TaxTMI 
TaxTMI 
13 Oct 2026 
Capital expenditure
If the expenditure creates an asset or significantly increased its useful life/capacity is called as ‘Capital Expenditure’. This expenditure usually extends beyond one accounting period. The assets are recorded in the balance sheet as an asset and depreciation is charged on the assets.
Revenue expenditure
If the expenditure maintains normal operations or existing capacity is called as the ‘Revenue Expenditure’. This expenditure is incurred almost within that accounting period. This is charged as expenditure in the ‘Income Statement’.
To identify whether an expenditure is a capital expenditure or revenue expenditure the above said points are to be taken care of.
Issue
In this article the electricity subsidy granted to a business entity will be considered as ‘capital expenditure’ or ‘revenue expenditure’ with a decided case law.
Case law
In M/s. Mepco Industries Ltd. Versus Commissioner of Income Tax, Madurai. - 2026 (10) TMI 618 - Supreme Court, the appellant received electricity subsidy from the Pondicherry Government to the tune of Rs.16.2 lakhs for the assessment year 1997 – 98. The appellant company is manufacturing potassium chloride and it received electricity subsidy for the same. The appellant treated this expenditure as capital expenditure. This subsidy was granted under the scheme of power subsidy, which was in operation with effect from 27.11.1975. The scheme was framed with the object of fostering industrial growth in the Union Territory and, under the relevant pattern, provided subsidy on power charges for a specified period after commencement of production. The rate of subsidy was 33⅓% of the power charges for the first three years, 20% for the fourth year and 10% for the fifth year, subject to the applicable ceiling.
The appellant filed its return of income on 27.11.1997 in which it claimed the electricity subsidy of Rs. 16,20,745/- as a capital receipt not liable to tax. The assessment was thereafter taken up for scrutiny and completed under Section 143(3) of the Income Tax Act, by the Joint Commissioner of Income Tax, Special Range-II, Madurai - 3, by order dated 31.03.2000. The Assessing Officer treated the subsidy as a revenue receipt and included the amount of Rs. 16,20,745/- in the taxable income. In doing so, it was held that the subsidy was given towards revenue expenditure.
Being aggrieved against the order of Assessing Officer, the appellant filed an appeal before the First Appellate Authority. The First Appellate Authority observed that the subsidy was calculated with reference to the power charges, and concluded that its effect was to reduce the cost of power consumed by the appellant assessee and consequently assist the profitability of the business and confirmed the assessment order.
The appellant, against the order of the First Appellate Authority filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short). The ITAT dismissed the appeal on 28.07.2005. The ITAT held that the subsidy was available only after the industrial unit had been set up and production had commenced and that it was granted with reference to the cost of electricity. The subsidy is an assistance in carrying on the business rather than as a contribution towards the capital outlay of the industrial undertaking. This subsidy was granted for bringing any new asset into existence. Therefore, the ITAT held that the power subsidy, being assistance received after commencement of production and operating to reduce the cost of electricity consumed by the appellant, was revenue in character.
Against the order of ITAT the appellant filed an appeal before the High Court. The High Court confirmed the findings of the lower authorities and dismissed the appeal. Against the said order, the appellant filed an appeal before the Supreme Court.
The Supreme Court heard the submissions of both the parties and also analysed the documents on records. The short question which arised for the Supreme Court was as to whether the electricity subsidy of Rs.16,20,745/- received by the appellant under the scheme of the Government of Pondicherry is a capital receipt or a revenue receipt. The Supreme Court wanted the answer in this appeal must necessarily depend upon the true character and purpose of the subsidy scheme under which the amount was granted.
The Supreme Court examined the nature of various incentives granted under the Andhra Pradesh Government's scheme, including relief in electricity and water charges and other concessions available to new industries. The said subsidies were available only after the industry had been set up and production had commenced, and were intended to assist the assessee in carrying on its business. This subsidy payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives was given to the industries to run more profitably for a period of five years from the date of the commencement of production. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production.
The Supreme Court drew the distinction between a subsidy which assists an assessee in setting up or completing its capital structure and one which assists it in carrying on the business which has already been established. The subsidy requires the character of the particular assistance to be determined in the light of the scheme under which it is granted. Where the object is to enable the assessee to run its business more profitably, the receipt is held to be on revenue account, and where the object is to enable the assessee to set up a new unit or substantially expand an existing unit, the receipt is on capital account. The purpose of the subsidy has to be ascertained from the scheme as a whole and not merely from a general statement of policy or from the nomenclature employed by the Government.
In the present case, the Supreme Court observed that original subsidy scheme, published in the Gazette dated 27.11.1975, provided for power subsidy to new industries, both LT and HT consumers, with the stated object of fostering industrial growth in the Union Territory. The subsidy itself was tied to power charges, and the scheme itself contemplated that the consumer would pay the electricity charges and claim subsidy with reference to the electricity consumed for the manufacturing process. The revised pattern approved on 09.12.1985 makes the operational character of this assistance even clearer, wherein the subsidy was to be paid for five years from the date the unit went into production and was quantified at 33⅓% of the actual energy charges paid during the first three years, 20% during the fourth year and 10% during the fifth year. The Government of Pondicherry, by G.O.Ms. No. 47/87 dated 12.08.1987, similarly described the measure as a power subsidy to industrial units on a tapering basis from the date of commencement of production.
The subsidy was not an independent grant calculated with reference to the capital invested in the industrial undertaking, rather its quantum moved directly with the electricity charges incurred in the course of production. The Supreme Court considered another aspect which goes against the appellant-assessee is that the subsidy does not lose its revenue character merely because, as a matter of business economics, reduction in electricity expenditure may leave more funds available with the assessee for its business. The relevant inquiry is whether the Government intended to make a contribution towards the capital structure or capital assets of the undertaking. A perusal of the record would reveal no such feature in the scheme.
In view of the above discussions the Supreme Court confirmed the findings of the lower authorities as this subsidy is a revenue expenditure. After the establishment of the industrial unit and commencement of production; that it was calculated with reference to power charges; that it reduced the cost of electricity consumed by the appellant-assessee; and that it was not shown to be a contribution towards bringing any new capital asset into existence. Therefore, the Supreme Court dismissed the present appeal.