2023 (12) TMI 227 - HC - Income Tax

Government subsidies and incentives are taxable income under Section 2(24)(xviii) of Income Tax Act

Serum Institute of India Private Limited Versus Union of India, Central Board of Direct Taxes, The Commissioner of Income Tax, Circle – 6, Pune, The Assistant Commissioner of Income Tax, Circle – 6, Pune,

Serum Institute of India Private Limited Versus Union of India, Central Board of Direct Taxes, The Commissioner of Income Tax, Circle – 6, Pune, The ... Issues Involved:1. Constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961.2. Retrospective application of the sub-clause.3. Distinction between capital and revenue receipts.Summary:1. Constitutional Validity of Sub-Clause (xviii) to Section 2(24):The petitioner challenged the constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961, arguing that it unjustly includes subsidies, grants, cash incentives, duty drawbacks, waivers, concessions, or reimbursements as 'income,' making them taxable. The petitioner contended that this sub-clause obliterates the distinction between 'income' and 'capital receipts,' which the Supreme Court has historically upheld as non-taxable. The petitioner argued that taxing capital receipts as income is constitutionally impermissible and violates Articles 14, 19, 246, 265, and 289 of the Constitution of India.The court held that the legislative competence of Parliament to enact such a provision is well established. The court emphasized the presumption of constitutionality in fiscal statutes and the limited scope of judicial review in economic matters. The court found no constitutional infirmity in the provision, stating that the legislature has the authority to define what constitutes income and to include subsidies and grants within that definition. The court dismissed the petition, upholding the validity of the sub-clause.2. Retrospective Application:The petitioner argued that the sub-clause has unintended retrospective application, affecting benefits availed before its enactment. The court noted that the petitioner applied for the subsidy after the amendment had been in effect for over two years, indicating acceptance of the prevailing tax regime. The court held that the amendment was public knowledge, and the petitioner, being engaged in business activities, should have been aware of the tax implications. The court found no merit in the argument of unintended retrospective application.3. Distinction Between Capital and Revenue Receipts:The petitioner contended that the sub-clause fails to differentiate between capital and revenue receipts, contrary to established judicial precedents. The court referred to landmark cases like Sahney Steel and Press Works Ltd. and Ponni Sugars and Chemicals Ltd., which applied the 'purpose test' to determine the nature of subsidies. The court acknowledged that the Finance Act, 2015, sought to end disputes by making all subsidies taxable unless they fell under an exclusion category. The court held that the legislative intent was to align the definition of 'income' with evolving economic landscapes and judicial precedent. The court found no irrationality in the legislature's decision to include various subsidies and concessions as income.Conclusion:The court dismissed the petition, upholding the constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961. The court found no merit in the arguments regarding retrospective application and the distinction between capital and revenue receipts. The court emphasized the legislature's authority to define income and the presumption of constitutionality in fiscal statutes.