Purpose of grant is to be seen to ascertain it as a capital or revenue receipt

In CIT v. Shyam Steel Industries Ltd., a Division Bench of Calcutta High Court held that the subsidy allowed by the State Government on account of power consumption to new or expanding industrial units was a capital receipt.

The subsidy as referred to above was granted to business units and the question was whether such subsidy is to be regarded as capital receipt or revenue receipt. The instant appeal was filed at the instance of Income Tax Department. There was a difference of opinion between judicial member and accountant member of the Appellate Authority.

In order to decide the question, the High Court referred to a few Supreme Court decisions and held that the purpose of grant of subsidy would be the overwhelming consideration in ascertaining whether the subsidy is to be treated as capital receipt or revenue receipt. A wider interpretation was given to the purpose test and it was held that since the subsidy was provided in lieu of certain other subsidies on account of capital expenditure, the real purpose of the scheme was augmenting capital resources by a new or expanding unit. The difference may be in degrees but the real purpose of the scheme has to be discerned. Accordingly, the Court held that the subsidy as provided in the instant case was a capital receipt and not a revenue receipt.

Article referred: http://blog.scconline.com/post/2018/05/23/purpose-of-grant-is-to-be-seen-to-ascertain-it-as-a-capital-or-revenue-receipt/