35 Income – capital or revenue receipt – Subsidy allowed by State Government on account of power consumption which was available only to new units and units which had undergone an expansion, was to be regarded as capital subsidy not liable to tax

Principal
CIT vs. Shyam Steel Industries Ltd.; [2018] 93 taxmann.com 495 (Cal):

Date
of Order: 07^th May, 2018:

Section
4 of ITA 1961

The question arose in
instant appeal was as to whether a subsidy allowed by the State Government on
account of power consumption, by its very nature, would make the subsidy a
revenue receipt and not a capital receipt, irrespective of the purpose of the
scheme under which such incentive or subsidy was made available to a business
unit.

The Calcutta High Court
held as under:

“i)  The difference may be in degrees but the words
of a scheme and the real purpose thereof have to be discerned in assessing
whether the incentive or the subsidy thereunder has to be regarded as a capital
receipt or a revenue receipt. There may be a scheme, for instance, that permits
every entity of a certain class to lower charges for consumption of power,
irrespective of the unit being a new unit or it having expanded itself. In such
a scenario, the incentive would have to be invariably regarded as a revenue
receipt. However, when the scheme itself makes the incentive applicable only to
new and expanding units, the fact that the incentive is in the form of a rebate
by way of sales tax or concessional charges on account of use of power or a
lower rate of duty being made applicable would be of little or no relevance.

ii)   When an entrepreneur sets up a business unit,
particularly a manufacturing unit, or embarks on an exercise for expanding an
existing unit, the entrepreneur factors in the cost of setting up the unit or
the cost of its expansion and the costs to be incurred in running the unit or
the expanded unit. It is the totality of the capital expenditure and the
expenses to run it that are taken into account by the entrepreneur. The
investment by an entrepreneur by way of capital expenditure is recovered over a
period of time and has a gestation gap. If the running expenses are made
cheaper by way of any subsidy or incentive and made applicable only to new
units or expanded units, the realisation of the capital investment is quicker
and the decision as to the quantum of capital investment is influenced thereby.
That is the exact scenario in the present case where the lower operational
costs by way of subsidy on consumption of power helps in the quicker
realisation of the capital expenditure or the servicing the debt incurred for
such purpose.

iii)  In view of the acceptance of the wider ambit
of the “purpose test” and the scheme in this case being available
only to new units and units which have undergone an expansion, the real purpose
of the incentive in this case has to be seen as a capital subsidy and has to be
regarded, as such, as a capital receipt and not a revenue receipt.

iv)  In the result, the revenue’s appeal is
dismissed.”