Sales tax subsidy under an industrial incentive scheme is capital receipt when aimed at promoting backward-area industrial investment.

Sales tax subsidy under a State industrial incentive scheme for backward areas was treated as a capital receipt, because its character depended on the scheme's object of promoting industrial investment and development rather than on trading operations. The fact that the subsidy was linked to substantial expansion of an existing unit did not alter its tax treatment, since the decisive factor remained the purpose for which the incentive was granted. The subsidy was therefore not assessable as revenue income.

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Issues: Whether sales tax subsidy granted under the Madhya Pradesh scheme for industries in backward areas, including for substantial expansion of an existing industrial unit, constituted a capital receipt and was not taxable as revenue income.

Analysis: The reference was answered by following the earlier binding view that sales tax subsidy granted under the State scheme to industries set up in backward areas for a specified period from commencement of production was a capital receipt. The scheme's object and character of the subsidy, rather than the mere fact that it was linked to expansion, governed its tax treatment.

Conclusion: The subsidy was held to be a capital receipt and not assessable to tax.

Ratio Decidendi: A sales tax subsidy granted under an industrial incentive scheme framed to promote development in backward areas is a capital receipt where the subsidy is referable to the object of setting up or encouraging industrial investment rather than to day-to-day trading operations.

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