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Issues: (i) Whether the amount retained by the assessee by way of sales tax exemption under the U.P. industrial incentive scheme was a capital receipt not liable to tax or a revenue receipt taxable as income; (ii) whether a lessee in possession and use of the asset was entitled to depreciation.
Issue (i): Whether the amount retained by the assessee by way of sales tax exemption under the U.P. industrial incentive scheme was a capital receipt not liable to tax or a revenue receipt taxable as income.
Analysis: The character of a subsidy is determined by the purpose for which it is granted. A receipt is capital if the scheme is designed to enable setting up of a new unit or expansion of an existing unit and the assistance is tied to capital deployment. It is revenue if the object is to assist the assessee in carrying on business more profitably after production has commenced. The supplementary U.P. notification of 27.07.1991 granted exemption or retention of sales tax after production, without a condition that the retained amount must be used for capital expenditure. The presence of a separate capital subsidy in the main scheme, and the absence of a similar capital-use condition in the supplementary scheme, showed that the retained sales tax was meant to encourage profitability and industrial growth, not to recoup capital cost.
Conclusion: The amount retained under the sales tax exemption scheme was a revenue receipt and was taxable. This issue is decided in favour of Revenue and against the assessees.
Issue (ii): Whether a lessee in possession and use of the asset was entitled to depreciation.
Analysis: The question was covered by binding precedent recognizing that ownership for depreciation purposes includes a person who is entitled to use the asset for business and has the requisite dominion over it, even if title is not vested in that person in the strict legal sense. The earlier decision of the Court, applying the principles laid down by the Supreme Court, had already concluded that a lessee can claim depreciation.
Conclusion: Depreciation was allowable to the assessee-lessee. This issue is decided in favour of the assessee and against Revenue.
Final Conclusion: The common question on subsidy taxability was answered against the assessees, while the depreciation issue was answered in their favour, resulting in only a partial success for Revenue.
Ratio Decidendi: The true nature of a subsidy is ascertained by its purpose and object; where the scheme grants a post-commencement incentive without obliging capital utilization, the receipt is revenue, whereas depreciation may be claimed by a lessee having business use and effective dominion over the asset.
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