Income: Capital or revenue receipt: Subsidy: A. Y. 1997-98: If the subsidy is to enable the assessee to run the business more profitably then the receipt is on revenue account: If the subsidy is to enable the assessee to set up a new unit then the receipt would be on capital account:

The assessee was engaged in manufacturing of internal combustion engines of three horse power. The assessee received subsidy from the State Government of Rs. 20 lakh as incentive to set up a new unit. The assesee treated the same as capital receipt. The Assessing Officer held that it is the revenue receipt and added it to the total income. The Tribunal allowed the assessee’s appeal and deleted the addition.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The character of a receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. The purpose test has to be applied. The point of time at which the subsidy is given is not relevant. The source is immaterial. The form of subsidy is immaterial. The main condition and with which the court should be concerned is that the incentive must be utilised by the assessee to set up a new unit or for substantial expansion of the existing unit.

ii) If the object of the subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit, the receipt of subsidy would be on the capital account.

iii) Once the undisputed facts pointed towards the object and that being to enable the assessee to set up a new unit then the receipt was a capital receipt.”

Editor’s Note: The decision is for A.Y. 1997-98. The impact of Explanation 10 to section 43(i) inserted w.e.f. 01-04-1999 needs to be considered.