Subsidy classification as capital receipt can raise a referable question of law; duplicate nexus issue need not be separately referred.

The article explains that the tax treatment of a subsidy depends on the scheme governing it and on whether the receipt is capital or revenue in character. It notes that, under section 256(2) of the Income-tax Act, the question whether a subsidy is a capital receipt can raise a referable question of law for the High Court. It also states that a substantially overlapping question on absence of nexus with business activities need not be separately referred because it is covered by the main issue. The operative point is that duplicate reference questions may be declined as redundant.

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Issues: (i) Whether the question whether the subsidy received by the assessee was a capital receipt was referable to the High Court under section 256(2) of the Income-tax Act, 1961. (ii) Whether the question whether there was no nexus between the subsidy receipts and the assessee's business activities was separately referable.

Issue (i): Whether the question whether the subsidy received by the assessee was a capital receipt was referable to the High Court under section 256(2) of the Income-tax Act, 1961.

Analysis: The answer turned on the nature of the subsidy scheme, the character of the receipt, and the governing test for distinguishing capital from revenue subsidy receipts. The question required examination of the scheme and application of the legal principles governing subsidy classification, and therefore raised a referable question of law.

Conclusion: Yes. Question No. (i) was directed to be referred for opinion of the High Court.

Issue (ii): Whether the question whether there was no nexus between the subsidy receipts and the assessee's business activities was separately referable.

Analysis: The second question was substantially covered by the first question and did not require a separate reference.

Conclusion: No. Question No. (ii) was held not separately referable.

Final Conclusion: The reference application succeeded only in part, with a reference directed on the first question alone and the second question declined as redundant.

Ratio Decidendi: Where determination of the true character of a subsidy receipt depends on the scheme and the capital or revenue nature of the benefit, the issue may give rise to a referable question of law, but a substantially covered duplicate question need not be separately referred.

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