1. The main issue in this appeal is whether the subsidy received by the assessee from the State Government could be considered as income for the assessment year under consideration.
2. The assessee, a registered firm, has a business of manufacture and sale of tiles. It would appear that the assessee has applied to the director of industries for a payment of subsidy which is available to industries started in backward areas under GO Ms. No. 224, dated 9-3-1976. The subsidy was received by the assessee on 7-4-1979 amounting to Rs. 66,475. This falls within the accounting year.
3. The abovementioned GO is in supersession of two earlier GOs, GO No.1225 of 31-12-1968 and GO No. 455 of 3-5-1971. The earlier two GOs have been referred to by the Andhra Pradesh High Court in the case of CIT v.Sahney Steel & Press Works Ltd.  152 ITR 39. In the earlier two GOs, the Government have granted subsidies to industrialists wishing to set up new industries. The amount was equivalent to the 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 equity capital.
Subsidy was also given on power consumed for production to the extent of 10 per cent in the case of medium- and large-scale industries and 12 1/2 per cent for small-scale industries.
4. GO Ms. No. 224 with which we are concerned states that in the light of the developments and the needs of the present situation, the Government have been considering revision of the earlier incentives so as to more effectively serve the purpose of bringing about rapid industrial growth in the State and along with that to serve the purpose of bringing about this growth in all parts of the State with particular attention to backward taluks. GO Ms. No. 224 superseded the earlier two GOs The new incentives are offered to all new industries which will go into regular production on or after 1-1-1976. Those industries which go into substantial expansion, i.e., add fixed capital cost of a value not less than 25 per cent of the undepreciated value of the existing units capital cost would also be eligible. The actual paragraph dealing with the grant of subsidy is quoted below: A. Investment subsidy: Under this scheme, entrepreneur setting up new industrial units and/or effecting substantial expansion of the existing units will be eligible for investment subsidy on the fixed capital cost (i) at 10 per cent of the fixed capital cost subject to a ceiling of Rs. 10 lakhs in all the areas which have been declared as backward under the six point formula by the Government (vide Annexure 1) and excluding those covered by the Central Subsidy Scheme or the list of Scheduled (Tribal) areas.
(ii) At 20 per cent of the fixed capital cost subject to a ceiling of Rs. 15 lakhs in all the Scheduled (Tribal) areas (vide Annexure II). In such Scheduled (Tribal) areas where Central subsidy is admissible, the balance to make up the total of 20 per cent will be given by the State Government.
No investment subsidy is admissible in the areas not declared as backward either under the central subsidy scheme or under the six-point formula including the Municipal limits of Hyderabad and Secunderabad, Vijayawada and Visakhapatnam.
The investment subsidy is admissible provided the fixed capital cost on land, buildings, plant and machinery does not exceed Rs. 1 crore.
Cases where fixed capital cost exceeds Rs. 1 crore can be considered in exceptional circumstances on merits based on the criteria of relevance of the industry to the economy of the area and subject to a ceiling of Rs. 10 or 15 lakhs, as the case may be.
5. As stated earlier, the assessee had applied for incentive and was granted Rs. 66,475. This represents 10 per cent of the fixed capital.
6. The ITO was of the opinion that the subsidy received is taxable. He pointed out that the assessee had directly credited profits the partners' accounts in their profit and loss sharing ratio. This would appear, according to him, to show that it is part of the profits. It is also noted by him that the assessee had not utilised the subsidy so received in any way for business purposes. On these reasons, he added the amount as income.
7. The Commissioner (Appeals) agreed with him. He pointed out that the question whether subsidy is taxable or not has been decided by the Andhra Pradesh High Court in the case of Sahney Steel & Frees Works Ltd. (supra). He pointed out that although the subsidy is received under a different GO it is only a revision of the earlier GOs. The first condition of the State incentive scheme under the later GO is that the industry should go into production on or after 1-1-1976 and the GO will be in operation for a period of five years. For units which went into production prior to 1-1-1976 the earlier GOs will be operative. These differences, according to the Commissioner (Appeals), were only differences in form and not in substance. What is granted is only an incentive to strengthen the industry to ensure industrial growth. The critical point to notice, as per the learned Commissioner, is that the grant is payable only after the commencement of production.
The idea of linking growth with production is to ensure that the funds shall be utilised to strengthen the industry after it started production. Financial assistance, he opined, given to the industry after starting of production is in the nature of income receipt. He, therefore, upheld the order of the ITO.8. The assessee is in further appeal before us. Shri Ramachandra Rao, the learned counsel for the assessee, submitted that there is a difference between the GO considered by the Andhra Pradesh High Court in the case of Sahney Steel & Press Works Ltd. (supra) and the GO under which the assessee received the subsidy. He submitted that whereas the earlier GO's linked the subsidy to actual expenditure incurred by the assessee like payment of sales tax and electricity charges, in the later GO there is no link with any expenditure incurred. Therefore, it cannot be considered as a revenue receipt. Shri Ramachandra Rao conceded that the amount received could be adjusted against the cost of the depreciable assets under the proviso to Section 43(7) of the Income-tax Act, 1961 ('the Act') and depreciation could be reduced.
9. Shri Raghavendra Rao, for the department, submitted that the principle involved has been laid down by the Andhra Pradesh High Court and it should be applied.
10. We have considered the submissions. As pointed out by Shri Raina-chandra Rao, there is a difference in the method of evaluating the subsidy as obtained in the earlier GOs considered by the Andhra Pradesh High Court and the GO of 1976. Under the earlier GOs, the subsidy is directly linked to an expenditure incurred by the assessee.
What is available to an assessee is the refund of the sales tax on raw materials, machineries, etc., levied by the State Government. If the assessee had not paid any sales tax, he was not entitled to any subsidy. There is a ceiling with reference to the equity capital but this operates only as a limiting factor. The subsidy on account of electricity consumed is directly referable to the expenditure incurred on power consumption. In the scheme we are considering, there is no link with the expenditure at all. For any entrepreneur setting up a new industry, the GO authorises payment of 10 per cent of the fixed capital cost subject to a ceiling of Rs. 10 lakhs. It will be seen that the assessee need not incur any expenditure at all in order to be eligible for the subsidy.
11. Although we have noted above a vital distinction in the quantification of the subsidy, that by itself cannot determine the issue before us. We have to consider in detail the decision of the Andhra Pradesh High Court to see whether the larger principles laid laid by them will be applicable to the facts of the case. The main issue before them had been framed as follows: "Whether the refund of the amount of Rs. 14,655.70 in terms of GO Ms. No. 455, represents refund of sales tax paid by the assessee or whether it was a voluntary contribution by the State unrelated to the character of the assessee and whether the said amount constitutes income in the hands of the recipient, viz., the assessee." The High Court then stated that this question has four aspects: (i) whether the refund of the said amount was a voluntary contribution, (ii) whether the contribution was unrelated to the character and business of the assessee, (iii) whether the nature of the receipt is capital or revenue, and (iv) whether it can be called income. As far as two of these issues are concerned, i.e., the first two issues, the findings to be given will be governed by the Andhra Pradesh High Court's decision. Even this subsidy received under GO Ms. No. 224 of 1976 is not a voluntary contribution and the assessee has a right to get it once it satisfies the condition. Secondly, it is not unrelated to the character and business of the assessee. The third issue to be considered is whether it is revenue or capital and the fourth issue is connected with that, i.e., if it is capital, certainly it is not income.
12. This will take us to the discussion regarding the third issue.
After considering the meaning of the expression 'development of the unit in the GO, the High Court gave a finding that there was no room or basis for dissociating the subsidy with the business of the assessee inasmuch as the subsidy is given for the development of the business and not for any other unrelated purpose. Later, the High Court stated that the subsidy being given to assist the business of the undertaking, the receipt of the said subsidy or refund is of revenue nature and cannot be called a capital receipt. As we have pointed out earlier, the basic fact in the earlier GOs was the linking of the subsidy with the expenditure. In the absence of such a linking in the GO we are considering, we will have to go into the question whether it is capital or revenue.
13. Before going into the issue, we may clear a misconception. The Andhra Pradesh High Court has not held that all subsidies will be revenue in nature. The following extract from the decision would make this clear. After stating the two propositions laid down by Viscount Simon in the case of Ostime v. Pontypridd and Rhondda Joint Water Board  28 TC 261 (HL), they observed: "We are not inclined to read the said proposition in such a wide fashion as the department wants us to do. The State may give a subsidy to a person to set up a new plant. In such a case, it cannot be said that the subsidy is a trading receipt. At the same time, we must say that a subsidy to assist the business of an assessee may be given in many a manner. There are several ways of subsidising an industrial undertaking." It will be seen from the above extract that the High Court was of the opinion that a subsidy given to set up a new plant will not be treated as a trading receipt.
14. In our opinion, the subsidy we are considering under the 1976 GO is a subsidy given to set up a plant. Therefore, even according to the Andhra Pradesh High Court, this is not a trading receipt. We have already extracted in paragraph 4 the paragraph from the GO authorising payment of subsidy. It will be seen that it is available for an entrepreneur for setting up new industrial unit. It will also be available for an entrepreneur who is effecting substantial expansion of the existing units. Thus, either in the case of a new unit or in the case of an expansion of a unit, it is a case of capital receipt.
15. One of the objections of the Commissioner (Appeals) was based on the condition that the industry should go into regular production on or after 1-1-1976 and, therefore, the grant is only after the commencement of production and not before. He went on to say that financial assistance given to the industry after the starting of production is in the nature of income receipt and not capital receipt. It is true, as we have noted, that the GO contains the following condition: The incentives are available for new units going into regular production on or before 1-1-1976. Units which went into production prior to 1-1-1976 and who are eligible to avail themselves of the incentives under GO No. 1225, Industries, dated 31-12-1968 and GO Ms. No. 455, Industries and Commerce department, dated 3-5-1971 must register with the Director of Industries within 3 months from the date of issue of this order to avail themselves of the incentives offered in the above two GOs." Now, there is distinction between the purpose for which a subsidy is given and the condition under which the subsidy would be given. The purpose for which the subsidy is given qualifies its nature. The conditions imposed could be safeguards to see that the subsidy is properly utilised. We have to emphasise this distinction, because, in the law regarding subsidies, the purpose of the subsidy has a dominant role to play. In this connection, we may refer to the decision of the Supreme Court in the case of V.S.S.V. Meenakshi Achi v. CIT  60 ITR 253. In that case, the assessee owned rubber plantations in the Federated Malay States (as it then was). Out of a fund into which cesses collected under the Rubber Industry Fund Ordinance on rubber produced and rubber exported were paid, proportionate parts of the cess so collected were credited to the accounts of the assessee corresponding to the amount of rubber produced by them and payments were made from the amounts so credited against expenditure incurred on the maintenance of the plantation. The assessee therein had received such payments and the question before the Supreme Court was whether such payments are capital or revenue. The Supreme Court referred to the decision in the case of Higgs v. Wrightson 26 TC 73 and stated that the payments to the planters were made against the expenditure incurred for maintaining rubber plantations. Since the amounts earmarked for the assessee were on the basis of rubber produced by them and were paid against expenditure incurred by them for maintaining the rubber plantations, it was a revenue receipt. It will be seen that the underlying principle laid down by the Supreme Court was the purpose for which the subsidy was given. There are a number of other authorities on this point and the principles laid down by them can be summarised thus: "If a subsidy is given to recoup revenue expenditure, it will take the same colour and will be deemed to be a revenue receipt in the hands of the assessed. It is the purpose for which it is given which is material and is the determining factor. . . ." (p. 830)--Chaturvedi and Pithisaria's Income-tax Law, Vol. 1, 3rd edn.
In view of the above analysis, the condition that the assessee should have gone into production after 1-1-1976 is only a safeguard and does not influence the purpose and, therefore, is not relevant in determining the character. Therefore, we are of the opinion that the decision of the Andhra Pradesh High Court in the case of Sahney Steel & Press Works Ltd. (supra) does not govern the issue in this case.
16. For the reasons given above, we are of the opinion that the receipt is capital in nature.
17. The next question would be whether these receipts could be considered for the purpose of the actual cost under the proviso to Section 43(7). Shri Ramachandra Rao had conceded before us that the subsidies can be adjusted against the cost of the assets. In view of the concession, we hold that the ITO would be justified in making such adjustments in depreciation.