V. Bhargava, J.
1. The two questions that have been referred by the Income-tax Appellate Tribunal for opinion to this Court are :
1. 'Whether the subsidy of a sum of Rs. 89,791/- paid by the Government of India to the assessee company during the present accounting period is liable to be assessed as income, profits or gains of the assessee's business? And
2. Whether this sum of Rs. 89,791/- is in the nature of a refund of the additional excise duty levied and paid by the assessee during the year under consideration?'
2. The assessee is a limited company carrying on the business of! manufacturing sugar. It appears that, in the relevant accounting period ending on 30-10-1947, relating to the assessment year 1948-49, certain increases in the existing wage levels of workmen prevailing in the sugar factories in U. P. and Bihar, were recommended by the Labour Wage Inquiry Committee, These recommendations were accepted by the Governments of U. P. and Bihar so that the Government of U. P. ordered the sugar factories, situate in U. P. to pay wages to the workmen at the enhanced rates with retrospective effect from 30-9-1946. The order was passed sometime in the month of February, 1947.
In order to implement this demand of the U. P. Government, the sugar factories demanded proportionate compensation either in the form of increase in the price of sugar or in the form of subsidy by the Government of India. The Government of India, after consultation with the Governments of U. P. and Bihar, decided to accept, in principle, the claim of the sugar factories in the U. P. and Bihar for compensation and to pay such compensation in the form of a subsidy to all sugar factories in these two provinces. The payment of the subsidy was agreed to be at rate of 9 annas per maund to each sugar factory in the two provinces on quantity of sugar actually produced by each factory during the sugar season 1946-47, which covers the period from 1-12-1946 to 30-11-1947.
Having directed this payment, the Central Government had to decide where the amount for this payment was to be drawn from and it was laid down that this charge was to be met out of the proceeds of the additional excise duty levied under the Sugar (Temporary Excise Duty) Ordinance, 1946, which had been continued in force by the Sugar (Temporary Excise Duty) Act, 1947. In accordance with this direction of the Central Government, a sum of Rs. 89,791/- was paid to the assessee company. The assessee company claimed that this sum of money received by it was not income arising from business and was a casual receipt, so that it was exempt from the liability to income-tax under Section 4 (3) (vii), of the Income Tax Act.
The Tribunal rejected this contention on two grounds; firstly, both the members of the Tribunal agreed that this sum was income of the assessee liable to tax under principle laid down by the House of Lords in the case of Pontypride and Rhondda Joint' Water Board v. Ostime (H. M. Inspector of Tax), 1946 14 ITR 45 (Sup) (A) secondly; One of the members of the Tribunal rejected the plea of the assessee on one additional ground which was that this sum was in the nature of a refund of the additional excise duty which had been levied and had been paid by the assessee company during the accounting year in question. The assessee thereupon made an application under Section 66 (1) of the Income-tax Act, for a reference to this Court and the Income Tax Appellate Tribunal has now referred the two questions, mentioned above, for our opinion.
3. From the facts given in the statement of the case, which have been reproduced above, it appears that, when the sum of Rs. 89,791/-was paid by the Government of India to the assessee company, it was described as being a payment in the form of subsidy to the assessee company. Since it was described as a subsidy by the Government of India itself, it was contended on behalf of the assessee that it could not be a revenue receipt, which could be held to be income arising from business, and that the true nature of this receipt was that of a voluntary gift by the Government of India to the assessee company.
The general proposition that no subsidy paid by a Government can be held to be income arising from business was not, in that form, put forward on behalf of the assessee, though learned counsel for the assessee urged that in this particular case the payment of additional wages to the workmen was made by the assessee company under the orders of the U. P. Government, whereas this subsidy was paid to the assessee by the Government of India, which was distinct and separate from the U. P. Government, so that the two transactions cannot be related to each other and this payment must be held to be a gratuitous payment by the Central Government irrespective of ether circumstances.
In our opinion, in judging the nature of a receipt, we have to take into account all the circumstances under which the assessee may have received the money and particularly the purpose for which it was given to the assessee. In the present case, the facts show that the assessee company had been directed to implement the decision of the U. P. Government under which additional wages had to be paid to the workmen with effect from 1-10-1946, and thereupon the assessee company, in conjunction with other companies which had received similar directions demanded proportionate compensation either in the form of an increase in the price of the sugar or in the form of subsidy by the Government of India.
Thereafter, the decision of the Government of India was to pay such compensation, but the payment was to take the form of a subsidy. Clearly, the question of payment of this subsidy arose because the assessee had been called upon to incur extra expenditure on wages of the workmen, which was an expenditure that the assessee could and did deduct from its business receipts for the purposes of calculating the profits and gains from the business liable to income-tax. The effect of that extra payment of wages was that the taxable profits and gains of the assessee company were reduced to the extent of the extra payment made to the workmen.
Under the circumstances, the company demanded compensation for this loss of profit and what the Government of India accepted was the principle of compensating the company for this loss of profit. The payment was, no doubt, made in the form of subsidy, but it is clear that it was made specifically with, the object of compensating the company for the loss of certain profits arising to the company from being compelled to pay additional wages to the workmen.
This was, therefore an income or receipt by the company which was inseparably connected with the conduct of the business of the company and it arose from that business. If the company had not carried on the business of purchasing and selling sugar and had not been called to pay additional wages to its workmen, there would have been no question of such a subsidy being paid to the company by the Government of India.
The payment was directly the result of extra expenditure incurred by the company for the purpose of earning its profits and consequently it is a payment which arose from its business. In the circumstances, this amount must be added to the revenue receipts of the company accruing from its business and is in this way liable to be included in the taxable income of the company.
4. In support of his contention that the view, expressed by us above, does not apply to the case of the assessee company, learned counsel for the assessee company relied on a decision of the House of Lords in the case of The Seaham Harbour Dock, Co. v. Crook (H. M. Inspector of Taxes). (1932) 16 Tax Cas 333 (B). That was a case where a dock company, which was contemplating an extension of its dock, applied to the Unemployment Grants Committee for financial assistance. The Committee consented to sanction certain grants from time to time, as the work progressed and was paid for. The payments were made on the particular basis which was sanctioned, and these payments were made several times a year, for some years. It was held that the payments were not annual profits or gains liable to income-tax.
The two main judgments in this case were delivered by Lord Buckmaster and Lord Atkin, both of whom held that the payments, which had been made to the dock company by the Unemployment Grants Committee, were not annual profits or gains liable to income-tax as they were not trading receipts at all. The decision in that case came for consideration before the House of Lords again in, 1946 14 ITR 45 (Sup) (A) cited above, where Lord Thankerton pointed out that in that earlier case what Lord Buck-master had said was:
'It was a grant by a Government Department with the idea that by its use men might be kept in employment. It was not a trade receipt.'
Lord Thankerton also noted that what Lord Atkin had said was,
'When received, they were received by the appropriate body not as part of their profits or gains or as a sum of which went to make Up the profits or gains of their trade.'
Lord Atkin had, in fact, gone on to hold,
'It is a receipt which is given for the express purpose which is named, and it has nothing to do with their trade in the sense in which you are considering the profits or gains of the trade.'
These views of Lord Buckmaster and Lord Atkin clearly show that, in that case, the receipts by the dock company were held not to be profits or gains of the business because the money had been paid to the dock company with the specific) purpose of carrying out an approved scheme to relieve unemployment. The payment in that case was, therefore, not with the object of enabling the dock company to carry on its business, to meet its trading liabilities, or to cover its losses arising out of the business. The payment was for a purpose which was clearly distinct and separate from the purpose with which the business was carried on by the dock company and it was, in these circumstances, that it was held not to be a trading receipt.
In our opinion, the facts of the case before us markedly differ from the facts dealt with in that case. In the case before us, the subsidy was paid with the specific purpose of compensating the assessee company for additional expenditure which the assessee company had to undergo, because of the directions of the U. P. Government to pay additional wages to their workmen who were employed in the business which was carried on by this company for earning profits. This is, therefore, a case where payment was for purposes of the business of the company and not for a separate or distinct purpose.
The case_ before us is very much similar to that dealt with by the House of Lords in 1946 14 ITR 45 (A). In the latter case it was held that the payment from the public fund had been made in order to assist the assessee in carrying on its trade or business of under-takers and consequently the payment was held to be a taxable trading receipt.
5. Very similar is the decision in the case of Smart (H. M. Inspector of Taxes) v. Lincolnshire Sugar Co. Ltd., (1936) 20 Tax Cas 643 (C). In that case the payment was made in order to enable the assessee company to pay for their raw material so that it was with the very object of enabling them to meet their trading obligations that the evidence in dispute had been made.
6. A similar case decided in India is that of In re Ahmadpur Katwa Rly. Co. Ltd., : 3ITR277(Cal) (D). In that case, under an agreement between the Secretary of State for India and the assessee, a subsidy was paid by the Government to make up deficiency in profits so as to enable payment of interest which, under certain stipulations, the assessee had to pay on the paid up capital. It was held that the subsidy paid to the company was income of the company and was liable to be taxed in spite of the fact that it was intended to be paid automatically to the share-holders.
7. Finally we may refer to a decision of the Supreme Court in the case of Raghuvanshi Mills Ltd., Bombay v. Commr. of Income-tax, Bombay City, 0043/1952 : 22ITR484(SC) (E). In that case the assessee company had received a certain amount from the Insurance Company as a result of fire. The amount was paid on account of loss of profits. Their Lordships of the Supreme Court holding that it was taxable income remarked:
'The assessee is a business company. Its aim is to make profits and to insure against loss. In the ordinary way, it does this by buying raw material, manufacturing goods out of them and selling them so that on balance there is a profit or gain to itself- But it also has other ways of acquiring gain, as do all prudent businesses, namely by insuring against loss of profits. It is indubitable that the money paid in such circumstances is a receipt and in so far as it represents loss of profits, as opposed to loss of capital and so forth, it is an item of income in any normal sense of the term. It is equally clear that the receipt is inseparably connected with the ownership and conduct of the business and arises from it. Accordingly, it is not exempt.'
8. The principle laid down by the Supreme Court in that case is clearly applicable to the case before us. In the present case, as a result of complying with the directions issued by the U. P. Government to pay additional wages to the workmen, there was loss of profit to the assessee company. In order to make up this loss, the assessee company made a representation to the Government of India for being allowed to earn higher profits, if the price for sale of sugar be increased as requested. In the alternative, compensation was claimed in the form of a subsidy. It was this latter prayer which was accepted.
The payment by the Government of India was thus specifically for the purpose of covering loss of profits of the assessee company and it was for that very purpose that the subsidy had been demanded. Consequently, this amount was received as a trading receipt and must be held to be income arising from the business of the assessee company so that it is taxable as such and Section 4 (3) (vii) of the Income Tax Act is inapplicable.
9. The result is that the first question must be answered in the affirmative.
10. So far as the second question is concerned, in view of our answer to the first question, it! is not at all necessary to answer that question, though we may incidentally say that we are unable to see how this payment of Rs. 89,791/- to the assessee company could be held to be a refund of additional excise duty levied on and paid by the assessee, when there is no finding of fact that this amount or an amount greater than this amount was actually realised as excise duty from the assessee and when the circumstances, under which the payment was made, clearly show that this amount was paid as compensation in respect of additional wages paid by the assessee company and no questions at any stage had arisen of refunding the excise duty already realised. The mere fact that the compensation was paid out of the proceeds of the additional excise duty cannot convert it into refund of excise duty.
11. Let the record be returned with ouropinion as above. Learned Counsel for the department will be entitled to the cost for thisreference, which we fix at Rs. 250/-.