SAROJA MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN these two tax case references under s. 256 of the IT Act, 1961, by the assessee, relating to the asst. yrs. 1979-80 and 1980-81, the common question referred to us is as follows :

(2.) ONE factual finding on which there is no dispute is that this was a subsidy in respect of a revenue expenditure incurred by the assessee in modernisation of its plant in its industrial unit, which was established in a backward area. It is also accepted by learned counsel for the assessee that the said revenue expenditure was allowed as a deduction in computing the total income of the assessee. Yet, he contends that, just as another subsidy, given by SIPCOT to the assessee under the same scheme towards fixed capital investment of the assessee in the industrial unit was admittedly earlier treated by the Revenue as capital receipt, this subsidy also should be treated as capital receipt since both the subsidies were given only as incentive for the assessee to establish the said industrial unit in a backward area.

(3.) IN fact, learned counsel for the assessee himself fairly drew our attention to a decision, which is against him, viz., Merinoply & Chemicals Ltd. vs. CIT which considered many of the earlier decisions and held that the transport subsidy received by the assessee therein (who was engaged in the manufacture and sale of plywood and blackboard) at the rate of 50 per cent of actual cost of transport, was a revenue receipt, since the subsidy was directly relatable to the abovesaid revenue expenditure of transport, which was an incidental expenditure of the assessee's business. The said decision specifically held that the abovesaid transport expenditure was the expenditure which the subsidy recouped and that the purpose of the recoupment was to make up possibly a profit deficit for operating in a backward area. Learned counsel for the assessee also sought to rely on an observation in CIT vs. P. J. Chemicals Ltd. . But, that decision did not at all deal with the question whether a particular receipt is a revenue receipt or a capital receipt. It only dealt with the interpretation of the term "actual cost" in working out the depreciation allowable (no doubt, in connection with a grant of subsidy by the Government, based on a specified percentage on the fixed capital cost and as incentive for setting up industries in backward areas). Thus, in the said case, the subsidy received was only a capital receipt. But despite the said fact, the Supreme Court held that depreciation was allowable on the corresponding capital asset created therefrom, disregarding the subsidy given since the subsidy did not form part of the "actual cost". IN that connection, the Supreme Court referred to a Gujarat decision which observed that the basis adopted for determining the subsidy was only a measure for quantifying the subsidy and the subsidy was not given for the specific purpose of meeting any portion of the cost of the fixed asset. Likewise, according to learned counsel, here also, the corresponding revenue expenditure was only adopted as a measure for quantifying the subsidy.