COMMISSIONER OF INCOME-TAX VS UDAYA PICTURES (P.) LTD.
1999 P T D 540
[225 I T R 394]
[Kerala High Court (India)]
Before V. V. Kamat and P. A. Mohammed, JJ
COMMISSIONER OF INCOME-TAX
Versus
UDAYA PICTURES (P.) LTD.
Income-tax Reference No.30 of 1990, decided on 20/06/1996.
Income-tax---
----Income---Business---Filmbusiness---Subsidy granted by State Government for producing newregional films---Assessable as income
The assessee was a private limited company engaged in the business of production of cinematographic films. During the accounting year relevant to the assessment year 1979-80, the assessee had received a sum of Rs.37,500 as subsidy from the Kerala State Government for producing new regional films. In the return filed by the assessee, this amount was shown as a capital receipt. The Income-tax Officer agreed with the claim advanced by the assessee. This was upheld by the Tribunal. On a reference:
Held, reversing the decision of the Tribunal, that the entitlement to the subsidy sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. What was received by the assessee from the Government was not a capital receipt but a subsidy and, therefore, it was income liable to tax.
Kesaria Tea Co. Ltd. v. C.I.T. (1989) 180 ITR 134 (Ker.) and A. M. Moosa v. C.W.T. (1997) 225 ITR 391 (Ker) applied.
C.I.T. v. Chitra Kalpa (1989) 177 ITR 540 (AP) distinguished.
Bombay Dyeing and Manufacturing Co. Ltd. v. C.W.T. (1974) 93 ITR 603 (SC); C.I.T. v. Sahney Steel and Press Works Ltd. (1985) 152 ITR 39 (AP); C.W.T. v. Gopinathan Nair (K) (1976) 103 ITR 23 (Ker.); Standard Mills Co. Ltd. v. C.W.T. (1967) 63 ITR 470 (SC); Ostime v. Pontypridd and Rhondda Joint Water Board ((1946) 14 ITR (Suppl.) 45; (1946) 28 TC 261 (HL) ref.
P. K. R. Menon and N. R. K. Nair for the Commissioner
C. Kochunni Nair, Dale P. Kurian and M A Firoz for the Assessee
JUDGMENT
P. A. MOHAMMED, J.---This income-tax referred case is coming up before us for decision at the instance of the Revenue. The question referred to us is as follows:
"Whether, on the facts and in the circumstances of the case, the subsidy amount is not taxable?"
The facts leading to the reference can be briefly stated thus: The assessee is a private limited company engaged in the business of production of cinematographic films. The assessment year involved in this reference is 1979-80. During the relevant accounting year the assessee had received a sum of Rs.37,500 as subsidy from the Kerala State Government for producing new regional films. In the return filed by the assessee, this amount was shown as capital receipt and hence exemption claimed from taxation. The Income-tax Officer agreed with the claim advanced by the assessee. Since the Income-tax Officer failed to include the above subsidy received from the Government during the relevant previous year for producing new regional language films, the Commissioner of Income-tax invoked the powers available under section 263 of the Income-tax Act, 1961, for enhancing the assessment. The Commissioner accordingly directed the Income-tax Officer to include the subsidy of Rs.37,500 in the total income of the assessee. Being aggrieved by the order of the Commissioner, the assessee filed an appeal before the Income-tax Appellate Tribunal. The Tribunal ultimately held that the subsidy received by the assessee is not taxable. In view of the aforesaid finding of the Tribunal, the Revenue came up with a reference application. That is how the matter is before us for decision.
It was argued by the assessee before the Tribunal that the issue regarding the taxation of film subsidy has been considered by the Tribunal in the case of Excel Productions and accepting the above contention the Tribunal held that the subsidy amount received by the assessee is not taxable. Before us the contention of counsel for the assessee is that the subsidy received from the Government would become income of the assessee only after the completion of five years of production from the date of subsidy or the commencement of production, whichever is later. In fact an identical question came up before us on an earlier occasion in I. T. R. No. 175 of 1987 (A.M. Moosa v. C.W.T. (1997) 225 ITR 391), which relates to wealth tax. In I.T.R. No. 175 of 1987 (A.M. Moosa v. C.W.T. (1997) 225 ITR 391), this Court took the view that at the time when the assessee received the subsidy amount it was income and consequently the wealth of the assessee liable to be included in the net wealth. While dealing with the said question, we have considered two decisions of the Supreme Court, viz., Bombay Dyeing and Manufacturing Co. Ltd. v. C.W.T. (1974) 93 ITR 603 and Standard Mills Co. Ltd. v. C.W.T. (1967) 63 ITR 470 and also the decision of a Division Bench of this Court in C.W.T. v. K. Gopinathan Nair (1976) 103 ITR 23. Apart from the above, another Division Bench decision of this Court in Kesaria Tea Co. Ltd. v. C.I.T. (1989) 180 ITR 134 considered a similar question. That was a case where the assessee, who carried on export business in tea, received during-the previous year relevant to the assessment year 1979-80 a sum of Rs.9,79,341 as cash assistance from the Government of India to carry on its business in a profitable manner. The Income-tax Officer held that the cash assistance was income liable to tax. The above view of the Income-tax Officer was confirmed by the Income-tax Appellate Tribunal. Then the matter came up before the Division Bench of this Court on reference. The Division Bench held to the following effect (headnote):
"The entitlement to the cash assistance sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. The subsidy or cash assistance was given by reference to the value of goods exported. The assistance received by the assessee was by way of additional payment for the goods exported and it could not be considered to be a capital receipt. The subsidy was not given for a specific or specified purpose. Therefore, the Tribunal was justified in holding that the cash assistance received by the assessee was income liable to tax.
The position with regard to the receipt of subsidy by the assessee from the Government in this case is in no way different. Learned counsel for the assessee brought to our notice a decision of a Division Bench of the Andhra Pradesh High Court in C.I.T. v. Chitra Kalpa (1989) 177 ITR 540. Before dealing with that decision, it would be apt to consider the view of the said High Court on this question which has been laid down in a Division Bench decision in C.I.T. v. Sahney Steel and Press Works Ltd. (1985) 152 ITR 39 (AP). After considering various decisions on this point, the Division Bench in the above case held that the receipt therein by the assessee was of a revenue nature. In fact, in Chitra Kalpa's case (1989) 177 ITR 540 (AP), the Division Bench observed thus (page 549):
"If we bear in mind the special arid peculiar features of the subsidy granted to industrial undertakings, which was the subject-matter of consideration in Sahney Steel's case (1985) 152 ITR 39 (AP), the decision of this Court that the subsidy partook of the nature of income is clearly and entirely understandable. The observations of Viscount Simon in Ostime v. Pontypridd and Rhondda, etc. (1946) 28 TC 261 (HL) were clearly satisfied because the subsidy was to be paid from public funds in order to help the undertaker to assist him in carrying on the undertaker's trade or business. The conclusion of this Court that the package of incentives offered to industrialists considered in Sahney Steel's case (1985) 152 ITR 39 was to assist the business of the industrialist governed the decision in that case. I am unable to see how the ratio in that judgment can be applied to the facts and circumstances of the present case, which are demonstrably different. I am satisfied that the subsidy granted by the Government in the present case is in the nature of an inducement. It is a cash grant to induce a producer to produce a feature film in this State in the hope and expectation that if producers are tempted to make feature films in this State, film production in the State will be encouraged and the State will reap the benefits of an organised flourishing film industry shifting to this State from elsewhere. The subsidy is not granted either to assist the producer in film-making or to increase his profits. The subsidy is too small to achieve any such purpose."
From the abovesaid observations it can be clearly seen that the facts of the present case are totally dissimilar to the facts involved in Chitra Kalpa's case (1989) 177 ITR 540 (AP). We have sufficiently noticed in the above case that the subsidy was granted by the Government as an inducement to encourage film production so that the State will reap the benefits of an organised flourishing film industry shifting to the State of Andhra Pradesh from elsewhere. His Lordship, Justice Jeevan Reddy (as he then was) in his concurring judgment observed that a film is a capital asset in the hands of the producer and, therefore, the true character of the receipt in the hands of the assessee was on capital account. The learned Judge also distinguished the decision in Sahney Steel's case (1985) 152 ITR 39 (AP) as below (page 541):
"There the subsidy was given to assist the business of the assessee in the initial five years after production is commenced. The subsidy consisted in refund of sales tax paid by the assessee on raw material, etc., besides some other minor subsidies. Indeed, it was clearly held in that decision that if the State gives a subsidy to a person to set up a new plant, it would not be a trading receipt but a capital receipt: "
From the materials available in this case it is crystalline that what was received by the assessee from the Government is not a capital receipt but a subsidy and, therefore, it is income liable to tax. We reiterate that the present case is fully covered by the decisions rendered by this Court in Kesaria Tea Co. Ltd. v. C. I. T. (1989) 180 ITR 134 and in I. T. R. No. 175 of 1987 (A. M. Moosa v. C. W. T. (1997) 225 ITR 391, dated June 14, 1996.
In view of the discussion hereinabove, we answer the question referred to us in the negative and in favour of the Revenue and against the assessee.
A copy of this judgment under the seal of the Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.
M.B.A./1724/FC Reference answered.