1. This set of two appeals, which are filed by the revenue, relate to the assessment years 1977-78 and 1978-79, while the cross-objection moved by the assessee relates to the assessment year 1978-79 only. For the sake of convenience both the appeals as also the cross-objection are disposed of by this combined order.
2. The assessee is a public limited company. The common ground raised in both the appeals reads as follows : The learned CIT (Appeals) has erred in law and on facts in deleting additions made on account of grant and subsidy of Rs. 6,36,285 for assessment year 1977-78 and Rs. 19,09,250 for assessment year 1978-79.
The assessee-company received, for the assessment year 1977-78, the following grants and subsidies from the Government of Gujarat during the relevant previous year being financial year ending 31-3-1977 :(i) Grants for Tribal area survey and for Tribal activity 2,67,000(ii) Subsidy for Crafts India 77 Exhibition Rs. 25,000 and other for Bombay Emporium 1,25,000(iii) Subsidy for intensive Handloom Development Scheme 4,10,000 8,02,000 The assessee credited the said amounts to its profit and loss account and at the same time debited a sum of Rs. 6,36,285 being unspent amount out of the said grant to its profit and loss account. Thus, in effect, the assessee took credit of a sum of Rs. 1,65,715, which was the amount spent by the assessee during the relevant year of account. It was explained on behalf of the assessee that the Government of Gujarat had sanctioned the grants and subsidies under various resolutions. The relevant resolutions were placed before the ITO. The ITO observed that a plain reading of these resolutions show that the amounts in question were disbursed to the assessee once and for all subject to the condition that the assessee should produce its account for audit to the Accountant General, Ahmedabad, if required by him. He next pointed out that the assessee was not answerable to the Government regarding unspent balances out of the funds received as grants and subsidies. In this view of the matter, therefore, the ITO held that the sum of Rs. 8,02,000 as aforesaid was the income of the assessee for the year under appeal. The ITO supported his conclusion by relying on the decision of the Supreme Court in the case of V.S.S.V. Meenakshi Achi v. CIT  60 ITR 253, where it was held that subsidies and grants given by the Government to assist a trader in his business, generally speaking, are payments of revenue nature. Applying this test, therefore, the impugned amount was treated as trade receipt as aforesaid.
3. For the assessment year 1978-79, the assessee-company had received a sum of Rs. 19,09,250 as grant and subsidy from the Government of Gujarat. The details of which are indicated hereunder :(a) Subsidy/grant for intensive Handloom Development Scheme 7,86,667(b) Subsidy/grant for carpet weaving centre 1,75,000(c) Subsidy for export promotion 5,000(d) Subsidy for Kutch Craft Research Scheme 3,50,000(e) Subsidy for Shamlaji Camp 75,000(f) Subsidy for Craft Centre, Panchmahal 75,000(g) Subsidy for Shamlaji Museum.
1,85,000 Rs.(i) Subsidy for Adivasi Handloom Centre 1,65,000(j) Subsidy for Paper Machine Centre 7,583 19,09,250 (sic) For this year also, the assessee contended that the said grant/subsidy were not in the nature of income and that the unspent amounts were required to be refunded to the Government. The ITO after going through various resolutions of the Government, for the same reasons as set out for the assessment year 1977-78, treated the entire amount as the assessee's income and brought the same to tax.
4. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). It was contended, on behalf of the assessee, that the entire share capital was fully owned by the Government of Gujarat which has set up the corporation with the primary object of development and encouragement of tribal handicrafts in the State of Gujarat, particularly its backward and undeveloped areas. As the main object of the corporation is to develop and encourage tribal handicrafts by dealing in such articles, the State Government had, during the years under consideration, provided funds to the corporation by way of loans and subsidies with a view that the main object of the corporation was not defeated for want of finance. The said loans and subsidies were granted by the Government for different objects and aims in various resolutions passed by the Government. In some cases the Government had converted subsidies granted earlier into loans. That apart there was a specific stipulation that the amounts of unspent subsidies have to be refunded to the Government in the following year.
Various resolutions in this connection were produced. Thus, on the basis of the resolutions it was pointed out firstly, that the subsidies were granted by the Government for specific object or purpose.
Secondly, the same were required to be utilised only for the said purpose and objects. Thirdly, the unspent subsidies were required to be refunded to the Government and lastly, the assessee received the amounts as subsidy as merely a trustee for the Government who was required to utilise the amount as per the directions of the Government from time to time. It was also pointed out that the assessee had no right over the funds at all. Relying on the decision in the case of Seaham Harbour Dock Co. v. Crook (Inspector of Taxes) 16 TC 333, it was pointed out that unemployment grant made by the Government department was not treated as income. Thus, on the principle laid down in this judgment, it was urged that the grants given by the Government for encouragement of handicrafts in tribal area, which did not relate to the assessee's own business activities, were not exigible to tax as income. The Commissioner (Appeals) observed that for the assessment year 1977-78, the assessee had received a sum of Rs. 8,02,000 out of which a sum of Rs. 1,65,715 was spent and the balance amount of Rs. 6,36,285 was treated as the assessee's income even though a sum of Rs. 30,349 was spent for acquiring assets for the purpose of the scheme.
Similarly, under different schemes, the assessee had received grant totalling Rs. 19,09,250 for the assessment year 1977-78 against which the expenditure incurred worked out to Rs. 5,81,426. The ITO had considered the entire amount of subsidy as receipts without allowing any expenditure. He has, thus, treated the gross amount as income of the assessee for the year. The Commissioner (Appeals) accepted the submission made by the assessee that the assessee was only a medium through which the Government implemented its scheme of encouraging tribal handicrafts industry. The amounts granted by the Government, thus, was for encouraging capital project in form of setting up training centres, museum, etc. Thus, the assessee was only acting in a representative capacity or on behalf of the Government so to say as a trustee qua grants and subsidies granted by the Government. It was fully accountable to the Government and the utilisation of the funds was subject to checks applied by the Government. Thus, the Government had retained control over utilisation of the funds and in such circumstances the said amount could not be treated as trading receipts in the hands of the assessee. After setting out various reasons in detail, the Commissioner (Appeals) concluded thus : 1. The assessee has no control over the funds as the same were to be spent as directed by the Government.
2. The assessee has to account to the Government for the expenditure incurred.
3. The assessee is not entitled to retain the profits accruing from the various schemes.
He, thus, held that the amounts in question did not form part of the assessee's trading receipts and were not taxable as income for the respective years under consideration. The Commissioner (Appeals), thus, deleted the said additions.
5. Being aggrieved, the revenue has come up in appeal before us for both the years. The learned departmental representative relying on the order of the ITO submitted that various grants and subsidies made over by the Government to the assessee were in the nature of income inasmuch as the assessee had credited the amounts to its profit and loss account. Secondly, grants and subsidies were given in order to supplement the assessee's own activities. Therefore, they were in nature of supplementary receipts and as such it could not be divorced from its main business activity. Relying on the decision in V.S.S.V.Meenakshi Achi's case (supra), it was pointed out that when a grant or subsidy is given to a trader by the Government to assist in his business activities, such grants or subsidies assume character of trading receipts and as such are revenue in nature. In effect, various subsidies and grants made by the Government under its various resolutions were intended to meet the loss caused to the assessee in course of its trading activity and, therefore, the amount so paid in order to meet with the losses incurred by the assessee in its own trading activity have to be treated as trading receipts and, consequently, are exigible to tax. Shri B.C. Shah, on the other hand, relying on the order of the Commissioner (Appeals), reiterated the same contentions which we have discussed earlier. It was pointed out that the grants and subsidies were paid to the assessee to carry out the objects specified by the Government in various resolutions. The assessee had no control or domain over the funds in its own right but was accountable to the Government not only in respect of the expenditure incurred but was also required to refund the amounts which had remained unspent. Thus, the assessee was merely a conduit pipe for utilising the Government funds in the manner required by the Government. This was not a case where the Government had sanctioned the grant/subsidy to meet any loss made by the assessee in its trading activity. He, therefore, submitted that the decision of the Commissioner (Appeals) did not call for any interference.
6. We have considered the rival submissions. The short point which arises for our consideration is whether the amounts of grant or subsidy received by the assessee as aforesaid for the respective years under appeal was in the nature of income and thereby exigible to tax. The first point raised by the revenue is that the assessee had credited the amount initially to its profit and loss account and thereafter transferred the unspent balance to its balance sheet as a liability.
Now the mere fact that the amount is credited to profit and loss account would not be conclusive to determine the character of receipt as a revenue receipt. In this connection we refer to the decision of the Patna High Court in the case of Monghyr Electric Supply Co. Ltd. v.CIT 26 ITR 15 in which it is stated thus : Although in the books of account, the company has to treat and has treated the receipt as revenue receipt, it is not binding upon the Court or the income-tax authorities. In determining the question whether the receipt is of a capital nature or of income nature the substance of the matter has to be looked into and the true effect and character of the payment made by the consumers have to be examined.
The Supreme Court in the case of CIT v. India Discount Co. Ltd.  75 ITR 191, 192 have stated "that the receipt being one which in law could not be regarded as income, it could not become income merely because the respondent erroneously credited it to the profit and loss account." Therefore, in the light of these decisions, which we respectfully follow, the submission made by the revenue to treat the amounts as income only on the footing that amount stood credited to the profit and loss account must fail.
7. Now we turn to the main question about the nature and character of the receipts, viz., grants and subsidies. A reference to the following decisions would be relevant :-- 1. In CIT v. Bijli Cotton Mills (P.) Ltd.  116 ITR 60 (SC).
The question arose regarding 'Dharmada' collection made by the assessee according to custom from its customers. It was held that : ... when the customers or brokers paid the amounts to the respondent earmarking them for 'Dharmada', those payments were validy earmarked for charity : in other words, right from the inception those amounts were received and held by the respondent under an obligation to spend them for charitable purposes only, with the result that those amounts were not its trading receipts ; 2. In Bijli Cotton Mills (P.) Ltd. v. CIT  81 ITR 400 (All.).
The question which arose for consideration was as to whether the manufacturer recovering wholesale price from the wholesale dealers and distributing to quotaholder his margin of profit and the undistributed balance was transferred by manufacturer to its profit and loss account could be treated as its taxable income. It was held that the amount which was transferred to the profit and loss account being undistributed balance was not the income of the assessee liable to be taxed. Though the assessee had received the wholesale price, the part representing the ex-mill price alone belonged to it while the balance belonged to quotaholders. It was never intended under the arrangement that the quotaholder's margin of profit should ever form a constituent part of the profits accruing to the assessee and that the assessee should have any title thereto at any stage.
From the outset, the excess over the ex-mill price was impressed with the character of trust money, to be held by the assessee on behalf of the quotaholders. It is well settled that taxability of a receipt is fixed with reference to its character at the moment it is received and that merely because the recipient treats it subsequently in his own account as its own does not alter that character. In coming to this decision their Lordships had considered the decision in the case of Morley (Inspector of Taxes) v. Tattersall  7 ITR 316 (CA) as also in V.S.S.V. Meenakshi Achi's case (supra). The observations made in Morley (Inspector of Taxes)'s case (supra) are set out hereunder : ... The money which was received was money which had not got any profit-making quality about it ; it was money which, in a business sense was the client's money and nobody else's. It was money for which they were liable to account to the client, and the fact that they paid it into their own account, as they clearly did, and the fact that it remained among their assets until paid out, do not alter that circumstance...
The learned Master of Rolls expressed himself in favour of the principles that-- the quality and nature of receipt for income-tax purposes is fixed once and for all when it is received.
3. In the case of Seaham Harbour Dock Co. (supra) the speech of Lord Buckmaster reads as follows : 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 51/2 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 51/2 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.
8. A clear reading of the above decisions would show that the character and the nature of receipt is to be determined right from the inception when the same was received. In other words, if the assessee were to receive the amount for a specific purpose and that certain obligations were attached thereto, it cannot be treated as a revenue receipt chargeable to tax. Secondly, a distinction must be made between grants/subsidy which is received by a trader to fill that hole in his profits and other grant or subsidy. That is to say, if any grant or subsidy is paid to a trader to make good the loss which he has suffered in his profits, the character of such receipt would be of revenue in nature. But when any amount or amounts is or are received de hors the normal trading activity, the same conclusion, in law, would not follow.
Thus, there is an essential distinction between a grant and subsidy received on revenue account to make good the loss and grant the subsidy received for certain specific purpose and the obligation attached thereto.
9. Bearing in mind the above principles, let us revert to the facts of the case. The assessee is dealing in handicrafts and handlooms. It is a company wholly owned by the State Government. Now under the scheme for intensive development of handloom industries, the State Government by various resolutions (copies of which are placed on record) sanctioned various amounts from time to time under certain terms and conditions.
It was not only required to utilise the amounts, which were sanctioned by the Government from time to time, in carrying out the development activities particularly in regard to tribal handicrafts but was also required to return the unutilised portion to the Government when there was a failure to spend it. Secondly, the subsidies were granted with the condition that the same will have to be utilised only for the purposes for which they are given. Any deviation from the scheme or terms and conditions under which the subsidy was given would render the assessee liable for refund of the same to the Government. Therefore, it is clear that the assessee was not only required to utilise the grant and subsidy in the manner laid down by the Government, that is to say, it was under an obligation to utilise the grant/subsidy in the manner directed by the Government from time to time but was also required to refund the unspent balance to the Government. That apart any deviation in utilising the fund for the set purpose, would also make the assessee liable to refund the amount. Therefore, right from the time the assessee received the grant/subsidy till it was utilised or had remained unutilised, there was no control or domain over the funds by the assessee in its own right. The assessee was merely a conduit pipe to canalise various grants and subsidies granted by the Government for certain objectives which were in turn specified by the Government. The character and the nature of the grant or subsidy, therefore, in the light of the above facts, was not in the nature of revenue receipt in order to make up for the loss but the receipt from its very inception was for a set purpose with an obligation attached thereto with regard to its disposition.
Therefore, the said grants and subsidies could not be treated as normal revenue receipts chargeable to tax in the hands of the assessee. In our opinion, therefore, the conclusion reached by the Commissioner (Appeals), which we have set out at para 4 of our order, represents the correct position and we, therefore, see no reason to interfere with the same. The decision of the Commissioner (Appeals), therefore, to exclude the impugned amounts for the two years under appeal is upheld.10. This brings us to consider the cross-objection raised by the assessee in regard to the claim for loss of Rs. 2,86,975 being shortages in various items dealt with by the assessee. The cross-objection, it may be pointed out, relates to the assessment year 1978-79 only. On going through the annual report filed by the assessee-company, the ITO found that the auditors had made certain adverse remarks against certain aspects of the accounts of the assessee. The said remarks stated that there was no physical verification of stocks. Secondly, there was misappropriation of goods in Saputara Emporium as also in Bombay Emporium styled Gurjari.
Similarly there were discrepancies, alterations and erasures in the stock register. The stock registers were not maintained properly from time to time and there was omission to record the stock of Ahmedabad and Delhi Emporium properly in the light of these defects, the ITO concluded that the stocks deficit as disclosed by the assessee was not subject to verification. Therefore, he declined to allow the claim of the assessee for shortage of goods amounting to Rs. 2,86,975.
11. The matter was carried in appeal before the Commissioner (Appeals).
It was contended that even assuming that the stock registers were not maintained properly and that physical verification has not been carried out or that the valuation has not been properly made, the fact that the shortage has occurred due to breakage and pilferage in transport could not be ruled out. The assessee dealt with thousands of items of small articles of fragile nature and loss or breakage was inevitable. Thus, having regard to the value of closing stock which was over Rs. 40 lakhs, the shortage claimed by the assessee was reasonable and there was no reason to disallow the same. It was also explained that the loss arising due to embezzlement or misappropriation was duly debited to the concerned employee's account and the corresponding adjustment was made in the sales account. Therefore, on this score no loss was claimed and the question of allowing the same, therefore, did not arise. The claim of the assessee, therefore, was restricted to losses in transit due to breakage as pointed out earlier. The Commissioner (Appeals) considered this submission but declined to allow the claim of the assessee. He pointed out that the stock reconciliation left much to be desired and admittedly there was no check over the issue of stock to various branches. The actual loss was not established by verification and valuation. In other words, in the absence of necessary proof in support of the loss claimed, the claim of the assessee could not be allowed.
He, therefore, upheld the addition as made by the ITO.12. Being aggrieved, the assessee has come up in cross-objection before us. The main stay of Shri Shah's submission was that having regard to the large turnover and also the large stock held by the assessee, the losses due to breakage in transit or pilferage was inevitable. The assessee was supplying various articles to Emporia at Bombay, Delhi and other places in the country and by very nature of thing it was impossible to maintain a full proof check as desired by the revenue authorities. According to Shri Shah; the proper test was whether the claim for shortage was reasonable having regard to the turnover and the stocks and, therefore, when the claim for shortage was about 4 per cent, it could not be said to be unreasonable and the claim ought not to have been disallowed. The learned departmental representative, on the other hand, relying on the orders of the authorities below submitted that both the ITO as well as the Commissioner (Appeals) have pinpointed the defects in maintenance of stock registers and there was no proof to support the claim for shortage as made by the assessee.
Therefore, in absence of data or material to verify the shortage the claim was rightly disallowed.
13. We have considered the rival submissions. We have no quarrel with the proposition canvassed by Shri Shah that breakage as in transit or pilferage are inevitable in the nature of the business carried on by the assessee. But the material point at issue is whether necessary material or proof has been placed before the authorities below to support such a claim. Now when the records maintained by the assessee are admittedly defective and are not capable of verification in the manner required, it is difficult for us to accept the assessee's claim for shortages on the broad proposition canvassed before us. Even the auditors of the company have not been satisfied with the manner in which the inventory of stocks, etc., have been maintained. Therefore, in view of the inherent lack of details to support the claim for shortages, we are afraid we cannot admit the claim of the assessee. We are, therefore, left with no alternative but to uphold the decisions of the authorities below on this point.
14. In the result, both the appeals as also the cross-objection are dismissed.