Capital receipt test for industrial subsidies: incentive linked to setting up new units was not taxable as revenue income.

Subsidy received as refund or exemption of excise duty and sales tax/VAT under the Kutch incentive schemes was held to be a capital receipt, because the decisive factor was the object of the scheme. The incentives were designed to encourage setting up new industrial units and promote development and employment in the notified area, so their linkage to production or their disbursement after commercial operations began did not change their character. The timing and mechanism of payment were irrelevant where the purpose was to induce establishment of the unit. As a result, such receipts were not taxable as income and additions treating them as revenue receipts could not be sustained.

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Issues: Whether the subsidy received by way of refund or exemption of excise duty and sales tax value added tax under the incentive schemes for Kutch district constituted a capital receipt or a revenue receipt.

Analysis: The subsidy schemes were framed to encourage setting up of new industrial units in the notified area and to promote development and employment in Kutch district. The receipt of incentives depended on the eligible unit having been established under the scheme, and the timing or mechanism of disbursement after commercial production did not determine the character of the receipt. Applying the purpose test, the decisive factor was the object of the scheme. Since the incentives were intended to induce setting up of new industrial units, the receipts were on capital account. The authorities below erred in treating the incentives as revenue receipts merely because they were linked to production and collected or refunded after commencement of operations.

Conclusion: The subsidy in the form of excise duty refund and sales tax or VAT exemption was a capital receipt and not taxable as income.

Final Conclusion: The additions made by treating the incentive receipts as revenue income could not be sustained, and the assessee succeeded in all the appeals.

Ratio Decidendi: The character of a subsidy depends on the purpose for which it is granted; where the object of the scheme is to assist in setting up a new industrial unit, the subsidy is a capital receipt, and the time or form of payment is irrelevant.

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