28 December 2007
My cliet is running a factory and producing paper in Assam. He is eligible for deduction u/s 80IC. Besides this he is also eligible for sales tax exemption and excise exemption. Sales tax exemption in Assam is given in form of remission. First he collects the tax from the customers and then 1% of such tax is to be returned to the State and the balance 99% is to be retained by him. As far as excise duty is concerned he has to pay the excise duty first of all and then the the entire duty paid is refunded. Moreover the benefit of the excise duty is passed over to the customers who do not claim modvat.( About 90% customers do not claim Modvat ). My query is :- a) Whether the sales tax remission and excise duty refunds are business income and hence eligible for deduction u/s 80IC ?
28 December 2007
Similar issue is arising in case of Transport subsidy. There is judicial controversy over the isssue and issue is not settled.
However you may go through the following judments to get some arguments in your favour:
SHARDA PLYWOOD INDUSTRIES VS CIT 1999 238 ITR 0354
Page No: 0357
S. B. Sinha J.—These two references made to this court in terms of sec- tion 256(2) of the Income-tax Act, 1961, relate to the assessment years 1983- 84, 1984-85, 1985-86 and 1986-87.
Although two questions each for the aforementioned assessment years were referred to this court, but two questions being question No. 2 for the assessment years 1983-84 and 1984-85 were not pressed and the same are as follows :
“1. Whether,, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the addition of Rs. 1,15,000 in respect of the alleged extra income earned from sales at Ahmedabad ?
2. Whether, on the facts and in the circumstances of the case, the Tri- bunal was justified in confirming the addition of Rs. 1,35,627 in respect of the alleged extra income earned from the sales at Ahmedabad ?”
One of the questions for each of the assessment years is common which is question No. 2 as mentioned hereinbelow. This court, therefore, is required to answer the following four questions :
Page No: 0358
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of Rs. 1,07,570 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the transport subsidy granted under the Transport Subsidy Scheme, 1971, amounting to Rs. 3,26,912 was a revenue receipt ?
3. Whether, on the facts and in the circumstances of the case, the Tri- bunal was justified in holding that the expenditure of Rs. 87,249 was in the nature of entertainment expenditure as per Explanation 2 to section 37(2A) of the Income-tax Act, 1961 ?
4. Whether, on the facts and in the circumstances of the case, the Tri- bunal was justified in holding that the expenditure of Rs. 25,000 and Rs.25,000 incurred on horse race and golf competition, respectively, spon- sored by the appellant-company for publicity of its products was more for the prestigious post of the managing director than anything else and consequently disallowing the same ?”
Regarding 1 : Question No. 1 :
The applicant is a company registered and incorporated under the Companies Act. It manufactures plywood, the manufacturing unit where- for has been set up in the State of Assam.
It is admitted that the assessee held a dealers’ conference wherein presentation of 180 boxes of silver was made to the dealers costing Rs.1,16,570. The Revenue treated the said expenditure to be entertain- ment expenses as laid down under section 37(2A) of the Act and allowed only a sum of Rs. 50 per silver box stating that the said matter is governed by section 37(3) of the Act read with rule 6B of the Rules.
The question, thus, which arises for consideration is as to whether the disallowance of a sum of Rs. 1,07,570 towards the price of the silver box is justified treating the same to be an advertisement.
Section 37(2A) which provides for a non-obstante clause states that not- withstanding anything contained in sub-section (1) or (2) of section 37 of the Act no allowance shall be made in respect of so much of the expen- diture in the nature of entertainment expenditure incurred by the asses- see during any previous year in excess of the aggregate amount computed in the manner specified therein.
It is not necessary to consider the provisions as they stood on April 1, 1979, as amended in the year 1981 and as further amended in the year 1984 in great detail. Sub-sections (2B) and (3) of section 37 as they stood on April 1, 1979, read thus :
“(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
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(3) Notwithstanding anything contained in sub-section (1), any expen- diture incurred by an assessee after the 31st day of March, 1964, on adver- tisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be pres- cribed.”
Clause (vi) of sub-section (3B) of section 37 reads thus :
“Nothing contained in sub-section (3A) shall apply in relation to any expenditure incurred by an assessee on—. . .
(vi) the holding of, or the participation in, any press conference, sales conference, trade convention, trade fair or exhibition.”
With effect from April 1, 1981, the provisions of sub-sections (3A), (3B), (3C) and (3D) were omitted in terms of the Finance (No. 2) Act, of 1980. By reason of the Finance Act (No. 11) of 1983, Explanation 2 was added to sub- section (2A) of section 37 with retrospective effect from April 1, 1976, which is to the following effect :
“For the removal of doubts, it is hereby declared that for the pur- poses of this sub-section and sub-section (2B), as it stood before the 1st day of April, 1977, ‘entertainment expenditure’ includes expenditure on pro- vision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner what- soever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.”
Sub-sections (3A) and (3B) of section 37 as inserted by the Finance Act (No. 11) of 1983, read thus :
“(3A) Notwithstanding anything contained in sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds one hundred thousand rupees, twenty per cent. of such excess shall not be allowed as deduction in computing the income charge- able under the head ‘Profits and gains of business or profession’ .
(3B) The expenditure referred to in sub-section (3A) is that incurred on—
(i) advertisement, publicity and sales promotion ; or
(ii) running and maintenance of aircraft and motor cars ; or
(iii) payments made to hotels.
Explanation.—For the purposes of sub-sections (3A) and (3B),—
(a) the expenditure specified in clause (i) to clause (iii) of sub-sec- tion (3B) shall be the aggregate amount of expenditure incurred by the
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assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act ;
(b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities ;
(c) expenditure on running and maintenance of aircraft and motor cars shall include,—
(i) expenditure incurred on chartering any aircraft and expen- diture on hire charges for engaging cars plied for hire ;
(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also.”
Rule 6B of the Income-tax Rules, inter alia, provides that the allowance in respect of expenditure on advertisement shall not exceed Rs. 50 in respect of articles intended for presentation.
Mr. N. K. Poddar, learned counsel appearing on behalf of the applicant, inter alia, submitted that keeping in view the meaning of the words “advertise” and “advertisement” as obtaining in different dictionaries, it would be evident that the same inter alia, means a notice given in a manner designed to attract public attention and thus presentation to the dealers in recognition of their services cannot be said to be an expenditure on advertisement. According to learned counsel, dealers cannot be said to be the prospective buyers and, thus, it cannot be said that by reason of presentation of silver boxes to the dealers any expenditure on advertise- ment had been undertaken only because the name of the company was inscribed on the said boxes.
Mr. Prodesh Mallick, learned counsel appearing on behalf of the Revenue, on the other hand, submitted that the question framed by the Tribunal is a pure question of fact. According to learned counsel as a find- ing of fact had been arrived at by the Tribunal to the effect that such expenses had been made by way of advertisement the same cannot be assailed before this court. The findings of the learned Tribunal in relation to the aforementioned question are as follows :
“Grounds Nos. 3 and 4 relate to disallowance of Rs. 1,07,570 being expenditure incurred on 180 silver boxes given as reward to the delegates of the dealer’s conference in recognition of services rendered by them. The Assessing Officer disallowed the above amount being excess cost above Rs.50 in respect of each item under section 37(2A) read with rule 6B of the Income-tax Rules. Before the Commissioner of Income-tax (Appeals) it was submitted on behalf of the appellant-company that the silver boxes given to the delegates were not in the nature of presentation of articles. They were given to the delegates in recognition of the services rendered by them in the appellant’s sales. It was also stated that some rewards were also given to the appellant’s employees. Rule 6B of the Income-tax Rules
Page No: 0361
would not, therefore, be applied in the appellant’s case. The Commis- sioner of Income-tax (Appeals) considered the facts of the case and the arguments advanced before him. He found that the name and address of the appellant-company were inscribed on the silver boxes. He, therefore, felt that the expenditure should be considered as advertisement expen- diture within the meaning of rule 6B of the Income-tax Rules. The expen- diture incurred being extended for presentation to the delegates and the cost of each article exceeded Rs. 50, the Assessing Officer was justified in the disallowance made by him being the amount in excess of Rs. 50 in each case.
Learned counsel for the assessee objected to the order of the Commis- sioner of Income-tax (Appeals). The facts of the case and the arguments advanced before the Commissioner of Income-tax (Appeals) were reite- rated. On the other hand, the learned departmental representative sup- ported the order of the Commissioner of Income-tax (Appeals).
Having considered the facts of the case, the order of the Commis- sioner of Income-tax (Appeals) and the arguments advanced by both the sides, we are of the opinion that the appeal on this point cannot be allowed. It is common ground that the assessee presented 180 silver boxes to the delegates who attended the dealers’ conference in Calcutta. All that was stated was that the silver boxes were given in recognition of the services rendered by the delegates is the appellant’s claim. The finding of the Commissioner of Income-tax (Appeals) that the name and address of the appellant-company were inscribed on the boxes is not controverted. It is also not disputed that the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) was only the amount in excess of Rs. 50 in each case on the basis of rule 6B(1)(a) of the Income-tax Rules. In view of the above we find that the Commissioner of Income-tax (Appeals) is justified in upholding the disallowance made by the Assessing Officer. In this connection, reliance may be placed on the decision of the Andhra Pradesh High Court in the case of CIT v. Raj Bro- thers [1988] 171 ITR 249, wherein it has been held that expenditure on advertisement, publicity, etc., is subject to the limits specified in section 37(3A) of the Act as per qualifications made under rule 6B of the Income- tax Rules. In view of the above, the appeal on this point is rejected.”
The question which, thus, arises for consideration of this court is as to whether the Tribunal was justified on the admitted facts in coming to the conclusion as to whether presentation of 180 silver boxes to the delegates who attended the dealers’ conference in Calcutta would be an expenditure on advertisement in terms of section 37(2B) of the Act read with rule 6B of the aforementioned rules.
The question raised herein necessarily gives rise to another question as to what is an advertisement.
Page No: 0362
In Black’s Law Dictionary, sixth edition, 1992, the word “advertise” has been stated, inter alia, to mean to give notice of, make known, publish or to call a matter to the public attention by any means whatsoever. The word “advertisement” has been stated to mean a notice given in a manner designed to attract public attention.
In L. B. Curzon Dictionary of Law, fourth edition 1993, “advertisement” has been stated to mean public announcement or notice.
In Mozley and Whiteley’s Law Dictionary, eleventh edition, 1993, the word “advertisement” was stated to include any notice, circular, label, wrapper, invoice or other document and any public announcement made orally or by any means of producing or transmitting light or sound.
Similar meaning has been assigned in the dictionary of English Law, Earl Jowitt, (1959) edition.
In the Concise Oxford Dictionary, seventh edition, 1982, the word “advertise” is stated to mean to make generally or publicly known ; (esp.) describe (goods) publicly with a view to increasing sales. The word “adver- tisement” is stated to mean public announcement (esp. in newspapers, on posters, by television, etc.).
In Wharton’s Law Lexicon, the word “advertisement” has been held to mean a public notice or announcement of a thing.
The question, therefore is whether any presentation to its dealers by a manufacturer can be said to be an advertisement keeping in view the aforementioned dictionary meanings, the answer to the said question must be rendered in the negative.
In CIT v. Santosh Agencies [1994] 210 ITR 78, a Division Bench of this court relied upon its earlier decision in CIT v. The Statesman Ltd. [1992] 198 ITR 582, and held that keeping in view the fact that the expression “sales promotion” is preceded by the words “advertisement” and “publi- city” in clause (i) of sub-section (3B) of section 37 of the Act : The principles of ejusdem generis should be applied and, thus, the statute imposes restriction on advertisement, publicity and sales promotion and in that view of the matter the expression “sales promotion” cannot include the selling expenses incurred in the ordinary course of business. This court held that these incentives given to the assessee’s selling agents cannot be said to be sales promotion in the context of section 37(3B). Sales promo- tion connotes activity akin to advertisement and publicity and rewarding the selling agents or allowing special discount or pleasure trips on the basis of performance, cannot be said to be sales promotion pertaining to the same genus as advertisement and publicity. In The Statesman Ltd.’s case [1992] 198 ITR 582 (Cal), a Division Bench has held that payment of commission of the advertising agent is also a business part of newspaper publication.
Page No: 0363
In CIT v. Modi Spinning and Weaving Mills Co. Ltd. [1993] 202 ITR 708 (Delhi), a Division Bench comprising B. N. Kirpal (as his Lordship then was) and Arun Kumar J., categorically held that rule 6B of the Income-tax Rules, 1962, applies only in the case of presentation of articles by way of advertisement. Thus rule 6B of the Income-tax Rules has no application in a case of this nature.
In CIT v. Aditya Mills Ltd. [1994] 209 ITR 933 (Raj), a Division Bench consisting of K. C. Agrawal C.J., and V. K. Singhal J., was inter alia, consi- dering a question as regards expenditure on account of celebration of the 10th anniversary of the company and it was held that in view of the fact that the Tribunal did not find that the expenditure had not been con- nected with the business, rule 6B has no application.
In CIT v. Tirrihannah Co. Ltd. [1992] 195 ITR 393 (Cal), it was held that distribution of tea to the shareholders and directors without charging any price would come within the purview of business expenditure.
In Karjan Co-operative Cotton Sales Ginning and Pressing Society v. CIT [1993] 199 ITR 17, S. B. Majumdar J. (as his Lordship then was), speaking for the Full Bench of the Gujarat High Court, while considering a question as to whether distribution of presents to the shareholders on celebration of its silver jubilee by the assessee is allowable business expenditure. Upon construing the provision of section 37 of the Act and various decisions it was held that such type of presents to keep the delegates in good humour were necessary for augmenting and maintaining the business prospects of the society.
In CIT v. Raj Brothers [1988] 171 ITR 249, a Division Bench of the Andhra Pradesh High Court was considering the question as regards the adjusted expenditure, upon which reliance has been placed by the Tribu- nal, and it is in that connection held that the two limitations prescribed under rule 6B and section 37(3A) are valid. The said decision is not an authority for the proposition as to what is an advertisement. The Division Bench therein was concerned only with the question as to whether the double limitation provided for in rule 6B and section 37(3A) was permis- sible in law. Such a question does not arise in the facts and circumstances of this case.
Whether an expenditure incurred by an assessee is a business expendi- ture or not, although a question of fact, but it is well settled that when on admitted facts the inference drawn by the Tribunal is an erroneous one, a mixed question of fact and law would arise and in such a situation the reference of such a question in terms of section 256(2) of the Act cannot be said to be not maintainable. A question with regard to the interpretation of rule 6B would essentially be a question of law. Similarly whether any distribution of silver boxes, said to be meant for keeping dry fruits to its dealers amounts to an advertisement, would essentially be a question of
Page No: 0364
law. As noticed hereinbefore, the dictionary meaning of advertisement as also the decisions of the various High Courts make the position absolutely clear that any presentation made to the delegates, directors or share- holders who essentially are not members of the public and thus being not a potential buyer, the same would not amount to “advertisement”.
An argument has been sought to be advanced before us that such pre- sentation made amount to “entertainment” but as the said question had not been raised by the Revenue before the Tribunal, we are of the opinion that the same cannot be allowed to be raised for the first time in this reference.
As regards the contention of Mr. Mallick that the question referred to this court is essentially a question of fact, suffice it to say that a wrong interpretation on a provision of law vis-a-vis the admitted fact cannot be said to be a pure question of fact.
In Gemini Pictures Circuit P. Ltd. v. CIT [1981] 130 ITR 686 (Mad), Venugopal J., speaking for a Division Bench, held that whether a particular property is an “agricultural land or not” is not a pure question of fact and the High Court is not precluded from considering the correctness of the findings of the Tribunal in the light of the tests which have been laid down for determining whether a particular property comes within the ambit of agricultural land.
The learned judges further held that a wrong conclusion drawn on an admitted fact is not binding on the High Court and in such an event, the High Court can examine the correctness of such conclusion and interfere with the finding of the Tribunal if it is shown that the criteria adopted by the Tribunal for determining the character of the land was erroneous.
In CED v. Mahant Umesh Narain Puri [1982] 135 ITR 139, the apex court observed (page 143) :
“It is true that in the absence of a specific question raised with regard to the correctness of any finding of fact, the High Court in a reference is not to interfere with the finding of fact by the Tribunal and the High Court has to proceed to answer the question on the facts found by the Tri- bunal. The finding of the CBR in the instant case that the properties are the personal properties of the deceased Mahant cannot, in the facts and circumstances of this case, be considered to be a finding of fact. The CBR in coming to its conclusion that the properties were the personal proper- ties of the deceased Mahant had considered the nature of the grant by the Firman and also the judgment of the district judge in the title suit. The conclusion of the Board of Revenue that the properties are the personal properties of the Mahant on an interpretation of the grant and on a consi- deration of the judgment of the district judge is not a pure finding of fact.”
Yet again in Seth Keshrichand Khaitan Education and Welfare Trust v. CIT [1982] 138 ITR 351 (Cal), Sabyasachi Mukharji J. (as the learned Chief
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Justice then was), speaking for a Division Bench of this court, while considering a contention as to whether a trust had been created bona fide or not, would be a pure question of fact held that when the fact and the case were not disputed nor the application of funds of the trust or the object thereof or the date of its creation was not disputed and in the absence of any finding that the creation of such trust was a colourable one, there is hardly any scope for challenging any finding of facts merely because the Tribunal had arrived at a conclusion that in order to prove bona fides it was required to consider the subsequent conduct and also the application of funds and on that principle has rested its conclusion and, thus, the same is not a finding of fact. It was observed (page 358) :
“A conclusion about the intention, arrived at on undisputed basic facts, by applying a certain test, would be a question of law. The question would be whether the test applied was the appropriate test under the sec- tion.”
In the instant case also the basic fact is not in dispute. The tests neces- sary to hold that presentation of certain items to the dealers was by way of an advertisement raise a basic question as regards the meaning of adver- tisement and, thus, the same would not be a pure question of fact. In this view of the matter, the answer to the aforementioned question must be rendered in the negative, i.e., in favour of the assessee and against the Revenue.
Re : Question No. 2, for the assessment years 1983-84 and 1985-86 and question No. 1 for 1986-87 :
Although the question raised appears to be covered by three Division Bench decisions of this court, viz., Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448, Merinoply and Chemicals Ltd. v. CIT [1994] 209 ITR 508 as also Kesoram Industries and Cotton Mills Ltd. v. CIT [1991] 191 ITR 518, Mr. Poddar appearing on behalf of the applicant submitted that the said deci- sions require a reconsideration in view of the decisions in CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830 (SC), CIT v. Orissa Industries Ltd. [1992] 198 ITR 251 (Orissa), CIT v. Assam Asbestos Ltd. [1995] 215 ITR 847 (Gau- hati) and CIT v. Anand and Co. [1998] 233 ITR 18 (Cal).
Learned counsel for the parties, however, have also referred to various other decisions on the aforementioned question. However, it may be recorded that the principle of law which is applicable for consideration as to whether a subsidy granted by the Government would be a capital receipt or a revenue receipt would depend upon the nature thereof in so far as a subsidy granted for development purpose would be a capital receipt ; whereas that granted by way of reimbursement of the tax paid or expenses incurred would be revenue receipt is not in dispute.
The law on this point is no longer res integra in view of the decision of the Supreme Court of India in Sahney Steel and Press Works Ltd. v.
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CIT [1997] 228 ITR 253 ; [1997] 7 SCC 764, wherein, it was held (page 257) :
“The important point to note is that all the incentives are production incentives in the sense that the company will be entitled to these incen- tives only after it goes into production. The scheme was not to make any payment directly or indirectly for the setting up of the industries. It is only after the industries had been set up and production had been com- menced that the incentives were to be given.
The second important thing to note is that the manner in which the incentives were given is of no consequence for determination of the ques- tion raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to ‘power consumed for production’. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable.”
The apex court upon taking into consideration the decisions of the English court as also various High Courts including this court in Kesoram Industries and Cotton Mills Ltd. v. CIT [1991] 191 ITR 518, held (page 262) :
“That precisely is the question raised in this case. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the pay- ments were to be made only if and when the assessee commenced its pro- duction. The said payments were made for a period of five years calcu- lated from the date of commencement of production in the assessee’s factory. The subsidies are operational subsidies and not capital subsidies.”
Repelling an argument advanced on behalf of the assessee that the refund of sales tax on purchase of machinery must be treated as capital, the apex court observed (page 262) :
“This argument, though attractive at first blush, does not bear close scrutiny. This argument overlooks the basic principle laid down in the cases discussed above. It is not the source from which the amount is paid to the assessee, which is determinative of the question whether the sub- sidy payments are of revenue or capital nature.”
In the aforementioned backdrop, the relevant provisions of the Trans- port Subsidy Scheme, 1971, may be considered. The said scheme came into force in terms of a notification dated July 23, 1971, issued by the
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Government of India for grant of subsidy on the transport of raw mate- rials and finished goods to and from certain selected areas with a view to promoting growth of industries there. The said scheme came into force on July 15, 1971. The short title of the scheme as laid down in clause 1 thereof is the Transport Subsidy Scheme, 1971.
Clause 2 provides for commencement and duration, which reads thus :
“It comes into effect from July 15, 1971, for selected areas (A) with effect from September 24, 1973, for selected area (B) with effect from December 1, 1976, for selected areas (C) and with effect from December 5, 1977, for selected areas (D) and will remain in operation till May 31, 1979.”
Clause 6 provides for details of the scheme. Sub-clauses (i), (iv) and (x) of clause 6 reads thus :
“(i) A transport subsidy will be given to the industrial units located in the selected areas in respect of raw materials which are brought into and finished goods which are taken out of such areas.
(iv) In the case of North Eastern Region comprising the States of Assam, Meghalaya, Nagaland, Manipur, Tripura and the Union Territories of Arunachal Pradesh and Mizoram, the transport subsidy be given on the transport costs between Siliguri and the location of the industrial unit in these States/Union territories. While calculating the transport costs of raw materials the cost of movement by railway from Siliguri to the railway station nearest to the location of the industrial unit and thereafter the cost of movement by road to the location of industrial unit will be taken into account. Similarly, while calculating the transport costs of finished goods, the cost of movement by road from the location of industrial unit to the nearest railway station and thereafter the cost of movement by rail to Sili- guri will be taken into account. In the case of North Eastern Region, for raw materials moving entirely by road or other mode of transport, the transport cost will be limited to the amount which the industrial unit might have paid had the raw materials moved from Siliguri by rail up to the railway station nearest to the location of the industrial unit and there- after by road.
Similarly, in the case of movement of finished goods moving entirely by road or other mode of transport in the North Eastern Region, the trans- port cost will be limited to the amount which the industrial unit might have paid, had the finished goods moved from the location of the indus- trial units to the nearest railway station by road and thereafter by rail to Siliguri.
(x) Existing industrial units in the selected areas are also eligible for transport subsidy in respect of the additional transport costs of raw mate- rials and finished goods arising as a result of substantial expansion of diversification effected by them after the commencement of the scheme. Transport subsidy in such cases will be restricted to 50 per cent. of the
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transport costs of the additional raw materials required and finished goods produced as a result of the substantial expansion or diversification.”
Although the aforementioned scheme was for promoting growth of industries which is the prime concern for grant of subsidy that by itself is not conclusive.
A document, as is well known, must be construed upon reading the same in its entirety. The object in framing a subsidy scheme cannot, in the opinion of this court, be deciphered only from the preamble thereof.
In Kesoram Industries’ case [1991] 191 ITR 518 (Cal), the meaning of the word “subsidy” had been considered in great detail which is to the follow- ing effect : (page 529)
“Webster's New World Dictionary, 1962 : ‘a grant of money, specifi- cally (a) . . . (b) a government grant to a private enterprise considered of benefit to the public.’
Shorter Oxford English Dictionary : ‘Help, aid, assistance. . . Finan- cial aid furnished by a State or a public corporation in furtherance of an undertaking or the upkeep of a thing . . .’
Chambers’ Twentieth Century Dictionary, revised edition : ‘assist- ance, aid in money . . . a grant of public money in aid of some enterprise, industry, etc., or to keep down the price of a commodity. . .’
The Reader’s Digest Great Encyclopaedic Dictionary, vol. II (M-Z) : ‘2. Financial aid given by government towards expenses of an undertak- ing or institution held to be of public utility, money paid by government to producers of a commodity so that it can be sold to consumers at a low price . . .’
In addition, our attention has been drawn to the definition given in ‘Words and Phrases, permanent edition, vol. 40,’ where subsidy is des- cribed as follows :
‘A subsidy is a grant of funds or property from a government, as of the state or municipal corporation to a private person or company to assist the establishment or support of an enterprise deemed advantageous to the public ; a subvention.’
Reference is made to 60 Corpus Juris, Corpus Juris Secundum, vol. 83, page 760, gives the following under the heading of subsidy:
‘Something, usually money, donated or given or appropriated by the Government through its power agencies, a grant of funds or property from a Government, as of the state or a municipal corporation, to a private person or company to assist in the establishment or support of an enter- prise deemed advantageous to the public ; a subvention.
Pecuniary premiums offered by the Government to persons enlist- ing in the public service, or engaging in particular industries, or performing specified services for the public benefit are treated in Boun- ties’.”
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A subsidy, therefore, can be granted, inter alia, for the manufacturer to sell his commodity to consumers at a low price. A bare perusal of the relevant provisions of the scheme as noticed hereinbefore, would show that the subsidy is granted so as to recompense the cash of a manufac- turing unit to the extent of the extra transport costs which a manufacturer has to incur. Such transport costs are not necessarily paid in their entirety. The same are related to : (1) cost incurred for transport of raw materials and finished products ; (2) having a limited duration ; (3) mode of calcu- lation for such costs being laid down under clauses 6(iv) i.e., to and from Siliguri to the place where the manufacturing unit is situated and, thus, not the entire cost, and (4) the manner of grant thereof.
Keeping in view all the factors into consideration, there cannot be any doubt that the same had been granted by way of recouping or reimbursing or by way of refund of the expenditure on account of transport. The said subsidy had been granted to supplement the trading receipts artificially so that they may compete with the manufacturers of the same products hav- ing their manufacturing units at places which are not in a backward area.
In Jeewanlal’s case [1983] 142 ITR 448 (Cal), Sabyasachi Mukharji J. (as the learned Chief Justice then was) while considering the grant of cash assistance for encouraging exports referring to a large number of decisions held (page 459) :
“If on an examination of the nature of the receipts of the amounts it is found that these amounts were supplemental trading receipts or were connected with the business, even though they did not arise actually from any positive operation of the traders, then, in our opinion, it should legiti- mately be considered to be business receipts. In this case the Government announced cash assistance for encouraging exports; but it was only the exporters, who did, in fact, export, got the assistance. It was by the expor- tation or making favourable exports that the assessee received those amounts. This, in our opinion, is the true nature of the assistance. If that is the position then it is incidental to and supplemental to the trading receipts and should, therefore, be considered to be revenue receipts. These principles, as we have mentioned before, have been considered by the different authorities.”
In Merinoply and Chemicals Ltd. v. CIT [1994] 209 ITR 508, a Division Bench of this court was considering the very scheme which is before us. The learned judges held (page 516) :
“In any case, we are of the view, that the transport subsidy is a sum which went to make up the profits or gains of the trade of the assessee, in so far as it recoups the expenditure on account of transport. The judiciary is also very clear on the treatment of subsidies or grants from public funds. There is a clear principle discernible in V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC), that where subsidies or grants are given by the
Page No: 0370
Government to assist the trader to earn profit in his business, they are, generally speaking, payments of a revenue nature. As we have seen above, the English judiciary has gone to the length of saying that even where the supplementary trade receipts are in the form of advances which are sub- ject to contingencies of repayment they are still to be treated as supple- mentary trade receipts.”
Mr. Poddar learned counsel, however, submitted that the learned judges proceeded on a wrong premise in so far it was held that the motive behind the grant of subsidy is not conclusive and in support of his aforementioned contention placed strong reliance upon a decision in CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830 (SC). In that case before the apex court the nature of the subsidy was for the purpose of meeting a portion of the cost of the assets though quantified as or geared to a per- centage of such cost. It is only in that situation, the apex court observed (page 839) :
“But the real question is as to the character and nature of a subsidy whether it was really intended to subsidise the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid.”
A Division Bench of this court in Merinoply’s case [1994] 209 ITR 508, has not laid down a law in absolute terms that the motive for grant of a subsidy is not relevant.
Let us now consider the decisions cited by Mr. Poddar.
In CIT v. Orissa Industries Ltd. [1992] 198 ITR 251 (Orissa) which has been affirmed by the apex court in P. J. Chemicals Ltd.’s case [1994] 210 ITR 830, the Division Bench of the Orissa High Court was considering a subsidy which was granted on fixed assets. In that case, there was no restriction on the utilisation of the amount granted as subsidy. It was not paid to meet the cost of assets of the assessee. It was granted for setting up industrial units in a backward area. It was, in this situation, held that clause (1) of section 43 of the Income-tax Act has no application. The said decision cannot be said to have any application in the facts and circum- stances of this case.
In CIT v. Assam Asbestos Ltd. [1995] 215 ITR 847 (Gauhati), although the Division Bench of the Assam High Court was considering the self-same scheme, the main question which was canvassed was as to whether the finding of the Tribunal to the effect that the subsidy is a generous act of the State, or rather a grant or gift to the assessee for the sole purpose of assisting the assessee for the growth of industries and, therefore, cannot be considered as a trading or revenue receipt liable to be taxed, is correct or not.
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No other contention was raised nor any other argument was advanced and the learned judges were remiss in considering the actual nature of the scheme as also the decisions of the Division Benches of this court which were rendered upon consideration of a large number of decisions of the Supreme Court and other High Courts as also English courts.
In Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC), the fact of the matter was entirely different. In that case the tea estate consisting of tea garden, factories and other buildings meant for carrying on the business of manufacturing tea were requisitioned for defence purpose by the mili- tary authorities. Although the assessee continued to be in possession of the tea gardens, the manufacture of tea was stopped completely. The question raised therein was as to whether the compensation paid under the Defence of India Rules was revenue receipt or not. Such a question does not arise for consideration in the instant case.
In Bombay Burmah Trading Corporation Ltd. v. CIT [1988] 169 ITR 148, the Bombay High Court was again concerned with a question as to whether compensation granted would be a revenue receipt as during the period in question the assessee was not in possession to carry out his business.
In CIT v. Groz-Beckert Saboo [1979] 116 ITR 125 (SC), the question which arose was as to whether the raw materials and semi-finished needles received by the assessee from its West German collaborators by way of gift were capital assets or not. They were held to be so keeping in view the facts and circumstances of the case.
In CIT v. Anand and Co. [1998] 233 ITR 18, a Division Bench of this court was considering a question as to whether a subsidy received from the Indian Cotton Mills Federation was in the nature of voluntary and gratuitous payment and not liable to pay tax. In that case the assistance having been received by the assessee from a private body where no service had been rendered by the assessee the same was held to be not taxable as income. The said decision again has no application.
In Addl. CIT v. Handicrafts and Handloom Export Corporation [1982] 133 ITR 590 (Delhi) a grant-in-aid was received by the assessee for pro- moting exports. A grant-in-aid undoubtedly would not be a trade receipt.
In Kalpetta Estates Ltd. v. CIT [1996] 221 ITR 601 (SC), a replantation subsidy had been granted which was considered to be not a revenue receipt.
In Sadichha Chitra v. CIT [1991] 189 ITR 774 (Bom), the law has been laid down in the following manner (page 784) :
“We are of the view that the answer to the question whether the receipt of a particular subsidy amounts to a capital receipt or a revenue receipt would depend upon the nature and content of the subsidy, the scheme, its objective and the purpose for which the subsidy is granted. Having regard to the nature, scope and object of the subsidy in the instant
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case, we are of the view that the financial assistance of Rs. 2,10,085 received by the assessee from the Government of Maharashtra did not constitute a revenue receipt in the instant case.”
There cannot be any quarrel with the proposition of law laid down in the said decision.
In CIT v. Chitra Kalpa [1989] 177 ITR 540 (AP), the fact was that the State of Andhra Pradesh granted a subsidy for encouraging the film indus- tries wherein the films were produced in the studios located in the State. In that situation and upon taking into consideration the essential features of the scheme it was held (page 545) :
“They at once indicate that the main objective of granting the sub- sidy of Rs. 50,000 is to encourage the production of films in this State. The sum of Rs. 50,000 offered is an inducement to the producer to produce the picture in this State. Obviously, the idea behind the entire scheme is that if the producers take advantage of the inducement offered and begin pro- ducing pictures in the State of Andhra Pradesh, the film industry would grow in course of time and the State will be benefited.”
The fact that such subsidy was held to be in the nature of an induce- ment wherefor cash grant was made to induce a producer to produce feature films in the State of Andhra Pradesh in the hope and expectation that if producers are tempted to make feature films in the State, film production of the State will be encouraged and the State will reap the benefits of an organised flourishing film industry shifting to the State from elsewhere. It was noticed that the subsidy was not granted either to assist the producer in film making or to increase his profits as the amount was too small to achieve any such purpose.
Keeping in view the facts and circumstances of this case we, therefore, find ourselves in complete agreement with the Division Bench decisions of this court in Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448, Merinoply and Chemicals Ltd. v. CIT [1994] 209 ITR 508 and Kesoram Industries and Cot- ton Mills Ltd. v. CIT [1991] 191 ITR 518, and hold that transport subsidy is granted only for the purpose of recouping or reimbursing a portion of the transport costs incurred by an owner of a manufacturing unit set up in a backward area, so as to enable him to recoup the loss which he may suffer by way of additional transport cost. The said subsidy was, therefore, not granted by way of capital assets. The said question, therefore, is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
Re. Question No. 3 : This relates to question No. 2 for the year 1984-85.
The relevant facts noticed by the Tribunal in its order are as follows :
“The next objection is regarding disallowance of Rs. 92,429 which was incurred for holding a dealers’ conference. The aforesaid amount was disallowed treating it as sales promotion expenses at Delhi, hotel bills, etc., representing entertainment expenditure.
Page No: 0373
Before the Commissioner of Income-tax (Appeals) it was submitted that Rs. 39,824 was incurred in connection with the dealer’s conference organised at Kathmandu in Nepal. The amount was incurred for staying of the delegates in hotels. It is, therefore, an allowable deduction under sec- tion 37(1) of the Act. The Commissioner of Income-tax (Appeals) consi- dered the facts of the case and the arguments advanced on behalf of the appellant. He has taken a view that the hotel bills paid in connection with the dealers’ conference and also the expenditure incurred for providing lodging to the visitors were to be treated as entertainment expenditure as per Explanation 2 to section 37(2A) of the Act. However, he has taken a view that a part of the expenditure relating to the hiring of conference hall is an allowable deduction which he estimated at Rs. 5,000. He accordingly reduced the disallowance by Rs. 5,000.
While objecting to the order of the Commissioner of Income-tax (Appeals) learned counsel on behalf of the appellant reiterated the facts of the case and the nature of expenditure claimed stating that the entire expenditure should have been allowed under section 37(1) of the Income- tax Act, 1961.
On the other hand, the learned Departmental Representative has supported the order of the Commissioner of Income-tax (Appeals).
Having considered the rival submissions and the facts of the case, we are of the opinion that the appeal on this point is without any force. It is not disputed that the dealers’ conference was organised in Kathmandu in Nepal which was neither the place of business of the assessee nor the head office was located there. The provisions of Explanation 2 to section 37(2A) of the Income-tax Act have rightly been invoked by the Commissioner of Income-tax (Appeals) while upholding the order of the Assessing Officer at Rs. 87,429. We do not see any reason to interfere with the order of the Commissioner of Income-tax (Appeals) which is hereby upheld.“
Before us a contention has been raised that the Tribunal has proceeded on a wrong premise. The break-up figure of Rs. 87,429 which appears from the order passed by the Assessing Officer and the Commissioner of Income-tax which has been upheld by the Income-tax Appellate Tribunal is as follows : ”Particulars Expenses Disallowance by ITO
Rs. Rs. Payments to clubs 60,547 30,000 Payments to hotel 39,824 39,824 Meals, lunch and drinks at branch office 11,422 11,422 Sales promotions 11,183 11,183
1,22,976 92,429 Allowed by the CIT(A) and upheld by the ITAT
5,000 Disallowance maintaned by the ITAT under section 37(2A) read with Explanation (2) thereto
87,429“
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It is unfortunate that the Tribunal did not consider the question as to whether disallowance of the claim of Rs. 30,000 made by way of payment to clubs ; Rs. 11,422 towards expenditure for supply of meals, lunch and drinks at branch office and Rs. 11,183 by way of sales promotion would come within the purview of the term “entertainment”.
Explanation 2 appended to section 37(2A) reads thus :
“For the removal of doubts, it is hereby declared that for the pur- poses of this sub-section and sub-section (2B) as it stood before the 1st day of April, 1977, ‘entertainment expenditure’ includes expenditure on provi- sion of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expen- diture on food or beverages provided by the assessee to his employees in office, factory or other place of their work.”
The wordings of the said section are absolutely clear. The question, however, before the Assessing Officer, the appellate authority as also before the Tribunal was as to whether expenses incurred under all the four heads amounting to Rs. 1,22,976 were allowable as business expen- diture ; where for the assessing authority allowed a sum of Rs. 33,000 and odd towards payments to clubs only. The appellate authority allowed a sum of Rs. 5,000 towards the rental charges of the conference hall at Kath- mandu where the conference had been held.
The Tribunal, as indicated hereinbefore, although noticed that merely a sum of Rs. 39,824 was incurred in connection with the dealers’ conference, without taking into consideration the fact that other expenses were under the head “payment to club”, “meals, lunch and drinks at branch office” and “sales promotion” although the same had nothing to do with the dea- lers’ conference proceeded to reject the same only on the ground that Kathmandu being in Nepal and the same neither being the business place of the assessee nor the head office being located there, the said expendi- ture could not have been allowed. The question raised is as to whether holding of a dealers’ conference would be an “entertainment”. Holding of dealers’s conference would not come within the purview of entertainment or advertisement. It has been so held in various decisions, e.g., in CIT v. Eskaps (India) P. Ltd. [1991] 191 ITR 674 (Cal), CIT v. Indo Asian Switch- gears (P.) Ltd. [1996] 222 ITR 772 (P & H) and CIT v. Bennett Coleman [1994] 73 Taxman 64 (Bom), that such expenses are by way of business expenditure and not entertainment.
Furthermore, Explanation 2 appended to section 37(2A) does not bar an expenditure towards stay of the delegates in a hotel. Whether such expen- ditures were by way of entertainment expenditure or not, could not have been denied to be considered only on the ground that the conference had
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been held outside the territory of India as such an embargo is not con- templated by reason of Explanation 2 to section 37(2A). Mr. Mallick, how- ever, submitted that such a question cannot be permitted to be raised by the assessee before this court for the first time. The contention of Mr. Mal- lick cannot be accepted inasmuch as if in a given case this court while exercising its jurisdiction comes to a conclusion that the Tribunal had failed to take into consideration the relevant fact and/or relevant provi- sion of law, it has the power and the jurisdiction to remit the matter back to the Tribunal, particularly when it appears that clubbing of several heads incorrectly has prejudiced the assessee to a great extent.
The decisions relied upon by Mr. Mallick may now be taken into con- sideration.
In CIT v. Nadh Shah Kapur and Sons [1980] 122 ITR 972, a Division Bench of the Punjab and Haryana High Court was considering the provi- sions as they stood prior to the coming into force of Explanation 2 afore- mentioned. However, in that case itself it has been held that hospitality or treatment of guest per se cannot be said to be entertainment. The said decision, therefore, runs counter to the submission of Mr. Mallick.
In Phool Chand Gajanand v. CIT [1989] 177 ITR 265, a Full Bench of the Allahabad High Court was considering the provision of sub-section (2A) and (2B) of section 37 in relation to the assessment year 1974-75. Expla- nation 2 appended to section 37 was inserted in 1983 with effect from April 1, 1976. Sub-section (2B) of section 37 as inserted by the Finance Act of 1970 reads thus :
“Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970.”
In that case there was no dispute that the expenditure incurred was by way of entertainment. In this case, such a contention has been raised clearly in relation to three items and in relation to a part of one of the items. In that case the expenditure was incurred for the messing of its cus- tomers and, thus, was held to be expenditure in the nature of entertain- ment. The said decision, therefore, has also no application in the instant case.
In Phool Chand Gajanand v. CIT [1989] 178 ITR 535 (All). The Allahabad High Court merely followed its earlier decision. In that case also the assessment year involved was 1974-75.
In CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336, a Full Bench of the Punjab and Haryana High Court differing with the views of some High Courts that only lavish hospitality expended for business purposes would amount to entertainment expenditure held that business hospita- lity whether lavish or frugal comes within the ambit of the phrase “in the
Page No: 0376
nature of entertainment expenditure”. In that case also the assessee was running a regular kitchen to furnish wholesome food and drink to its cus- tomers which undoubtedly was entertainment expenses.
In CIT v. Green Roadways [1985] 154 ITR 639, a Division Bench of the Rajasthan High Court has considered the scope of Explanation 2 appended to sub-section (2A) of section 37 of the Act and it was found in that case that as apart from the employees, the hospitality was provided by the assessee to any other person including guests or customers by providing tea, coffee, soft drinks, etc., the same would fall within the category of entertainment expenditure. No exception can be taken to the aforemen- tioned proposition of law.
However, as noticed hereinbefore, as in this case, the points raised by the assessee had not been taken into consideration by the Tribunal, it is a fit case where the matter should be remitted back. The matter is, there- fore, remitted to the Tribunal for considering the matter afresh in accord- ance with law.
Re. Question No. 4 : Question No. 2 for the year 1986-87.
The relevant facts in respect of the said question are as follows :
“During the year under consideration the assessee-company spon- sored a horse race which had cost the company Rs. 30,000. The concerned race was hardly of one minute duration. On the day of the race, at the finishing line of the course, the company was allowed to have a small banner. To get this meagre advantage, the company had to bear the stakes money of the concerned race. Similarly, in Tollygunge Club, the company had to bear the expenditure including prize money for a golf competition (Rs. 30,000). All that the company got was to have a small banner display in the golf course. The type of advertisement coverage in both the cases is not commensurate with the bulk of expenditure. It was really not required for the purpose of the company’s business. However, the decision was taken apparently for the social movements of the high profile directors. There- fore, in my view, the expenditure of Rs. 60,000 is not to be allowed as a legitimate expenditure wholly and exclusively for the company’s business.”
It is now a well settled principle of law that any expenses incurred by way of advertisement must be considered from the point of view of the assessee and not from any other angle. In CIT v. Delhi Cloth and General Mills Co. Ltd. [1978] 115 ITR 659 (Delhi), expenditure incurred by the asses- see in organising football and hockey tournaments was held to be allow- able deduction under section 10(2)(xv) of the Act. The same principle was reiterated in Delhi Cloth and General Mills Co. Ltd. v. CIT [1992] 198 ITR 500 (Delhi) and Addl. CIT v. Delhi Cloth and General Mills Co. Ltd. [1983] 144 ITR 280 (Delhi) (Appendix I).
In CIT v. Aluminium Industries Ltd. [1995] 214 ITR 541, a Division Bench of the Kerala High Court has clearly held (page 545) :
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“It is now an accepted proposition that the expenditure laid out wholly or exclusively for the purpose of business would include the cost of advertisement.”
It has been held that once it is found that the expenditure had been, as a matter of fact, incurred by the assessee for publicity or advertisement, it is not for the Department to consider whether commercial expediency justified the expenditure. Reasonableness of the expenditure can be gone into only for the purpose of determining whether in fact the amount was spent. We respectfully agree with the aforementioned observations.
In this view of the matter, the said question is also answered in the negative, i.e., in favour of the assessee and against the Revenue.
Our answers to the questions raised are as follows :
1. The answer to the aforementioned question is rendered in the negative, i.e., in favour of the assessee and against the Revenue.
2. The answer to the aforementioned question is rendered in the affirmative, i.e., in favour of the Revenue and against the assessee.
03 January 2008
Nahata Ji, I am of the view that:-
In terms of section 145A, the accounting system regularly employed by the assessee will decide, whether such income is business income or not?
But, only because these are business Income from eligible industry, it is not neccessary that theses will be exempted u/s. 80IC. The phrase "derived by an undertaking" used in section 80IC is most vital and the current dispute is whether revenue subsidies etc. are to be treated as income derived from induistrial undertaking or not?
Sampat Ji is master in this field. He had rightly quoted the case law. I will also like to quote few lines from the Judement of Apex Court:- "A tax is a payment for raising general revenue. It is a burden. It is based on the principle of ability or capacity to pay. It is a manifestation of the taxing power of the State. An exemption from payment of tax under an enactment is an exemption from the tax liability. Therefore, every such exemption notification has to be read strictly. However, when an assessee is promised with a tax exemption for setting up an industry in the backward area as a term of the Industrial Policy, we have to read the implementing notifications in the context of the Industrial Policy. In such a case, the exemption notifications have to be read liberally keeping in mind the objects envisaged by the Industrial Policy and not in a strict sense as in the case of exemptions from tax liability under the taxing statute. [2006] 145 STC 0340- - State of Jharkhand and others Vs. Tata Cummins Ltd. and another (SC)."
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