Purpose-based test for industrial subsidy: VAT remission held capital in nature and excluded from normal tax and book profit.

VAT remission under an industrial incentive scheme was treated as a capital receipt because the decisive test was the scheme's object: to promote industrial expansion, fixed capital investment and employment. On that purpose-based approach, the remission fell in the capital field and was not taxable as revenue income under normal provisions. The same receipt was also excluded from book profit under section 115JB because a sum that is not income in character cannot be brought into MAT computation merely by credit in the profit and loss account. The subsidy was therefore excluded from taxation under both computations.

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Issues: (i) Whether VAT remission received under the Assam industrial incentive scheme was a capital receipt or a revenue receipt for purposes of normal taxation; (ii) whether such subsidy, if capital in nature, was includible in book profit under section 115JB.

Issue (i): Whether VAT remission received under the Assam industrial incentive scheme was a capital receipt or a revenue receipt for purposes of normal taxation.

Analysis: The decisive test was the object and purpose of the scheme, not the stage of disbursement, source, or form of the subsidy. The scheme was framed to accelerate industrial development, attract fixed capital investment, and generate employment in the State of Assam, and the assessee received the incentive for substantial expansion of its industrial unit. Applying the purpose test, the receipt was held to be in the capital field and outside the charge of income-tax under the normal provisions.

Conclusion: The VAT remission was capital in nature and not taxable as revenue receipt.

Issue (ii): Whether such subsidy, if capital in nature, was includible in book profit under section 115JB.

Analysis: A receipt which is not in the character of income cannot be brought into book profit merely because it is credited in the profit and loss account. Since the subsidy was found to be a capital receipt and not income, its inclusion would not reflect real working results and would be inconsistent with the computation framework of minimum alternate tax.

Conclusion: The subsidy was not includible in book profit under section 115JB.

Final Conclusion: The assessee succeeded on both the normal computation issue and the book profit issue, and the subsidy was directed to be excluded from taxation in both computations.

Ratio Decidendi: The character of an industrial subsidy depends on the purpose of the scheme, and where the scheme is designed to promote industrial expansion, capital investment, and employment, the subsidy is a capital receipt that does not form part of taxable income or book profit.

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