2002 (12) TMI 39 - HC - Income Tax

Amounts received by the assessee as subsidy capital or revenue receipt - Government of Tamil Nadu has framed a special component plan for employment of persons from Adi Dravida community and to provide employment to persons coming from Adi Dravida community, the Government has granted the subsidy with the object and intention to benefit the persons coming from Adi Dravida community by providing them employment. - The amount received by the assessee has nothing to do with the trade or business of the assessee. It is not a reimbursement of salary; it is not made for the normal working of the mill ; it is not made for the benefit of the assessee, but paid with a social objective in mind to achieve a social purpose Thus, amount received by way of subsidy under the scheme was capital in nature

Summary

Issues:
1. Classification of subsidy received as revenue or capital receipt.

Analysis:
The judgment of the High Court of Madras addressed the issue of whether certain amounts received by the assessee as subsidy should be treated as revenue or capital receipts for tax purposes. The assessee received a subsidy from the Government of Tamil Nadu under a special component plan to recruit 70 workers from the Adi Dravida community. The Income-tax Officer treated the subsidy as revenue in nature, while the Commissioner of Income-tax (Appeals) upheld this decision. However, the Appellate Tribunal disagreed, stating that the subsidy was granted for a benevolent purpose to provide employment and was not assessable as income.

The primary argument presented by the Revenue was that the subsidy represented the salary payable to employees and, therefore, should be considered revenue in nature. However, the court found no evidence to support this claim. The court emphasized that the purpose of the subsidy was to benefit the Adi Dravida community by providing employment, making it a capital receipt. The court highlighted the social objective behind the subsidy, aiming to uplift the socially oppressed community, rather than solely benefiting the assessee.

Additionally, the court rejected the Revenue's argument that treating the subsidy as a capital receipt would result in a double deduction, as the salary paid to employees would have been claimed as a business expenditure. The court clarified that the nature of the receipt should be determined at the time of receipt based on its quality, nature, and character in the hands of the recipient. Referring to previous legal precedents, including the House of Lords and decisions by Indian courts, the court emphasized that subsidies granted for benevolent purposes, such as providing employment to weaker sections of society, should not be taxed as income.

In conclusion, the High Court of Madras affirmed the Appellate Tribunal's decision, ruling that the subsidy received by the assessee was capital in nature, aligning with the benevolent and beneficial purpose of providing employment to the Adi Dravida community. The court answered the referred question of law in favor of the assessee and against the Revenue, highlighting the social objective and public interest behind the subsidy.