Bengal Textiles Association vs Commissioner of Income Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 30 March, 1960

Coram: J.L. Kapur, M. Hidayatullah

Bengal Textiles Association versus Commissioner of Income‑Tax, West Bengal, was decided by the Supreme Court of India on 30 March 1960. The judgment was authored by Justices J L Kapur and M Hidayatullah, with Kapur delivering the opinion. The matter before the Court concerned an appeal filed by special leave against the judgment and order of the High Court of Calcutta. The appeal arose out of an income‑tax reference that had been decided adversely to the assessee, the Bengal Textile Association, which at the time of the appeal was in liquidation. For convenience the Court referred to the appellant as “the association.”

The association had been constituted as a statutory corporation under Central Ordinance No 32 of 1945, which was promulgated on 8 September 1945 for the purpose of improving the procurement and wholesale distribution of cotton piece‑goods in the Province of Bengal. Membership was limited strictly to dealers engaged in the wholesale trade of piece‑goods, and the board of control comprised nine members, all of whom were nominated by the Government. An agreement between the Government of Bengal and the association conferred certain privileges on the latter. One clause stipulated that the Government would be responsible for paying the association each month the administrative expenses incurred in the preceding month, including establishment charges, office advertising, and salaries and wages, provided that the total did not exceed Rs 60,00,000 per year after deducting the salary and expenses of the liaison officer. In response to a request from the association, the Central Board of Revenue issued a letter dated 13 November 1945, agreeing that the association’s profits would not be subject to income‑tax, super‑tax or excess profits tax. However, the Board required that each member of the association be assessed on the full share of the association’s profits, not merely on any dividends received. Accordingly, the members were required to furnish to the Commissioner of Income‑Tax, Bengal, undertakings in a prescribed form. The letter further stipulated that if any member withdrew from the undertaking, the assessment of the association for the preceding years could be reopened and the association itself could be assessed. The members gave such undertakings, and the association continued its business without being assessed for income‑tax, super‑tax or excess profits tax. In 1947 the Business Profits Tax Act (XXI of 1947) came into force retroactively from 1 April 1946. The income‑tax authorities attempted to assess the association under this new Act, prompting the association to approach the Central Government. By a letter dated 16 July 1948, the Central Government informed the association that it could not accede to the association’s request for exemption beyond the scope of the existing exemption. Consequently, the association was assessed under the Business Profits Tax for three chargeable accounting periods ending 31 December 1946, 31 March 1947, and 31 December 1947.

For the accounting periods ending on December 31, 1946, March 31, 1947, and December 31, 1947, the association asserted that it was entitled to exemption from tax. It further contended that a sum of Rs 6,00,000, which had been paid by the Government to the association during the first chargeable accounting period, should be excluded from the business profits tax under section 4, proviso (c), of the Business Profits Tax Act because the payment was a subsidy. The Income‑tax Officer rejected these contentions, and the rejection was affirmed by the Income‑tax Appellate Tribunal. The Tribunal held that the tax imposed by the Business Profits Tax Act did not fall within the exemption that had been granted, that the exemption notice did not possess the force of law, and that the Rs 6,00,000 paid by the Bengal Government was not a subsidy and therefore could not be exempted under section 4, proviso (c), of the Act.

Subsequently, the association filed a case before the High Court under section 66(I) of the Income‑tax Act, seeking the Court’s opinion on three specific questions. The first question asked whether, on the facts of the case, the association’s profits were exempt from taxation under the Business Profits Tax Act of 1947. The second question concerned whether the provision of the Business Profits Tax Act that brought profits made from April 1, 1946, within the charge of tax was beyond the legislative competence of the Central Legislature. The third question inquired whether the Rs 6,00,000 paid by the Government of Bengal for the accounting year ending December 31, 1946, qualified as a subsidy and was therefore exempt under clause (c) of the proviso to section 4 of the Act. The High Court did not consider the second question. It answered the remaining two questions against the association, holding that the association’s profits were not exempt under either the statutory provisions or the exemption letter dated November 13, 1945, and that the Rs 6,00,000 was not a subsidy but a payment towards the association’s expenses. The Court also ruled that the issue of whether the payment came from the Central Government or the Bengal Government could not be argued, as it had not been raised before the Tribunal. After examining the terms of the agreement, the functions performed by the association, and the manner in which the business was conducted, the High Court concluded that even if the association were a separate entity, the payment by the Government appeared to be a payment to itself, and therefore it was “not help but price.” The association subsequently appealed this judgment to this Court by way of special leave. For the three chargeable accounting periods, a common question remains whether the association obtained a valid exemption from payment of the Business Profits Tax.

In this case the Court examined whether the association was exempt from business profits tax for every chargeable accounting period. The first issue it considered was whether the sum of six hundred thousand rupees paid to the association constituted a subsidy within the meaning of the proviso to section four of the Business Profits Tax Act. The Court observed that the High Court had already answered both of the questions that arose in this respect and that those answers were correct. The Court turned first to the question of exemption based on the letter dated eleven thirteen 1945 and on the provisions of the Income‑Tax Act. It held that the exemption claimed by the association could not operate because the letter granted exemption only under certain conditions relating to income‑tax, super‑tax or excess‑profits tax, and because, under section sixty‑three of the Income‑Tax Act, the power to grant such exemption ceased to be exercisable after the Indian Income‑Tax (Amendment) Act of nineteen‑thirty‑nine took effect. The Court quoted the relevant sub‑section, which states that after the commencement of that amendment the power conferred by the earlier sub‑section may be used only for the purpose of rescinding, reducing or modifying an exemption that had already been granted. Consequently, the Court concluded that neither the Central Board of Revenue’s letter nor the Income‑Tax Act could support the association’s contention, and that the first question was rightly answered in the negative. The Court then addressed the second issue, namely the character of the six hundred thousand rupees paid by the Government of Bengal during the first chargeable accounting period that ended on thirty‑first December nineteen‑forty‑six. The appellant asserted that the payment was a subsidy and therefore fell within the exemption provided by the proviso to section four of the Business Profits Tax Act. To determine the true nature of the payment, the Court examined the agreement between the Government of Bengal and the association. The preamble of the agreement set out the respective obligations of the parties. Clause eight required the association, subject to the Government’s contribution, to arrange and maintain suitable office accommodation in Calcutta and to equip it with appropriate technical and administrative staff. Clause eighteen obliged the association, at its own expense, to keep all sorts of cloth and to receive no remuneration or profit beyond the margin between the purchase price and the selling price to the buyer. Clause twenty‑four stipulated that a sum not exceeding six hundred thousand rupees could be paid for establishment charges, office rent, advertising, salaries, wages and similar expenses. The clause read that during the existence of the association the Government would be responsible for and would pay each month to the association the administrative expenses incurred in the preceding month, including establishment charges, office rent, advertising, salaries and wages, but that the total annual amount could not exceed six hundred thousand rupees, with a maximum of seventy‑five thousand rupees per annum for certain items. The Court noted these terms in order to assess whether the payment was truly a subsidy or merely a contribution towards the association’s administrative costs.

In the agreement the Government undertook to pay the salary and expenses of the liaison officer who was appointed by the Government and of his personal staff, but it expressly excluded any responsibility for the costs and expenses that the association might incur in connection with the purchase, transport, insurance, storage and distribution of cloth. The association had been created for the purpose of procuring and distributing cloth, and its functions were governed both by the provisions of the agreement and by the Bengal Cloth and Yarn Control Order. The overall pattern of the agreement indicates that the association bore responsibility for its own expenses, subject only to the contribution described above that the Government would make. The High Court had interpreted the Government’s contribution as a payment made by the Government to itself. That interpretation was rejected because, when the various terms of the agreement are read together, it becomes reasonably clear that the Government was paying for services actually rendered and that its contribution was intended to reimburse the actual expenses incurred by the association in a given month, to be paid in the month following the expense. The contribution therefore cannot be characterized as a bounty. The payments were made to enable the association to carry on its trade or business and to compensate it for services it performed for the Government; consequently they must be viewed from that perspective. Because the payments were made for business purposes and for services rendered, they cannot be said to be of a benevolent nature. Their character and quality preclude treating them as a bonus or a subsidy, since the term “bonus” or “subsidy” in section 4, proviso (c) implies a gift, which these payments were not. Counsel for the association relied upon two authorities, namely Seaham Harbour Dock Co. v. Crook and Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue. In the first case the grant was provided not as a supplementary trading receipt but for the specific purpose of enabling the company to undertake works of relief of unemployment, and it was held not to constitute taxable income. Lord Buckmaster observed that the grant was made by a government department with the idea that, by its use, men might be kept in employment. The sums granted in that case were received by the assessee not as part of its profits or gains, nor as a sum intended to make up profits, but solely for an expense purpose related to unemployment relief. The latter case was not helpful in deciding the present matter; it was cited only to illustrate that the measure of payment does not by itself indicate its quality. In the present case, however, the payments were made for services rendered to the Government, which negates any characterization of them as a subsidy.

The Court observed that in the earlier authority the amount received by the assessee was not intended to augment its profits; rather, it was supplied solely to meet expenses incurred in the relief of unemployment. Regarding the second authority cited, the Court held that it did not aid in deciding the present dispute because that decision had been invoked merely to illustrate the principle that the size of a payment does not, by itself, determine the nature or quality of the payment. The Court acknowledged that the proposition might be correct in a general sense, but emphasized that in the facts before it the payments under scrutiny were made because the association had performed services for the Government. Consequently, those payments could not be classified as a subsidy, since they were consideration for services rendered rather than a gratuitous grant. Having examined the arguments and the authorities relied upon, the Court concluded that the questions referred to the High Court had been answered correctly. Accordingly, the appeal was dismissed, and the costs of the proceedings were awarded to the opposing party.