Short Overview: Where assessee was granted Government subsidy for purpose of setting up new industry, and not merely for acquisition of plant or machinery, said subsidy amount would not be deducted from actual cost of plant and machinery.

Kutch was hit by a devastating earthquake. Subsidies were granted to assessee for setting up new industry. Under the subsidy scheme, the State Government introduced a Sales Tax exemption/deferment scheme under which at the option of the assessee, for specified period, on new investment, there would either be exemption or deferment of Sales tax. Revenue argued that such incentives were in the nature of assessee’s revenue receipts. Assessee contended that the receipts were capital in nature. Tribunal upheld the assessee’s contention and held that the incentives received in the form of Sales Tax and Central Excise benefit was capital receipt.

It is held that subsidy was granted under schemes framed by the State and the Central Government, to be given to assessee who set up new industry in Kutch District. The scheme was envisaged to encourage investment which would in turn, provide fresh employment opportunity in the district which had suffered due to devastating earthquake. The computation of subsidy may be on the basis of sales tax or excise duty. Nevertheless, the purpose test would ensure that the subsidy was capital in nature as decided by High Court in CIT v. Swastik Sanitary Works Ltd. (2006) 286 ITR 544: 2006 TaxPub(DT) 1608 (Guj-HC).

Decision: In assessee’s favour.