Misc. Appeal No.425 of 2010 Against the order dated 9.10.2009, passed by Income Tax Appellate Tribunal, Patna Bench, Patna, in ITA No.210/Pat/ 2008. BIHAR STATE TEXT BOOK PUBLISHING CORPORATION, a Corporation incorporated under the Companies Act, 1956, having its office at Budh Marg, PS Kotwali, District Patna, through its Registrar cum Secretary, Basant Kumar son of Shri Satrughan Prasaad Kunwar, resident of Budh Marg, PS Kotwali, District Patna ........Appellant Versus 1. THE COMMISSIONER OF INCOME TAX –I, Patna, having its office at Central Revenue Building, Birchand Patel Marg, Patna -800 001 2. The Joint Commissioner of Income Tax, Range -2, having its office at Central Revenue Building, Birchand PatelMarg, Patna -800 001 ....Respondents/Respondents ******** For the Appellant : Mr. D V Pathy, Advocate For the Respondents : Mr. Rishi Raj Sinha ******** P R E S E N T THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR THE HON'BLE MR. JUSTICE SAMARENDRA PRATAP SINGH S K KATRIAR, J. The assessee has preferred this appeal under section 260A of the Income Tax Act 1961 (hereinafter referred to as `the Act’), and raises a grievance with respect to the order dated 9.10.2009, passed by the Income Tax Appellate Tribunal, Patna Bench, whereby the orders of the learned appellate authority as well as the learned assessing authority have been upheld, and it has been held that the subsidies received or receivable by the assessee from the Bihar Government is taxable under the provisions of the Act. It is with respect to the assessment year 2005-2006. 2. The assessee is a public sector undertaking of the Government of Bihar, and is a `Government Company’ within the meaning of section 617 of the Companies Act 1956, the entire shares of which are held by the Governor of Bihar or his official 2 nominees. The assessee is engaged in the business of printing and sale of text books, and job works relating to printing etc. It had submitted its returns for the period in question claiming exemption from taxation, and also claimed to be an educational institution for charitable purpose within the meaning of section 2(15) of the Act. The affairs of the assessee are controlled by the State Government. In view of its policy decision, the State Government extends cash subsidy to the assessee for print and sale of text books at low rates to reach the children of the deprived sections of the society in an effort to fulfil the constitutional mandate of spread of education. The assessee had during the period in question disclosed total income of Rs.34,29,88,490/-, and additional income of Rs.1,65,10,570. The case was assessed under section 43(i) of the Act. It was selected for scrutiny and the statutory notices were issued. After a detailed scrutiny and hearing, the learned assessing officer held that the subsidies from the State Government, either already received or receivable in future, had to be accounted for as per the mercantile system and was taxable vide order dated 10.12.2007, passed by the learned Joint Commissioner of Income Tax. 2.1) Aggrieved by the order, the assessee preferred appeal which has been dismissed by the learned Commissioner of Income Tax (Appeals) II, and upheld the order of the learned assessing officer, vide order dt. 18.8.2002. While dismissing the appeal, the learned Commissioner relied on circular no.717, dt. 14.8.95, issued by the Central Board of Direct Taxes, and also on the judgment of the Supreme Court in Sahney Steel & Press Works Ltd. v. C I T [(1997) 228 ITR 253]. The assessee challenged the appellate order before the Tribunal which has been dismissed by the impugned orders, and the orders of the two learned authorities have been upheld. 3 3. By order dated 6.7.2010, passed in the present proceeding, the following substantial questions of law have been formulated for consideration of this Court:- “(i) Whether the Tribunal was correct in law in holding that the amount of Rs.8,23,15,167/- being the amount of subsidy receivable on sale of text books though not received either by the end of the final year or till date, could be brought to tax as income under the scheme of the Act? (ii) Whether the Tribunal was in error in applying the ratio of the judgment of the Hon’ble Supreme Court in Sahni Steel Case (supra) which is distinguishable on facts? (iii) Whether the Tribunal was in error in holding that the subsidy receivable from the State Government of Bihar on sale of text books was taxable on mercantile system of accounting without an appropriate consideration of the fact that such subsidy not having been received was not real income and, therefore, not liable to tax? (iv) Whether the Tribunal erred in considering the fact that even otherwise sale of text book was an educational activity exempt from tax?” 4. Learned counsel for the parties have made elaborate submissions in support their respective stand. 5. We have perused the materials on record and considered the submissions of the learned counsel for the parties. Section 2 of the Act is headed `Definitions’, sub-section 15 whereof is headed `charitable purpose’, and is reproduced hereinbelow:- “(15) `charitable purpose’ includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest], and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.” It is relevant to state that the proviso was appended to section 2(15) by a Parliamentary amendment with effect from 1.4.2009, and is obviously inapplicable to the present situation. Sections 4 and 5 of 4 the Act, if we may use the expression with respect to fiscal laws, are the charging sections. Section 4 is headed `Charge of income-tax’, and generally speaking seeks to charge every income in this country. Section 5 is headed `Scope of total income’. There are certain incomes exempt from taxation spread over the Act. We shall notice the relevant ones in view of the assessee’s stand that the subsidies received by it from the State Government qualifies for exemption from taxation. Chapter III of the Act is headed “Incomes which do not form part of total income”. Section 10 is headed `Incomes not included in total income’. Section 10(22), omitted from the statute book with effect from 1.4.1999, may be reproduced hereinbelow for a comparison with the provisions which have been substituted in its place and applies to the present case, by Finance (No. 2) Act of 1988: “(22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.” As indicated above, section 10(22) has since been substituted by section 10 (23C) of the Act, with effect from 1.4.1999, by Finance (No. 2) Act 1998, the relevant portions whereof are reproduced hereinbelow:- “(23C) any income received by any person on behalf of – ......... .......... (iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or .......... ......... (iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or ............ .......... (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or .............. .......... 5 Provided also that the fund or trust or institution (or any university or other educational institution or any hospital or other medical institution) referred to in sub- clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) – (a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and (b) does not invest or deposit its funds, other than – (i) any assets held by the fund, trust or institution or any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of the fund, trust or institution or any university or other educational institution or any hospital or other medical institution as on the 1st day of June 1973; ................ ............. Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (via) shall apply in relation to any income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business : ................. ................. Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government or is approved by the prescribed authority, as the case may be, or any other university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that – (i) such fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not – (A) applied its income in accordance with the provisions contained in clause (a) of the third proviso; or (B) invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or .............. ...................” 6 6. Adverting first of all to the definition of `Charitable purpose’ as per section 2(15) of the Act, the activities of the assessee are covered by the expression `education’, as well as `the advancement of any other object of general public utility’, occurring therein. It has to be read with Part IV of the Constitution which enshrines the Directive Principles of State Policy. Article 38 is headed `State to secure a social order for the promotion of welfare of the people’. Article 39 is to the effect that the State shall, in particular, direct its policy towards securing for the citizens, men and women equally, to secure the right to an adequate means of livelihood. Article 41 is headed `Right to work, to education and to public assistance in certain cases’. It is to the effect that the State shall, within the limits of its economic capacity and development, make effective provision for securing the right to education. Article 45 provides that the State shall endeavour to provide early childhood care and education for all children until they complete the age of six years. Article 46 provides to the effect that the State shall promote with special care the educational interest of the weaker sections of the people and, in particular, of the Scheduled Castes and the Scheduled Tribes. It may be parenthetically added that in furtherance of these provisions of the Constitution, the Parliament has enacted the Right of Children to Free and Compulsory Education Act 2009. 7. The spirit of the quondam section 10(22) was to exempt the income of a university or other educational institutions existing solely for the educational purpose and not for the purpose of profit. As stated hereinabove, this provision has been omitted with effect from 1.4.1999, and has been substituted by section 10(23C) of the Act. It is evident on a perusal of the relevant provision of section 10(23C), that the spirit of exemption from taxability of the income of 7 the university or other educational institution without profit motive runs through the newly inserted provision with details added therein. Section 10(23C)(iii ab) appears to us to be of paramount importance in the present case and has been reproduced hereinabove. There is no denying the position that the assessee is an instrumentality of the State Government, and a government company within the meaning of section 617 of the Companies Act, which carries out the mandate of the State Government, enshrined in Chapter- IV of the Constitution and summarized hereinabove. It strives to carry out the directive principles of Chapter –IV of the Constitution and as per the direction of the State Government supplies books to students at low prices, the subsidy coming from the State Government. In such a situation, its charitable nature and character is in no doubt, and is dependent on the State finance. The fact that, in pursuit of its charitable purpose, it registers some income in its balance-sheet will not per se make it to be a profit- making organization. An organization of this size has to maintain its infrastructure and the staff which needs money. This kind of seemingly apparent income is really not Per Se indicative of profit- making. We are of the view that the activities of the assessee are covered by section 10(23C)(iiiab) of the Act. The motive, the aims and objective, the purpose and the nature of its activities have to be adjudged, and are the relevant basic indicia. 8. We must consider the question of applicability of section 10(23C)(iiiad) to the present case. The admitted position is that the gross receipts of the assessee exceeds Rs. one crore. Applicability of section 10(23C)(iiiad) to the present case is obviated because the provision is applicable to those educational institutions with turn- over upto Rs. one crore. The gross receipts of the present assessee exceeds Rs. one crore and cannot, therefore, be within the mischief of section 10(23C)(iiiad) of the Act. 8 9. We must notice the provisions of section 10(23C)(vi) on which the learned Standing Counsel has placed considerable emphasis. In his submission, the assessee has not obtained the permission of the prescribed authority and is, therefore, covered by this provision. The contention is stated only to be rejected. That is not reading the whole of the sub-section which is really to the effect it is not applicable to situations which are covered by section 10(23C)(iiiab), and (iiiad) of sub-section (23C), of section 10. In other words, sub-section (iii ab) applies to educational institutions wholly or substantially financed by the Government, in contradistinction to sub-section (vi) which applies to organizations which do not have the benefit of government finance. As indicated hereinabove, the assessee is an instrumentality of the Government of Bihar, is indeed a government company within the meaning of section 617 of the Companies Act, and is substantially financed by government subsidy. We have, therefore, no doubt in rejecting the contention advanced on behalf of the learned Standing Counsel. Consequently, the applicability of sub-section (vi) is obviated. 10. We must consider the judgment of the Supreme Court in Sahney Steel & Press Works Ltd. (supra), on which the learned appellate authority as well as the learned Tribunal have placed full reliance. We are of the view that the judgment is inapplicable to the facts and circumstances of the present case, inasmuch as it did not deal with `charitable purpose’ within the meaning of section 2(15), nor the `benefits of exemption available to educational institutions from the State Government’, within the meaning of section 10(23C), of the Act. Sahney Steel & Press Works Ltd. was really concerned with industrial subsidy from the Government which is fundamentally different and distinct from educational institutions to which has to be added Chapter-IV of the Constitution of India which lays down the governmental duty to promote education amongst all, 9 particularly the downtrodden sections, of this country. In view of the facts and circumstances of the case, the Supreme Court held that the amount paid to the assessee in that case was in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. The Supreme Court held that, having regard to the scheme of the notification, there was no doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably. 11. We wish to notice some of the judgments discussed in Sahney Steel & Press Works Ltd. (supra), to the extent relevant in the present context. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Ostime v Pontypridd and Rhondda Joint Water Board [(1946) 14 ITR (Suppl) 45, 47; (1946) 28 TC 261 (HL)], that the nature of subsidy from public funds made to an undertaker to assist in carrying on the undertaker’s trade or business are trading receipts and are, therefore, taxable. The identity of the source is of great importance. In other words, it must come from public funds. Equally important is that the subsidy from public funds are meant to carry on the undertaker’s trade and business which are trading receipts, that is, are to be brought into account in arriving at the balance of profits orgains. 11.1) The judgment of the House of Lords in Seaham Harbour Dock Co. v Crook [(1931) 16 TC 333 (HL)], may be noticed. The Harbour Dock Company had applied for and obtained grants from the Unemployment Grants Committee from funds appropriated by Parliament. These grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. In other words, the House of Lords observed that if a subsidy 10 from public funds given for a particular purpose and objective to take care of the problem of unemployment, in that case financial assistance will not be treated to be operational or trade receipt and, therefore, exempt from taxation. Such a subsidy does not form part of trade activities of the company and, therefore, the House of Lords reached that conclusion. It had nothing to do with the trade of the company. Another test to determine this is whether or not such a subsidy is meant to achieve a certain objective, or the beneficiary is free to spend it for any item of its trade or business as was the case in Sahney Steel & Press Works Ltd. In other words, if the recipient is bound to use the subsidy from public funds for a particular purpose, as was the case in Seaham Harbour Dock Company, or Lincolnshire Sugar Co. Ltd. v. Smart [(1937) 20 TC 643 (HL)], it would not be operational or trade receipts, and would therefore not be taxed. 11.2) We would next like to notice the facts and circumstances of Lincolnshire Sugar Co. Ltd. (supra). In that case, it was found that the Company carried on the business of manufacturing sugar from home-grown beet. The company was paid various sums under the British Sugar Industry (Assistance) Act 1931, out of monies provided by Parliament. The question was whether these monies were to be taken into account as trade receipts or not. The object of the grant was that in the year 1931, in view of the heavy fall in prices of sugar, sugar industries were in difficulty. The government decided to give financial assistance to certain industries in respect of sugar manufactured by them from home-grown beet during the relevant period. Lord Macmillan held that : “What to my mind is decisive is that these payments were made to the company in order that the money might be used in their business.” He further observed that : 11 “ I think that they were supplementary trade receipts bestowed upon the company by the Government and proper to be taken into computation in arriving at the balance of the company’s profits and gains for the year in which they were received.” Applying these principles in the case of Sahney Steel & Press Works Ltd., the Supreme Court observed that the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee, Sahney Steel, could not use this money for distribution as dividend to its share-holders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like extension of docks as in the Seaham Harbour Dock’s case (supra). 11.3) The judgment in the Canadian case in St. John Dry Dock and Ship Building Co. Ltd. v. Minister of National Revenue, 4 DLR 1, may also be referred. It was a case where the Canadian Government had given aid to the company to encourage construction of dry dock which was “an aid to the construction of dry dock”, and was, therefore, treated to be not an operational subsidy. It was, therefore, exempt from taxation because it was meant for a particular objective of general public utility. 12. The ratio of the judgments discussed above is that the grant coming from the Government will qualify for exemption from taxation if the same was granted for a particular purpose of public utility or public importance, or to alleviate a situation affecting the general public, and cannot be used for any other purpose. The subsidy from the Government would be taxable if it can be used for any purpose the assessee likes including its trade and business, would then be in the nature of trade receipts and taxable. In other words, the basic question to be determined is whether a subsidy 12 from payment from public funds is in the nature of capital or revenue. In the case of the former, it is not taxable, and is taxable in case of the latter. 13. The judgment of the Supreme Court in Assam State Text Book Production and Publication Corporation Ltd. vs. C I T [(2009) 319 ITR 317 (SC)], is particularly relevant in the present context and deals with taxability of the subsidy received by the appellant from the Assam Government. The facts and circumstances of that case with variation of minor details are common with the present case. We must sound the requisite note of caution that it was a case under quondam section 10(22) of the Act. The Supreme Court observed that it was entitled to the benefit of exemption. We must also point out that the Supreme Court in its judgment in American Hotel and Lodging Association Educational Institute v. Central Board of Direct Taxes [(2008) 301 ITR 86 (SC)], has observed that the quondam section 10(22) is substantially in Para Materia with section 10(23C) of the Act. 14. In view of the foregoing discussion, we do not feel the necessity of considering the remaining questions. 15. In the result, the appeal is allowed. We disagree with the order dated 9.10.2009, passed by the learned Income Tax Appellate Tribunal, Patna Bench, in ITA No. 210/Pat/2008, and is hereby set aside. The substantial questions of law at nos. (i), (ii), and (iv) are answered in favour of the assessee, and against the Revenue. We do not consider it necessary to decide the question of law at no. (iii), and it will be open to the learned assessing officer to consider the same afresh. Since we have discussed only the question of taxability