effect that the passing of entries in the books of account was not determinative of the deductibility of expenditure for the purposes of computing total income. While relying on Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Sutlej Cotton Mill Ltd. v. CIT (1979) 116 ITR 1 (SC) it was submitted that the mere claim in the books of account could not entitle the assessed to deduction when the effect of the transaction was that there was no liability to pay interest and in fact the interest was waived by the government.

6. On the nature of subsidy it was contended on behalf of the revenue that the same was taxable. While relying on the decision of Honble Supreme Court in the case of Sahney Steels & Press Works Ltd.s case (supra) and V S.S.V. Meenakshi Achi v. CIT (1966) 60 ITR 253 (SC) it was contended that the Honble Supreme Court has categorically laid down that the subsidy was taxable. In the final analysis the learned Departmental Representative urged that the order of the Commissioner (Appeals) was in accordance with the law and did not warrant any interference.

7. We have considered the rival submissions in the light of material placed before us and precedents relied upon. There is no dispute about the fact that the undertaking of the assessed which was earlier taken over by the government was handed over to the assessed-company and as a result of the agreement entered into by the Government of India with the assessed on 31-1-1986 and its modification thereafter, the assessed was liable to make repayment of loan to the tune of Rs. 693.39 lakhs outstanding on the date of handing over. It was an interest bearing loan and was to be repaid in twenty equal yearly Installments after a moratorium period of five years. The agreement specifically provides that the interest accruing at the rate of 14 per cent per annum during the period of moratorium will be credited as subsidy to the mill by the government. There is also no quarrel about the fact that the interest was not to be physically paid and then received back as subsidy, but was to be book adjusted. In order to decide the controversy in this appeal we have to examine the issue from two angles viz., (i) whether the assessed was entitled to any deduction on account of interest and (ii) whether the subsidy was capital in nature. If either the liability to pay interest is found to be non-existent or the subsidy is found to be revenue, the amount in question cant escape tax. We will examine both the aspects one by one.

8. First of all we will deal with the first aspect, namely, the deduction of interest on loan. The assessed had claimed the deduction for the sum under consideration by way of debit to its Profit & Loss Account. As per the view of the assessing officer and the Commissioner (Appeals) no amount was deductible on this count and the fact that the book entries were passed was not determinative of the claim for deduction. We fully agree with the finding of the authorities below in so far as the fact that entries in the books of account are not determinative of the real transaction and rather it is the substance of the transaction that matters. The various authorities relied upon by the learned Departmental Representative support this view. But the fact remains that we have to examine the real nature of the transaction irrespective of the way in which it is reflected in the books of account. If a claim for deduction is made in the books of account which is not legally tenable, no deduction can be allowed on that count. In the like manner if no deduction is claimed in the books of account but the assessed, in fact, is entitled to it in accordance with the provisions of the Act, then, in our considered opinion there is no impediment in granting the same. Referring to the facts of the case, we are satisfied that the mere fact that the assessed had claimed deduction for interest in its books of account could not make or mar the claim in this regard. In order to determine the eligibility of deduction we have to examine as to whether there was really any liability on the assessed to pay interest in question. If no liability to pay any interest turns out, there cannot be any question of deduction and vice-versa. A perusal of agreement placed at page Nos. 42 onwards of the Paper Book clearly shows that the liability to pay interest at the rate of 14 per cent per annum during the moratorium period of five years was there on the assessed. It is clearly brought out from the amendment to the agreement as well placed at page 48 of the Paper Book that the interest would accrue during the moratorium period at the rate of 14 per cent per annum. The letter written by the Director, Ministry of Food, Government of India to the bank placed at page 11 clearly stipulates that "It has been agreed that the interest at the rate of 14 per cent on loan of Rs. 693.39 lakhs may be charged and given back as subsidy through book adjustment". The letter written by the Director, Ministry of Food to the assessed on 25-10-1989 placed at page 52 of the Paper Book clearly reads that the outstanding loan bears an interest from the date of handing over of the mill at the rate of 14 per cent per annum". It is therefore crystal clear that the assessed was liable to pay interest at the rate of 14 per cent per annum on the amount of loan, which in the year under consideration amounted to Rs. 97.07 lakhs. As the liability to pay such interests was there upon the assessed, we do not see any reason as to why the claim for deduction of interest should be negatived.

9. The second aspect of the controversy is the decision on the nature of subsidy. If it is found out that the subsidy was revenue in nature then it has to be taxed in accordance with the provisions of the Act, and in the converse situation the same cannot be considered for taxation, being capital in nature. Both the sides have heavily relied upon the decision of the Apex Court in Sahney Steel & Press Works Ltd.s case (supra). The facts of this case are that a notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after 1-1-1969 with capital investment not exceeding Rs. 5 crores. The incentives were to be allowed. for a period of five years from the date of commencement of production. The incentives were available unless and until production had commenced. These incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemptions were also given for payment of water rate. The assessed company obtained refund totalling Rs. 14,665.70 being the refund of sales tax on purchase of machines, purchase of raw materials and sale of finished goods. The Income Tax Officer while making the assessment for the year 1974-75 included the said amount in the assessable income of the assessed which was confirmed in the first appeal. However the Tribunal upheld the contention of the assessed by holding that subsidy was in the nature of capital receipt. The Honble High Court by reversing the order of the Tribunal held the amount as taxable. When the matter travelled to the Honble Summit Court, it was found that the assessed 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. It was also observed that the subsidies were not granted to bring into existence any new asset. Eventually the amount was held to be revenue receipt and liable to tax accordingly. A perusal of this judgment brings to light that any subsidy which is granted to assist the assessed in carrying out its business operations and to meet out the revenue costs is liable to tax. However, if the purpose is to help the assessed to set up or expand its business by purchasing capital assets, the same is capital in nature. It therefore boils down that the decisive factor in determining the nature of subsidy is the purpose for which it is granted.

10. Now we will proceed to ascertain the purpose for which the subsidy in question was granted to the assessed. The agreement of the assessed with the Government of India stipulates that the interest accruing during the period of moratorium will be credited as subsidy to the mill by the government. Subsequently on 12-10-1989 a letter was addressed by the assessed to the Ministry of Food, seeking clarification as regards the purpose for which the subsidy was to be utilized. Thereafter on 25-10-1989 a letter was written by the Ministry of Food and Civil Supplies. Para 2 of the said letter provides that the interest due and actually paid by the mill during the period of moratorium will be paid back to the factory as capital subsidy. The purpose of utilization of the subsidy is stated to be "in order to enable the factory to improve its functioning and rehabilitate it financially by modernization, expansion, etc." A further clarification was given by the Ministry of Food & Civil Supplies on 8-12-1989 stating that "the objective of granting moratorium on the payment of loan and thus for the subsidy amount, as being to enable the factory to improve its financial performance and take steps towards rehabilitation and meeting the various essential and other items including those of capital expenditure for modernization and expansion etc. and to boost up the cane development activity in the area of operation of the factory as required for rehabilitation of the factory. The purpose of the moratorium and through adjustments of subsidy is not that it may be utilized towards any avoidable expenditure or for distribution of profits etc. All essential expenditure items including those required towards both short and long term rehabilitation has been of the sugar factory are made, as per letter and spirit of the agreement". These letters written by government clearly bring out that the purpose of subsidy was to enable the assessed to take steps towards rehabilitation and incurring capital expenditure for modernization and expansion. When a subsidy is granted to assist a unit in setting up or rehabilitate or expand its capital base by installing new plant and machinery etc., the same is capital in nature and cannot be charged to tax. In Sadichha Chitras case (supra) it was laid down that the subsidy granted to the film producers to produce new and better films or to assist an assessed in acquiring a capital asset was distinguishable from enabling the assessed to recoup revenue expenditure, and hence did not constitute revenue receipt assessable to tax. To the similar effect in the case of CIT v. Ruby Rubber Works Ltd. (1989) 178 ITR 181 (Ker)(FB) holding that if any amount is paid by the government with an express purpose and it has nothing to do with its trade in the sense of acquiring profits or gains of the trade, certainly it is not income in the hands of the recipient.

11. Next we will examine the case of V.S.S.V. Meenakshi Achi (supra), heavily relied upon by the learned Departmental Representative. In that case the assessed owned rubber plantations. The payments were made to the assessed against the expenditure incurred on the maintenance of the plantations. It was held that as the amount from the fund earmarked for the assessed on the basis of rubber produced by it was paid against the expenditure incurred for maintaining the rubber plantations and producing the rubber, the amounts received were revenue receipts and therefore liable to be included in the assessable income.

12. This judgment, in our considered opinion, does not bring the case of the revenue any further in as much as no amount was given to the present assessed by way of subsidy to recoup the revenue expenditure. The amount given to the assessed was earmarked with a specific purpose in the expansion and furtherance of existing capital outlay. The certificate of Chartered Accountant placed at page 105 of the Paper Book unequivocally states that the sum of Rs. 97.07 lakhs was spent on expansion and modernization work.

13. A close study of the legal position as enunciated by various courts emerging from catena of cases discussed above manifestly draws a line of distinction between a capital subsidy and revenue subsidy. Whereas the former is directed towards the expansion of the capital base and accordingly falls beyond the ambit of taxation, the later helps the recipient in recouping the revenue expenses and cannot escape the taxation. When the facts of the instant case are decided on the touchstone of the distinction between a capital and revenue subsidy, it becomes palpable that the case of the assessed falls in the former category and hence the amount of subsidy cannot attract tax.

14. On consideration of the matter from both the angles, namely, the existence of the liability of the assessed to pay interest and the nature of the subsidy, being the revenue, we cant sustain the action of the first appellate authority.

15. Before parting with the matter, we would like to deal with another contention raised by the learned Departmental Representative to the effect that the interest was waived by the government and consequently there was neither any expenditure nor receipt on this count. It is noted from the facts of the case that the amount of Rs. 97.07 lakhs was not physically paid by the assessed as interest payment nor the equal amount was received as capital subsidy. Both these aspects were recognized in the books of account by way of book adjustment. We are at loss to understand as to how the conclusion will differ if the amount is adjusted by way of book entries instead of first paying and then receiving back the same amount. There is no qualitative distinction between the situation where a sum is not paid at all and the situation where it is paid and then received back. It is the substance of the transaction that matters rather than the way in which it is recorded in the books of account maintained by the assessed. The Honble Supreme Court in J.B. Bodda & Co. (P) Ltd. v. CBDT (1997) 223 ITR 271 (SC) held, in the context of deduction under section 80-0, that the formal remittance to the foreign company and receipt thereafter was not necessary and the condition of receiving the income in convertible foreign exchange got satisfied when the gross amount payable to the foreign company was reduced by the commission there from and the net amount was finally remitted. In view of these facts we hold that the payment and receipt of interest by way of book adjustment does not alter the nature of transaction. The further argument of the learned Departmental Representative regarding the waiver of interest by the Government is also devoid of merits for the clear reason that there is a marked distinction between the waiver of interest and the payment of interest and receipt of capital subsidy. Whereas in the former case there remains no liability on the assessed to pay the same, in the latter the liability stands but is translated into subsidy by the subsequent action of the government. The agreement in question categorically provides that the assessed was liable to pay interest at the rate of 14 per cent per annum during the moratorium period and the equal amount was given to the assessed in the shape of subsidy for a specific purpose. In the facts of the present case the Government of India had not waived the interest liability but the same was ascertained in the first step and then converted into subsidy in the second step. That being the position we are not convinced with this argument of the learned Departmental Representative as well. The reliance of the learned Departmental Representative on the case of Colaba Central Cooperative (supra) is misconceived as the facts of that case and distinguishable and bear no resemblance to the factual scenario prevailing in the present case, in as much as that case was on diversion of income by overriding title, where it was held that the assessed had not incurred any expenditure at all. Around four decades ago, the Honble Supreme Court in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) considered the doctrine of diversion of income and held it to be applicable when by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. in contrast the facts of the instant case lie in different compartment where the liability to pay interest was an ascertained liability and had no connection with the receipt of capital subsidy. These were two related but entirely different transactions.

16. In view of the legal position as discussed above in the lights of the facts of the present case, we are satisfied that the learned Commissioner (Appeals) was not justified in confirming the addition of Rs. 97.07 lakhs on account of interest to the Government of India.

17. In the result the appeal is allowed.