1. This appeal is concerned with the question whether a subsidy received by a producer of a feature film is assessable to income-tax.
2. The assessee is an individual earning income from the business of production of feature films. In the previous year ended 31-3-1974, the assessee had produced a feature film in Telugu called 'Marapurani Manihsi'--Production No. 3. According to the accounts of the assessee, the cost of production was Rs. 6,16,060 and with other expenditure, the total outlay was Rs. 13,17,205, which resulted in a gross loss of Rs. 4,44,938 after setting off the receipts, in striking the accounts of that previous year. However, the trading account for the year ended 31-3-1975, showed gross profit of Rs. 4,75,230 which included subsidy received from the Andhra Pradesh Government amounting to Rs. 50,000. In the return for the assessment year 1975-76, corresponding to the previous year ended 31-3-1975, the assessee excluded this amount of Rs. 50,000 and admitted the income of only the balance before setting off the loss carried forward from the earlier years. According to the assessee, the subsidy received was a capital receipt and not liable to income-tax. The ITO did not accept this contention in the view that the receipt of subsidy did not bring into existence any new capital asset and, therefore, it was a revenue receipt and exigible to income-tax. On appeal, the AAC allowed the claim following the decision of the Tribunal, Cuttack Bench, dated 10-10-1977 in IT Appeal No. 979 (Hyd.) of 1976-77 in which it was held that a similar receipt of Rs. 50,000 received by another producer, Chittrakalpana, from the Government of Andhra Pradesh represented a capital receipt and was not liable to income-tax.
3. The revenue is in appeal and relied on the decision of the Madras Bench 'A', dated 27-2-1976 in the case of Smt. Pandari Bai in IT Appeal No. 1674 (Mad.) of 1972-73 where it was held that similar subsidy received from the Karnataka Government was chargeable to income-tax.
Because of the apparent conflict between the decisions of the Madras Bench-A and the Cuttack Bench, the matter has come up for consideration before this Special Bench.
4. In this appeal it was contended on behalf of the revenue that under the terms of the subsidy scheme the assistance given by the Government of Andhra Pradesh went to reduce the cost of production of the film, which was in fact revenue expenditure. It was pointed out that the cost of production of this particular film had been fully amortized in the assessment year 1974-75 and, therefore, the receipt was taxable in its entirety as a revenue receipt. It was contended that the feature film which was produced was treated as stock-in-trade and, therefore, an amount received in respect of expenditure incurring for acquiring stock-in-trade could not be treated as capital receipt. According to the revenue, the intention of the Government to encourage the film industry might have been motivated by certain cumulative advantages, such as developing ancillary industries and employment opportunities, but such an intention could not govern the character of the receipt in the hands of the assessee. It was, thus, argued that the assessment should be restored.
5. On the other hand, it was contended on behalf of the assessee that the decision of the Cuttack Bench should be followed because it had been rendered in respect of the Andhra Pradesh Subsidy Scheme and there was no reason to depart from it. It was pointed out that the grant of subsidy was discretionary and as held by the Delhi High Court in the case of Siddhartha Publications (P.) Ltd. v. CIT  129 ITR 603, a receipt about which the assessee had no right or expectation or any commercial arrangement so that it was only a bounty and not a revenue receipt liable to tax. It was further pointed out that under the scheme there was a review in the light of the progress of the infrastructure development which showed that the subsidy was given for the purpose of capital investment and, therefore, it could not be treated as revenue receipt. It was submitted that in the circumstances, the order of the AAC should be confirmed.
6. On a consideration of the rival submissions, we are of the opinion that the revenue is entitled to succeed. The assessee being a film producer, was in receipt of subsidy from the Andhra Pradesh Government.
The Andhra Pradesh Subsidy to Feature Films Rules, 1970 provides the following conditions for the payment of subsidy: (1) The producer must have the registered office in the State of Andhra Pradesh.
(2) The film produced must be a feature film produced in the State of Andhra Pradesh.
(3) A certificate that not more than 25 per cent of the total length of the film has been shot outside the State 'of Andhra Pradesh.
(4) In computing the total length of the film the length of the film utilised outside the State for recording music shall be excluded till six channel recording equipment is available in the State.
(5) A certificate from a film studio or studios in the State of Andhra Pradesh to the effect that the film has been shot or processed and printed therein.
(6) The entire film is produced in the studios in the locales of the State of Andhra Pradesh.
(7) The raw film required has been purchased to the extent available at any place within the State.
In the relevant previous year the rule further provided that the feature film shall be screened by the Committee and recommended for the subsidy, though later it was given up as redundant because no feature film which had applied for subsidy had been refused and every one of them had been certified by the Film Censor Board. According to the assessee, the conditions for the grant of the subsidy show that it was a capital receipt, while according to the revenue it was a revenue receipt. In order that the subsidy may be treated as capital receipt it must be possible for the assessee to show that the subsidy was designed to meet the cost of any capital asset. The facts of this case show that the subsidy did not meet the cost of any capital asset. The reference to the development of infrastructure is oblique because the Government expected that if the assessee produces the film in the State of Andhra Pradesh, ancillary industries and other facilities would develop. This could be seen from condition (4) which envisages that the recording of music may be done outside the State until facility for such recording comes up in the State of Andhra Pradesh. The development of such infrastructure was not the project of the assessee but the vision of the Government for the future of the State.
As far as the assessee was concerned there was only an invitation to produce a film in the State of Andhra Pradesh using the facilities available in the State of Andhra Pradesh and encourage the development of such facilities for the increase in the production of such films.
Such an encouragement did not involve any capital expenditure by the assessee and admittedly the assessee had not by reason of the subsidy granted by the Government incurred any capital expenditure or set up any infrastructure. Therefore, the undisputed fact is that the subsidy went only to reduce the cost of production of the feature film and it is so exhibited even in the accounts of the assessee. The cost of production of a feature film is acknowledged to be revenue expenditure because the feature film itself is treated as stock-in-trade, while drawing up the trading account. The Income-tax Rules also provide in rules 9A and 9B for amortization of such cost in ascertaining the taxable profit. Therefore, the subsidy which went to reduce such cost of production can only be treated as a revenue receipt. By reducing the revenue expenditure the income of the assessee is augmented and in the present assessment year since the expenditure was nil, the income of the assessee was increased by the amount of the subsidy and was, therefore, liable to be taxed.
7. We are unable to follow the decision of the Cuttack Bench (supra), because it proceeds on the assumption that the subsidy went to reduce the capital expenditure of the assessee by treating the cost of production of the feature film as capital expenditure. As we have seen above the cost of production is only revenue expenditure because the film is treated as trading asset both by the assessee in drawing up the accounts as well as the revenue under the Income-tax Rules. Since, it has not been established by the assessee that the subsidy went to meet any capital expenditure or required the assessee to invest in any capital asset, it is not possible to apply the decision of the Cuttack Bench to the facts of this case. The other contention of the assessee that the subsidy was discretionary and should be treated as a bounty cannot be accepted because, as held by the Madras Bench, the receipt by an assessee who was carrying on a profession must be treated as income from that profession because it was given to assist it in the carrying on of the business. It is obvious that the subsidy was not given out of benevolence but only to meet the additional expenditure that the assessee may have to incur by producing the feature film in the State of Andhra Pradesh with reduced facilities and that the receipt was directly connected with the exercise and the result of the professional activity of the assessee. We are, therefore, convinced that the ITO was right in assessing the subsidy as part of the income of the assessee.
We, therefore, set aside the order of the AAC and restore the assessment order.