Purpose test confirms sales tax subsidy is a capital receipt as consideration for capital investment, appeal allowed.

Whether a sales tax subsidy under a State Industrial Policy is a capital or revenue receipt was resolved by applying the purpose test: the dominant object of the grant governs its character, not timing or manner of payment. The policy linked subsidy benefits to fixed capital investment (including retention of sales tax for ten years, a ceiling tied to 300% of fixed capital investment, and location-based differentials), indicating the grant was consideration for capital investment. The Revenue's concession before the tribunal under Supreme Court precedent went unchallenged. Result: the sales tax subsidy is a capital receipt and the assessee's appeal succeeds.

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Issues: Whether the sales tax subsidy/exemption granted under the State Industrial Policy is a capital receipt or a revenue receipt.

Analysis: The Court examined whether the subsidy was granted to promote capital investment (capital nature) or was an operational/recurring assistance post commencement of production (revenue nature). The Court applied the purpose test as articulated by the Supreme Court in Ponni Sugars and reiterated in Chaphalkar Brothers, holding that the time or manner of grant is immaterial and the larger object (promotion of capital investment) is decisive. The factual matrix showed retention of sales tax collected by the assessee for ten years, with a ceiling linked to fixed capital investment (300% of fixed capital investment) and differential benefit based on location within the State, indicating that the subsidy was granted in consideration of capital investment. The Income Tax Department conceded before the Tribunal (ITAT) in light of the Supreme Court rulings that such subsidy is capital in nature, and no challenge to that concession was pressed by Revenue.

Conclusion: The sales tax subsidy/exemption under the State Industrial Policy is a capital receipt; this conclusion is in favour of the assessee and the assessee's appeal is allowed.

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