Sales tax subsidy received after production start-up treated as operational income, not capital receipt; held taxable as revenue.

The dominant issue was whether sales tax subsidy received by the assessee constituted a capital receipt not chargeable to income-tax. Applying SC precedent in Sahney Steel, the HC held that a subsidy granted after commencement of production is revenue in nature because it is linked to operational activity rather than acquisition of a capital asset or setting up of the business. Consequently, the Tribunal's view treating the subsidy as a capital receipt was held legally unsustainable, and the question was answered against the assessee and in favour of the Revenue, making the subsidy taxable as a revenue receipt.

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Issues involved: Interpretation of sales tax subsidy as a capital or revenue receipt under Income-tax Act, 1961.

Judgment Summary:

The High Court of Calcutta considered an application u/s 256(1) of the Income-tax Act, 1961, where the Tribunal referred the question of whether a sales tax subsidy of Rs. 2,06,400 received by the assessee should be considered a capital receipt not liable to income-tax. The Assessing Officer initially claimed the subsidy was exempt from income-tax, but later treated it as a revenue receipt. The Commissioner of Income-tax (Appeals) and the Tribunal, following precedents, held that the subsidy is a capital receipt not subject to tax.

The Revenue argued that a recent apex court decision in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 concluded that sales tax subsidy received after production cannot be considered a capital receipt. The subsidy in question was received after production had commenced.

Referring to the apex court decision, the High Court noted that subsidies given after and conditional upon the commencement of production are considered assistance for the purpose of trade, not capital receipts. The Court found the earlier decision of the Madhya Pradesh High Court to be erroneous. Consequently, the Court ruled in favor of the Revenue, stating that the sales tax subsidy received after production cannot be treated as a capital receipt.

Therefore, the Court answered the question in the negative, in favor of the Revenue and against the assessee, disposing of the reference application. All parties were instructed to act on a xerox signed copy of the order.

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