Purpose of subsidy controls tax character: industry-setting incentive linked to fixed capital investment is capital, not revenue.

Subsidy under a State Investment Subsidy Scheme is characterised by its purpose: if it is designed to induce establishment of an industry and is linked to fixed capital investment, it is a capital receipt. Where the scheme excludes working capital, computes assistance by reference to fixed investment, and requires continued production for a stipulated period, the payment retains capital character even if sanction is finalised after production begins. A subsidy aimed at supporting post-commencement business operations would ordinarily be revenue in nature, but the operative test remains the object of the scheme rather than the source of funds or timing of approval. The subsidy was treated as a capital receipt and not taxable as revenue receipt.

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Issues: Whether the subsidy received by the assessee under the State Investment Subsidy Scheme was a capital receipt or a revenue receipt.

Analysis: The character of subsidy depends on its purpose. A subsidy granted to assist carrying on business operations after commencement of production is ordinarily a revenue receipt, but where the subsidy is intended to encourage setting up of industry and is linked to fixed capital investment, it takes the character of a capital receipt. The scheme in question computed subsidy with reference to fixed capital investment, excluded working capital, and required the industrial unit to continue in production for a stipulated period, showing that the payment was meant to induce establishment of industry in a backward area. The fact that the sanction was finalized after commencement of production did not alter the purpose of the subsidy.

Conclusion: The subsidy was a capital receipt and not taxable as revenue receipt.

Ratio Decidendi: The true character of a subsidy is determined by its purpose and not by the source of funds or the timing of sanction alone; if the subsidy is intended to promote setting up of an industry and is linked to fixed capital investment, it is a capital receipt.

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