Whether when power tariff incentive received by assessee from State Govt goes towards reducing electricity bill, same is to be treated as revenue receipt - YES: HC

THE issues before the Bench are - Whether when the power tariff incentive received by the assessee from the State Govt goes towards reducing the electricity bill, the same is to be treated as revenue receipt and Whether scrap sales should be included in the total turnover for the purpose of computing deduction u/s 80HHC. And the verdict partly goes in favour of Revenue.

Facts of the case

The Assessee considered industrial power tariff concession granted by the Tamil Nadu Government as capital receipt. The AO treated the same to be a revenue receipt. As regards the deduction u/s 80HHC, in respect of scrap sales, the AO followed the earlier year's order and included the same in the total turnover of the assessee. The CIT(A) while considering the issue relating to power tariff concession, rejected the Assessee’s claim and pointed out that the subsidy given by way of power tariff concession was not related to production. Regarding the deduction u/s 80HHC in respect of sale of scrap, the CIT(A) confirmed the order of the AO.

The Tribunal held that the power subsidy was of revenue in nature, especially when subsidy had gone to reduce the electricity bills and rejected the case of the assessee. With regard to the scrap sales, the Tribunal held that it had to be included in the total turnover in the denominator.

On Appeal before the HC the Assessee's Counsel submitted that to determine the purpose for which the subsidy was given, the test was the character of the receipt in the hands of the assessee. Hence the concession was given for the purpose of setting up or establishing the new industry in the area specified and not based on commencement of production. The counsel further submitted that the scrap sales did not represent the turnover manufactured by the Assessee and the said amount would reduce the cost of raw materials consumed. The Revenue's Counsel submitted that the issue was squarely covered by the decision of the Supreme Court in the case of Sahney Steel.

Having heard the parties, the HC held that,

++ the concession granted to the assessee is pursuant to the industrial policy announced by the Government of Tamil Nadu under which number of concessions were extended as incentive to carry on the industrial development. One such concession/subsidy is the power tariff concession. The tariff rates were fixed pursuant to the statutory notification. In terms of Section 4 of the Tamil Nadu Revision of Tariff Rates on Supply of Electrical Energy Act, 1978 (Tamil Nadu Act 1 of 1979), the State Government may after taking into account the cost of production of energy, and such other matters as may be prescribed, by notification, amend the provisions of the Schedule to the Act. The Notification under which the assessee claims power tariff concession has been issued in exercise of the powers conferred under Section 4 of the Tamil Nadu Revision of Tariff Rates on Supply of Electrical Energy Act, 1978 and the said notification amended the earlier notification and came into force on 01.02.1995;

++ on a careful reading of the Notification, it is evidently clear that the notification imposes several conditions and it is not contingent upon the industry merely being established in an area other than non-Metropolitan area. The Notification clearly states that the unit should have reached the particular percentage for claiming tariff concession. Therefore, it is clear that the power tariff concession does not get automatically extended merely on the fact that the assessee set up the industry in other than non-metropolitan area viz., in the instant case, Sholinghur and at Polambakkam. Once, we steer clear of this factual position, the question that remains to be considered is how the tariff concession should be treated under the provisions of the Income Tax Act. This question is no longer res integra and answered by the Supreme Court in the case of Sahney Steel, wherein, the Supreme Court laid down the basic test to be applied in judging the character of the subsidy. It was pointed out that the character of the receipt in the hands of the assessee whether Revenue or capital has to be determined with respect to the purpose for which the subsidy was given and that the point of time at which it is paid, its source or its form were irrelevant; if the object of the subsidy was to enable the assessee to run the business more profitably then the receipt is on revenue account; on the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of the subsidy was on capital account;

++ a cumulative reading of the conditions makes it manifestly clear that the condition is not contingent upon establishment of the unit, but, for the purpose of assisting the assessee in carrying out the business operation and the subsidy is given subject to strict compliance of the conditions given in Notification. Therefore, the receipt has to be treated as Revenue receipt, as it is contingent upon the commencement of the production and to enable the assessee to run the business more profitably;

++ as far as deduction u/s 80HHC, scrap sales is not to be included in the total turnover for the purpose of computing the deduction u/s 80HHC.