Capital subsidy principle: sales tax reimbursement under an industrial incentive scheme was treated as non-taxable capital receipt.

Sales tax reimbursement under a State incentive scheme for Scheduled Caste and Scheduled Tribe entrepreneurs was treated as a capital subsidy because the scheme's dominant object was to encourage setting up of industries and establish the business. The character of a subsidy depends on its purpose, not its source, and reimbursement quantified by reference to sales tax or linked to production does not become revenue income where the incentive forms part of a special package for industrial set-up. The receipt was therefore not taxable as revenue income.

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Issues: Whether sales tax reimbursement received under a State incentive scheme for Scheduled Caste and Scheduled Tribe entrepreneurs was a capital receipt or a revenue receipt liable to tax.

Analysis: The character of a subsidy depends on its purpose and not on the source from which it is paid. Where the scheme is framed to encourage setting up of industries and the incentive is granted as part of a special package for establishing the business, the receipt is attributable to a capital purpose. The fact that reimbursement is quantified with reference to sales tax, or that it is linked to production, does not by itself make the receipt revenue in nature if the dominant object of the scheme is to assist in setting up the industrial unit.

Conclusion: The sales tax reimbursement under the scheme was held to be a capital subsidy and was not taxable as revenue income, in favour of the assessee.

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