Capital receipt versus revenue receipt and lease rent treatment turn on the purpose of the payment and the rights acquired.

A grant for research and development was treated as capital in nature where the agreement required the cash component to be kept as an earmarked corpus and invested in long-term financial instruments, with only the interest available for use; the character of the receipt depended on the purpose and conditions attached to it, so the principal was not taxable as income. Lease rent paid for Narela leasehold land was treated as revenue expenditure because the assessee merely obtained the right to use the land for business, while ownership remained with the lessor; the long-term nature of the lease did not convert the periodic rent into capital expenditure.

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Issues: (i) Whether the grant of Rs. 24.44 crores received from the holding entity for research and development was a capital receipt or a revenue receipt; (ii) Whether lease rent paid for the Narela leasehold land was capital expenditure or revenue expenditure.

Issue (i): Whether the grant of Rs. 24.44 crores received from the holding entity for research and development was a capital receipt or a revenue receipt.

Analysis: The agreement showed that the overall grant was intended for research and development, but the cash component was required to be treated as an earmarked corpus and invested in long-term financial instruments, with only the interest thereon available for research and development. The Tribunal applied the purposive test and held that the character of the receipt had to be determined by the object and terms attached to the grant. Since the principal amount was kept under the control of the grantor and the assessee could use only the interest, the cash grant retained a capital character.

Conclusion: The receipt of Rs. 24.44 crores was held to be capital in nature and not taxable as income.

Issue (ii): Whether lease rent paid for the Narela leasehold land was capital expenditure or revenue expenditure.

Analysis: The Tribunal distinguished between acquisition of a capital asset and payment for use of land. It followed the principle that where the assessee merely obtains the facility to carry on business on leased land and the ownership remains with the lessor, the payment is revenue in nature. The perpetual or long-term nature of the lease by itself did not convert the periodic lease rent into capital expenditure.

Conclusion: The lease rent paid for the Narela land was held to be revenue expenditure and allowable.

Final Conclusion: The assessee succeeded on the substantive grounds that were adjudicated, and the assessment was altered to that extent, resulting in a partial allowance of the appeal.

Ratio Decidendi: For determining whether a grant or subsidy is capital or revenue in nature, the decisive factor is the purpose and effect of the receipt as governed by the terms of the grant, and a payment for mere use of leased land without transfer of ownership is revenue expenditure.

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