Taxation of Subsidy: “Purpose Test” has to be applied


Taxation of Subsidy: “Purpose Test” has to be applied

Inox Air Products Private Limited (ITA No.1118/PUN/2017)
Short Overview :
  1. It is settled position of law that to determine the true nature of the subsidy, a “purpose test” has to be applied as held by the Hon’ble Supreme Court in the case of CIT Vs. Ponni Sugars and Chemicals Ltd reported in 306 ITR 392 (SC). 
  1. The assessee company received capital subsidy of Rs.8,81,44,464/- for the setting up of new industrial units. 
  1. The Assessing Officer was of the opinion that the subsidies were received after the commencement of commercial production, therefore, according to him, these subsidies were granted only to assist the revenue operations of the business of the assessee company and therefore, the nature of the subsidy is only revenue in nature. 
The ITAT held as below:
  1. On perusal of the respective schemes of the subsidy, it is clear that the subsidy is only granted in order to accelerate the industrial development and promote the employment opportunities.
  1. On applying the purpose test, it is clear that the nature of subsidy is capital in nature.