Law: Income Tax Act, 1961

Section: 256,256(2)

Income-tax----Capital or revenue expenditure---Subsidy---Tests---Purpose of subsidy to set up or complete a new project---Subsidy is capital receipt---Subsidy received to run business operations successfully after commencement of production---Subsidy received is revenue receipt ---Assessee engaged in producing meat and meat products---Subsidy received from Government--­No clear fining recorded by Tribunal whether subsidy was grad to assessee for establishing a new unit for manufacturing or 'for starting some other activity or for successful running of an already established unit--­Matter remanded. The test to distinguish between subsidy of capital nature and subsidy of revenue nature is the purpose of the subsidy. 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. If the monies are given to the assessee for assisting him in carrying on 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 and as revenue receipts. The assessee engaged in the business of meat and meat products received a sum of Rs.5 lakhs from the State Government as subsidy. The Assessing Officer assessed the amount as receipt of a revenue nature. On appeal, the Commissioner of Income-tax (Appeals) held that the subsidy received was in the nature of a capital receipt. On further appeal, the Tribunal held that the subsidy was meant for low cost high quality pig feeds for distribution to farmers and affirmed the order of the Commissioner of Income-tax (Appeals). On a reference: Held, that no clear finding had been recorded by the Tribunal whether the subsidy was granted to the assessee for establishing a new unit for manufacturing or for starting some other activity or for successful running of an already established unit. Hence the matter was to be remanded to the Tribunal for recording a clear finding as to what was the purpose for which the subsidy was granted to the assessee and thereafter for deciding the appeal afresh Sahney Steel and Press Works Ltd. v. CIT…

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