Supreme Court: electricity subsidy tied to power bills is revenue, not capital, income — reaffirms the 'purpose test'

The Supreme Court held that an electricity subsidy an industrial unit received under a Pondicherry government scheme was a taxable revenue receipt, not an exempt capital receipt, under the Income Tax Act, 1961. The subsidy, worth a third of power charges for the first three years tapering to a tenth by the fifth, was payable only after production began and was calculated with reference to power actually consumed. Applying the 'purpose test' laid down in Sahney Steel & Press Works v. CIT and reaffirmed in CIT v. Ponni Sugars and Chemicals, the Court explained that a subsidy's character does not depend on its form, timing or source, but on the object the government scheme was designed to achieve: where the object is to help a business run more profitably, the receipt is revenue in nature; where it is to help set up or expand capital assets, it is capital in nature.

Because this scheme reduced an ongoing operating expense rather than contributing to any new capital asset, it was an operational subsidy and therefore revenue in character, confirming the view taken by the Assessing Officer, the Commissioner (Appeals), the Income Tax Appellate Tribunal and the Madras High Court. The appeal was dismissed.