1. These are two references arising out of the assessments to income-tax of the Handicrafts & Handloom Exports Corporation of India, hereinafter briefly referred to as 'the assessed'. The references relate to the assessment years 1965-66 and 1966-67, the relevant previous years being the financial years 1964-65 and 1965-66, respectively. The question of law referred for our decision in I. T. R. No. 17 of 1974 reads as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the amount of Rs. 6,27,000 was not includible in the total income of the assessed as per the provisions of the Income-tax Act, 196 ?'
2. The question of law referred in I. T. R. 94 of 1974 is in identical terms with the only difference that the amount involved is Rs. 4,52,000 for that year instead of Rs. 6,27,000, which was the figure for the earlier year. The two questions arise out of the identical circumstances and the amounts mentioned in the question represent the amounts received by the assessed corporation from the State Trading Corporation of India (hereinafter referred to as the 'STC') for the reasons which will be mentioned later.
3. The assessed-corporation was set up by the Ministry of Commerce of the Government of India in 1958, as a Government company under the name and style of Indian Handicrafts Development Corporation Ltd. Till the year 1962-63, the corporation was known under this name and its expenditure was being met by the Govt. of India by way of grants sanctioned on the basis of budget estimates submitted from year to year. The corporation after appropriating the grants had to send a certificate of utilisation to the Government. In June, 1962, the entire paid up share capital of the corporation was acquired by the STC from the Govt. of India. In October, 1962, the Handloom Exports Organisation of the STC was merged with the Indian Handicrafts Development Corporation and the name of the assessed-corporation was changed into its present name.
4. For the assessment year 1963-64, the corporation incurred a loss of Rs. 7,60,378. It appears that for that assessment year, the assessed received a sum of Rs. 85,000 from the Govt. of India but no further details are available as to the manner in which the corporation was assessed for the year.
5. For the assessment year 1964-65, the corporation's accounts showed a loss of Rs. 11,16,599. The corporation made a request to the STC for reimbursement of the loss, which it was stated, was mainly accounted for by the merger of promotional, development, and servicing activities of the corporation which were not commercially rewarded. A similar request had also been made in respect of the earlier assessment year. Ultimately, some time in 1965, the Government acceded to the request of the corporation and the STC reimbursed the corporation in respect of the losses suffered by it for the years in question. The annexures to I. T. R. No. 17 of 1974 as well as the order of the Tribunal for the subsequent year show that the reimbursement had been made in pursuance of a decision of the Commerce Ministry recorded on 2nd September, 1965. The office note recording the basis on which the decision had been taken by the Commerce Ministry shows that, since the assessed-corporation was a fully owned subsidiary of the STC, it was really an internal matter for that corporation to decide how the losses of its subsidiary would be met. It was pointed out that from the point of view of the Govt. of India, no subsidy from the public revenue could be given and that subject to steps being taken for the re-organisation on proper lines of the assessed-corporation, the losses incurred by it could be met only by the STC.
6. For the assessment year 1964-65, the ITO held that the losses incurred by the assessed-corporation in its trading activities must be taken to have been wiped off as the same had been reimbursed by the STC. This conclusion was upheld by the AAC but on further appeal by the assessed the Appellate Tribunal was of the opinion that the position taken up by the I. T. authorities was not correct. It was also held that the company had claimed expenditure in respect of the promotional and developmental activities and the consideration thereof in the determination of its income was fully justified. So far as the aspect of reimbursement was concerned, it was pointed out that there was nothing to show that the company could claim reimbursement as a matter of right. Even as late as in 1965, the matter was under correspondence between the assessed, the STC and the Government and there was no clearly established right in the favor of the company, either against the STC, its holding company, or against the Government. It was, thereforee, held that it was not possible to set off the loss against any accrued right to receive the reimbursement in respect thereof. It was, thereforee, held by the Tribunal that the total income of the company should be determined after taking into account the expenditure subject to routine inadmissibles. It appears that this order of the Tribunal was accepted but he department and there was no further reference in the matter.
7. For the assessment year 1965-66, the assessed-company claimed a loss of Rs. 8,75,367. This represented the excess of the expenditure incurred by the assessed over the Government grants. In this year also the assessed's loss was reimbursed by the STC to the extent of Rs. 6,27,000. IT may also be mentioned that actually the total loss incurred by the assessed during the relevant previous year was a sum of Rs. 13,62,880. During the year, however, the assessed had received certain grants from the Government amounting to Rs. 4,87,513 and it was after setting off the grants thus received against the loss incurred that the assessed claimed in its return the loss of Rs. 8,75,367 which has been referred to earlier.
8. Before the AAC, to whom the assessed appealed, two questions arose. One was in regard to the inclusion of the grants received from the Government as part of the assessed's income and the other was regarding the treatment that was liable to be accorded to the reimbursement received by the assessed from the STC. The AAC agreed with the ITO that the entire loss incurred by the assessed having been reimbursed and made good by either the Government or the STC the assessed's trading activity from the previous year had not resulted in any loss and that the ITO was justified in completing the assessment at 'nil' income.
9. The assessed preferred an appeal to the Appellate Tribunal. Before the Tribunal it was common ground that the amount of Rs. 4,87,513 received directly from the Government was in the nature of grant-in-aid given to the assessed for export efforts. The Appellate Tribunal was of the opinion that the amount received from the Government was clearly includible in the total income of the assessed as it was in a sense the granting-aid for export efforts. The Tribunal pointed out that the export efforts by the corporation represented an essential part of its business activities and that the reimbursement by the Government was to all intents and purposes reimbursement of the expenditure incurred by the assessed. It was not an ex gratia payment and it was clearly related to the trading account of the assessed, deductions in respect of which had been taken into account while determining the assessed's total income in view of the basis adopted in the order of the Tribunal for the earlier year. In conformity with the earlier order, the reimbursement received by the assessed from the Government, it was held, must be taken as a part of the trading account and included in the total income as such. Coming to the reimbursement received from the STC, however, the Tribunal was of the opinion that the position was entirely different. It observed :
'The position regarding the amount received from the State Trading Corporation, however, is quite different. In general law as well as for income-tax law each company has a separate personality and the subsidiary company has to be treated as distinct and separate form the parent or holding company. While it is true that in considering the nature and scope of business of a public sector undertaking, the special circumstances of its origin and functioning can be taken into account, the distinction between the holding company and the subsidiary company cannot in any manner be diluted or watered down. Judged from that point of view, all that had happened in the present case was that the holding company had made good the losses suffered by the subsidiary company. These losses had not occurred or at any rate there is nothing to show that these losses had occurred due to transactions undertaken by the assessed-company on behalf of the holding company. There was also nothing to show that the reimbursement was made by the holding company under any basic arrangement whereby the holding company was bound to reimburse and the subsidiary company could anticipate such reimbursement. The indication, on the other hand, was that the question of reimbursement of the loss of the assessed-company was under discussion between the Govt. of India and the State Trading Corporation and ultimately it was decided that the State Trading Corporation and the assessed-company should made the consequential arrangement as an internal matter. In effect, thereforee, what happened was that the assessed-company's capital was eroded by the loss and that erosion was rectified by a contribution from the holding company. It would be analogous to a sole proprietor introducing additional capital in a business which had been losing or more particularly analogous to a holding company in a private sector diverting some of its surplus funds to the subsidiary to enable it to tide over the loss of capital. The contribution made in such circumstances could not be treated as the income of the recipient. The amount of Rs. 6,27,000 could not, thereforee, be taken into account as part of the assessed's trading receipts or for that matter as a part of its total income.'
10. The department is in reference against that part of the order of the Tribunal in which it was held that the amount of Rs. 6,27,000 received from the STC could not be taxed. We may mention that the assessed did not raise and has not raised any question regarding the Tribunal's conclusion that the subsidies received from the Government were taxable and so we are not concerned directly with this aspect of the matter.
11. The same question arose for the assessment year 1966-67. The assessed had incurred expenditure to the tune of Rs. 15,22,982 and its accounts showed a net loss of Rs. 3,77,770 after taking into account certain subsidies received from the Govt. of India. After setting off these grants, there was a deficit of Rs. 6,53,554, which was treated as a deduction in computing the taxable income. During the previous year, the assessed had received from the STC a reimbursement of Rs. 4,52,000 on the same lines as in the earlier year. It had also received in addition to the export subsidies of Rs. 8,69,435 certain grants from the development reserve of the Govt. of India for participating in a fair held at Moscow, to the tune of Rs. 1,45,639. The ITO and the AAC having held against the assessed, as in the earlier years, the assessed appealed to the Tribunal. It is seen that before the Tribunal there was controversy only with regard to the assessability of the amount of Rs. 1,45,639 received by way of grant from the Moscow fair, and the sum of Rs. 4,52,000 received from the STC. The Tribunal, following the order of the assessment year 1965-66, held that the sum of Rs. 1,44,639 was taxable but not the further sum of Rs. 4,52,000. So far as the sum of Rs. 4,52,000 is concerned, an attempt was made by the department before the Tribunal to persuade it to take a view different from that taken in the earlier assessment year. It was sought to be suggested that the full correspondence with the Govt. of India in the matter had not been before the Tribunal when the appeal for the earlier year had been heard and that in any event having regard to the decision taken by the Government on September 2, 1965, to reimburse the assessed out of the funds of the STC, it should be taken that the STC had agreed to reimburse the losses incurred by the assessed and that the amounts paid by it should be treated as income. The Tribunal did not accept the points of distinction sought to be made out by the department and for the reasons recorded separately but more or less the same, as had been set out in the earlier order, allowed the assessed's claim in regard to that sum. The department is in reference from the order of the Tribunal in regard to the sum of Rs. 4,52,000.
12. We are of the opinion that the view taken by the Tribunal is the correct view having regard to the facts and circumstances. We have set out earlier the reasons given by the Tribunal for coming to this conclusion in regard to the assessment year 1965-66. We entirely agree with the reasons contained in the extracted paragraph of the Tribunal's order. This is clearly a case in which the assessed-company had incurred a trading loss and all that has happened is that the STC, having regard to its relation with the assessed-company, had agreed to discharge the liabilities of the assessed-corporation and reimburse it to the extent of such loss. The case is somewhat analogous to the case of a person agreeing to meet the losses incurred by another person in carrying on a business and to discharge the debts incurred by him out of considerations of affection or regard, such as a father meeting the losses incurred by his son in carrying on a business. It is clear that the losses incurred by the assessed cannot be ignored merely because they have been made up by the holding company. The position will be clearer if we take the converse case. Suppose the corporation had made profits and claimed that the profits should not be assessed in its hands because they had been subsequently transferred to the holding company, the STC, such a contention would clearly be not tenable, for, it is simply a case of application of income by an assessed who had earned it. Similarly, in the present case, which is the converse of the illustration given, the assessed had clearly incurred a loss and merely because somebody else agreed to recoup the loss, it cannot be said that the losses have ceased to exist.
13. An attempt has been made on behalf of the department to equate the reimbursement by the STC with the reimbursement said to have been made by the Government. In our opinion, this attempt ignores the fundamental difference in the nature of the payments made by the Government on the one hand and by the STC on the other. While it is true that the Government was reimbursing the assessed's loss, when the assessed was a branch of the Government, i.e., till 1962, the nature of the grants given by the Government during the years in question are totally different. It has been found by all the authorities and in particular by the Tribunal in both the appellate orders and in the statement of case that the amounts given by the Government were in the nature of grants-in-aid. In other words, they were not of the same nature as the reimbursement made by the STC. They were amounts paid by the Government to the assessed which was carrying on an export business to promote its activities and the subsidies given by the Government to enable the assessed to carry on its export business more efficiently and satisfactorily were part of the trading receipts of the STC. We are of the opinion that the Tribunal was right in refusing to equate the reimbursement given by the STC with the grants-in-aid given by the Government.
14. For the reasons which we have mentioned above we are of the opinion that the view taken by the Tribunal was correct and the sum of Rs. 6,27,000 for the assessment year 1965-66, and Rs. 4,52,000 for the assessment year 1966-67, were held rightly to be not includible in the total income of the assessed under the provisions of the I. T. Act, 1961. The questions referred are thus answered in the affirmative and in favor of the assessed. The assessed will be entitled to its costs. Counsel fee Rs. 350, one set.