JCIT (In-Situ) Vs Bengal Beverage Pvt. Ltd. (ITAT Kolkata)
Sales Tax Incentive & Electricity Duty Remission for Expansion Are Capital Receipts: ITAT
Introduction
The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT), in JCIT (In-Situ) vs. Bengal Beverage Pvt. Ltd., upheld the treatment of sales tax incentives and electricity duty remission totalling ₹3,43,87,168 as capital receipts. The Tribunal found that the incentives were granted for fresh capital investment towards project expansion under the West Bengal Incentive Scheme, 2008.
Accordingly, the Tribunal dismissed the Revenue’s appeal and upheld the relief granted by the Commissioner (Appeals), including the corresponding relief concerning book profits under Section 115JB.
Facts of the Case
The assessee was engaged in manufacturing soft drinks and other beverages and generating electricity through windmills. It filed its return declaring total income of ₹16,37,14,630.
During scrutiny assessment, the Assessing Officer noticed that the assessee had received ₹44,67,168 as electricity duty remission and ₹2,99,20,000 as sales tax incentives. The company treated both amounts as capital receipts while computing its taxable income.
The Assessing Officer called upon the assessee to explain the claim and furnish supporting documents. The assessee submitted its eligibility certificate under the West Bengal Incentive Scheme, 2008. However, the Assessing Officer rejected the explanation and added the aggregate amount of ₹3,43,87,168 as revenue receipts.
Assessing Officer’s View
The Assessing Officer relied on Sahney Steel & Press Works Ltd. vs. CIT [1997] 228 ITR 253 (SC) and noted that the character of a subsidy depends upon the purpose for which it is granted.
Nevertheless, he considered the incentives revenue in nature because they were received through electricity duty remission and sales tax benefits. Consequently, the entire amount was brought to tax in the assessment completed under Section 143(3).
Findings of the Commissioner (Appeals)
The Commissioner (Appeals) examined the scheme and found that the sales tax incentive aimed to encourage industrial growth through capital investment in backward areas. Eligibility was linked to fresh capital investment, and the quantum was calculated with reference to the gross value of fixed capital assets.
The dominant purpose was, therefore, promotion of capital investment, rather than reimbursement of routine business expenditure. Applying the purpose test, the appellate authority treated the sales tax incentive as a capital receipt.
Regarding electricity duty remission, the Commissioner (Appeals) observed that crediting the amount to the profit and loss account did not conclusively establish its tax character. The purpose and substance of the receipt prevailed over its accounting treatment. The addition covering both incentives was accordingly deleted.
ITAT’s Observations on Capital Investment
The Tribunal found that the assessee had received both incentives for fresh capital investment made towards expansion of the project under the 2008 scheme.
It further noted that the assessee had incurred capital expenditure on the expansion and obtained an eligibility certificate from the West Bengal Industrial Development Corporation Ltd., a Government of West Bengal undertaking.
These facts established the connection between the incentives and the capital expansion. The Tribunal, therefore, agreed with the Commissioner (Appeals) that the receipts were capital in nature.
Purpose Test Determines Nature of Subsidy
The Tribunal relied on DCIT vs. Ankit Metal & Power Ltd. [2022] 134 taxmann.com 98, which examined power and sales tax/VAT subsidies under a West Bengal industrial incentive scheme.
The principle emerging from that decision was that the object of the assistance determines its character. A subsidy intended to enable an assessee to establish a new unit or expand an existing unit belongs to the capital field. Assistance meant to support ordinary business operations is revenue in nature.
The precedents discussed included CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) and CIT vs. Chaphalkar Brothers [2018] 400 ITR 279 (SC). These decisions emphasised that the form, source and timing of payment do not determine the character of the subsidy.
Thus, computation of an incentive by reference to sales tax or electricity charges does not, by itself, make the receipt taxable as revenue.
Treatment Under Section 115JB
The Commissioner (Appeals) had also directed deletion of the corresponding adjustment to book profits under Section 115JB, to the extent it included these incentives. The Tribunal upheld the appellate order.
The precedent reproduced by the Tribunal also discussed the prospective insertion of Section 2(24)(xviii) from assessment year 2016-17. The present dispute related to assessment year 2014-15.
Conclusion
The ITAT dismissed the Revenue’s appeal, sustaining deletion of the ₹3.43 crore addition. The ruling highlights that the tax character of an industrial incentive must be determined by examining the scheme’s purpose, capital investment conditions and supporting eligibility documents, rather than merely the form in which the benefit is received.
Cases Discussed
- Sahney Steel & Press Works Ltd. Vs CIT; [1997] 228 ITR 253 (SC): Supreme Court established the purpose test for deciding whether a subsidy is capital or revenue.
- CIT Vs Ponni Sugars and Chemicals Ltd.; [2008] 306 ITR 392 (SC): Supreme Court held that subsidies for setting up or expanding a unit may be capital receipts.
- Shree Balaji Alloys Vs CIT; [2011] 333 ITR 335 (J&K HC): Industrial development and employment incentives treated as capital receipts.
- Crystal Crop Protection Pvt. Ltd. Vs ACIT; ITAT Delhi: State-policy sales tax subsidy encouraging capital investment treated as capital.
- CIT Vs Bokaro Steel Ltd.; [1999] 236 ITR 315 (SC): Accounting entries do not conclusively decide the nature of a receipt.
- CIT Vs Khaitan Chemicals and Fertilizers Ltd.; [2019] 419 ITR 292 (Delhi HC): Discussed the treatment of subsidies in book profit under Section 115JB.
- DCIT Vs Ankit Metal & Power Ltd.; [2022] 134 taxmann.com 98 (ITAT Kolkata): Co-ordinate Bench examined power and VAT subsidies under a West Bengal industrial scheme.
- CIT Vs Rajaram Maize Products; [2001] 251 ITR 427 (SC): Revenue relied on this decision in the reproduced precedent.
- PCIT Vs Ankit Metal & Power Ltd.; [2019] 416 ITR 591 (Calcutta HC): High Court treated industrial incentive subsidies as capital and addressed book profits.
- CIT Vs Rasoi Ltd.; [2011] 335 ITR 438 (Calcutta HC): Court considered sales tax/VAT remission under a West Bengal incentive scheme.
- CIT Vs Chaphalkar Brothers; [2018] 400 ITR 279 (SC): Supreme Court applied the purpose test to entertainment duty incentives.
- Apollo Tyres Ltd. Vs CIT; [2002] 255 ITR 273 (SC): Reproduced precedent distinguished MAT treatment of capital receipts.
- Senairam Doongarmall Vs CIT; AIR 1961 SC 1579: Character of payment determined by quality rather than method or measure.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal preferred by the revenue is against the order passed u/s 250 of the Income-tax Act, 1961 (In short, ‘the Act’) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as the “ld.CIT(A)”], dated 12.11.2025 for the Assessment Year (AY) 2014-15.
2. At the outset, we observe that the appeal is barred by 25 days. The revenue filed petition for condonation of delay, explaining the delay in filing the appeal. The ld. Sr. DR submitted that the delay has been fully explained which is for good and sufficient reasons Therefore, the aforesaid delay is hereby condoned and appeal is admitted for adjudication.
3. The only issued raised by the revenue is against the order of ld. CIT(A) deleting the addition of Rs.3,43,87,168/- by treating the incentives received by the assessee as capital receipts instead of revenue receipts held by the AO.
4. The facts of the case in brief are that assessee filed return of income on 29.10.2014, declaring total income of Rs.16,37,14,630/-. The case of the assessee was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and served upon the assesseee, which was duly complied with. The assessee is engaged in the business of manufacturing soft drinks & other beverages and also in generation of electricity through wind mills. The Assessing Officer (In short, ‘the AO’) observed that during the year, the assessee received Rs.44,67,168/- as electricity duty remission and Rs.2,99,20,000/- as sales tax incentives and claimed the same as capital receipt. Accordingly, the AO called upon the assessee to justify the claim of the said subsidy/incentive as a capital receipt while computing the tax liability along with eligibility certificate for incentive under West Bengal incentives Scheme and also explain why such Govt. subsidy aggregating Rs.3,43,87,168/- should not be treated as revenue receipt. The assessee replied the same by filing the eligibility certificate for incentives under WB Incentive Scheme, 2008. However, the AO rejected the claim of the assessee that the said incentive/subsidy is capital receipt and treated the same as revenue receipt by relying on the decision of Hon’ble Apex Court in case of Sahney Steel & Press Works Ltd. vs. CIT, (197) 228 ITR 253 (SC) that the character of receipt of a subsidy/grant in the hands of an assessee is determined by the purpose for which the grant has been received. The AO noted that the form of subsidy, its source and point of time when subsidy is given is immaterial. The AO also noted that the nature of the grant is purely of revenue nature being electricity duty and sales tax, remission/subsidy, therefore, the same is of revenue nature. Consequently, the AO added the same to the income of the assessee in the assessment framed u/s 143(3) of the Act, dated 27.12.2016.
5. In the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee on this issue by observing and holding as under:
“15. Decision:
The Assessment Order, Grounds of Appeal, the Statement of Facts, Submissions of the appellant and law in this regard is considered.
15.1. The core issue to be decided is whether the Electricity Duty Remission of Rs. 44,67,168/- and Sales Tax Incentives of Rs.2,99,20,000/- received by the appellant under the West Bengal Incentive Scheme, 2008 constitute capital receipts or revenue receipts in the hands of the appellant.
15.2. On the said issue, reliance is placed on following case laws:
1) The test of purpose as laid down by the Hon’ble Supreme Court in Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC) is that:
“The character of a subsidy in the hands of the recipient is to be determined with respect to the purpose for which the subsidy is granted. The point of time when is paid, its source, or its form are irrelevant.”
15.3. In the present case, the Sales Tax Incentive was granted under the West Bengal Incentive Scheme, 2008, which was framed for the purpose of encouraging industrial growth by supporting capital investments in backward areas. The eligibility was linked to fresh capital investment, and the quantum was calculated as a percentage of gross value of fixed capital assets. Thus, the dominant purpose of the subsidy was to promote capital investment, and not to support the day-to-day operational expenses of the business.
15.4. Reliance may be placed on following case laws also:
1. CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC)
The Hon’ble Supreme Court reiterated that the “purpose test” is determinative. If the object of the subsidy is to enable the assessee to set up a new unit or expand the existing one, the receipt is capital in nature.
2. Shree Balaji Alloys v. CIT [2011] 333 ITR 335 (J&K HC)
Industrial subsidies (such as excise duty refund, interest subsidy, and insurarice subsidy) received for establishment or expansion was held to be capital receipts. not revenue.
3. Crystal Crop Protection Pvt. Ltd. v. ACIT (ITAT Delhi)
Sales tax subsidy received under a state policy encouraging capital investment was treated as capital receipt.
15.5. In light of these rulings, the sales tax incentive of Rs.2,99,20,000/- is squarely covered under the “purpose test” and qualifies as a capital receipt.
15.6. Electricity Duty Remission:
The Electricity Duty Remission of Rs.44,67,168/-, however, appears to have been credited to the profit & loss account, and treated by the appellant as a revenue item in the books. Nonetheless, mere accounting entry is not conclusive. As held in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC), the substance of the receipt and the purpose for which it is given determines its character, not its treatment in accounts.
Even in the case of Electricity Duty Remission, if the remission is granted as part of the incentive to reduce the operational cost for a newly established or expanded unit under an incentive scheme linked to capital investment, then its purpose also aligns with capital incentive, and hence, it should be treated as a capital receipt.
15.7. Section 115JB:
The addition of the aforesaid subsidy while computing book profits under section 115JB is also not justified. The Hon’ble Delhi High Court in the case of CIT v. Khaitan Chemicals and Fertilizers Ltd. [2019] 419 ITR 292 (Del.) held that unless a subsidy is credited to the profit & loss account and not exempt under the normal provisions, it cannot be added back to book profits under clause (ii) of the Explanation to section 115JB(2).
In the present case, as sales tax incentive of Rs.2.99 crore was not credited to the P&L Account, its addition to book profit u/s 115JB is unsustainable.
15.8. In view of the above judicial precedents and factual matrix, it is concluded that the sales tax subsidy of Rs.2,99,20,000/- is a capital receipt and not taxable. The electricity duty remission of Rs.44,67,168/-, though credited to the P&L account, also bears the character of capital receipt if it was granted under the incentive scheme linked to capital investment. Hence, the total addition of Rs.3,43,87,168/- is therefore liable to be deleted. Consequently, the adjustment to book profit u/s 115JB is also directed to be deleted to the extent it includes these amounts.
15.9. Hence, the addition of Rs.3,43,87,168/- made by the Ld. A.O. treating Government subsidies as revenue receipts is hereby deleted.”
6. We have heard rival submissions and perused the materials available on record. We find that the assessee has received a sum of Rs.44,67,168/-as electricity duty remission and Rs.2,99,20,000/- as sales tax incentives for fresh capital investment made on expansion of the project under West Bengal Incentive Scheme, 2008 and treated the same as capital receipt. We note that the assessee incurred capital expenses on the expansion of the project in accordance with the above scheme and the assessee has also been issued an eligibility certificate for incentives under WB Incentives Scheme issued by West Bengal Industrial Development Corporation Ltd. (A Govt. of West Bengal Undertaking). Therefore, we are in full agreement with the ld. CIT(A) treating the same as capital receipt. The case of the assessee is squarely covered by the decision of Co-ordinate Bench of Kolkata in case of DCIT vs. Ankit Metal & Power Ltd. (2022) 134 taxmann.com98, dated 28.10.2021, wherein the Co-ordinate Bench held as under:
“20. Hence, in view of the above, we do not find any force in the Ld. CIT, DR’s contention for use of weighted average mean as against arithmetical mean computed by the assessee.
21. We also do not find any merit in the Revenue’s contention that, when the assessee has accepted the draft assessment order, pursuant to the TPO’s order making the T. P. adjustment, by not filing objections before the DRP, resulted in automatic acceptance of the T.P. adjustment. It is well laid out in the statute that if the assessee is not agreeable to the T.P. Adjustment which has been incorporated in the draft assessment order pursuant to the TP order, then the assessee has two alternative appellate routes viz., (a) to object to the draft order inter alia including the T P Adjustment before the DRP or (b) post passing of the final assessment order, prefer an appeal against the action of the TPO before the Ld. CIT(A). In the facts of the present case, the assessee has availed the alternate remedy and chose to challenge the action of the TPO before the Ld. CIT(A). Such action of the assessee of choosing to file appeal before the CIT(A) rather than the DRP cannot be objected to by the AO/Revenue nor does it in any manner tantamount to acceptance of the draft assessment order by the assessee.
22. For the reasons as mentioned above, we do find any reason to interfere with the order of the Ld. CIT(A) and therefore the Ground Nos. 1 & 2 of the Revenue’s appeal stands dismissed.
23. Ground nos. 3 and 4 raised by the revenue relate to taxability of power subsidy and VAT subsidy received by the assessee under the State Industrial Policy by way of revenue receipt.
24. During the relevant assessment year, the assessee has claimed following subsidies as capital receipt and had accordingly excluded them from the computation of income:
i. Capital receipt of power subsidy: Rs. 73,81,832/-
ii. Capital receipt of VAT subsidy under VAT Incentive : Rs. 44,79,82,00/-
Total : Rs. 45,53,63,832
25. The AO assessed the above subsidies received from the State Government on the premise that the subsidies were not utilized for the purchase of new plant & machineries & expansion of factory. On appeal, the Ld. CIT(A), after examining the purpose and intent behind the grant of subsidy upheld the assessee’s claim that it was in the nature of capital receipt. Aggrieved by the action of the Ld. CIT(A) the Revenue is before us.
26. Assailing the action of the Ld. CIT(A), the Ld. CIT, DR contended that the Ld. CIT(A) erred in holding that the subsidies, which the assessee received from the State Government, were capital in nature. In support of his contention, he relied on the decisions of the Hon’ble Supreme Court in the case of CIT v. Rajaram Maize Products[2001] 119 Taxman 492/251 ITR 427and in the case of Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368/228 ITR 253. According to him, particularly in relation to power subsidy, the Hon’ble Supreme Court had held it to be revenue in nature and therefore taxable. So, he pleaded that the order of Ld. CIT(A) on this issue may be reversed and AO’s view to be upheld.
27. Per contra, the Ld. A.R submitted that the issue of taxability of subsidy being treated as a capital receipt is squarely covered in their favour by the decision rendered by the Hon’ble Calcutta High Court in their own case for which is in Pr. CIT v. Ankit Metal & Power Ltd.[2019] 109 com 93/266 Taxman 237/416 ITR 591. He also relied on the another decision of the Hon’ble Calcutta High Court in the case of CIT v. Rasoi Ltd. [2011] 11 taxmann.com 220/199 Taxman 235 (Mag.)/335 ITR 438. He thus urged that the order of the Ld. CIT(A) be upheld.
28. We have heard both the parties. It is noted that the State of West Bengal had formulated an Industrial Policy Scheme expressly for the purpose of attracting private investment in the State of West Bengal in the specified areas. To promote industrialization and generation of employment in the State, the Government offered various incentives/subsidies including ‘Industrial Promotion Assistance’ (‘IPA’) in the form of concessional power tariffs by way of power subsidy and refund of 75% of sales tax paid on sale of goods within the State of West Bengal. The subsidy was thus directed towards industrial development in the State. The purpose/object of the West Bengal Incentive Scheme was for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA was to be paid in form of power subsidy, sales tax/VAT subsidy to the assessee.
29. The Hon’ble Apex Court in their judgment in the case of CIT v. Ponni Sugar & Chemicals Ltd.[2008] 174 Taxman 87/306 ITR 392 has held that whether the subsidy or grant given by the Government is in the nature of capital or revenue will have to be judged and decided with reference to the object and the purpose for which the subsidies are granted and not the form and manner of payment.
30. From the given facts of the present case, especially to the Gazette Notification of the West Bengal Government the Incentive for Promotion of Industries Scheme 2004, (hereinafter referred to as the Scheme) wherein details of the Scheme is found placed from pages 143 to 171 of PB and from a perusal of the same it is noted that the intent and object behind the industrial promotion assistance [hereinafter referred to as IPA] extended by the State under their Industrial Policy Scheme was to encourage the assessee to set up a new unit or expand the existing unit for overall economic development of the State and not to enable the assessee to run the business more profitably. In this case the assessee had invested in Sponge Iron Plant and Mega Project (Induction manufacturing units Sponge Iron, Power, Billet) as per the Scheme, which made the assessee eligible for subsidy [ sanction under the scheme given by West Bengal Industrial Development Corporation dated 5 january, 2010 found placed at page 172 PB and Registration and Eligibilty Certificate as per the Scheme is found placed at pages 173 to 183 PB] under the Scheme taken out by the Government of West Bengal for making ‘capital investment’ in the State. We find that the intent and purpose of the Industrial Policy of State of West Bengal, 2004 was for establishing/substantial expansion of manufacturing units located in backward areas of State of West Bengal and generate employment for the local people, and therefore the nature of subsidy received under the State Industrial Scheme was in the capital field not exigible to tax. This subsidy was remitted through two modes viz., power subsidy and sales tax/VAT subsidy. Hence, applying the purpose test, both these subsidies received by the assessee was for undertaking industrialization in the State and is thus found to be in capital field and the details of the Scheme which has been reproduced by the Ld. CIT(A) in respect of power subsidy from pages 24 to 29 of his impugned order and in respect of VAT subsidy from pages 29 to 31 of his impugned order, has been taken into account for our decision, which is not repeated for the sake of brevity.
31.Thus we find that the object of the West Bengal Incentive Scheme, 2004 was envisaged for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA in form of VAT subsidy and power subsidy was granted to the assessee.
32 .In view of the above facts, we find that the incentive in the form of sales tax/VAT subsidy and power subsidy, have been granted for setting up new units in the States of West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State and so we concur/endorse this finding of Ld CIT(A) on this issue to the same effect.
33. We find that this particular issue is now no longer res integra in light of the decision of the Hon’ble Supreme Court in the case of CIT v. Chaphalkar Brothers[2017] 88 com 178/[2018] 252 Taxman 360/400 ITR 279 wherein the Supreme Court after analysing the ratio laid down in their earlier judgments in the cases of Rajaram Maize Products (supra), Sahney Steel & Press Works Ltd. (supra) and Ponni Sugar & Chemicals Ltd. (supra) held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment in the State, is capital in nature. The relevant extracts of the judgment are as follows:
“21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the “purpose test“. It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.
22. Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.
23. Mr. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT[2011] 9 taxmann.com 255/198 Taxman 122/333 ITR 335. While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.
24. After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19-4-2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed.
25. We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.”
(emphasis supplied)
34. It is further noted that this exact same issue regarding taxability of subsidy received under the West Bengal State Industrial Scheme has been adjudicated in assessee’s own case for the earlier A.Y. 2010-11. In the instant case, the Hon’ble jurisdictional Calcutta High Court (supra) upheld the order of this Tribunal holding the subsidies to be capital in nature and therefore not exigible to income-tax. The relevant extracts of the judgment are as follows :—
‘..We have heard both sides at length on the issues involved in the instant appeal, considered their submission and perused the relevant record. The first issue which requires adjudication is whether incentives ‘Interest subsidy’ and ‘Power subsidy’ received by the assessee under the schemes in question are capital receipt not liable to the taxed or ‘Revenue receipt’ and is liable to be taxed and the key question which arises for determination of this issue is what is the character of the incentive subsidies under the said schemes in question and in judging the character of incentives, the “purpose test” is a great factor.
20. On this issue decision in the case of Sahney Steel and Press Works Ltd. (supra) relied upon by the revenue is a leading decision on the test or determining the nature and character of a subsidy under any scheme as to when it is to be treated as ‘capital receipt’ or ‘revenue receipt’ in the hands of the assessee and considering this decision of Sahney Steel & Press Works Ltd. (supra) another leading decision on this proposition of law is Ponni Sugars and Chemicals Ltd. (supra). Law laid down in these two decisions have been uniformly followed in series of decisions of the Hon’ble Supreme Court, our High Court and other High Courts which assessee has relied as referred above on this issue. The following paragraph of the judgment delivered by the Hon’ble Supreme Court in Ponni Sugars & Chemicals Ltd. (supra) case reads thus (page 400) :
“The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. It the object of the subsidy scheme was to enable the assessee to run the business more profitable then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant.”
21. A perusal of the judgments in Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) therefore, reveals that the apex court had applied the above quoted dictum to determine the purpose, which the two schemes had intended to achieve by the incentive subsidies, permissible under the schemes in question in those cases.
22. It was, therefore, in the context of respective subsidy incentive schemes in the two cases, that the subsidy in Sahney Steel & Press Works Ltd. (supra) was held to be revenue receipt whereas the subsidy in Ponni Sugars & Chemicals Ltd. (supra) was held as capital receipt.”
23. On a careful look into these decisions it appears that the law is settled that the nature of incentives/subsidies granted by the Government under any Scheme to any enterprise would totally depend upon the salient features of the said Scheme. The purpose for which the incentive/subsidy is given under the Scheme is the determining factor to lay down the nature of the incentive/subsidy. If an incentive/subsidy is given as a general assistance to the assessee to carry on his business or trade, it would be an operational incentive and thus a trading receipt in the hands of the assessee. However if the object of the subsidy, irrespective of its source, is to enable the assessee to acquire new plant and machinery or for further expansion of its manufacturing capacity or for setting up a new unit, the entire subsidy must be held to be a capital receipt. The incentives/subsidies, depending upon the purpose for which they are granted, fall under two categories namely:
(i) Operational incentives/subsidies which are given to the assessee to
carry on his business or trade and;
(ii) Fixed capital incentives/subsidies which are given to the assessee to set up a new unit or to expand its existing unit.
24. On perusal of the contents of the relevant portion under the incentive subsidy schemes in question we found that in the case of the assessee, the State Government under the West Bengal Incentive Scheme, 2000, and ‘West Bengal Incentive to Power Intensive Industries Scheme, 2005’, had actually granted the subsidy with the sole intention of setting up new industry and attracting private investment in the state of West Bengal in the specified areas in the present case Bankura which is industrially backward hence the same was of the nature of non- taxable Capital receipt. Thus according to the ‘purpose test’ laid out by the Hon’ble Supreme Court, various and High Courts including our Court the aforesaid subsidy should be treated as capital receipt in spite of the fact that computation of ‘Power subsidy’ is based on the power consumed by the assessee. It is well established from submission of the assessee as enunciated above that once the purpose of a subsidy is established; the mode of computation is not relevant as held in the decisions of the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra), Ponni sugars & Chemicals Ltd. (supra) and the decision of our High Court in case of Rasoi Ltd. (supra) against which SLP has been dismissed. The mode of computation/form of subsidy is irrelevant. The mode of giving incentive is re-imbursement of energy charges. The nature of subsidy depends on the purpose for which it is given. Hence the assessee draws support from the decisions already discussed earlier as the same principle will apply here. Thus, the entire reason behind receiving the subsidy is setting up of plant in the backward region of West Bengal, namely, Bankura.
25. Accordingly we hold the aforesaid incentive subsidies are ‘capital receipts’ and is not an ‘income’ liable to be taxed in relevant assessment year 2010-11 on the basis of discussion made above and further taking into consideration the definition of Income under section 2(24) of the Income-tax Act, 1961, where sub-clause (xviii) has been inserted including ‘subsidy’ for the first time by Finance Act, 2015 w.e.f. April, 2016 i.e assessment year 2016-17. The amendment has prospective effect and had no effect on the law on the subject discussed above applicable to the subject assessment years.
26. Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under section 115JB of the Income-tax Act, 1961 as contended by the revenue by relying on the decision in the case of Appollo Tyres Ltd. (supra).
27. In this case since we have already held that in relevant assessment year 2010-11 the incentives ‘Interest subsidy’ and ‘Power subsidy’ is a ‘capital receipt’ and does not fall within the definition of ‘Income’ under section 2(24) of Income-tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under section 115JB of the Income-tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under section 115JB of the Income-tax Act, 1961.’
35. Gainful reference may also be made to the following observations made by the Hon’ble jurisdictional Calcutta High Court in the case of Rasoi Ltd. (supra) holding that the subsidy in the form of VAT remission received under the West Bengal Industrial Scheme was capital in nature and hence not liable to tax.
14A. From the objects and the reasons of the aforesaid scheme as well as the entitlement as indicated in section 3 mentioned above, it is clear that the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales tax paid by the Industry concerned, for any quarter under the Sales Tax Act in respect of sales of such goods.
15. We find that the principles laid down in the case of Sahney Steel & Press Works Ltd. (supra), relied upon by Mr. Nizamuddin has been explained by the Supreme Court in a subsequent decision in the case of Ponni Sugars & Chemicals Ltd. (supra), relied upon by Mr. Poddar in the following terms:
“In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in Sahney Steel and Press Works Ltd. In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee.”
[Emphasis supplied]
In the aforesaid case, it was held that if the object of the Subsidy Scheme was 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 was to enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account. Therefore, the Court proceeded, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.
16. In the case before us, the object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and, thus, those are for the assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary does not imply that the same was in the form of refund of sale tax paid. As pointed out by the Supreme Court in the case of SenairamDoongarmall v. CIT AIR 1961 SC 1579, it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. Thus, in the case before us, the amount paid as subsidy was really capital in nature.
36. For the reasons as discussed above and respectfully following the above cited judgments of the Hon’ble Supreme Court and jurisdictional Calcutta High Court (supra), we accordingly uphold the Ld. CIT(A)’s action of treating the aforesaid incentive subsidies as ‘capital receipts‘ and therefore not in the nature of ‘income’ liable to be taxed in relevant AY 2013-14. Ground Nos. 3 & 4 of the Revenue therefore stands dismissed.
37. In the result, the appeal of Revenue is dismissed.”
7. Respectfully following the aforesaid decisions cited supra, we uphold the order of ld. CIT(A) by dismissing the appeal of the revenue.
8. In the result, the appeal of the revenue is dismissed.
The order is pronounced on 26/10/2026.
