Industrial subsidy refunds under an incentive policy are capital receipts when aimed at setting up and expanding new units, not taxable income.

Industrial incentive refunds under the Jammu & Kashmir policy, including refund of GST and excise duty for eligible units in notified areas, are characterised by the purpose of the subsidy rather than its receipt form. Where the incentive is designed to promote industrial setting up and expansion, it is treated as a capital receipt and not as trading income. The analysis applies the character-and-purpose test, rejects treatment as revenue receipt merely because the amount was disclosed in the return, and notes that such refund is not covered by section 2(24)(xviii) unless expressly brought within the charging provision.

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Issues: Whether the subsidy received by the assessee under the Jammu & Kashmir industrial policy, in the form of refund of GST/excise duty, was a revenue receipt exigible to tax or a capital receipt not taxable under the Income-tax Act, 1961.

Analysis: The subsidy was granted under the New Industrial Policy and Notification No. 56/2002, which provided excise duty exemption/refund to eligible industrial units in notified areas. The decisive test applied was the character and purpose of the incentive. The refund was linked to industrial setting up and expansion under a fiscal incentive scheme and was not a trading receipt arising from operations. The Court followed the view that such duty refund does not fall within the scope of income under section 2(24)(xviii) and cannot be treated as revenue receipt merely because it was first offered in the return. The earlier decisions holding identical incentive receipts to be capital in nature were accepted and applied.

Conclusion: The subsidy received by the assessee was not exigible to tax and had to be treated as a capital receipt.

Final Conclusion: The addition sustained on account of the subsidy was deleted and the assessee succeeded in the appeal.

Ratio Decidendi: An industrial incentive granted as refund or exemption of excise duty under a policy designed to promote new industrial units is a capital receipt when its purpose is to encourage industrial development, and it is not taxable as income unless expressly brought within the charging provision.

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