02 July 2009
Subsidy is a monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.
Subsidies are of two types. Capital subsidy and Revenue subsidy. The test to be applied for determining the nature of subsidy is purpose test. If the object is to enable the business to run more profitably then the receipt is on revenue account. If the object of assistance is to enable to set up a new unit or to expand the existing unit then the subsidy received is a capital receipt.
Citation:- CIT Vs. Ponni Sugars and Chemicals Ltd (2008) 219ITR 105(SC).
If it is a revenue receipt,as per the above test,it is assessable to income tax.
Citation:- Sahney steel and Press Works Ltd Va.CIT (1997) 228 ITR 253 (SC).
If it is a capital subsidy,as per the purpose test, it should not be reduced from the cost of the asset.
Citation:- CIT. P J Chemicals Ltd.(1994) 210 ITR 830 (SC).
But to overcome the decision Government has amended the Income tax Act,1961 by way of explanation 10 to section 43(1) w.e.f 01/4/1999 stating that capital subsidy should be reduced from the cost of the asset concerned.
In addition to the above,Subsidy received from tea board is exempted u/s 10 (30) of the Income tax Act,1961. Similarly subsidy received from Certain Crop Boards are also exempted u/s 10 (31) of the above said act.
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