Case: M/S. Sahney Steel &amp; Press Works Ltd. Hyderabad Vs. Commissioner Of Income Tax.Andhra Pradesh-I , Hyderabad

It appears from the notification issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after9 with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession is also available for subsequent expansion of 50 per cent and above of existing capacities provided in each case, the expansion was located in a city or town or panchayat area other than that in which the existing unit is located. The incentives were"(a) Refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10% of the equity capital paid up in the case of public limited companies and the actual capital in the case of others(b) Subsidy on power consumed for production to the extent of 10% in the case of medium ande industries and 12 1/2% in the case ofe industries. This concession will not apply to cases where concessional tariffs are allowed by the Electricity Board(c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body;(d) Refund of water rate in respect of water drawn from a government source or from a source maintained by any local body but returned purified to it;(e) Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used(f) The following additional incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, Pochampad and K.C. canal in them areas and in the following eight backward districts2. The salient feature of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available unless and until production had commenced. The availability of the incentives would be limited to a period of five years from the date of commencement of production. The incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemptions were given also from payment of water rate. Refund was also provided for water rate in respect of water drawn from government sources. There were certain additional incentives with which we are not concerned in this case3. The important point to note is that all the incentives are production incentives in the sense that the Company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for setting up of the industries. It is only after the industries had been set up and production had been commenced that the incentives were to be given4. The second important thing to note is that the manner in which the incentives were given is of no consequence for determination of the question 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 machineries, 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

Reasoning:
10. In the instant case, the first proposition of Viscount Simon clearly applies. The amount paid to the assessee in the instant case is 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. In our view, having regard to the scheme of the notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably13. In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives was given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries30. The facts of this case have not been clearly stated in the judgment. But it appears that subsidy was granted after making of the film. The Bombay judgment in the case of Sadichha Chitra [(Bom)] proceeded on the footing that subsidies were granted as and when the film was being completed which resulted in creation of a capital asset. A similar view was taken by the Andhra Pradesh High Court in the case of CIT v. Chitra Kalpa [(AP)] where it was held that subsidy was for making a film and was to be treated as a capital receipt because the film was a capital asset in the hands of the producer. The view taken by the Bombay and Kerala High Courts appears to be correct and accords with the principle laid down in Seaham Harbour Dock Co. case [16 TC 333] that assistance given by the Government for completion of a project must be of capital nature31. In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. Applying the test of Viscount Simon in the case of Ostime [28 TC 261 it must be held that these subsidies are of revenue character and will have to be taxed accordingly32. A Division Bench of the Calcutta High Court in the case ofKesoram Industries and Cotton Mills Ltd. v. CIT [(Cal)]also examined a scheme of refund of sales tax framed by the Andhra Pradesh Government to assist newly set up industries. There the assessee had set up a cement plant. The Calcutta High Court held that receipt of the incentives from the State Government was incidental to carrying on the business of the assessee. Such subsidies were received year after year by refund of sales tax. The benefit was received in course of carrying on the assessees business. It was a benefit incidental to its business. The subsidy was not intended to be contribution towards capital outlay of the industry. Therefore, it was held that the subsidy received by the assessee in that case could not be regarded as anything but a revenue receipt33. The Madhya Pradesh High Court in the case of CIT v. Dusad Industries [(MP)], dealt with a case where Government had framed a scheme for granting sales tax subsidies to industries set up in backward areas. The High Court was of the view that the object of the scheme was not to supplement the profits made by industries. In that view of the matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries and could not be taxed as revenue receipts. In that case, 75 per cent of the sales tax paid in a year for a period of five years from the day of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously the subsidy was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee as was clear from the facts and circumstances of the case. The Madhya Pradesh High Court, however, filed to notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already there but as an assistance after the industry commenced production. The view taken by the Madhya Pradesh High Court is erroneous