Case: Bengal Textiles Association Vs. Commissioner of Income Tax, West Bengal

the letter dated November 13, 1945, and under the provisions of the Income-tax Act the exemption is inoperative in regard to the claim made by the Association. The letter gave exemption on certain conditions in regard to Income-tax, Super-tax or Excess Profits Tax. But under S. 60(3) of the Income-tax Act the power of exemption was not exercisable by the Government after the commencement of the Indian Income-tax (Amendment) Act. 1939. This sub-section provides :Section 60(3) "After the commencement of the Indian Income-tax (Amendment) Act, 1939, the power conferred by sub-sec. (1) shall not be exercisable except for the purpose of rescinding an exemption, reduction or modification already made".Consequently neither the letter of the Central Board of Revenue nor the provisions of the Income-tax Act can operate in favour of the contention of the Association raised before us and the first question was rightly answered in the negative.6. The next question raised was in regard to the nature of the payment of Rs. 6,00,000 by the Government of Bengal during the first chargeable accounting period ending December 31, 1946. The appellant claimed that it was in the nature of a subsidy and was therefore exempt under proviso (c) to S. 4 of the Business Profits Tax Act. To ascertain the true nature and character of the payment of this sum it is necessary to consider the relevant terms of the agreement between the Government of Bengal and the Association. The preamble sets out the obligations which were undertaken by the Government and by the Association. In Cl. 8 it was provided that the Association shall, subject to the contribution by the Government as provided in the agreement, arrange for and maintain suitable office accommodation in Calcutta and equip it with suitable technical and administrative personnel. Under Cl. 18 it was provided that the Association shall, at its own expense, keep all sorts of cloth and shall receive no remuneration or profit beyond the margin between the buying price and the price paid by the buyer. Clause 24 made provision as to the payment of a sum not exceeding Rs. 6,00,000 for establishment charges, office rent, advertisement, salaries and wages etc. This clause when quoted runs as under :Cl. 24. "During the existence of the Association the Government will be responsible for and pay every month to the Association the administrative expenses it has incurred in the previous month including establishment charges, office rent, advertising, salaries and wages etc., but not exceeding Rs. 6,00,000 per annum less the amount, subject to a maximum of Rs. 75,000 per annum. Government will pay as salary and expenses of the Liaison Officer with the Association appointed by Government and those of his personal staff. The Government, however, shall not be responsible for any of the costs and expenses to be incurred by the Association in connection with the purchase, transport, insurance, storage and distribution of cloth."The Association was started for the purpose of procurement and distribution of cloth and its functions were controlled by the provisions of the agreement and it was also subject to the provisions of the Bengal Cloth and Yarn Control Order. The whole trend of the agreement shows that the Association itself was responsible for the payment of its expenses subject to the contribution by the Government as above stated.On the construction of the various terms of the agreement the High Court was of the opinion that the payment by Government was a payment to itself. This view of the agreement does not appear to us to be correct. If the terms of the agreement are read as a whole, it seems to be reasonably clear that the payment was made for services rendered and the contribution was in the form of paying for the actual expenses incurred per month which were to be paid in the month following the month in which the amount was expended. Can it be said that the payment was by way of a bounty? The answer must be in the negative because the payments were made to the Association to assist it in carrying on its trade or business and for the services it was rendering to Government by doing so.What is decisive in this case is that these payments were made to the Association in order that they be used in the business of the Association and for services rendered and they have to be viewed from that point of view. So viewed the payments cannot be said to be of a benevolent nature. Their very quality and nature make it impossible to treat them as a bounty or subsidy because the use of the word bonus or subsidy in S. 4, proviso (c) connotes that the payment is in the nature of a gift which in the instant case it is not. Counsel for the Association relied upon two cases : Seaham Harbour Dock Co. v. Crook, (1931) 16 Tax Cas 333 and Glenboig Union Fireclay, Co., Ltd. v. Commrs. of Inland Revenue, (1922) 12 Tax Cas 427. In the former case the grant was given not as a supplementary trading receipt but for the specific purpose of enabling the company to undertake works of relief of unemployment and it was held not to be taxable income. Lord Buckmaster said at p. 353 :"It was a grant which was made by a government department with the idea that by its use men might be kept in employment."In that case the sums granted were received by the assessee not as part of their profits or gains or as a sum which went to make up the profits but was given for an express purpose of relief of unemployment. The latter case does not assist in the decision of the case. It was relied upon to show that the measure of payment is not indicative of its quality. That may be so but in the present case the payments were made for services rendered to Government and that would negative their being a subsidy.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]For the three chargeable accounting periods a common question arises whether the Association obtained a valid exemption from payment of Business Profits Tax for all the chargeable accounting periods. For the first chargeable accounting period the question which arises is whether Rs. 6,00,000 paid to the Association was a subsidy within the meaning of S. 4, proviso (c) of the Business Profits Tax Act.In our opinion both these questions have been correctly answered by the HighAssociation was started for the purpose of procurement and distribution of cloth and its functions were controlled by the provisions of the agreement and it was also subject to the provisions of the Bengal Cloth and Yarn Control Order. The whole trend of the agreement shows that the Association itself was responsible for the payment of its expenses subject to the contribution by the Government as above stated.On the construction of the various terms of the agreement the High Court was of the opinion that the payment by Government was a payment to itself. This view of the agreement does not appear to us to be correct. If the terms of the agreement are read as a whole, it seems to be reasonably clear that the payment was made for services rendered and the contribution was in the form of paying for the actual expenses incurred per month which were to be paid in the month following the month in which the amount was expended. Can it be said that the payment was by way of a bounty? The answer must be in the negative because the payments were made to the Association to assist it in carrying on its trade or business and for the services it was rendering to Government by doing so.What is decisive in this case is that these payments were made to the Association in order that they be used in the business of the Association and for services rendered and they have to be viewed from that point of view. So viewed the payments cannot be said to be of a benevolent nature. Their very quality and nature make it impossible to treat them as a bounty or subsidy because the use of the word bonus or subsidy in S. 4, proviso (c) connotes that the payment is in the nature of a gift which in the instant case it isthat case the sums granted were received by the assessee not as part of their profits or gains or as a sum which went to make up the profits but was given for an express purpose of relief of unemployment. The latter case does not assist in the decision of the case. It was relied upon to show that the measure of payment is not indicative of its quality. That may be so but in the present case the payments were made for services rendered to Government and that would negative their being a subsidy.