Law: Income Tax Act, 1961

Section: 41(1)

Income-tax-----Income or capital---Subsidy received from Government---General principles--- Payments from public funds to assist assessee in carrying on trade or business are Revenue receipts---Subsidy granted to assessees after they started production---Refund of sales tax, subsidies on power consumed and exemption from payment of water charges, etc.---Amounts received were production incentives and operational subsidies and not capital subsidies--¬Subsidy payments were revenue in nature.---[CIT v. Dusad Industries (1986) 162 ITR 784 (MP) overruled]. If payments to the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient-whether revenue or capital-will have to be determined, having regard to the purpose for which the subsidy is given. The source of the fund is quite immaterial. 'However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. A notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after January 1, 1969, with investment capital (excluding working capital) not exceeding Rs.5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession was also available for subsequent expansion of 50 per cent. and above of existing capacities, provided, in each case, the expansion was located in a city or town or panchayat area other than that in which the existing unit was located. The salient features of the scheme formulated by the Andhra Pradesh Government were that the incentives were not available, unless and until production had commenced; the availability of the…

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