The Commissioner Of Income-Tax, Madurai v. M/S. The Kanyakumari Dist. Co-Op. Spinning Mills Ltd., Aralvoymozhi

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 31/12/2002 CORAM THE HONOURABLE MR.JUSTICE N.V.BALASUBRAMANIANandTHE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIAN T.C.No.196 of 1999 The Commissioner of Income-tax,Madurai. ... Applicant. -Vs- M/s. The Kanyakumari Dist. Co-op. SpinningMills Ltd., Aralvoymozhi. ... Respondent. Reference arising out of the order of the Income-tax AppellateTribunal C-Bench, Madras in I.T.A.No.4184/Mds/ 89, dated 19-12-1997, at theinstance of the Revenue. !For applicant :: Mrs.Pushya Sitharaman, Sr.SC for IT. ^For respondent :: Mr.V.Ramachandran, Sr.counsel forM/s.Anitha Sumanth & Mallika,S. :JUDGMENT N.V.BALASUBRAMANIAN,J. In this reference, the question that arises for considerationis whether certain amounts received by the assessee as subsidy are to betreated as revenue receipts or capital receipts. The relevant facts that arenecessary for the disposal of the tax case reference are that the assesseereceived certain amount of subsidy from the Government of Tamil Nadu and inthe assessment proceedings for the assessment year 1985-86, the assesseeclaimed that the amount received as subsidy from the Government of Tamil Naduwas a capital receipt and not liable to tax. The assessee received thesubsidy amount in the following circumstances:- The Government of Tamil Nadu,taking into account the welfare of Adi Dravidas and their poor representationin the assessee's firm, sanctioned certain financial assistance amounting asum of Rs.10.50 lakhs under a Special Component Plan to the assessee torecruit 70 Adi Dravidas and the assessee received the same. The assessee is aCo-operative Society and the total number of workers belonging to Adi Dravidacommunity in the assessee mill were only 90 against the sanctioned strength of912 persons out of which 832 permanent workers were employed. The Director of Handlooms and Textiles requested the Government of Tamil Nadu to sanctioncertain amount for recruitment of 70 Adi Dravida workers in the assessee'smill under the Special Component Plan and on that basis, the sum of Rs.10.50lakhs was sanctioned in favour of the assessee. The assessee also recruited70 additional workers from Adi Dravida community. The relevant GovernmentOrder issued by the Social Welfare Department reads as under:-" SOCIAL WELFARE DEPARTMENT G.O.Ms.No.2247 Dated: 3.9.1983Aavani 18, RuthrothkariThiruvalluvarandu 2014, Read: 1. From the Director of Handlooms and Textiles,Madras letter Ro.No.38487/82/D3,dt. 2.2.83. 2. From the Director of Adi Dravidar and TribalWelfare, Madras-5 Lr.Ro.No.81/2435/83,dt.14.2.1983.3. From the Director of Handlooms and Textiles Lr.Ro.No.38487/82/ D3, dated28.3.1983. ..... ORDER: SOCIAL WELFARE DEPARTMENT G.O.Ms.No.2247 Dated: 3.9.1983Aavani 18, RuthrothkariThiruvalluvarandu 2014, Read: 1. From the Director of Handlooms and Textiles,Madras letter Ro.No.38487/82/D3,dt. 2.2.83. 2. From the Director of Adi Dravidar and TribalWelfare, Madras-5 Lr.Ro.No.81/2435/83,dt.14.2.1983.3. From the Director of Handlooms and Textiles Lr.Ro.No.38487/82/ D3, dated28.3.1983. ..... ORDER: The Director of Handlooms and Textiles has stated thataccording to the spin plan for seven days' working and 15% forleave/absenteeism, the total number of labourers required in the KanniyakumariDistrict Co-operative Spinning Mills is 912. At present 832 permanent workersare working in the Kanyakumari District Co-operative Spinning Mills. Thetotal number of Adi Dravidar workers in the Mill is only 90, which is belowthe prescribed reserved ratio of 18% for Scheduled Castes. In order to fillup the shortfall and to strengthen the equity base, the Mills has proposed torecruit 70 additional workers from Adi Dravidar Community and to avail thefinancial assistance of Rs.10.50 lakhs at the rate of Rs.15,000/- per head,under "Special Component Plan". The Director of Handlooms and Textiles has,therefore, requested the Government's permission to recruit 70 Adi Dravidarworkers under Special Component Plan and to sanction Rs.10.50 lakhs at therate of Rs.15,000/- per worker.2. The above proposal was placed before the Secretaries'Committee under the Chairmanship of Chief Secretary to Government on 22.8.83.The Committee approved the scheme.3. In pursuance of the decision of the Secretaries Committee,the Government sanction the payment of a sum of Rs.10.50 (Rs.ten lakhs andfifty thousand only) lakhs from the Special Central Assistance Fund availablewith Tamil Nadu Adi Dravidar Housing and Development Corporation to theKanniyakumari District Co-operative Spinning Mills, so as to enable the Millto recruit and employ 70 Hindu Adi Dravidars. The Managing Director, TamilNadu Adi Dravidar Housing and Development Corporation, is requested to release the amount sanctioned above to the Mill as and when it is actually required. 4. The technical and professional responsibility for over-seeing, monitoring and ensuring proper tie-ups for finance and marketingwill rest with the Director of Handlooms and Textiles, Madras. He isrequested to see that all the 70 Hindu Adi Dravidars are employed within 3months from the date of issue of the order and send a report to theGovernment. 5. The beneficiaries to be employed should be selected in accordance with the guidelines already issued in G.O.Ms.No.2593, SocialWelfare Department, dated 30.10.1982. (BY ORDER OF THE GOVERNOR) M.S.RAMESH, COMMISSIONER AND SECRETARY TO GOVERNMENT." 2. The Income-tax Officer held that the amount of Rs.3 lakhs received as subsidy was revenue in nature and assessed the same. TheCommissioner of Income-tax (Appeals) confirmed the order of the IncometaxOfficer holding that the subsidy was received in the course of business andincome in nature. The Appellate Tribunal, however, on appeal, took adifferent view and held that the amount was granted and paid for a benevolentand beneficial purpose to provide employment to 70 workers belonging to AdiDravida community and it was paid to promote weaker sections of the societyand the subsidy amount received by the assessee was not the income of theassessee and not assessable to income-tax. 3. The Revenue filed an application before the Appellate Tribunal to state a case and refer a question of law, and the AppellateTribunal has stated a case and referred the following question of law for ourconsideration:"Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in holding that the amount of subsidyreceived by the assessee from the Tamil Nadu Government was in the nature ofcapital receipt and hence, cannot be taxed as income?" 4. We heard Mrs.Pushya Sitharaman, learned senior standing 3. The Revenue filed an application before the Appellate Tribunal to state a case and refer a question of law, and the AppellateTribunal has stated a case and referred the following question of law for ourconsideration:"Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in holding that the amount of subsidyreceived by the assessee from the Tamil Nadu Government was in the nature ofcapital receipt and hence, cannot be taxed as income?" 4. We heard Mrs.Pushya Sitharaman, learned senior standing counsel for the Revenue and Mr.V.Ramachandran, learned senior counsel for theassessee. The first submission of Mrs.Pushya Sitharaman is that the assesseewas required to recruit 18% of total staff from Schedule Caste people underthe Government Reservation Policy and hence, the amount was received and itwould represent the salary payable to the employees and therefore it isrevenue in nature. We find that there is absolutely no material to show thatthe assessee was required to fill up 18% of its employees under theReservation Policy of the Government. We also find that no such argument hasbeen advanced and no finding has been rendered in this Court. The referenceto 18% of the employees does not indicate that the assessee was obliged tofollow 1 8% of the Government Reservation Policy and had the ReservationPolicy been in operation in the assessee's mill, the assessee should haverecruited persons from the Scheduled Caste much earlier to conform to therecruitment of 18% of the employees' strength, even without a Government Order sanctioning the subsidy. Further, we are unable to accept the submission asthe learned senior standing counsel for the Revenue. We are of the view thatit is for the executives to determine whether persons coming from Adi Dravidacommunity adequately represent in the services in the assessee's mill as theexecutives are supposed to know the existing condition in the society and makeadequate provision. From that, it cannot be said that the amount received wastowards the payment of salary to the persons to be employed ignoring thepublic and social purpose behind it. 5. The second submission of Mrs. Pushya Sitharaman, learned sanctioning the subsidy. Further, we are unable to accept the submission asthe learned senior standing counsel for the Revenue. We are of the view thatit is for the executives to determine whether persons coming from Adi Dravidacommunity adequately represent in the services in the assessee's mill as theexecutives are supposed to know the existing condition in the society and makeadequate provision. From that, it cannot be said that the amount received wastowards the payment of salary to the persons to be employed ignoring thepublic and social purpose behind it. 5. The second submission of Mrs. Pushya Sitharaman, learned senior standing counsel for the Revenue is that what was granted by subsidywas reimbursement of the salary payable to the employees and since theassessee had already commenced its business, the subsidy amount received forrunning the business would be revenue in nature. Mr.V. Ramachandran, learnedsenior counsel for the assessee, on the other hand submitted that the objectof granting the subsidy is not to benefit the assessee, but to benefit thepersons from Adi Dravida community by providing employment to them andtherefore, it is only capital in nature. We find considerable force in thesubmission of the learned senior counsel for the assessee. A close reading ofthe Government Order as well as the order sanctioning the amount clearly showsthat the Government of Tamil Nadu has framed a Special Component Plan foremployment of persons from Adi Dravida community and to provide employment topersons coming from Adi Dravida community, the Government has granted thesubsidy with the object and intention to benefit the persons coming from AdiDravida community by providing them employment. It is axiomatic that personsfrom Adi Dravida community are socially and educationally backward and forupliftment of persons coming from the weaker sections of the society, theGovernment of Tamil Nadu has framed a scheme and sanctioned the subsidy to theassessee. The scheme has a laudable social object behind it and under thescheme, persons from Adi Dravida community are required to be recruited sothat instead of giving money directly to the persons who are oppressed andsocially backward by way of dole, the offering of employment to such personseither in the Government or in other corporations would benefit not only thepersons employed but also the entire community as a whole in the long run andwould alleviate their sufferings to some extent. As earlier observed by us,the object of the grant of subsidy is to uplift the socially oppressed peopleand by providing employment opportunity, it will not onl y provide jobopportunity, but also just sustenance to the persons so employed so that theycan maintain themselves and their families just above the poverty line, andthey can also come out of the backwardness and lead a life with dignity. Wetherefore hold that the object of the grant of subsidy is not to benefit theassessee, but it has a social object behind it to uplift the Adi Dravidacommunity people and hence, the submission of the learned senior standingcounsel for the Revenue that the amount was given for the benefit to run themill by the assessee is untenable and we reject the same. 6. Learned senior standing counsel for the Revenue also submitted that if the amount received is held to be a capital receipt, itwould amount to grant of double deduction as the assessee would have claimedthe salary paid to its employees as business expenditure in the computation ofbusiness income. Apart from there being no material for such an assumption,we are of the view that the question regarding the nature and character of thereceipt cannot be determined on the basis of deduction that might have been granted at the time of discharge of its obligation, and the question whetherit is a capital receipt or revenue receipt has to be determined at the time ofthe receipt of the amount depending upon the quality, nature and character ofthe receipt in the hands of recipient. 7. The House of Lords, as early as in 1930, in THE SEAHAM submitted that if the amount received is held to be a capital receipt, itwould amount to grant of double deduction as the assessee would have claimedthe salary paid to its employees as business expenditure in the computation ofbusiness income. Apart from there being no material for such an assumption,we are of the view that the question regarding the nature and character of thereceipt cannot be determined on the basis of deduction that might have been granted at the time of discharge of its obligation, and the question whetherit is a capital receipt or revenue receipt has to be determined at the time ofthe receipt of the amount depending upon the quality, nature and character ofthe receipt in the hands of recipient. 7. The House of Lords, as early as in 1930, in THE SEAHAM HARBOUR DOCK CO. v. CROOK (H.M.INSPECTOR OF TAXES (16 Tax Cases 333) wasconsidering a case of grant from an Unemployment Grants Committee to the dockcompany and the House of Lords held that the grants were not annual profits orgains liable to income-tax. The following observation of the House of Lordsin the Seaham harbour Dock Co. case is relevant for the purpose of this caseas well:- " It was a grant which was made by a government department with the idea that by its use men might be kept in employment, and it was paidto and received by the Dock Company without any special allocation to anyparticular part of their property, either capital or revenue, and was simplyto enable them to carry out the work upon which they were engaged, with theidea that by so doing people might be employed. I find myself quite unable tosee that it was a trade receipt, or that it bore any resemblance to a tradereceipt. It appears to me to have been simply a grant made by the Governmentfor the purposes which I have mentioned, and in those circumstances cannot beincluded in revenue for the purposes of tax." 8. In C.I.T. v. RUBY RUBBER WORKS LTD. (178 ITR 181), a Full Bench of the Kerala High Court, presided over by K.S.Paripoornam,J. (asHis Lordship then was) held as under: " There cannot be any dispute that if any amount is paid by the Government with an express purpose benevolent and beneficial in the publicinterest and the same is received by the appropriate body and it has nothingto do with their trade in the sense of acquiring profits or gains of thetrade, certainly it is not income in the hands of the recipient. Similarly,if a subsidy or any amount is paid for a beneficial purpose, such as keepingmen in employment or starting an industry in a backward area or electrifying aremote area which could not be undertaken but for the grant, such payment,being of a beneficial character, cannot be taxed as income. In applying thisprinciple, necessarily, we have to examine the nature, character and contentof the subsidy given to the assessee." 9. The Supreme Court in SAHNEY STEEL & PRESS WORKS LTD. v. C.I.T. (228 ITR 253) has quoted with approval the decision of the Kerala HighCourt in C.I.T. v. RUBY RUBBER WORKS LTD. (178 ITR 181). We are of theview that the ratio of the decision of the Supreme Court does apply as thegrant was made under a beneficial and benevolent scheme for the welfare andupliftment of weaker sections of the society and the scheme was framed onbenevolent consideration with a view to benefit Adi Dravida community peoplein securing employment. We hold that the amount received by the assessee hasnothing to do with the trade or business of the assessee. It is not areimbursement of salary; it is not made for the normal working of the mill; itis not made for the benefit of the assessee, but paid with a social objectivein mind to achieve a social purpose of providing employment to sociallydepressed class of people to enable them to get employment with a decentsalary affording them some security in life to lead a normal and decent life. The Appellate Tribunal was therefore correct in holding that the amountreceived by way of subsidy under the scheme was capital in nature. The Appellate Tribunal was therefore correct in holding that the amountreceived by way of subsidy under the scheme was capital in nature. 10. Accordingly, the question of law referred to us isrequired to be and is answered in the affirmative, in favour of the assesseeand against the Revenue. No costs. Index: YesWebsite: Yesna.To 1. The Assistant Registrar,Income-tax Appellate Tribunal,Rajaji Bhavan, Besant Nagar,Chennai 600 090 (five copies with records) 2. The Secretary,Central Board of Direct Taxes, New Delhi (3 copies) 3. The Commissioner of Income-tax,Madurai. 4. The Commissioner of Income-tax (Appeals I), Madurai. 5. The Income-tax Officer, Nagercoil.