TaxTMI 
TaxTMI 
2026 (10) TMI 618
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.... Income-tax Act, 1961 ['IT Act'], as held by the Courts below. The appellant is a limited company engaged in the manufacture of potassium chlorate. For the relevant assessment year, it received the aforesaid amount as electricity subsidy and treated the same as a capital receipt. 2. The subsidy was granted under the Scheme of Power Subsidy ['Scheme'] of the Government of Pondicherry, which had been in operation since 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's case was that the scheme was intended to encourage the establishment of new industries in backward areas, whereas on the other hand, the Revenue Authorities have treated the subsidy as assistance towards the cost of power consumed in the course of the existing business. 3. The appellant filed its return of income on 27.11.1997. In the return, it claimed....
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....ment dated 09.07.2012, the High Court dismissed the appeal and had affirmed the view taken by Courts below. Essentially, the High Court followed its earlier decision in Commissioner of Income-tax vs. Karaikal Chlorates Ltd. [2011 SCC OnLine Mad 2604 [The Madras High Court has relied on the decision of this Court in Sahney Steel (supra)].], concerning the nature of the power subsidy under the same scheme, and held the receipt to be revenue in character, thereby taxable under the IT Act. 7. It is against these concurrent findings, the appellant-assessee has preferred the present Appeal. 8. We have heard the learned counsel appearing for the appellant and the learned ASG appearing for the respondent and have perused the materials on record. 9. The short question which arises now is 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 answer must necessarily depend upon the true character and purpose of the subsidy scheme under which the amount was granted. It is in this context that the decision of this Court in Sahney Steel (supra), on which complete relia....
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....ot capital subsidies." (emphasis supplied) 11. The decision in Sahney Steel (supra) examines the substance of the assistance and draws 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. In the latter situation, the subsidy bears the character of a revenue receipt. Thus understood, Sahney Steel (supra) does not lay down that every subsidy linked to production or electricity consumption is invariably revenue in nature, rather it requires the character of the particular assistance to be determined in the light of the scheme under which it is granted.[ Sahney Steels (supra) at Para 10, 13, 17, 19, 23 to 26, 32, 33.] 12. This understanding was specifically reaffirmed by this Court in Commissioner of Income Tax, Madras vs. Ponni Sugars and Chemicals Limited (2008) 9 SCC 337 at Para 14., where the decision in Sahney Steel (supra) was described to have laid down the basic test for determining the character of a subsidy and held that the character of the receipt must be determined with reference to the purpose for which the subsid....
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....f the scheme. The subsidy there took the form of exemption from entertainment duty, but the Court looked beyond the form of the incentive and found that the object of the scheme was to encourage the setting up of highly capital-intensive multiplex theatre complexes. Therefore, the subsidy was consequently held to be capital in nature with the Court specifically reiterating that the time of payment, source and form of the subsidy are not determinative as there is no straightjacket formula for determining whether an incentive is capital or revenue in nature. 14. Thus, the jurisprudence developed post Sahney Steel (supra) makes it clear that the "purpose test" is the governing test, but the purpose 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. The fact that a scheme of subsidy is intended to encourage industrial growth, employment or development of a backward area cannot, by itself, conclude the character of the receipt, and the Court must examine the manner in which the incentive actually operates and the benefit which it is designed to confer upon the recipient. 15. Tested....
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.... of subsidy was to encourage industrial growth and the establishment of industries in a backward area. We are of the view that this object cannot be viewed in isolation since an industrial incentive may undoubtedly have the broad economic objective of encouraging industrialisation, employment or development of a backward region, while the particular financial assistance granted under the scheme may nevertheless be intended to meet an operational cost of an industry which has already commenced production. Therefore, the relevant inquiry is not whether the scheme, viewed at a high level, seeks to promote industry, but what the particular subsidy provided by the scheme is intended to achieve in the hands of the recipient. 18. In the present case, the answer emerges from the scheme itself as the benefit is calculated as a specified percentage of the actual energy charges, and it is available for a limited period commencing with production, and its immediate and direct effect is to reduce the electricity cost incurred in the manufacturing process. The scheme does not require the subsidy to be applied towards acquisition of plant or machinery, construction of the factory, repayment of....