Industrial subsidy character depends on purpose: promotion-linked sales tax incentive is capital, cost-reimbursement fertilizer subsidy qualifies for deduction.

Sales tax incentive under the West Bengal industrial promotion scheme was treated as a capital receipt because the subsidy's purpose was to encourage setting up industry in a backward area, not to supplement trading operations. Fertilizer subsidy was treated differently: it reimbursed part of the manufacturing and selling cost under a controlled pricing mechanism, giving it a direct nexus with the eligible industrial undertaking. On that basis, it formed profits derived from the business and qualified for deduction under section 80(IB).

---

---

Issues: (i) Whether the sales tax incentive retained under the West Bengal incentive scheme was a capital receipt not chargeable to tax. (ii) Whether the fertilizer subsidy was income derived from the industrial undertaking and eligible for deduction under section 80(IB).

Issue (i): Whether the sales tax incentive retained under the West Bengal incentive scheme was a capital receipt not chargeable to tax.

Analysis: The incentive scheme was framed to promote industrialisation in the backward area and the assessee received the benefit because of the location and object of the scheme. The nature of the subsidy depended on the purpose for which it was granted, not on the form in which it was received. On that test, the sales tax incentive was held to be an incentive for setting up industries and not a trading receipt arising from the business operations of the undertaking.

Conclusion: The sales tax incentive was held to be a capital receipt not chargeable to tax, in favour of the assessee.

Issue (ii): Whether the fertilizer subsidy was income derived from the industrial undertaking and eligible for deduction under section 80(IB).

Analysis: The fertilizer subsidy represented part of the sale realisation linked to the controlled pricing mechanism, under which the Government reimbursed the difference between the cost of production and the notified price. The receipt went directly to recoup manufacturing and selling costs and therefore had a direct nexus with the business of the eligible industrial undertaking. Applying the settled principle that subsidies which reimburse business costs are profits derived from the business, the subsidy fell within the eligible profits for section 80(IB).

Conclusion: The fertilizer subsidy was held to be income derived from the industrial undertaking and was eligible for deduction under section 80(IB), in favour of the assessee.

Final Conclusion: The assessee succeeded on both the capital receipt issue and the deduction claim relating to fertilizer subsidy, and the appeal was allowed to that extent.

Ratio Decidendi: A subsidy granted for industrial promotion is a capital receipt when its object is to encourage setting up of industry, while a subsidy that reimburses a component of manufacturing or selling cost is profits derived from the eligible business for deduction purposes.

---