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The Tax Publishers Taxation of subsidy - purpose test - Effect of Section 2(24)(xviii) vide Finance Act, 2015 *Facts:* Assessee was in receipt of development subsidy for expansion of industry in a backward area which was credited to general reserve. It was the case of the revenue that this was taxable as revenue receipt by both AO and CIT(A). On appeal assessee's plea was that the subsidy ought to be seen from its purpose and intent and not in the manner how it was disbursed or utilized. Held in favour of the assessee that the subsidy was in fact a capital receipt not subject to tax. W.e.f. 01-04-2016 post facto insertion of Section 2(24)(xviii) even such subsidies would be taxable under the act. The year under appeal was assessment year 2010-11 when the said Section 2(24)(xviii) did not exist in the statute and the Section will apply only prospectively. *Applied:* CIT v. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) : 1994 TaxPub(DT) 1271 (SC) Sahney Steel Works Ltd. v. CIT (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC) *Ed. Note:* If subsidy is received for operational purpose it is taxable as a revenue receipt. If it is given to compensate an investment in an asset it will go to reduce the cost of the asset as per explanation 10 to Section 43(1) and if it was received for any other purpose post 01-04-2016 it would be taxed as income under Section 2(24(xviii). The author's personal view is that the wording used in Section 2(24)(xviii) still is not water tight. *Case:* Chaitanya Steelshape (P) Ltd. v. ITO 2023 TaxPub(DT) 4529 (Pun-Trib)

The Tax Publishers

Taxation of subsidy - purpose test - Effect of Section 2(24)(xviii) vide Finance Act, 2015

Facts:

Assessee was in receipt of development subsidy for expansion of industry in a backward area which was credited to general reserve. It was the case of the revenue that this was taxable as revenue receipt by both AO and CIT(A). On appeal assessee's plea was that the subsidy ought to be seen from its purpose and intent and not in the manner how it was disbursed or utilized.

Held in favour of the assessee that the subsidy was in fact a capital receipt not subject to tax. W.e.f. 01-04-2016 post facto insertion of Section 2(24)(xviii) even such subsidies would be taxable under the act. The year under appeal was assessment year 2010-11 when the said Section 2(24)(xviii) did not exist in the statute and the Section will apply only prospectively.

Applied:

CIT v. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) : 1994 TaxPub(DT) 1271 (SC)

Sahney Steel Works Ltd. v. CIT (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC)

Ed. Note: If subsidy is received for operational purpose it is taxable as a revenue receipt. If it is given to compensate an investment in an asset it will go to reduce the cost of the asset as per explanation 10 to Section 43(1) and if it was received for any other purpose post 01-04-2016 it would be taxed as income under Section 2(24(xviii). The author's personal view is that the wording used in Section 2(24)(xviii) still is not water tight.

Case: Chaitanya Steelshape (P) Ltd. v. ITO 2023 TaxPub(DT) 4529 (Pun-Trib)