1. This appeal by the assessee, a limited company, relates to the assessment year 1974-75. The accounting period followed by the assessee is the calendar year 1973.
2. In computing the total income, an amount of Rs. 14,665 which represented subsidy received from the Government of Andhra Pradesh, stood included. There is no express discussion in the assessment order about the inclusion of this amount and there is no express reference to any claim for exclusion made by the assessee. The assessee, however, appealed and contended before the Commissioner (Appeals) that the ITO had omitted to consider that the incentive granted by the Government was a contribution towards capital and did not form part of the business income and was, therefore, not exigible to tax.
3. The Commissioner (Appeals) has, in paragraph 9 of his order, set out the break-up of the amount of Rs. 14,665 as under:- Refund of sales tax on purchase of machines during the year 1971-72 5,839.93- Refund of sales tax on purchases of raw materials during the year 1971-72 390.79- Refund of sales tax paid on sale of finished goods during the year 1971-72 8,434.98 14,655.70 He proceeded to state that the aforesaid amounts were received as incentive by way of subsidy consequent to two orders of the Government of Andhra Pradesh, i.e., G.O. Ms. No 1225 of the Industries Department, dated 31-12-1968 and G.O. Ms. No. 455 of the Industries and Commerce Department dated 3-5-1971. The Commissioner (Appeals) has set out in his order the contents of the G.O. dated 31-12-1968 and the portion which he considered relevant of the subsequent G.O. dated 3-5-1971. The Commissioner (Appeals) then referred to the contention of the assessee that the amounts received were of the nature of capital grant received from the Government of Andhra Pradesh for development of industry and that the receipts, therefore, were not of income nature. The argument of the assessee was that though the quantum of the grant made by the Government was determined with reference to the sales tax paid, still it was a capital receipt. The assessee had also relied on a letter addressed by the Joint Secretary to the Government of Andhra Pradesh, Industries and Commerce Department, to the Federation of Andhra Pradesh Chambers of Commerce and Industry, dated 13-9-1977, whereby it was stated on behalf of the Government of Andhra Pradesh that inasmuch as the subsidy and incentives were intended to be a contribution towards capital outlay of industrial units, the payments would be in the nature of capital receipt in the hands of the recipient industrialists.
4. The Commissioner (Appeals) set out in his order the provisions of Section 41(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') and, according to him, the assessee's claim for exclusion of the amount of Rs. 14,665 could not be accepted, because the amount was clearly includible in the income of the year by virtue of the provisions of Section 41(1). The Commissioner (Appeals) stated that there was an allowance or deduction on account of sales tax which was allowed in earlier assessment years and during the previous year the assessee had received the remission in respect of outgoings allowed earlier and, therefore, the receipt had necessarily to be deemed to be the income of the year. As the Commissioner (Appeals) had considered that the requirements of Section 41(1) were satisfied, he did not go into the other argument of the assessee that the amounts received represented a capital receipt. He also mentioned that the clarification given in the letter of the Industries Department of the Government of Andhra Pradesh that the receipt should be construed to be capital was of no consequence, because it was not within the realm of the aforesaid Department to issue any such clarification. Finally, the Commissioner (Appeals) concluded by stating that the view taken by him was also in accordance with the ratio of the judgment of the Andhra Pradesh High Court in the case of Panyam Cements & Mineral Industries Ltd. v. Addl.
CIT  117 ITR 770. The inclusion of the amount of Rs. 14,665 was accordingly upheld.5. The assessee appealed to the Tribunal. The assessee contended that the Commissioner (Appeals) erred in considering that the amount of Rs. 14,665 represented profits chargeable to tax under Section 41(1).
According to the assessee, the amount represented a capital grant and the same could not be taken to represent business income of the assessee under any circumstances.
6. When the case first came up for hearing, it was noticed by the Bench that there was an earlier decision of the Hyderabad Bench 'B' in IT Appeal Nos. 1209 and 1210 (Hyd.) of 1975-76 dated 9-8-1978 where the conclusion was that similar receipts could not be treated as trading receipts. There was, however, a subsequent decision in IT Appeal No.238 (Hyd.) of 1978-79 of the Hyderabad Bench 'B' dated 7-8-1979 where a contrary view was taken. In view of the conflict in decisions, the matter was referred to the President of the Tribunal under Section 255(3) for constitution of a Special Bench. A Special Bench was accordingly constituted by the President, and it is in the aforesaid circumstances that the appeal has come to be heard by this Bench.
7. The learned counsel for the assessee submitted that he would put forth his arguments both in support of the proposition that the amount of Rs. 14,665 did not represent receipt of an income nature and also that the provisions of Section 41(1) were not attracted as far as the receipt in question was concerned.
8. The learned counsel took us through G.O. Ms. No. 1225 dated 31-12-1968 of the Industries Department which reads as under: 1. Government have been increasingly concerned about the slow pace of industrialisation in the State and, in particular, the inadequate private sector investment. During the second and third Five Year Plan periods the private sector investment in this State has been only of the order of 3.7 per cent and 5.2 per cent respectively, of the total private sector investment in the country. Even this meagre investment has been concentrated around Hyderabad and Visakhapatnam and, to some extent, Vijayawada. In order to stimulate rapid industrialisation throughout the State, the Government has decided to offer facilities and incentives to entrepreneurs wishing to set up industries as indicated below: (a) Refund of sales tax on raw materials, machinery and finished goods levied by the State Government subject to a maximum of 10 per cent of the equity capital in the case of public limited companies and the actual capital outlay (excluding working capital) in the case of others ; (b) Subsidy on power consumed to the extent of 10 per cent in the case of medium and large-scale industries and 12 1/2 per cent in the case of small-scale industries. This will not apply to the 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 but returned purified to it ; (e) Liability on account, of assessment of land revenue or taxes on land used for establishment of an industry, shall be limited to the amount of such taxes payable immediately before the land is so used ; (f) The following further incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, and K.C, Canal and the Ramagundam Kothagudem area: (ii) grant of financial assistance on a priority basis by the State financing institutions.
2. The above concessions will be available to all new industries licenced or set up on or after 1-1-1969 whose capital (excluding working capital) does not exceed Rs. 5 crores. The concessions under items (a) to (f) in para 1 above will be allowed in each case for a period of 5 years from the date of commencement of production.
3. Any entrepreneur wishing to avail himself of the above concessions will apply to the Director of Industries who will issue the necessary eligibility certificate indicating the various concessions he is entitled to. On the basis of the eligibility certificate, the concerned authority will arrange to grant the concessions. The detailed procedure for the various concessions will be issued separately.
4. Government, however, reserve the right to withdraw at any time all of the concessions mentioned above in relation to a class or classes of industries without assigning any reasons.
5. This order issues with the concurrence of Finance (Expr. Ind.) vide U.O. No. 3567/68 I, dated 29-11-1968.
He emphasised that the incentives given under the aforesaid G.O. were 'to stimulate rapid industrialisation throughout the State' and were granted to 'entrepreneurs wishing to set up industries'. In particular, he pointed out that as far as the incentive falling under Clause (a) was concerned, the quantum of incentive was measured with reference to the sales tax paid, but it was actually given with reference to the capital outlay and the maximum admissible was fixed at a percentage of the capital outlay as far as it related to concerns of the assessee's type. The concessions were also to be available only to new industries set up after 1-9-1969 and was admissible only for a period of 5 years.
It was granted only with reference to eligibility certificates which had to be obtained by the concern.
9. Reference was next made to G.O. Ms. No. 455 of the Industries and Commerce Department of the Government of Andhra Pradesh dated 3-5-1971 wherein certain clarifications by way of explanations, etc., were given. Regarding the incentive available under Clause (a) of the G.O.dated 31-12-1968 which is the incentive now under consideration, it was clarified that the ceiling of 10 per cent of the capital outlay was to be for the whole period of 5 years and was not an annual ceiling. There were also clarifications as to how the value of plant and machinery, etc., was to be worked out. In particular, there was paragraph 6 of the G.O. which reads as under: The subsidies, refunds and other financial concessions granted under this G.O. shall be deemed to be a development grant for each unit.
Therefore, in order to ensure that this development grant is used only for the purpose intended, every application shall be accompanied by an affidavit to the effect that the amounts applied for will be wholly and solely for the development of the unit.
Misutilisation will, apart from other consequences, entails loss of eligibility for the continuance of the subsidies, and other financial concessions for future years under this G.O. and the subsidies, refunds and financial concessions already granted may be summarily recovered.
The point sought to be made was that the Government had categorically stated that the incentives would be deemed to be a development grant for the units and had to be used for the purpose intended and an application for incentive bad to be accompanied by an affidavit to the effect that the amount would be so applied and used solely for the development of the unit. The learned counsel submitted that in the event of misutilisation, the recovery of financial concessions already granted was provided for and, under clause 7, the Director of Industries could inspect the unit and determine whether the conditions for grant of incentive were satisfied and if not, he could direct forfeiture of the same.
10. Under the aforesaid scheme, the assessee was issued an eligibility certificate dated 27-9-1972 (page 45 of the paper book). The assessee was entitled to a maximum subsidy of Rs. 1,75,496 representing 10 per cent of the capital outlay which was described in certificate as 'refund of sales tax' and was for the period of 5 years commencing from the date of production, i.e., 13-12-1971. In pursuance of the aforesaid incentive eligibility certificate, the assessee received from the Director of Industries a letter dated 31-7-1973 sanctioning the amount of Rs. 14,665 of which the break-up was, to repeat, as under: Rs.Sales tax paid on purchase of machinery during the year 1971-72 5,839.93Sales tax paid on purchase of raw materials during the year1971-72 390.79Sales tax paid on sale of finished goods during the year 1971-72 8,434.98 14,665.70 11. The learned counsel submitted that the amount of Rs. 14,665 was, by the letter dated 31-7-1973, placed by the Director of Industries at the disposal of the Assistant Director of Industries for drawal and disbursement to the assessee. In particular, he stated that it was provided that 'the expenditure is debitable to '35-Industries-C.--Grants in aid-contribution schemes included in the IV Five Year Plan--XIV--Grants towards Incentives to Industries' ".
According to him, though in the bifurcation there was reference to refund of sales tax amount paid, it was clear that what was refunded was not sales tax because the expenditure was not debitable to the accounts under which sales tax revenues of the State were credited, but to a separate head which was set out in the letter. He emphasised that this again showed that what was refunded was not actually sales tax, but was an amount which was quantified with reference to sales tax paid. The refund was also not made by the Sales Tax Department as it should have been were it a refund of sales tax simpliciter, but it was a payment made by the Industries Department. He also submitted that the eligibility certificate (page 51 of the paper book) was revised on 30-7-1977 by which the aggregate amount of what was described as refund of sales tax to which the assessee would be entitled would be Rs. 5,30,000 up to 31-3-1975.
12. The learned counsel for the assessee stated that if the amount received was to be considered as refund of sales tax, the provisions of Section 41(1) would admittedly be attracted except in respect of first amount of Rs. 5,839 which was described as a refund in respect of sales tax paid on purchase of machinery. He submitted that sales tax paid on purchases of machinery would necessarily have been on capital account and could never have been allowed as a deduction in earlier years and, therefore, even if a refund was obtained and construed to be refund of sales tax only, since there was no allowance earlier, the amount of Rs. 5,839 could never be brought to tax under the provisions of Section 41(1). Regarding the remaining two amounts of Rs. 390 and Rs. 8,434, he submitted that the aforesaid argument would not be available to the assessee. But, he emphasised, that the amounts in question did not represent refund of sales tax.
13. The learned counsel then went on to urge that the receipts in question were not revenue in nature. The first case relied on was the decision of the Supreme Court in Senairam Doongarmall v. CIT  42 ITR 392 where the Supreme Court observed: ... It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. (p. 397) The learned counsel went on to state that the principle enunciated in the aforesaid case was noticed and reiterated by the Supreme Court in the case of S.R.Y. Sivaram Prasad Bahadur v. CIT  82 ITR 527 where, referring to the observations in the case of Senairam Doongarmall, the Court stated: ... In the course of the judgment, Mr. Justice Hidayatullah, J. (as he then v/as), speaking for the Court, observed: The compensation which was paid in the two years was no doubt paid as an equivalent of the likely profits in those years ; but, as pointed out by Lord Buckmaster in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue  12 TC 427(HL) and affirmed by Lord Macmillan in Van den Berghs Ltd. v. Clark  3 ITR (Eng.
Cas.) 17 (HL), "there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test". This proposition is as sound as it is well-expressed, and has been followed in numerous cases under the Indian Income-tax Act and also by this Court. It is the quality of the payment that is decisive of the character of the payment and not the method cf the payment or its measure, and makes it fall within capital or revenue.
(p. 535) The Court also, in the course of the judgment, referring to the decision in Simpson (H.M. Inspector of Taxes) v. Executors of Bonner Maurice  14 TC 580 (CA), set out the observations of Lord Hanworth, MR., while confirming the judgment of Rowlatt, J. as under: The duty to pay compensation was imposed upon them by the treaty.
The statute does not apply it, and the root of the payment is the duty to pay compensation . . . For withholding this sum, for preventing Mr. Kay, or his executors, exercising the power of disposition over his property, the Germans have been compelled to pay compensation. The way to estimate that compensation or damages--the sensible way no doubt--would be by calculating a sum in terms of what interest it would have earned. That has been done, but the sum that was paid has not been turned into interest so as to attract income-tax to it. It remains compensation and, for these reasons, it appears to me that it is not a sum which attracts or attract income-tax to it. (p. 536) The proposition put forth was that the character of the receipt could not be judged by the measure used for computing the amount payable.
According to the learned counsel, the ratio of the judgment of the Andhra Pradesh High Court in the case of Panyam Cements & Mineral Industries (supra) did not go against the proposition which he was canvassing, viz., that the receipts in the present case were capital in nature. He referred to the facts in that case and submitted that the Andhra Pradesh High Court had expressly stated (at page 776) that the assessee had to use electricity in the manufacture of cement and the subsidy given by the Government had only the effect of supplying electricity at reduced rates. His contention was that in the case of Panyam Cements & Mineral Industries (supra), the result of the subsidy was that the assessee was able to obtain power which was utilised for manufacture (viz., a raw material) at a reduced rate and naturally the subsidy went to swell trading profits which was not the case here.
Adverting to the decision of the Bombay High Court in. the case of Dhrangadhra Chemical Works Ltd. v. CIT  106 ITR 473, it was contended that the proposition laid down by the Bombay High Court was that it was well settled that where subsidies or grants are given by the Government to assist a trader in his business, they were, generally speaking, payments of a revenue nature and they represented supplementary trade receipts and not capital payments although they might be called advances or might even be subject to the contingency of repayment. In the present case, however, it was reiterated that the amount given was not to assist the assessee in its business, but it was given as an incentive for setting up the business and the amounts received further had to be ploughed back for developing and expanding the business. This, according to the learned counsel, was not assistance in the day to day carrying on of the business and the receipt would clearly be capital in nature. The decision of the Bombay High Court in Mehboob Productions (P.) Ltd. v. CIT  106 ITR 758 was next cited and particular attention was drawn to the definition of 'income' which Vimadalal, J. had set out in that decision which was as under: Income is a monetary return expected by the assessee for the labour and/or skill bestowed, and/or capital invested by him ; coming in from a definite source, which need not be a legal source, in the sense that the failure to pay the same need not be enforceable in a court of law ; and excluding a receipt 'in the nature of a mere windfall which, as already stated above, must mean a windfall in regard to its very nature and not in regard to its extent or quantum. (p. 790) According to the learned counsel, the subsidy in the present case could not be construed as a return for capital invested by the assessee. It was a subsidy given with reference to capital investment and was actually returned to the assessee as a portion of the capital itself for ploughing back. The receipt, he contended, was therefore, only a capital receipt. The next judgment to which our attention was drawn was that of Lord Buckmaster in the case of Seaham Harbour Dock Co. v. Crook  16 TC 333.
14. Finally, reliance was placed on Circular No. 142, dated 1-8-1974 of the Central Board of Direct Taxes (Board). The submission was that the circular dealt with the treatment to be accorded in respect of 10 per cent Central outright grant for industrial units to be set up in selected backward districts and the Board had expressly stated that amounts given for helping the growth of industry and not for supplementing profits and which were determined with reference to the capital representing receipts of a capital nature as the subsidy was intended to be a contribution towards capital outlay. The learned counsel submitted that it was settled law that circulars of the Board were binding on the tax authorities and there were express observations to this effect that the authorities concerned were bound to give effect to the circulars issued by the Board, in R.J.K. Ranga Rao v. CET  116 ITR 154, which was a decision of the Andhra Pradesh High Court itself. In terms of the circular also, the submission of the learned counsel was that the receipt in question had to be construed as capital.
15. For all the aforesaid reasons, it was contended, the amount of Rs. 14,665 should be excluded from the total income. The learned counsel expressly stated that the only other ground urged in the appeal relating to development rebate was not being pressed.
16. The learned departmental representative contended that the present was a case where what the assessee obtained was nothing but refund of sales tax and, therefore, the provisions of Section 41(1) clearly applied. Even in respect of the amount of Rs. 5,839 which is described as representing sales tax paid on purchase of machinery, the submission of the learned departmental representative was that the provisions of Section 41(1) would be attracted, because even if the said amount had gone to increase the capital cost of machinery, the assessee would have secured some benefit by way of depreciation, etc., which were allowances, and subsequently a remission was obtained.
17. Referring to the decision of the Andhra Pradesh High Court in the case of Panyam Cements & Mineral Industries (supra), the learned departmental representative referred to the portion of the judgment at page 774 where the High Court had referred to the first contention of the counsel for the assessee in that case, viz., that the power subsidy did not form part of the assessee's income. His contention was that the court had come to the conclusion that the subsidy received in that case was taxable after due consideration of the plea of the counsel that the subsidy was not of income nature. To this extent, he submitted that certain observations in the decision of the Tribunal in IT Appeal Nos.
1209 and 1210 (Hyd.) of 1975-76 dated 9 8-1978 to the effect that the Hon'ble High Court had no occasion to consider whether the receipt was a capital receipt and not of the character of income at all, would require consideration. In particular, reference was also made to the observations at page 777 that when there was refund of electricity charges, the requirements of Section 41(1) were fully fulfilled. In the present case also, he submitted that when sales tax paid earlier was refunded, the provisions of Section 41(1) were clearly attracted. The learned counsel also submitted that even in the case of Panyam Cements & Mineral Industries Ltd. (supra), the subsidy was given for a deal purpose (as observed at page 772) because of the adverse effect of the existing power rates upon the competitive capacity of the local manufacturers as well as because it affected the growth and expansion of industry in the State of Andhra Pradesh. He urged that, as in the present case there also the Government gave the subsidy to ensure amongst other things the growth and expansion of industry in the State and, therefore, the ratio of the aforesaid judgment was squarely applicable in the present circumstances also. The decision of the Gujarat High Court in the case of Motilal Ambaidas v. CIT  108 ITR 136 was next referred to advance the proposition that Section 41(1) was not a charging section and, therefore, it could not be contended for the assessee that the same should be strictly construed. The provision, the learned departmental representative stated, should be read so as to effectuate the intention of the Legislature to make the levy of income-tax effective and to make the machinery of assessment workable. Reliance was placed on the decision of the Bombay High Court in CIT v. Smt. Godavaridevi Saraf  113 ITR 589 to state that where there was a decision of only one High Court on a particular point, that should be followed by the Tribunal. It was, therefore, pleaded that as far as the provisions of Section 41(1) were concerned, the scope of the same should be interpreted in the light of the pronouncement of the Gujarat High Court in Motilal Ambaidas (supra).
18. Referring to the decision in the case of Mehboob Productions (P.) Ltd. (supra), the submission of the learned departmental representative was that in the Bombay High Court case, the assessee could not anticipate the receipt, whereas in the present case there were Government orders by which the assessee knew that it would be entitled to the subsidies and, therefore, there was receipt from an expected source and it constituted income. Adverting to the decision in Dhrangadhra Chemical Works Ltd. (supra) our attention was drawn to the observations at page 481 that where subsidies were granted to assist a trader in his business, they were held to be payments of revenue nature. According to the learned departmental representative, the present subsidy also resulted clearly in assisting the assessee in the carrying on of the business and, therefore, it was of income nature.
Submitting that the subsidy in the present case was by way of refund of sales tax, was relatable to the trading activities of the assessee, and, therefore, they constituted revenue receipts, it was contended that the facts were on a par with those cases where import entitlements received were held to be revenue receipts, such as Agra Chain Mfg. Co.
v. CIT  114 ITR 840 (All.) and Kesoram Industries & Cotton Mills Ltd. v. CIT  115 ITR 143 (Cal.). In the latter case, the learned departmental representative submitted that the Calcutta High Court had expressly stated that the fact that the amount received might be used as capital in the hands of the assessee was irrelevant for considering whether it was a revenue receipt or not (observations at page 147).
19. Another limb of argument, of the learned departmental representative was that the receipt in question was includible in the total income by virtue of the provisions of Section 28(iv) of the Act.
This provision enabled the revenue to tax the value of any benefit or perquisite arising from business or the exercise of a profession and he submitted that the subsidy received was clearly a benefit. He also referred to the decision in CIT v. Swadeshi Cotton Mills Co. Ltd.  121 ITR 747, which was a case of import entitlements, and stated that at a point of time when Section 28(iv) was not on the statute book, the Allahabad High Court still held that the receipt of import entitlements would constitute profits and gains of business within the meaning of Section 28(z) itself.
20. Adverting to Circular No. 142, dated 1-8-1974 on which the learned counsel for the assessee placed reliance, he submitted that the Board by its circulars could not fetter the judicial discretion of taxing authorities, and authority for this was the decision of the Supreme Court in Sirpur Paper Mill Ltd. v. CWT  77 ITR 6. Another decision referred to was that of the Madras High Court in A.L.A. Firm v. CIT  102 ITR 622. Another contention put forth was that the circular was not in force on the first day of the assessment year 1974-75, and, therefore, in any view of the matter, it did not lay down the law to be applied for the assessment year 1974-75 which was now under consideration. Finally, it was submitted that the circular in question did not relate to the subsidy now under consideration and what was laid down by the Board in respect of a different subsidy could not be imported for deciding the nature of the present subsidy.
21. For all the aforesaid reasons, the learned departmental representative submitted that the assessee could not seek for exclusion of the amount of Rs. 14,665.
22. We have considered the contentions of the parties. We would proceed to examine whether what is referred to in the different Government orders as refund of sales tax really partakes of such description. Such examination would also bring out the true nature of the receipts, i.e., whether they would be of income nature or capital nature.
23. G.O. No. 1225, dated 31 12-1968, which spelt out for the first time the reasons which promoted the Government of Andhra Pradesh to grant incentives, speaks of the concern of the Government of Andhra Pradesh about the slow pace of industrialisation and, in particular, the inadequate private sector investment and the urgent need for rapid industrialisation. Incentives were, therefore, to be given to those willing to set up industries. It is clear that the object of the Government was only one in the present case, viz., to give an incentive to those willing to set up industries, i.e., those willing to start industries for the first time. In the case of Panyam Cements & Mineral Industries Ltd. (supra), the High Court has referred to G.O. No. 678 dated 27-4-1961, whereby the Government decided to grant subsidy in respect of power rates, because it had adverse effect on competitive capacity of local manufacturers as well as the growth and expansion of industry in the State. The concession was thus granted for a deal purpose and the purposes were not ex facie separable. The subsidy was primarily to help meet the competition in business and increase the competitive capacity of local manufacturers. Therefore, it had direct relationship to the carrying on of the business from day to day in a competitive way. The Government order in the present case to which we have referred, on the other hand, shows that the sole objective was giving an incentive to set up industries, i.e., starting industries for the first time. This, in our opinion, makes a material difference in that expenditure incurred for setting up industry for the first time would be primarily on capital account. For, as observed by the Supreme Court in the case of S.R.Y. Sivaram Prasad Bahadur (supra) wherein the observations in the earlier, case of Senairam Doongarmall (supra) were reiterated, it is the quality of the payments that is decisive of the character of the payments and not the method of the payment or its measure which makes it fall within capital or revenue.
24. G.O. Ms. No. 455, dated 3-5-1971, in the present case, issued by the Government of Andhra Pradesh, clarified certain issues. It was specifically stated (para 6 thereof) that the incentives would be deemed to be a development grant for each new unit. Safeguards extending up to the withdrawal and even of recovery of incentives already allowed were stipulated by the Government to ensure that amounts obtained by way of incentives were only used for development.
Clause 7 of the aforesaid Government order also enabled the Director of Industries in the event of the unit stopping production to discontinue the grant of incentive.
25. The so-called refund of sales tax to be made was to be restricted under the aforesaid Government orders to 10 per cent of the capital employed, other than working capital, and the ceiling was to be enforced for the period of 5 years as a whole from the date of commencement of production. The original incentive eligibility certificate dated 27-9-1972 worked out the capital as under: Rs. The incentive under consideration, which the assessee was entitled to, could not exceed 10 per cent of such capital, i.e., Rs. 1,75,496, over a period of 5 years. The revised incentive eligibility certificate dated 30-7-1977 gave the computation of capital as under: Rs.Land and building 5,29,000Plant and machinery 47,74,000 53.03.000 The incentive under consideration in the 5 year period subsequent to commencement of production was not to exceed Rs. 53,03,000. The aforesaid facts clearly show that the Government's intention was definitely to give a grant for development and thus to attract investment from entrepreneurs for setting up or commencing new industries. This only reinforces the conclusion that the receipt was capital in nature. The Government further sought to ensure that the new industries would not only be set up but there would be effective industrialisation in that the newly set up industries would show further rapid growth in the subsequent 5 year period and would not fold up. Thus in-built provisions were incorporated for withdrawal or even recovery of the incentive if the grants were misused or not used.
26. The Government had to fix a preliminary criterion for the grant of the incentives. One such criterion was the payment of sales tax. Sales tax was payable in respect of cost of machinery, purchase of raw material and sale of finished goods. By making payment of sales tax as aforesaid a prerequisite for the grant of subsidy now under consideration, the Government ensured purchase of capital equipment which would go to set up the industry, as also the proper functioning of the newly setup industry for an initial period which would make sure that the industry was firmly established and that the industry so commenced did make a real contribution to the industrialisation of the State of Andhra Pradesh and did not prove a mere illusion.
27. Once the preliminary requirement of payment of sales tax was satisfied, the incentive was not restricted to any percentage of sales tax. It, of course, by implication could not exceed the sales tax paid, but the criterion was the capital invested in the new industry (other than working capital employed). The incentive could not exceed 10 per cent of such capital. Thus, the smaller the capital invested in fixed assets, the lower the incentive irrespective of the sales tax that may have been paid. What the assessee got thus as subsidy was a grant with reference to fixed capital in the form of a development grant again to be utilised only for further purposes of growth. The receipt was a contribution by the Government towards capital. It was not a return on capital and this would fall outside the definition of 'income' as set out by Vimadalal, J. in Mehboob Productions' case (supra). The nature of the payment, therefore, was really not refund of sales tax. The Government was not returning any tax which the assessee had paid beyond the requirements of the sales tax statute. The payment made was only a grant which had a prerequisite requirement of payment of sales tax, but which was computed with reference to fixed capital employed. Neither the description in the Government order of the nature of the payment as refund of sales tax on which the learned departmental representative placed reliance, nor the head of account under which the payment was returned on which the learned counsel for the assessee placed reliance, is conclusive of the nature of the payment. It is, therefore, that we have independently examined the nature of the receipt and have come to the conclusion that it did not represent refund of sales tax. In this view of the matter, the provisions of Section 41(1) are not attracted in that the essessee has not obtained any benefit by way of remission or cessation of liability or deduction in respect of an allowance made earlier.
28. For the sake of completeness, we may state that in any view of the matter the sales tax paid relating to the purchase of machinery, even if considered, as refund, will not be hit by the provisions of Section 41(1), because there was no allowance of the same in earlier years, and merely because this amount may have gone to enhance the value of certain capital assets on which depreciation may have been allowed, the provisions of Section 41(1) cannot be attracted. Therefore, the amount of Rs. 5,839 can in no view be brought to tax under the provisions of Section 41(1). The amounts which were received from the Government had to be utilised by the assessee for development. The assessee did not have an unbridled power of disposition over the amounts which were received. In case of non-user for the specified purposes, the Government had powers to recoup the amounts given. [A perusal of the G.O. dated 27-4-1961 regarding grant of refund of power charges which had come up for consideration in the case of Panyam Cements & Mineral Industries Ltd. (supra) shows that there were no such restrictions there.] Even if it was considered for argument's sake that what was received back as far as the remaining items, i.e., Rs. 390 and Rs. 8,423, were concerned was refund of sales tax, there was no benefit by way of remission or cessation thereof, because the return was purely conditional and subject to overriding directions regarding the utilisation.
29. We may add that even if a receipt is not of a revenue nature, if it falls within the provisions of Section 41(1) then it would have to be brought to tax. We have already set out our reasons as to why the provisions of Section 41(1) are not attracted. We would proceed to deal with the remaining arguments of the learned departmental representative.
30. The learned departmental representative had referred to the provisions of Section 28(iv). We have come to the conclusion that the present subsidy was received for setting up the business. It does not arise from carrying on of the business. We have held that it was receipt which was capital in nature. The provisions of Section 28(i), therefore, do not apply in that the amount does not represent profits or gains of any business carried on by the assessee. Therefore, the cases where import entitlements were received and which entitlements were held to be of revenue nature, which were relied on by the learned departmental representative, cannot help the revenue's stand. Coming to Section 28(iv), the amount received in the present case, even if it is considered to be a benefit, cannot be attributed to the carrying on of the business. In the case of Seaham Harbour Dock Co. (supra), the speech of Lord Buckmaster reads as under: My Lords, in September of 1923 the Seaham Harbour Dock Company were contemplating an extension of their dock. They had obtained Parliamentary power to increase their debenture issue by about 75,000, but they found that there was at least as much again that would be required to enable them to carry out their work. In those circumstances they wrote to the Unemployment Grants Committee asking that assistance might be rendered through the medium of that Committee, and as a result of their application, the Unemployment Grants Committee wrote on the 6th November, 1923, a letter which has turned out to be one of the most critical matters in the present dispute. That letter, after stating that careful consideration had been given to the application for State assistance in connection with the extension of the harbour, continued in these words:'I am directed to state that the Committee are prepared to sanction grant equivalent to half the interest at a rate not exceeding an average up to 5 1/2 per cent per annum on approved expenditure met out of loan (not exceeding 1,52,000) for a period of two years from the date or dates on which the payments are made.' I think that the 1,52,000 was arrived at by doubling the 75,000 and making possibly a little further allowance. At any rate, the whole point of the letter is that a grant is to be made on a basis that is to be determined by considering what is half the interest paid on the average for the loans for the execution of the work, with a limit of 5 1/2 per cent. Moneys were accordingly paid by the Unemployment Grants Committee in pursuance of that letter, and it is sought now to include the receipt of those moneys as part of the revenue of the Dock Company for purposes of assessments to income-tax.
Now I do not myself think that the matter can be put more succinctly than it was put by Mr. Hills when he said: 'Was this a trade receipt ?' and my answer is most unhesitatingly: No. It appears to me that it was nothing whatever of the kind. 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 paid to and received by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. I find myself quite unable to see that it was a trade receipt, or that it bore any resemblance to a trade receipt. It appears to me to have been simply a grant made by the Government for the purposes which I have mentioned, and in those circumstances cannot be included in revenue for the purposes of tax.
In the present case also, the grant made by the Government is simply one for setting up the business so that the pace of industrialisation in the State of Andhra Pradesh could go up and would, therefore, be capital in nature.
31. Here again, we may add that even if for argument's sake the amount given is considered to arise from business within the meaning of Section 28(iv), since what is given is a cash subsidy, the provisions of Section 28(jv) will not be attracted in view of the terminology used, viz., 'whether convertible into money or not' in the aforesaid provision when referring to the benefit, in the light of the decision of the Calcutta High Court in the case of CIT v. Kanan Devon Hill Produce Co. Ltd.  119 ITR 431 and of the decisions of the Madras High Court in CIT v. G. Venkataraman  111 ITR 444 and CIT v.Manjushree Plantations Ltd.  125 ITR 150.
32. The circular of the Board dated 1-8-1974 on which the learned counsel for the assessee relied on, reads as under: 1. The Board had occasion to consider whether the amount of subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme for industrial units to be set up in certain selected backward districts/areas would constitute revenue receipt or capital receipt in the hands of the recipient for the purpose of income-tax.
2. I am directed to say that the payment of subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits. Under the scheme the quantum of subsidy is determined with reference to the fixed capital and not the profits. The working capital has been specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of 5 years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient.
3. Contents of this circular may kindly be brought to the notice of all the officers working in your charge.
The argument of the learned departmental representative was that the circular was not in force on the first day of the assessment year 1974-75 and further that it related to Central Outright Grant of Subsidy which was a different subsidy from that which obtained in the present case. According to him, therefore, the circular was not binding on the ITO and, in any event, the circular could not fetter his judicial discretion. There is the Full Bench decision of the Kerala High Court in CIT v. B.M. Edward, India Sea Foods  119 ITR 334 which sets out the effect of the circulars. The Court, after referring to various pronouncements of other High Courts and the Supreme Court, has observed that there may be circulars which affect certain important rights in regard to assessment of the assessee apart from administrative matters and the provisions of Section 119 contemplate such instructions being issued by the Board. This decision was considered by the Kerala High Court in Peria Karamalai Tea & Produce Co. Ltd. v. CIT  124 ITR 899 and the effect of the ratio is that what has to be considered was whether a circular is in force on the date when an assessment is made. In the present case, the assessment was made only on 22-9-1977 and on that date the circular dated 1-8-1974 was in force. We have already set out the circular. For certain criteria as mentioned therein, the Board came to the conclusion that the receipt in question would be capital in nature. We have independently come to the conclusion earlier that the receipt in the present case is capital in nature. But, for the sake of completeness, we would examine whether the subsidy in the present case satisfies the criteria mentioned in the circular of the Board. We find: 1. The subsidy in the present case has primarily been given for helping the growth of industry and not supplementing profits. This is clear from the Government orders of the Government of Andhra Pradesh dated 31-12-1968 and 3-5-1971 which we have discussed at length earlier.
2. The subsidy is determined in the present case with reference to fixed capital and not the profits. This is also clear from the contents of the aforesaid Government orders.
3. The working capital has been specifically excluded in computing the limit of the subsidy. The 10 per cent limit on capital in the aforesaid Government orders, specifically excluded working capital.
4. It has been ensured that the unit must be in production for at least 5 years and this is evident from clause 7 of the G.O. dated 3-5-1971.
33. The conditions on which the Board felt satisfied that the subsidy referred to in the circular of the Board was a capital receipt are fully satisfied in the present case also. The nomenclature of the subsidy as referred to in the Board's circular, viz., the Central Outright Grant being different from the name of the present subsidy, therefore, loses all significance. The criterion in the two cases for the grant of subsidy is so identical that it would, in our view, preclude even an argument to attempt a distinction between the conditions governing the two subsidies. It would follow that if the subsidy in the first case according to the Board's circular was capital in nature, the subsidy in the present case received would also partake of the same nature. All that we would say is that the decision of the Board also about the nature of the subsidy in such cases is in conformity with the conclusion which we have independently arrived at on the facts of the present case.
34. We have, therefore, to come to the conclusion that the ratio of the judgment of the Andhra Pradesh High Court in the case of Panyam Cements & Mineral Industries Ltd. (supra) will not be applicable in the present case for the reasons which we have set out in the course of our order relating to the different aspects thereof. The assessee succeeds in the contention that the amount of Rs. 14,665 received from the Government of Andhra Pradesh will not fall to be included in the total income.
35. The appeal is allowed in part, as one other ground urged relating to grant of development rebate was not pressed.