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2008] 306 ITR 392 [2008] 174 TAXMAN 87 (SC) SUPREME COURT OF INDIA Commissioner of Income-tax, Madras v. Ponni Sugars & Chemicals Ltd. * S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ. CIVIL APPEAL NOS. 5694 TO 5715 OF 2008 SEPTEMBER 16, 2008 Section 4 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 1986-87 - Whether it is object for which subsidy/assistance is given which determines nature of incentive subsidy - Held, yes - Whether where under subsidy scheme, assessee, a sugar mill, was obliged to utilize subsidy only for repayment of term loans undertaken by it for setting up new unit/expansion of existing business, receipt of subsidy was capital in nature - Held, yes FACTS The assessee-company had received subsidy under the incentive subsidy scheme, 1980. The incentives conferred under the scheme were two fold; first, in nature of a higher free sale sugar quota and second, in allowing the manufacturer to collect excise duty on the sale price of the free sale sugar in excess of the normal quota, but to pay to the Government only the excise duty payable on the price of levy sugar. As per the scheme, the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by it for setting up new units/expansion of existing business. The assessee claimed that incentive received by it was a capital receipt, not includible in the total income. According to the department, since incentives were given through price and duty differentials, the character of the impugned incentives was revenue and not capital in nature. The High Court held that incentive subsidy received by the assessee was a capital receipt. On the revenue's appeal to the Supreme Court : HELD 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 when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. The main eligibility condition in the scheme in the instant case was that the incentive must be utilized for repayment of loans taken by the…

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