There is an amendment in Section 2(24) of the Income Tax Act by way of Finance Act 2015 w.e.f. 01.04.2014, whereby sub-clause (xviii) is inserted to include various subsidies and concessions in the definition of income. It states as under:-
“2(24) – Income includes:
(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, –
(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be.”
Prior to insertion of this sub-clause in section 2(24), subsidies, grants etc received by any person which were in the nature of capital receipt were excluded from the definition of income and therefore, was not taxable as income.
Hon’ble Supreme Court in the case of Sahney steel & Press Works Ltd. vs CIT (1997) 228 ITR 253 (SC), after discussing the entire case law on the subject held that if the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of subsidy is to enable the assessee to setup a new unit or to expand the existing unit then the receipt of subsidy is on capital account. Thus it is the object for which the subsidy is given which determines the nature and character of incentive subsidy. In such cases, one has to apply the “purpose test”, the point of time at which the subsidy is given is not relevant; the source of subsidy immaterial. The form of subsidy is equally immaterial. It is the object for which the subsidy is given which determines the nature of incentive subsidy.
Similarly, in the case of CIT vs Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC), also the Hon’ble Supreme Court held that the subsidies received from the central or the state government, whether capital or revenue receipt has to be determined on the basis of purpose test. In CIT vs P J Chemicals Ltd. (1994) 210 ITR 830 (SC) Supreme Court held that if the assistance is given by the government for completion of a project then it must be of a capital nature. If the actual cost wholly or partly is met out by the government by way of subsidy then the same is excluded from the actual cost while calculating the depreciation.
The government of Maharashtra had issued several industrial policies and schemes to promote industries in less developed areas of the state of Maharashtra. One such scheme being “Package Scheme of Incentive 2013” was floated on 01.04.2013 for a period of 05 years to provide for various incentives to major industries depending on the type of project and amount of investment they make. The benefits included stamp duty, concessions, exemption from electricity duty and VAT / CST / SGST subsidy. The scheme was investment based i.e. the industrial units satisfying the minimum threshold limits of fixed capital investment or direct employment prescribed in the scheme were entitled to the benefit of said scheme. The issue arose as to whether this is a capital receipt or revenue receipt in the case of Serum Institute of India Pvt. Ltd. vs UOI (2024) 463 ITR 582 (Bom). The state of Maharashtra issued to the assessee an eligibility certificate for the scheme. Assessee was of the view that the said receipt was in the nature of capital receipt and therefore, it was not chargeable to tax. However Department was of the view that in view of section (2)(24)(xviii), it is an income chargeable to tax. Assessee challenged the constitutional validity of the said sub-clause before the Hon’ble Bombay High Court on the grounds that
a) the said sub-clause (vi) to tax the capital receipt as income which is not constitutionally permissible. It obliterates the fundamental distinction between “income” and “capital receipt”.
b) the amendment which removes the said distinction is contrary to the principles of “real income” theory which is one of the foundations for levy of income tax. In Poona Electric Supply Co. Ltd. vs CIT (1965) 57 ITR 521 (SC), it is held that income tax is a tax on the real income i.e. the profits arrived at on commercial principles subject to the provisions of Income Tax Act. The real profit can be ascertained only by making the permissible deductions.
In Godhara Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 (SC), it is held that under the Income Tax Act, income chargeable to tax is the income that is received or is being to be received in India or the income that accrues or arises or is deemed to accrue or arise in India during the previous year relevant to the assessment year for which assessment is made. The computation of income is to be made in accordance with the method of accounting regularly employed by the assessee.
Again in CIT vs Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), it is held that income tax is levy on income. It takes into account two points of time, the accrual of the income or its receipt, but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a hypothetical income, which does not materialize. Hence, making the subsidies taxable under the Act is unconstitutional.
The term “income” defined in section 2(24) r/w section 4 of the Act, which is the charging section denotes that income is any monetary return coming in. In case of capital subsidy, there is no monetary return coming in, the assessee who invests capital does not invest the same in return of subsidy, he invests to earn profit from running its business activity, which is income and not the subsidy. The subsidy is benefit provided by the government who could not invest capital but encouraged private sectors to develop industry in specific areas by providing capital incentives to them and thereby reducing their capital cost. Hence, this incentive do not come within the “purview of income”.
Incentives are provided by the state government out of its own fund in order to promote industries and employment. Hence, charging these incentives to tax by the central government as income of recipient will be an indirect mechanism to tax the revenue of the state which is impermissible and violative of Article 289 of the Constitution. Accordingly, it was submitted that the impugned sub-clause is in violation of Articles 12, 14, 19 246, 265 & 289 of the Constitution of India and lets legislative competent.
The Assessee before Hon’ble Bombay High Court in case of Serum Institution of India (P) Ltd. (Supra) contended that, newly inserted sub-clause has infringed various provisions of Constitution of India, overstepped the legislative competence of Parliament and has overruled judicial precedence, which have distinguished capital receipts from revenue receipts. Subsuming both under income and subjecting them to taxation, the said sub-clause has over ridded the established legal principles and therefore, such sub-clause should be struck down. However Hon’ble Bombay High Court have dismissed the writ petition holding that
a) there was nothing arbitrary in introduction of sub-clause (xviii) to section 2(xxiv). The sub-clause did not suffer from the vice of discrimination. The legislative competence of Parliament under Article 245 of the Constitution of India cannot be doubted,
b) the economic legislation can be interfered by the Court only where the view reflected in the legislation is not possible to be taken. There is no perversity or gross disparity resulting in any discrimination by inserting sub-clause (xviii) to section 2(24). It is well settled principle that Court begins with a presumption in favour of constitutionality,
The constitution saveguard the right to trade under Article 19(1)(g) but does not protect the right to profit. When assessee applied for the subsidy, the amendment was already on the statute book. The amendment was in public knowledge and the implications of inclusion of subsidies within the ambit of taxable income were clear and unambiguous. By choosing to partake in the subsidy scheme, assessee has implicitly acknowledged and consented to the accompanying tax obligations. In any case, ignorance of law is not an excuse.
It is a settled law that it is permissible for a competent Legislature to overcome the effect of a decision of a Court, setting aside imposition of tax by passing a suitable legislation, by amending the relevant provision of the statute with retrospective effect, thus taking away the basis on which the decision of the Court had been rendered and by enacting an appropriate provision, validating the levy and collection of tax. It is for the legislature to decide whether there should be an amendment or explanation.
A judicial intervention in this provision would precipitate not merely a legal conundrum but a fiscal catastrophe with far reaching consequences. Accordingly, Bombay High Court upheld the constitutional validity of clause (xviii) to section 2(24). Hence, any assistance in the form of subsidy or grant or reimbursement in any form by whatever name called, whether capital or revenue, is an income chargeable to tax.