Purpose test for subsidy and rectification limitation after Vivad Se Vishwas settlement: reassessment order survives for collateral use.

Settlement under the Direct Tax Vivad Se Vishwas Scheme did not erase the reassessment order for collateral purposes, so limitation for rectification under section 154 ran from the reassessment order and the application was within time. Applying the purpose test, fertilizer subsidy under the Nutrient Based Subsidy Policy was treated as a capital receipt because the scheme promoted long-term industry objectives rather than meeting trading or operating costs. As a capital receipt, it was not chargeable to tax and was to be excluded while computing book profit under section 115JB.

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Issues: (i) Whether a reassessment order continued to be an operative order for the purpose of limitation under section 154 of the Income-tax Act, 1961 after settlement of the reassessment dispute under the Direct Tax Vivad Se Vishwas Scheme, and whether the rectification application was time-barred; (ii) whether fertilizer subsidy received under the Nutrient Based Subsidy Policy was a capital receipt not chargeable to tax and liable to be excluded while computing book profit under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether a reassessment order continued to be an operative order for the purpose of limitation under section 154 of the Income-tax Act, 1961 after settlement of the reassessment dispute under the Direct Tax Vivad Se Vishwas Scheme, and whether the rectification application was time-barred.

Analysis: Settlement under the Direct Tax Vivad Se Vishwas Scheme resolved the dispute covered by the declaration, but did not extinguish or erase the reassessment order from legal existence. The later reassessment order remained the operative order for purposes not inconsistent with the settlement. Once that order survived, limitation under section 154(7) had to be counted from the reassessment order and not from the original assessment order. The rectification application was also entertained in part by the Assessing Officer, which reinforced its maintainability.

Conclusion: The rectification application was within limitation and was not rendered invalid by the Direct Tax Vivad Se Vishwas settlement.

Issue (ii): Whether fertilizer subsidy received under the Nutrient Based Subsidy Policy was a capital receipt not chargeable to tax and liable to be excluded while computing book profit under section 115JB of the Income-tax Act, 1961.

Analysis: The decisive test for subsidy characterization is the purpose test. The policy was aimed at promoting balanced fertilization, modernization, investment, competitiveness, innovation and long-term development of the fertilizer industry, and not at supplementing trading receipts or meeting day-to-day operating costs. On that basis, the subsidy assumed capital character. The claim was purely legal and rested on facts already on record, so it could be examined in rectification and appellate proceedings. A receipt held to be capital in nature could not be brought to tax under the normal provisions or through the machinery of section 115JB.

Conclusion: The subsidy was held to be a capital receipt not chargeable to tax and was directed to be excluded while computing book profit under section 115JB.

Final Conclusion: The assessee succeeded on the limitation and merits issues for the first assessment year, and the Revenue failed on the subsidy characterization and MAT computation issues for the second assessment year, resulting in relief to the assessee and dismissal of the Revenue's challenge.

Ratio Decidendi: Settlement of a tax dispute under the Direct Tax Vivad Se Vishwas Scheme does not nullify the reassessment order for collateral purposes, and subsidy is capital or revenue in nature according to the dominant purpose of the scheme granting it.

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