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August 17, 2022

Subsidy granted for establishment of industries in less developed areas is capital receipt

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Subsidy granted for establishment of industries in less developed areas is capital receipt

Facts and Issues of the case

The assessee is a company incorporated under the provisions of The Companies Act, 1956. The assessee is engaged in the manufacture of Automobile and Brake System Components and Generation of power through Windmill. Against the said return of income, assessment was completed by the Assessing Officer (AO) at a total income of Rs.21, 87, 81,512/-. While doing so, the AO made addition of Rs.19,93,315/- under the provisions of section 14A of the Income-tax Act, 1961 and also treating the subsidy received from the Govt. of Maharashtra under the Industrial Promotion Subsidy Package Scheme, 2007 of Rs.5,98,28,000/- as revenue receipt.

Observations by the Court

The issue in the present appeal relates to the taxability of the subsidy received by the respondent-assessee under the Package Scheme of Incentives, 2007 announced by the Government of Maharashtra. We have gone through the nature of subsidy granted to the assessee by the Govt. of Maharashtra under Package Scheme of Incentives, 2007. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced Regional Development and Employment generation through greater Private and Public Investment in industrial development.”

However, the disbursal of the subsidy is in the form of refund of VAT and CST paid on sale of excavators. In our considered opinion, the decisive factor for considering the nature of subsidy as  a capital or revenue receipt is the ‘purpose’ for which the subsidy has been granted and not the manner of its disbursal. When we apply such a test on the facts and circumstances of the case, it demonstrably emerges that the purpose of subsidy is industrial growth; it is linked with the setting up of industrial units; and the amount of subsidy is linked with the amount of investment made in the eligible unit.

Simply because the subsidy has been disbursed in the form of refund of VAT and CST, it will not alter the purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State. The authorities below have been swayed by the fact that the subsidy was granted post commencement and is in the nature of refund of VAT and CST and overlooked the purpose of its granting, which is nothing but momentum in industrial pace in less developed parts of the State.

The court is of the considered opinion that the subsidy of Rs.4, 58, 41,000/- is a capital receipt and not chargeable to tax. Since the subsidy was granted actually as incentives for encouraging the dispersal of industries to the less developed areas of the State of Maharashtra, the subsidy cannot be treated as revenue receipt.


The subsidy granted for establishment of industrial units in less developed areas is to be treated as capital receipt. It is not revenue receipt.


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