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profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant."

The legal principle that emerges from the aforesaid decision of the Supreme Court is that the test to determine the character of any amount in the hands of the assessee is to determine the "purpose" for which the subsidy is given. The Court held that one has to apply the ''purpose test". The Court further held that the point of time at which the subsidy is paid is not relevant, the source is immaterial and the form of subsidy is also immaterial The Court further held that if the object of the subsidy was to enable the assessee to run the business more profitably, then the receipt would be on the revenue account. However, if the object of the assistance was to enable the assessee to set up a ne w unit or to expand the existing unit then the receipt of the subsidy was of capital account. Thus, the underlying emphasis of the Hon'ble Apex Court was on the purpose for which the subsidy was granted and not to be form and mechanism of its computation. The legal position that therefore emerges from the aforesaid decision is that if the purpose of granting subsidy/incentive is to promote industrialization in any particular area, promote employment generation, encourage capital expansion, etc., then not withstanding the mode, manner and timing of such subsidy, the same would constitute capital receipt. It is now a question of application of the said settled principles to the facts of the appellant's case, after taking into consideration relevant schemes/ notifications issued by the Governments in order to cull out the purpose for which the subsidy was granted.

The aforesaid view is also supported by the decision of the Jammu & Kashmir High Court in the case of Shree Balaji Alloys (referred above) which has been relied Sutlej Textiles and Industries Ltd.
upon by the A/R of the appellant. In that case, too, the High Court considered the taxability of subsidy amount for setting up units in the State of Jammu & Kashmir. The assessee in that case relied upon Office Memorandum dated 14 t h June, 2002, Notification dated 28 t h November, 2003 (as referred in the present case) and the two other notifications referred for exemption from payment of excise duty. Based on these notifications, the assessee claimed that excise refund and interest subsidy was in the nature of capital receipt not liable to tax. The Tribunal however, did not agree with the claim of the assessee and held that excise refund and interest subsidy were in the nature of revenue receipts. While, setting aside the decision of the Tribunal and upholding the claim of the assessee, the High Court held that excise refund and interest subsidy were capital receipt not liable to tax. Some of the relevant observations of the High Court are reproduced as under:
28th November, 2003 (as referred in the present case) and the two other notifications referred for exemption from payment of excise duty. Based on these notifications, the assessee claimed that excise refund and interest subsidy was in the nature of capital receipt not liable to tax. The Tribunal however, did not agree with the claim of the assessee and held that excise refund and interest subsidy were in the nature of revenue receipts. While, setting aside the decision of the Tribunal and upholding the claim of the assessee, the High Court held that excise refund and interest subsidy were capital receipt not liable to tax. Some of the relevant observations of the High Court are reproduced as under:
The claim of the appellant in the present case that interest subsidy is in the nature of capital receipt by applying purpose test is thus fully supported and covered by the aforesaid decision of the Jammu & Kashmir High Court. Therefore, interest subsidy (of Rs.3,36,53,526) is held to be in the nature of capital receipt."

(ii) Regarding 2.5 % Interest subsidy under Rajasthan Investment Promotion Scheme, 2003:

"On perusal of the records, it is further noticed that interest subsidy under the aforesaid Rajasthan Investment Promotion Scheme was also shown as part of other income in the Schedule 15 of the audited accounts. These facts, in my view, leads to the conclusion that since the subsidy was provided for promoting investment in the state of Rajasthan and was linked to capital investment/additional wages being provided, the same was granted in larger public interests and hence constitute capital receipt not liable to tax. Accordingly, it is held that subsidy of Rs.44,64,000/- received under the above unit was not liable to tax.