Purpose test for subsidy classification: incentive for setting up cinema halls was capital subsidy, not taxable revenue receipt.

The character of a subsidy depends on its purpose: if the scheme is intended to promote construction or setting up of a business facility, the subsidy is capital in nature; if it supports business operations, it is revenue. Applying that purpose test, the subsidy for construction of cinema halls was linked to establishing new theatres and was therefore a capital subsidy, not taxable as revenue receipt. The Tribunal had stated the correct principle but reached a contrary conclusion without adequate reasoning, so the HC set aside its order.

---

---

Issues: Whether the subsidy granted under the scheme for construction of cinema halls was capital subsidy not liable to tax or revenue subsidy exigible to assessment.

Analysis: The decisive factor was the object and purpose of the scheme, not the timing of disbursement or the manner in which the subsidy was quantified. The scheme was framed to promote construction of new cinema theatres, and the eligibility conditions and measure of subsidy were linked to that object. Applying the purpose test laid down by the Supreme Court, a subsidy intended to assist setting up a unit or completing a project is on capital account, whereas a subsidy meant to assist business operations is revenue in nature. The Tribunal had referred to the correct legal principle but then returned a conclusion contrary to that principle and unsupported by reasoning.

Conclusion: The subsidy was capital subsidy and not taxable as revenue receipt. The assessee succeeded and the Tribunal's order was set aside.

Ratio Decidendi: For determining the character of a subsidy, the controlling test is the purpose for which it is granted; a subsidy meant to promote construction or setting up of an industrial or business facility is a capital receipt, even if quantified or disbursed later.

---