Purchase-tax subsidy for sugarcane purchases: whether capital or revenue receipt; held taxable business income, petitions dismissed

The dominant issue was whether a purchase-tax subsidy received from the State Government was a capital receipt excludable from total income or a taxable revenue receipt. Applying the purpose test, the HC held that the subsidy scheme imposed no restriction requiring use for capital outlay, and the entitlement for five years from commencement of production, with quantification linked to sugarcane purchases, showed it was production-oriented and intended to support continuous business operations and meet initial operational difficulties, not to establish the factory. Although the CIT's reasoning treating it as purchase-tax reimbursement under s. 41(1) was inaccurate, the conclusion that the subsidy constituted a revenue receipt was legally sustainable; the writ petitions were dismissed.

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Issues involved: Challenge to order passed by CIT u/s 264 of the Income-tax Act for assessment of income for asst. yrs. 1986-87 and 1987-88 regarding treatment of purchase-tax subsidy as revenue or capital receipt.

Summary:
The petitioner challenged the CIT's order regarding the treatment of purchase-tax subsidy received as part of total income for asst. yrs. 1986-87 and 1987-88. The CIT considered the subsidy as a revenue receipt, leading to the petitioner filing writ petitions. The petitioner contended that the subsidy should be treated as a capital receipt, citing a Government Order recommending relief for new sugar factories. The CIT dismissed the revision, prompting the petitioner to file writ petitions.

The petitioner argued that the subsidy was for setting up sugar factories and should not be considered a revenue receipt simply because it equaled the purchase-tax on cane. Reference was made to a Supreme Court decision supporting the view that such subsidies are not taxable as revenue. The respondents, however, claimed the subsidy was granted post-production and was not for establishing the industries, supporting the CIT's stance that it was a revenue receipt.

Upon review, the Court found that the subsidy was provided to assist sugar factories post-production, not for their establishment, to help manage initial operational challenges. The Court agreed with the Supreme Court precedent that subsidies post-production are revenue receipts. It was noted that the subsidy was not tied to specific capital items or conditions, allowing its use for various purposes. The Court upheld the CIT's decision that the subsidy was a revenue receipt, dismissing the writ petitions.

In conclusion, the Court upheld the CIT's decision that the subsidy received was rightly treated as a revenue receipt, based on the scheme's production-oriented nature. The writ petitions were dismissed, with no costs awarded.

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