2018 (5) TMI 702 - HC - Income Tax

Nature of receipt - revenue or capital - subsidy allowed by the State Government on account of power consumption - purpose of the scheme under which such incentive or subsidy is made available to a business unit - scope of purpose test - Held that - When an entrepreneur sets up a business unit, particularly a manufacturing unit, or embarks on an exercise for expanding an existing unit, the entrepreneur factors in the cost of setting up the unit or the cost of its expansion and the costs to be incurred in running the unit or the expanded unit. Capital expenditure and the expenses to run it that are taken into account by the entrepreneur. The investment by an entrepreneur by way of capital expenditure is recovered over a period of time and has a gestation gap. If the running expenses are made cheaper by way of any subsidy or incentive and made applicable only to new units or expanded units, the realisation of the capital investment is quicker and the decision as to the quantum of capital investment is influenced thereby. That is the exact scenario in the present case where the lower operational costs by way of subsidy on consumption of power helps in the quicker realisation of the capital expenditure or the servicing the debt incurred for such purpose. In view of the acceptance of the wider ambit of the purpose test in the most recent judgment of the Supreme Court cited by the parties and the scheme in this case being available only to new units and units which have undergone an expansion, the real purpose of the incentive in this case has to be seen as a capital subsidy and has to be regarded, as such, as a capital receipt and not a revenue receipt.

Summary

Issues: Determination of whether a subsidy allowed by the State Government on power consumption constitutes a revenue receipt or a capital receipt, based on the purpose of the scheme under which the subsidy is provided.

Analysis:
The High Court deliberated on the issue of whether a subsidy granted by the State Government for power consumption should be classified as a revenue receipt or a capital receipt. The Court noted a divergence in opinions between the judicial member and the accountant member of the Appellate Tribunal. The judicial member relied on a previous Supreme Court judgment, while the accountant member referenced a more recent decision. The Court emphasized the significance of the purpose of the subsidy in determining its classification, considering whether it was intended for setting up new units or expanding existing ones. The Court referred to the Sahney Steel case, where a benefit received for business purposes was considered a revenue receipt. However, in the Ponni Sugars case, the purpose of the subsidy was crucial in classifying it as a capital receipt, even though the subsidy was in the form of reduced duty and increased allocation for sugar sales.

The Court further discussed the "purpose test" established in various judgments, including the Chaphalkar Brothers case, which broadened the scope of the test. The Court analyzed the terms of the scheme under which the subsidy was provided and highlighted clauses indicating restrictions on certain subsidies related to capital expenditure. The appellant argued that the scheme aimed to enhance capital resources for new or expanded units rather than reducing operational costs for existing units. The Court emphasized the importance of discerning the true purpose of the scheme to determine the nature of the subsidy.

Moreover, the Court considered the impact of subsidies on an entrepreneur's investment decisions, particularly in setting up or expanding business units. It noted that subsidies influencing capital investment recovery and operational expenses could expedite the realization of investments. Given the scheme's applicability only to new or expanded units, the Court concluded that the subsidy should be treated as a capital receipt rather than a revenue receipt. Consequently, the Court dismissed the appeal, affirming the Tribunal's majority view that the subsidy under the scheme constituted a capital receipt.