What is subsidy and illustrate some the cases applying subsidy?

Subsidy is the cash assistance received during the course of business from any number of agencies. Whether the amount so received is taxable will depend upon the purpose for which the subsidy is granted. A few cases are given below with a view to illustrating the point:

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Cases applying subsidy :

1. Where the subsidy is given just to supplement income of the assessee or by way of compensation for loss of profit, it will be of revenue nature and taxable.

2. At times subsidy is granted to recoup revenue expenditure then also it will be a receipt of the revenue nature. For example, the State Government reimbursing the rent paid by a cooperative society.

3. Any subsidy received during the course of business is of revenue nature.

4. The burden of proving that the subsidy in a particular case is taxable is on the Department.

5. Subsidy received for the purpose of acquiring a capital asset would be of capital na­ture and will go to reduce the cost of acquisition of the asset.

6. Subsidy provided by way of an incentive to set up industries would be capital in na­ture.

7. The CBDT has clarified in Circular No. 190 of 1-3-1976 that the 10% Central sub­sidy granted to encourage the setting up of industries in selected backward areas would constitute capital receipt. It will reduce the cost of acquisition of capital assets.

8. Sometimes the subsidy is received by way of refund of sales tax or power tariff al­ready paid and claimed as deduction. It will be taxed as deemed profits u/s 41.

9. The subsidy received by the assessee from the Rubber Board towards reimburse­ment of expenditure incurred in replantation development maintenance and upkeep of rubber trees is a revenue receipt. CIT v West Coast Industries Co. [1987] 168 ITR 72 [Ker].

10. Sales tax subsidy granted to the assessee under the scheme framed by the Govern­ment for grant of subsidy/interest free loan for substantial expansion of the existing in­dustrial unit was a capital receipt and therefore not taxable. CIT v Plastichem [1988] 174 ITR 546 (MP).