M/S. SAHNEY STEEL AND PRESS WORKS LTD., HYDERABAD ETC, ETC. versus COMMISSIONER OF INCOME TAX, ANDHRA PRADESH-I, HYDERABAD

Citation: [1997] SUPP. 4 S.C.R. 189 · Decided: 19-09-1997 · Supreme Court of India · Bench: S.C. SEN · Disposal: Disposed off

Judgment (excerpt)

M/S. SAHNEY STEEL AND PRESS 
WORKS LTD., HYDERABAD ETC, ETC. 
v. 
COMMISSIONER OF INCOME TAX, 
ANDHRA PRADESH-I, HYDERABAD 
SEPTEMBER 19, 1997 
[SUHAS C. SEN AND D.P. WADHWA, JJ.] 
A 
B 
Income Tax Act, 1961-Sections 28, 41-Subsidy-Whether taxable- C 
Determination of nature-Subsidy granted by State Government for jive years 
from the date of co_mmencement of production-All incentives are production 
incentives, to be given only after start of production-Held, object of subsidy 
is decisive not the manner or source of payment--,-lncentives like sales tax 
refand, electricity charges were intended to enable the assessee to run business 
more profitably and not for the purpose of selling the business-Hence, the D 
subsidies are operational subsidies and not capital subsidies and are of 
revenue character and to be taxed accordingly. 
The Andhra Pradesh State Government was giving subsidy under a 
notification, in the form of certain facilities and incentives to new industrial 
underlakings, which commenced production on or after l.l.1969, with E 
investment capital not exceeding a certain limit. The incentives were to be 
given by way of refund of sales tax, subsidy on power consumed. for production, 
exemptions from payment of water rate and also refund for water rate in 
respect of water drawn from the Government sources. 
The Assessee-Company set up a factory, which went into production in F 
the year 1973. In the assessment year 1974-75 the assessee received refund 
under the subsidy. The Income Tax Officer, while making the assessment, 
included the amount of refund in the assessable income of the assessee 
company which was also confirmed by the Commissioner of Income Tax 
(Appeals). However, the Tribunal in appeal held that the said amount cannot G 
be deemed to be the income of the assessee under section 41 (1) of the Act. 
The question in these appeals filed by the assessee company as well as 
the Revenue before this Court was whether the subsidy so received by the 
assessee company in the relevant accounting year was taxable as a revenue-
receipt or not. 
189 
H 
190 
SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R. 
A 
Disposing of the appeals, this Court 
HELD : 1. All the incentives in question are production incentives in 
the ~ense that the Assessee-company will be entitled to these incentives only 
after it goes into production. Incentives were given by way of refund of sales 
tax on raw material, machinery and finished goods. Similarly, subsidy on power 
B was confined to "power consumed for production", i.e. if power is consumed 
for any other purposes like setting up the plant and machineries, the 
incentives will not be given. Refund of sales tax will also be in respect of Taxes 
levied after commencement of production and up to a period of five years from 
the date of commencement of production. So, the subsidies are operational 
C subsidies and not capital subsidies. (192-G-H; 193-A) 
Ostime v. Pontypridd and Rhondda Joint Water Board, 28 T.C. 262, 
relied on. 
Seaham Harbour Dock Company's Case, 16 T.C. 333; Smart v .. 
Lincolnshire Sugar Company Ltd., 20 T.C. 643 and St. John Dry Dock & Ship 
D Building Co., v. Minister of National Revenue, 4 D.R.L. 1, referred to. 
2. The character of the subsidy in the hands of the recipient, 'whether 
revenue or capital' will have to be determined by having regard to the purpose 
for which the subsidy is given. If it is given IJy way of assistance to the assessee 
in carrying on of his trade or business, it has to be treated as trading-receipt. 
E In the instant case subsidies have not been granted for production of or 
bringing into existence any new assets. The subsidies were granted year after 
year only after setting up of the new industry and commencement of 
production. Such a subsidy could only be treated as assistance given for the 
purpose of carrying on of the business of the assessee. Therefore, it must be 
F 
G 
held that the subsidies are of revenue character and will have to be taxed 
accordingly. (198-C; 202-B-C) 
V.S.S. V. Meenakshi Achi & Anr. v. Commissioner of Income Tax, Madras, 
60 ITR 253, relied on. 
Commissioner of Income Tax v. Dusad Industries, 162 ITR 784, overruled. 
Higgs v. Wrightson, (1944) 26 T.C. 73; Commissioner of Income Tax, v. 
Ruby Rubber Works Ltd., 178 ITR 181; Sadichha Chitra v. Commissioner of 
Income Tax, 189 ITR 774; Commissioner of Income Tax v. Udaya Pictures (P) 
Ltd., 225 ITR 394; Commissioner of Income Tax v. Chitra

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