WP(C) 1821/2004 BEFORE THE HON BLE MR. JUSTICE HRISHIKESH ROY Heard Mr. GK Joshi, learned senior counsel appearing for the petitioners. The re spondents are represented by Mr. U Bhuyan, learned senior counsel. 2. The petitioner filed his return for the assessment year 1999-2000, where he claimed Transport Subsidy (Rs.18,58,842/-) received from the Government as c apital receipt. An intimation under Section 143(1) of the Income Tax Act, 1961 ( hereinafter referred as ’the IT Act’) was sent on 5.12.2000 to the assessee, in respect of the return filed by them on 29.12.1999. 3. Subsequently the Assistant Commissioner of Income Tax, Tinsukia issued n otice on 31.5.2002 (Annexure-III) intimating that he has reason to believe tha t the income of the assessee has escaped assessment within the meaning of Sectio n 147 of the IT Act and accordingly re-assessment was proposed for the assessmen t year 1999-2000. 4. In their reply made on 16.1.2004, the assessee stated that they had cred ited the Transport Subsidy for the relevant year to the capital receipt account, on the basis of the decision of this Court in the case of Commissioner of Incom e-Tax v. Assam Asbestos Ltd. (hereinafter referred to as the Assam Asbestos-I ) , reported in 1995 (215) ITR 847. It was further claimed that since Transport Su bsidy is being given as an incentive for capital investment in the North Eastern region and considering the purpose for which the subsidy is given, it cannot be considered as revenue receipt and shouldn’t therefore be subjected to income ta x. 5.1. The Asstt. Commissioner of Income Tax (Asstt. CIT) rejected the reply of the assessee through the communication dated 28.1.2004 and intimated the reason recorded in the file, for the impugned decision. The reasons being relevant, ar e extracted hereunder: From the Balance sheet as at 31.03.1999, it is evident the assessee disclosed a sum of Rs.18,58,842.00 being Transport Subsidy receivable as on 31.03.1999, whi ch was credited to Capital Reserve A/C, instead of crediting the sum in P/L Amou nt as on 31.03.1999. The amount of Transport Subsidy receivable of Rs.18,58,842.00 is a Revenue Recei pt taxable under I.T.Act, 1961. I have, therefore, reasons to believe that this sum of Rs.18,58,842.00 has escap ed within the meaning of section 147 of the Act. Issue notice u/s 148 of the Act. 5.2. The Asstt. CIT claimed support for the re-assessment notice, by referrin g to the law laid down by the Apex Court on the taxability of State Subsidy in S ahney Steel & Press Works Ltd. v. C.I.T. reported in (1997) 228 ITR 253 (SC), an d also the second decision on the point of this Court, in Deputy C.I.T. vs. Assa m Asbestos Ltd. (hereinafter referred to as the Assam Asbestos-II ),reported in (2003) 263 ITR 357. 6.1. Assailing the re-assessment proceeding initiated under Section 147 of th e IT Act, Mr. GK Joshi, learned senior counsel contends that Section 147 of the IT Act permits re-assessment only when, the Assessing Officer (A.O.) has ’reason to believe’ that any income chargeable to tax, has escaped assessment. He point s out that there is no authoritative pronouncement by any competent Court to the effect that Transport Subsidy cannot be included as capital receipt and accordi ngly he submits that, there can be no justification for the A.O. to take a view that the Transport Subsidy received by the assessee, has escaped assessment. 6.2. Referring to the interpretation of the Apex Court of the expression ’rea son to believe’ of Section 147 of the IT Act, in the decision of the Apex Court in Calcutta Discount Co. Ltd. v. Income Tax Officer reported in (1961) 41 ITR 19 1, Mr. Joshi contends that believe must be in good faith and cannot merely be a pretence and the expression does not imply a subjective satisfaction of the A.O. and cannot be based on mere suspicion and it must be founded upon information 6.3. The decision of the Supreme Court in Ganga Saran & Sons Pvt. Ltd. v. Inc ome Tax Officer reported in (1981) 130 ITR 1, is cited by Mr. Joshi to project t hat the expression ’reason to believe’ is stronger than ’is satisfied’ and the b elieve entertained by the A.O., must not be arbitrary or irrational and should b e based on relevant materials. 6.4. The view taken by the Supreme Court in Income Tax Officer v. Lakhmani Me wal Das reported in (1976) 103 ITR 437 is also relied upon by the counsel to con tend that the expression ’reasons to belief’ is not a subjective satisfaction of the ITO and it is open to the Court to examine whether the reason for the belie f, have a rational connection with the formation of the belief and are not extra neous and irrelevant for the purpose under Section 147 of the IT Act. 6.5. Since the original Section 147 of the IT Act before its substitution w.e .f.1.4.1989 was examined by the Supreme Court in the earlier cases of Calcutta D iscount Co. Ltd. Supra); Ganga Saran & Sons Pvt. Ltd. (Supra) and Lakhmani Mewal Das (Supra) and the second pre-condition, for initiation of re-assessment proce eding under Section 147 of the IT Act, relating to omission of the assessee to m ake return was removed by the Direct Tax Laws (Amendment) Act, 1986 w.e.f. 1.4.1 989, Mr. Joshi submits that notwithstanding the amendment, the continuance of th e expression ’reason to belief’ in Section 147, curtails arbitrary exercise of p ower by the A.O. to reopen assessment, on mere change of opinion. The anxiety of the Law Makers to protect the Supreme Court’s pre-amendment interpretation refl ected through the Central Board of Direct Tax (CBDT) Circular No.549 dated 31.10 .1989, is read out by the learned senior counsel to show that, even after amendm ent of Section 147, in the absence of bonafide ’reason to belief’, re-assessment can’t be ordered by an I.T.O. 6.6. The petitioner also contends that since the Transport Subsidy was given for the purpose of industrialization in the North Eastern region following the r atio in Sahney Steel & Press Works Ltd. (Supra), subsidy payment should be consi dered as capital receipt in the hands of the assessee. The Court in that case de clared that whether State subsidy is in the nature of capital or revenue receipt , has to be judged, by looking into the nature of the incentives. 6.7. The later decision of the Supreme Court reported in (2008) 306 ITR 392 i n Commissioner of Income-Tax v. Ponni Sugars & Chemical Ltd. is also relied upon by Mr. Joshi to show that the basic test set out in Sahney Steel & Press Works Ltd. (Supra) in judging the character of the subsidy, is still relevant and the nature of the receipt in the hands of the assessee has to be determined, by taki ng into account the purpose for which the subsidy is given or in other words, on e has to apply the ’purpose test’. In this case the Supreme Court has held that the subsidy given by the Government for repayment of loans is capital receipt. 7.1. Appearing for the Income-Tax authorities, it is contended by Mr. U Bhuya n, learned senior counsel that the impugned notices for re-assessment were given on the basis of the believe nurtured by the Officer that income chargeable to t ax has escaped assessment. Mr. Bhuyan further projects that the basis for the pr oposed re-assessment is disclosed in the impugned notice under Section 147 of th e IT Act and the legal foundation for the A.O. to invoke re-assessment power is apparent on the face of the notice dated 28.1.2004 and no interference is justif ied at this stage. 7.2. The learned counsel also submits that when pre-production incentives are given, it can be considered as capital receipt by applying the ’purpose test’ a s given in Sahney Steel & Press Works Ltd. (Supra) but post production incentive s like transport subsidy, should normally be considered as revenue receipt in th e hands of the assessee. However the Departmental counsel points out that since the ITO has not taken a final view on the issue and the notices issued under sec tion 147 is a preliminary exercise, interference of the Writ Court at this stage , mayn’t be justified. 7.3. Relying upon the decision of the Supreme Court in Assistant Commissioner of Income-Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. reported in (2007) 291 ITR 500 (SC), Mr. Bhuyan submits that the intimation given under Section 143(1) of the IT Act to the assessee, cannot be considered as an order of assessment si nce the A.O. is yet to pass an order, accepting the return of the assessee. In t his case the Supreme Court held that, at the stage of issuing notice under Secti on 147, the only question is whether there was relevant material on which a reas onable person could have formed the requisite belief and conclusive prove of the escapement, is not the concern at that stage of the proceeding since existence of belief of the A.O., is within the realm of subjective satisfaction. To confer jurisdiction under the substituted Section 147, omission of the assessee become s irrelevant and satisfaction of only the first condition, of having the belief that the income has escaped assessment, confers competent jurisdiction on the A. O., to open re-assessment. 7.4. Placing reliance on the unreported Division Bench decision of this Court rendered on 15.9.2009 in ITA No.8/2006 (Commissioner of Income-Tax vs. M/s. Shi v Shakti Flour Mills (P) Ltd.), Mr. Bhuyan submits that there is no finality on the assessee’s return, at the stage of issuance of intimation under Section 143( 1) of the IT Act and the A.O. would be justified in taking into consideration th e materials in the assessee’s return of income and if such materials provides th e basis to believe that income has escaped assessment, it is open for the A.O. t o initiate proceeding under Section 147 of the IT Act. 7.5. The learned senior counsel points out that neither in the Assam Asbestos -I nor in Assam Asbestos-II, the Court has declared that transport subsidy is ca pital receipt and the issue is yet to be adjudicated by the jurisdictional High Court and accordingly Mr. Bhuyan contends that no interference should be made wi th the notice(s) issued for re-assessment, since the assessee would have ample o pportunity during the re-assessment process, to show how transport subsidy shoul d be considered, for the purpose of the IT Act. He also submits that at the stag e of notice, the assessee is not prejudiced as he will have adequate opportunity and even thereafter they can avail the statutory alternate remedies, in the eve nt, the re-assessment decision goes against the assessee. 8. Before proceeding to consider the rival arguments, it would be appropria te to take note of the decision of the Apex Court in MEPCO Industries Ltd. v. Co mmissioner of Income-Tax reported in (2009) 319 ITR 208 (SC), where the Court af ter examining the earlier decision in Sahney Steel & Press Works Ltd. (Supra) an d Ponni Sugars & Chemical Ltd. (Supra) indicated how the incentives received fro m the Government is to be treated in the hands of the assessee. The Court said t hat the issue has to be examined on the nature of the subsidy and on the facts o f each case. The Supreme Court in Sahney Steel & Press Works Ltd. reported in (1 997) 228 ITR 253 (SC) noted with approval the views in Pontypridd and Rhondda Jo int Water Board v. Ostime reported in (1946) 1 All ER 668, where Viscount Simon made the following observations: The first proposition is that, subject to the exception hereafter mentioned, pa yments in the nature of a subsidy from public funds made to an undertaker to ass ist in carrying on the undertaker’s trade or business are trading receipts, are to be brought into account in arriving at the balance of profits or gains under Case I of Schedule D. It is sufficient to cite the decision of this House in the sugar been case (Smart v. Lincolnshire Sugar Co. Ltd.) as an illustration. The second proposition constitutes an exception. If the undertaker is a rating a uthority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient p revents any question of profits arising: see, for example, Lord Buckmaster’s exp lanation in Forth Conservancy Board v. IRC AC at p.546 (TC at p.117) and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills, TC at p.4 4. . Following the above ratio, the Supreme Court declared that the subsidy granted b y the Andhra Pradesh Government in the form of refund of sales tax, exemption of water and power tariff, being available after commencement of production, are i ncentives to assist the assessee to make its trade more profitable and consideri ng that it was post production incentive, declared that the government subsidies should be treated as assistance, for the purpose of trade and not as capital re ceipt. 9. Although support for the claim that the transport subsidy is capital rec eipt is sought from the decision of this Court in Assam Asbestos Ltd. (I) (Supra ), a reading of the decision shows that, the jurisdictional High Court hasn’t ap proved the Tribunal’s view that, transport subsidy should be treated as capital receipt. In fact, the Court in that case refused to entertain the reference, as no question of law was found to be involved for any reference to be answered. Si milarly in the case of Assam Asbestos-II, since the Taxing Authorities hadn’t ex amined the purpose for which the transport subsidy was given, the Court declared that the nature of the receipt cannot be ascertained in the absence of requisit e factual foundation and accordingly remanded the case to the Assessing Authorit ies, to consider taxability of the transport subsidy, in light of the basic prin ciples enunciated by the Supreme Court, in Sahney Steel & Press Works Ltd. (Supr a). 10. Therefore, this Court neither in the Assam Asbestos-I reported in 215 IT R 847 nor in Assam Asbestos-II reported in 263 ITR 357, had decided how transpor t subsidy is to be treated for assessment to Income Tax. Therefore a final view is yet to be taken by this Court or any other High Court on how transport subsid y is to be considered, by applying the ’purpose test’, which was declared to be the appropriate test by the Supreme Court, in Ponni Sugars & Chemical Ltd. (Supr a) and Sahney Steel & Press Works Ltd. (Supra). 11. While examining the scope of challenge to a re-assessment proceeding und er Section 147 of the IT Act, it is held by the Apex Court that Courts cannot in vestigate into the adequacy or sufficiency of the reasons which weighed with the ITO in arriving at the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matter. I have considered the jus tification recorded by the Officer for forming the belief to initiate reassessme nt proceeding under Section 147 of the IT Act and I am of the considered opinion that, the pre-condition for exercise of powers under Section 147(1) of the IT A ct is satisfied and the Asstt. CIT, Tinsukia had the legal jurisdiction to issue the impugned re-assessment notices. 12. Furthermore, although in M/s. Shiv Shakti Flour Mills (P) Ltd.), transpo rt subsidies was under specific consideration but since the Tribunal had not con sidered the assessibility in light of the test laid down in Sahney Steel & Press Works Ltd. (Supra), this Court remitted the matter to the Tribunal to decide as to whether, transport subsidy is chargeable to tax under the IT Act as revenue rece ipt. Therefore the issue is still open to adjudication. 13. When any State subsidy is given, the character of the subsidy in the han ds of the assessee - whether Capital or revenue - will have to be determined by taking into account the purpose for which the subsidy is given. It is held in Sa hney Steel & Press Works (Supra) that if it is given by way of assistance to the assessee in carrying out their trade or business, it should be treated as tradi ng receipt - the source of fund being quite immaterial. But when subsidies are g ranted only after the industry is set up and production commences, such subsidy is of revenue in character and will have to be taxed accordingly. Of course the se observations were made when the Court was examining incentives offered by the Andhra Pradesh Government to new undertaking by way of refund of sales tax on r aw material, machinery and finished goods. 14. In this case the determination to income tax assessibility has to be mad e for the transport subsidy, which the petitioner claims to be Capital receipt, not liable to tax under the IT Act. Since it has been declared in this judgment that this Court hadn’t given its conclusive verdict on the point in any of its e arlier decision(s), and assessment for the relevant year is yet to be made, this is not even a case of change of opinion and therefore I am of the considered vi ew that, interference with the impugned notice(s) is not warranted. 15. For all the above reasons, my conclusion is that the assessee should res pond to the notices and an appropriate adjudication exercise should be permitted to be made by the Income-Tax authorities, in pursuant to the impugned notice(s) . 16. Accordingly the writ petition is not accepted and the same is dismissed without any order of cost.