Vildirect: IncomeTax-caselaws-1988-VIL-406-AP-DT

1988-VIL-406-AP-DT

Equivalent Citation: [1989] 177 ITR 540 (AP)

ANDHRA PRADESH HIGH COURT

Case Referred No 132 of 1980.

Date: 05.08.1988

COMMISSIONER OF INCOME-TAX

CHITRA KALPA

BENCH

Judge(s) : Y. V. ANJANEYULU., JEEVAN REDDY

JUDGMENT

JEEVAN REDDY J. -I agree with the answer proposed by my learned brother, Y. V. Anjaneyulu J. (printed below) but for a different reason. I agree with the Tribunal that the subsidy granted by the Government in terms of G. O. Ms. No. 1290 dated December 31, 1971, was granted for producing a capital asset 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 Tribunal's finding is that the subsidy is granted "for the production of the assets". I agree that that is the dominant purpose of the G. O. The subsidy is meant for defraying partly the cost of production of films produced in Andhra Pradesh. The several requirements of the G. O. detailed in the order of my learned brother all pertain to the stage of production. Once this is so, the decision of this court in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39, becomes clearly distinguishable. That was a case where the subsidy was given after the plant had started production. 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 capital receipt. The present case is of such a nature. On this short ground, I answer the question referred in favour of the assessee.

Y. V. ANJANEYULU J.-At the instance of the Commissioner of Incometax, the Income-tax Appellate Tribunal made this reference to this court under section 256(1) of the Income-tax Act, 1961 (for short the "Act"). This reference relates to the income-tax assessment year 1972-73 And the question referred for the consideration of this court is

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the subsidy of Rs. 50,000 is not taxable as a revenue receipt ?"

The relevant facts may be noticed. In the previous year relevant to the income-tax assessment year 1972-73, the assessee was paid a sum of Rs. 50,000 by way of subsidy by the Government of Andhra Pradesh pursuant to G. O. Ms. No. 1290, General Administration (IPR & T) Department, dated December 31, 1971. The subsidy was paid to the assessee in connection with a feature film produced in the State of Andhra Pradesh for public exhibition. The Income-tax Officer held that this subsidy is in the nature of income and taxed it. The Appellate Assistant Commissioner of Income-tax before whom an appeal was filed by the assessee upheld the Income-tax Officer's view that the subsidy received by the assessee is liable to tax. The assessee filed a second appeal before the Income-tax Appellate Tribunal. Considering all the facts and circumstances, the Tribunal came to the opposite conclusion and held that the subsidy is not in the nature of income and cannot, therefore, be assessed to tax under the Act. The Commissioner of Income-tax applied for and obtained the present reference to this court for consideration of the question referred above.

Learned standing counsel for the Income-tax Department, Sri M. Suryanarayana Murthy, submits that this question is squarely covered against the assessee by the judgment of this court in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39. It was pointed out that the decision of the Tribunal was prior to the aforesaid decision of this court. Sri T. Ananta Babu, learned counsel for the assessee, canvassed the plea that the aforesaid decision of this court has no application to the facts of this case. He urged that the Tribunal was quite justified in holding that the subsidy cannot be regarded as "income" liable to tax under the Act. Learned counsel, therefore, commended to us the acceptance of the Tribunal's view.

It is necessary to refer to the circumstances under which the scheme for payment of subsidy in respect of pictures produced for public exhibition in this State was devised. It is common knowledge that the production of feature films in the South is concentrated in Madras ; the film industry in the North is concentrated in Bombay. After the advent of Andhra Pradesh, it was thought that the film industry would disperse from Madras and producers engaged in the production of Telugu films would shift from Madras to Hyderabad. In the expectation that Telugu feature films will be produced in this State, quite a few film studios were established. The expectations were belied. The industry did not choose to move from Madras. Almost all the Telugu feature films continued to be produced in Madras and were released for distribution in the State of Andhra Pradesh. Even Telugu producers found Madras to be a more convenient centre for production of Telugu films. The result was that the Telugu film industry showed indifference in moving to the State of Andhra Pradesh. The number of Telugu feature films produced far exceeded the films produced in other languages including Hindi. The Government felt disappointed that the film industry did not take root in the State of Andhra Pradesh although in the production of feature films, Telugu films are the forerunners. Obviously, the question engaged the attention of the Government as to how to attract the film industry to the State of Andhra Pradesh. It was in this context that initially in January, 1965, a scheme was devised whereby the State Government had decided to offer a subsidy of Rs. 50,000 to each film produced in Andhra Pradesh vide : G.O.Ms. No. 30, General Administration (I & PR) Department dated January 8, 1965. It is stated that the subsidy is offered with a view to encourage the film industry in the State. Rules for grant of subsidies for the feature films produced in the State of Andhra Pradesh were framed. These are, of course, administrative rules. The rules were called "Feature Films Rules". Under the rules, the Government may grant a subsidy of Rs. 50,000 to the producer of every feature film which had been certified for public exhibition on or after the specified date. The feature film should be a full length film of not less than 12,000 feet and does not include a documentary film, children's film or an educational film. A special committee was constituted to process the grants of subsidy. The procedure for obtaining the grant from the Government is specified. The producer should file a certificate issued by the Central Board of Censors. He should also file a certificate that not more than twenty-five per cent. of the total length of the film has been shot outside the State of Andhra Pradesh. The producer should also produce a certificate from a film studio or studios in the State of Andhra Pradesh to the effect that the film has been shot, processed and printed therein. Colour processing, however, has to be done outside the State as facilities were not available in this State.

Every applicant for the grant of subsidy has to satisfy certain conditions. The conditions are:

(i) the entire feature film must have been produced in the studios and in the locales of the State of Andhra Pradesh ;

(ii) not more than twenty-five per cent. of the total length of the film should have been shot outside the State

(iii) the raw film required for the feature film should have been purchased to the extent available at any place within the State of Andhra Pradesh ; and

(iv) the registered office of the producer should be within the State.

The above broadly constitutes the scheme for the grant of subsidy. The scheme was later extended in 1968 to be effective till March 31, 1970. By G. O. Ms. No. 1290, General Administration (IPR & T) Department, dated December 31, 1971, the scheme and the rules have been extended beyond April 1, 1970. G. O. Ms. No. 1290 dated December 31, 1971, is quite a short one and it will be convenient to extract the same below:

"General Administration (IPR & T) Department G. O. Ms. No. 1290 dated December 31, 1971.

Read the following:

1. G. O. Ms. 30, Gen. Admn. (I & PR) dated January 8, 1965.

2. G. O. Ms. No. 82, Gen. Admn. (I & PR) dated February 14,1968.

3. G. O. Ms. No. 424, Gen. Admn. (I & PR) dated July 3, 1968.

ORDER:

With a view to encourage the film industry, the State Government have decided to offer a subsidy of Rs. 50,000 (Rupees fifty thousand only) to each film produced in Andhra Pradesh. The Rules for the grant of subsidies were issued in the G. O. first cited and extended up to March 31, 1968, in the Government Order second cited. These rules have been extended for a further period till March 31, 1970, in the Government Order last cited.

The Government now order that the subsidy scheme and the rules as detailed in the annexure to this order be extended beyond April 1, 1970.

This order is issued with the concurrence of the Finance Department, vide their U.O.No.74663/3174/HG/71-1,dated December 24, 1971.

(By order and in the name of the

Governor of Andhra Pradesh)

Sd. V. K. Rao,

Chief Secretary to Government."

The rules detailed in the annexure to the Government Order dated December 31, 1971, have already been referred to above.

At the time of granting the subsidy, an indemnity bond is obtained from the producer to whom the subsidy is granted. The indemnity bond is executed by the producer to whom the subsidy is sanctioned. The indemnity bond sets out that the Government in G. O. Ms. No. 30, dated January 8, 1965, with a view to encourage the film industry in the State of Andhra Pradesh, had decided to offer a subsidy of Rs. 50,000 to each film produced in the studios located in the State. It refers to the extension of the subsidy scheme from time to time including the G. O. Ms. No. 1290, dated December 31, 1971. It further sets out that the guarantor accepted the conditions prescribed for the grant of subsidy scheme-and agreed to locate the registered office in the State of Andhra Pradesh. The indemnity bond further states that if the guarantor shifts his registered office contrary to the conditions laid down from this State to another State, he shall be obliged to refund the sum of Rs. 50,000 received as subsidy from the Government it is represented that the assessee in this case had executed such an indemnity bond in respect of the sum of Rs. 50,000 granted to him by way of subsidy for producing the film known as "Buddhimanthudu". The question whether the subsidy of Rs. 50,000 paid by the Government constitutes income liable to tax in the hands of the recipient has to be decided in the light of the scheme and rules above referred to.

I may, at this stage, mention that the printed record in the referred case contains only the statement of the case drawn up by the Tribunal on July 28, 1979. At the time of hearing, learned standing counsel for the Revenue has placed before us a copy of the Tribunal's order giving rise to the reference and copies of the relevant Government Order, rules and the indemnity bond. I have collected the facts and other information from the aforesaid documents placed before us by learned standing counsel for the Revenue.

The subsidy scheme and the rules above referred to bring out the following criteria upon which attention has to be focussed :

(a) the scheme is devised by the Government to encourage film industry in the State;

(b) conditions precedent for the grant of subsidy is that at least 75% of the total length of the film must have been shot in the State of Andhra Pradesh and its locales;

(d) the raw film required for the feature film should be purchased to the extent available at any place within the State

(e) the registered, office of the producer should be located within the State ; and

(f) when the registered office is shifted from this State, the subsidy received has to be refunded to the Government.

These are the essential features. They at once indicate that the main objective of granting the subsidy of Rs. 50,000 is to encourage the production of films in this State. The sum of Rs. 50,000 offered is an inducement to the producer to produce the picture in this State. Obviously, the idea behind the entire scheme is that if the producers take advantage of the inducement offered and begin producing pictures in the State of Andhra Pradesh, the film industry would grow in course of time and the State will be benefited. The Government rightly realised that notwithstanding that the Telugu film industry being the pioneer in film making, the benefits of films produced are going to the other States while the exhibition of the films produced elsewhere is confined to the State of Andhra Pradesh. Naturally, therefore, the Government was anxious that by encouraging the film production in the State of Andhra Pradesh, the film industry will grow in this State and all the consequential benefits will be enjoyed by this State. It is basically for the purpose of attracting producers to produce films in this State that the incentive of subsidy of Rs. 50,000 is offered. Could it be said, on these facts, that the subsidy granted is income liable to tax under the Income-tax Act ? The first impression itself is in the negative because if a producer has to pay 50% or more by way of tax from out of the subsidy, there is hardly any inducement and it frustrates the very purpose for which the subsidy is granted. The small moiety left out of the subsidy after the payment of tax can hardly induce a producer to produce films in the State and the subsidy does not serve the purpose of encouraging film production in the State. This first impression need not, however, blur the consideration if, upon application of correct legal principles, the subsidy could be treated as income and taxed as such. If the subsidy can be so taxed, it is inconsequential that the purpose for which the scheme is devised fails and the entire scheme is frustrated. I have, therefore, given my earnest consideration to the matter, especially in view of the decision of this court in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39, on which the Revenue heavily relied and to which one of us (Jeevan Reddy J.) is a party.

Examining meticulously the scheme under which the subsidy was granted in the case of Sahney Steel [1985] 152 ITR 39, we find that this court held the view that the subsidy was granted to assist the business of the industrialist. This court referred at page 51 of 152 ITR to the decision in Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda Joint Water Board [1946] 28 TC 261 (HL). One of the propositions made by Viscount Simon in that case was (at p. 278) :

"'The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains under Case I of Schedule D . . ."

Referring to the above proposition, learned standing counsel for the Department argued that the observations made by Viscount Simon should apply to all subsidies given by the State to an undertaking. This court declined to accept the Revenue's suggestion to read the propostion of Viscount Simon in such a wide fashion. The following observations occurring at page 52 of 152 ITR are relevant:

"...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. The State may do it by supplying the raw material at a concessional rate, by giving tax holiday, by giving a development rebate, by purchasing its goods at rate higher than the market rate and so on. It is not possible to exhaustively lay down the several methods or manner in which the State may choose to subsidise an undertaking ; but, one thing is clear in all such cases, the subsidy so given would fall within the first proposition of Viscount Simon."

Scrutinising the details of the subsidy given by the Government in the Sahney Steel's case [1985] 152 ITR 39 (AP), it was noticed that the subsidy consisted of the following :

(a) Refund of sales tax on raw materials, machinery and finished goods levied by the Government;

(b) Subsidy on power consumed for production to the extent of 10% in the case of medium and large scale industries and 121/2% in the case of small scale industries ;

(c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body ;

(d) Refund of water rate in respect of water drawn from a Government source or from a source maintained by any local body but returned purified to it

(e) Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used ;

(f) sale or lease of Government land at concessional rates ; and

(g) grant of financial assistance on a priority basis by the State financing institutions.

The sum total of all the items abovementioned is granted by way of subsidy for a period of five years to all new undertakings which commence production on or after January 1, 1969. The nature of subsidy granted in Sahney Steel's case [1985] 152 ITR 39, had to be decided by this court taking into consideration the various incentives offered by the Government to all new industrial undertakings set up. Referring to these incentives, this court observed at page 54(of 152 ITR ): "It, therefore, cannot be said that refunds were made only for the expansion of the unit. They were made with a view to strengthen the unit financially so that it can be run efficiently, and can become strong and grow. It is well-known that In the initial stages of any industrial unit, it has to face a number of problems, sometimes referred to as 'teething problems'. Very often, they are not able to avoid suffering losses in the initial years. It is for this reason that a number of benefits are given at this stage of development like tax holiday, initial depreciation on machinery and so on. The subsidy in question is also of such a nature and cannot be treated as one exclusively meant for expansion of the unit."

Proceeding further, this court observed at page-55 (of 152 ITR):

"...In the case before us too, the subsidy is given for strengthening and improving the industrial undertaking so that it can work properly and grow. This is another method. But in both cases the subsidy is given to assist the business of the undertaking. We are, therefore, of the opinion that the receipt of the said subsidy or refund, as it may be called, is of revenue nature and cannot be called a capital receipt in the hands of the assessee."

The passages quoted above from the Sahney Steel's case [1985] 152 ITR 39 (AP) bring out the reason for this court holding the subsidy under consideration in that case as partaking of the nature of income. The distinction between the two subsidies is too striking. I may catalogue the sam below:

Subsidy under consideration Subsidy under consideration in the in the present case case of Sahney Steel

1. The subsidy is an arbitrary The subsidy is not a cash grant lump sum cash grant of Rs. 50,000. but related to various constituents of production.

2. The subsidy is given to every The subsidy is given only to producer, whether new or established, entrepreneurs setting up, new for producing a feature film in this state. industrial undertakings. It is not available to existing industries.

3. The subsidy is not granted to The subsidy is granted to assist assist the producer in making the the entrepreneur to overcome the film. It is merely an inducement to produce "teething troubles" in the initial feature film in this State. The sum of stages. The refunds and remission Rs. 50,000 is far too inadequate to granted would reduce the revenue serve the purpose of assistance to expenditure and increase the profit the producer as the cost of production earning capacity in the initial years of each colour film these days is in the (for instance sales tax refund, power region of about Rs. 30 to 40 lakhs. tariff refund, water rate refund, land revenue refund, etc.)

4. The subsidy is a voluntary cash The subsidy is wholly connected grant which can be used by the producer with the production constituents and for any purpose he likes. and cannot be used for purposes other than trade.

5. No subsidy if no film is produced. Once a new industrial undertaking

No regularity of payment in periodical is established, subsidy runs for intervals. a period of five years from the date of commencement of production. There is regularity in the payment for a determined number of years from a definite source.

If we bear in mind the special and 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. 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. 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.

In the circumstances, I am unable to accept the contention of learned counsel for the Revenue that the ratio of the judgment in Sahney Steel's case [1985] 152 ITR 39 (AP) is applicable to the facts and circumstances in the present case. If anything, the ratio of that judgment would support the contention urged in the present case that the subsidy cannot be regarded as income. In the circumstances, I hold that the Tribunal was justified in coming to the conclusion that the subsidy of Rs. 50,000 is not taxable in the hands of the assessee as a revenue receipt. I, accordingly, answer the question in the affirmative, that is to say in favour of the assessee and against the Revenue. No costs.

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