Income Tax | Subsidy Can Become Taxable Depending On Purpose Test : Supreme Court
The Supreme Court on Wednesday (October 7) held that an electricity subsidy calculated based on power charges incurred by an industrial undertaking is a revenue receipt liable to tax when it is intended to reduce operational costs rather than contribute to capital investment.
A bench of Justice Prashant Kumar Mishra and Justice Shree Chandrashekhar dismissed an appeal filed by an assessee, upholding the tax authorities' and the Madras High Court's concurrent findings that the electricity subsidy of ₹16,20,745/- received by an assessee under the Puducherry Government's scheme was taxable.
The Court reiterated that the nature of a subsidy must be determined by applying the “purpose test”, examining the object for which it is granted and the scheme's actual operation.
Referring to its earlier judgments of Sahney Steel & Press Works Ltd. v. CIT and CIT v. Ponni Sugars and Chemicals Ltd., the Court clarified that the timing, source or form of a subsidy is not decisive. The inquiry is whether the assistance supports the business's operational expenses or facilitates capital investment.
Since the scheme did not require the amount to be used for acquiring assets or financing capital investment, but to reduce the electricity expenditure incurred in manufacturing, being available for five years from commencement of production, the judgment authored by Justice Mishra held that the amount received by the Appellant was not for capital purposes, but to reduce the electricity cost incurred in the manufacturing process; therefore, it amounted to only an operational subsidy as it was rendered for an operational assistance to the assessee.
“…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 a capital borrowing, or creation of any other capital asset. The record before us does not disclose that the amount received by the appellant was earmarked for any such capital purpose. On the contrary, the very basis of quantification is the expenditure on power consumed in production.”, the Court observed.
“…we find that the Assessing Officer, CIT (Appeals) and ITAT had correctly appreciated the nature of subsidy as a revenue receipt and as being given 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.”, the Court held.
As a result, the appeal was dismissed.
Appearance:
For Appellant(s) Ms. Radha Rangaswamy, AOR Mr. Tushar Jharwal, Adv. Ms. Ranjeeta Rohtagi, Adv. Ms. Shrika Gautam, Adv.
For Respondent(s) Mr. N Venkataraman, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. Sudarshan Lamba, AOR Mr. V Chandrashekhara Bharathi, Adv. Mr. Gaurav Arya, Adv. Mrs. Gargi Khanna, Adv. Ms. Rashmi Malhotra, Adv. Mr. Bhuvan Kapoor, Adv.