1. The assessee appeals. The assessment year is 1978-79, the accounting year being the year ended 31-12-1977. The assessee, a company, incorporated on 1-7-1974, is a new industrial undertaking situate at Thiruvanrniyur and in nature a small-scale unit manufacturing tappets, can shafts, etc. During the year of account the assessee received from the State Electricity Board two payments, the real nature and character of which we shall later advert to on the apparent and ostensible ground that it is a refund of current charges paid for the period 1-2-1975 to 30-9-1975 ; along with a letter dated 7-7-1977-Rs. 1,23,300.17, along with a letter dated 30-10-1977- Rs. 1,76,872.88=Rs. 3,00,173.05.
2. The assessee then worked out that a sum of Rs. 2,32,794 is relatable to the earlier accounting years and that the balance of Rs. 67,379 is relatable to the relevant accounting year ending 31-12-1977. It would appear that if the assessee had not been allowed any concessional rate for current consumption, the assessee will have to pay in the current accounting year a sum of Rs. 3,26,828 as current charges. The assessee had got a refund of Rs. 67,379 for the current year and the benefit by way of concessional tariff enjoyed for October to December 1977 was Rs. 8,676.04, meaning thereby that the assessee would have to pay this amount of Rs. 8,676.04 more had it been made to pay the current charges at the normal tariff for October to December 1977. So the total of the two figures came to Rs. 76,055. So the balance payable for the current period was Rs. 2,50,773 (Rs. 3,26,828 - Rs. 76,055). So in the preparation of the profit and loss account which showed a net profit of Rs. 3,63,146 what the assessee did was to treat Rs. 2,32,794 as profit by way of refund and to debit only Rs. 2,50,773 as current charges for the relevant accounting year. In the statement of adjusted total income for Rs. 2,03,440, the assessee claimed before the ITO that a sum of Rs. 2,32,794 received by way of refund is not revenue receipt but only capital in nature and, therefore, not taxable. Later, in a revised statement filed before the ITO, the assessee claimed Rs. 76,055 also as a capital receipt. But the ITO, with whom the Commissioner (Appeals) agreed, held that Section 41(1) of the Income-tax Act, 1961 ('the Act'), would apply to the facts of the case though admittedly on the face of the record that provision did not apply at least to Rs. 76,055 of the current year. So the authorities held the amount to be taxable income. Hence, the appeal by the assessee.
3. The assessee cited a Special Bench decision of the Hyderabad Bench of the Tribunal in the case of Sahney Steel & Press Works Ltd. v. ITO  1 SOT 316 and argued that what was received was subsidy from the Government, capital in nature, given in the form of refund of current charges, which refund process was only a method of giving the subsidy and the concessional rate for current charges is only a formula to determine the quantum of subsidy available and that, therefore, the receipt was in pith and substance a contribution by the Government towards capital. It was also argued by the assessee that this is on a par with the subsidy covered by the Board's Circular No. 142, dated 1-8-1974, published in  95 ITR (St.) 151 where it is laid down that Central Outright Grant of Subsidy Scheme, 1971, is capital receipt and that the scheme under which concessional rate in electric current was given to the assessee was primarily given for helping the growth of industries and not for supplementing their profits and that the subsidy is intended to be a contribution towards capital outlay of the industrial unit. The departmental representative cited in Panyam Cements & Mineral Industries Ltd. v. Addl. CIT  117 ITR 770 (AP) and relied on the commentaries at page 146 of Kanga and Palkhivala's Law and Practice of Income-tax, Seventh edition, Vol. 1, where it is said that subsidies or grants are, generally speaking, payments of a revenue nature and also Section 28 of the Act.
4. We are first to understand and appreciate the circumstances under which the assessee got these amounts. In a pamphlet styled 'SIPCOT'- Spectrum of services, published by the State Industries Promotion Corporation of Tamil Nadu Ltd., it is stated as follows : The State Industries Promotion Corporation of Tamil Nadu Ltd. (SIPCOT) was set up in 1971 as a public limited company wholly owned by the Government of Tamil Nadu with the specific objectives of playing a catalytic role in the promotion and development of medium and major industries and to hasten the industrial dispersal in backward and underdeveloped areas of the State. The Corporation commenced its activities in January 1972 with a comprehensive promotional programme designed to stimulate enterpreneurship. Ever since SIPCOT has been playing its role in the promotion and development of medium and major industries in Tamil Nadu. SIPCOT's role is to plan, promote and develop medium and major industries and its promotional activities comprise of the following : 1. Provision of financial assistance on liberal terms to medium and major industries, under IDBI Refinancing Scheme.
2. Implementation of a package of incentives for the benefit of entrepreneurs.
3. Development of potential growth centres and provision of developed lands at reasonable cost on easy payment terms.
5. This scheme of concessional tariff in electric current charges to industries under which the assessee got the money back, falls under item 2-Implementation of a package of incentives for the benefit of entrepreneurs. There are six types of incentives in item 2 of which the concessional power tariff (HT) falls under the sixth division of item two. It is as follows : (a) Concessional Power Tariff (HT) : New industries set up anywhere in Tamil Nadu are charged concessional power tariff for the first five years of working and the full tariff is payable only from the sixth year onwards as follows : In addition, new industries to be set up in any of the selected backward taluks of the State are entitled to a further reduction of 15 per cent in tariff. A list of eligible backward taluks for this concession is given below....
6. It may also be noted that the Central Outright Grant of Subsidy Scheme, 1971, which is the subject-matter of Circular No. 142 falls under the third division of item 2 which is as follows : Under the Central Outright Grant of Subsidy Scheme of 1971 new industrial units and expansion/modernisation/diversification units/schemes of the already existing industries to be set up/taken up in any one of the 33 notified backward taluks mentioned below will be eligible for Central Government subsidy equivalent to 15 per cent of the total Capital Investment...
7. In Circular No. 142 referred to above it is stated that the subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits and that the subsidy is intended to be a contribution towards capital outlay of the industrial unit. It is to be further noted that the package deal contains six different items of subsidies each different in character and different also in the extent of its application. It is not as if the assessee is entitled at one and the same time to financial assistance and also concessional tariff. There is no case that the assessee had received other categories of incentives from this package deal. Each incentive is distinct and separate in character. The first incentive in the package deal is subsidy for project report and studies. The second incentive is interest-free sales tax loan for medium and major industrial units set up in certain specified areas except in urban towns with a population of one lakh and more and in Madurai and Tiruchirapally urban agglomeration with 8 km. belt areas.
Under this incentive certain industries specified are also not eligible for this loan like textile industry, sugar industry and cement industry, etc. The third incentive ' is the Central investment subsidy already referred to as the Central Outright Grant/ Subsidy Scheme of 1971, referred to in the Board's Circular No. 142. The fourth is State investment subsidy for small-scale industries in certain areas and in certain taluks. The fifth is the special concessions to Scheduled Caste and Scheduled Tribe entrepreneurs. The sixth is the concessional power tariff. By the time the administrative machinery decided to grant the incentive of concessional power tariff to the assessee, it had already paid the current charges in full. That is why the electricity board had to refund the amount. The letter by which the refund of Rs. 1,76,872 was intimated to the assessee clearly shows that the refund was under the sixth division of incentive specified in item 2.
8. If one of the incentives in the package industries offered by the SIPCOT is construed in the Circular No. 142 as a subsidy primarily given for helping the growth of industries and not for supplementing their profits and that it is intended to be a contribution to capital outlay of the industrial unit, there is no reason to think that the other incentives of concessional tariff is not for the growth of industries but for supplementing the profits. It is only reasonable to give the same interpretation to all the incentives. All these incentives have the same object. All these intentives are intended to achieve the same goal and the same object. If we accept the position that this incentive of concessional power tariff like the one specified in the circular also is primarily given for helping the growth of industries and not for supplementing their profits and that the subsidy is intended to be a contribution towards capital outlay of the industrial unit then all other subsidiary or minor items of dispute in this case resolves itself without much efforts and any difficulty. The line of thinking that concessional tariff was given only to reduce the cost of production and earn more profits have to be discarded because the object of the incentive is contribution towards capital outlay.
There is also no meaning in thinking that it is to reduce the cost of production or supplement the profit. If cost of production is reduced, it does not always mean that profits will necessarily go up because the sale price also may have to be proportionately reduced. Further, there is no necessity also to subsidise the cost of production because it is not as if it is given only to a sick industry which is unable to withstand competition from outsiders. The grant of this incentive is not linked either with productivity or profitability. All the new industry irrespective of its scope of making profit is given the concessional tariff. That only shows that it is an invitation and inducement to industries to establish itself in Tamil Nadu. Such invitations and inducements by way of grant of concession are always understood in trade, commerce and industry as capital in nature.
9. It is an established principle that 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 which makes it fall within capital. We understand the object of this incentive is also the same like the one in the circular. What is done is that, instead of the Government paying to the assessee a certain amount of money, the method of process or modus operandi devised to implement the grant of this incentive No. 6 in item 2 is to allow the assessee to retain a certain amount of money with them which amount is the difference between normal and concessional tariff. Otherwise, the assessee will have to pay the normal tariff and wait to receive cash subsidy from the Government.
That is a tidious process. So the concessional rate has to be understood as a measure or method to determine the quantum of subsidy.
The method of 'concessional tariff where the assessee pays concessional rates has to be on piercing the veil to ascertain the pith and substance and the real character construed as a transaction where the assessee pays normal tariff and the Government pays a certain amount of subsidy for construction towards capital outlay. In this case the method of the assessee paying concessional rates failed to work for a certain period on account of some administrative reasons. So the assessee for that period paid the normal tariff. So the Government had to pay the subsidy in cash. That payment was routed through the electricity board which adopted the form and language of refund of a portion of the normal tariff. So it becomes clear that it is not because of cessation of liability that the electricity board paid the amount to the assessee. It was because of certain other extraneous force of SIPCOT subsidy that the board had to pay back this amount.
That refund is Only the form. The substance is that the Government wanted to pay the subsidy which is to be measured in terms of difference between normal and concessional tariff rates. So it becomes clear that it is not at all a payment under Section 41(1). If it is not such a payment then it follows that it is a capital receipt. If concessional tariff and the refund is not construed in this style as a measure and method then it will be in conflict with the object of the incentive of concessional tariff which, we repeat, following the principles in the Board Circular, is helping the growth of industries and contribution towards capital outlay.
10. Therefore, we hold that Rs. 3,00,173 received as well as Rs. 8,676 saved by concession in the aggregate Rs. 3,08,849 is capital receipt not taxable as income.