Purpose-based subsidy test treats industrial incentive subsidy as capital receipt, excluding reduction from asset cost for depreciation.

A subsidy granted under the Government of Maharashtra Package Scheme of Incentives, 2007 was capital in nature because its purpose was industrial dispersal, growth, and employment generation, not meeting the cost of any specific asset. On that basis, it was not taxable as revenue receipt and could not be reduced from the actual cost of fixed assets for depreciation under Explanation 10 to section 43(1). The later insertion of section 2(24)(xviii) did not apply to the assessment years covered. The decisive test was the object of the subsidy, not the timing of payment or its quantification by reference to investment.

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Issues: Whether subsidy received under the Government of Maharashtra Package Scheme of Incentives, 2007 was a capital receipt or a revenue receipt, and whether it could be reduced from the actual cost of assets for depreciation purposes.

Analysis: The subsidy was granted under a scheme whose object was industrial dispersal to less developed areas and sustained industrial growth with employment generation. The decisive factor was the purpose of the subsidy and not the timing or mode of disbursal. Since the subsidy was intended to encourage setting up of industrial units and not to meet the cost of any particular asset, it was capital in nature. For the same reason, Explanation 10 to section 43(1) did not apply, because the subsidy was not intended to offset the actual cost of the assets. The later insertion of section 2(24)(xviii) was not applicable to the assessment years involved.

Conclusion: The subsidy was held to be a capital receipt not chargeable to tax, and it could not be reduced from the actual cost of the fixed assets for depreciation purposes.

Ratio Decidendi: The true character of a subsidy is determined by the purpose for which it is granted; if the object is industrial development and setting up of units, the subsidy is capital in nature even if paid after commencement of production and even if quantified with reference to investment or asset cost.

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