Circular No. 142

What this is

Circular No. 142 was issued by the Central Board of Direct Taxes on 1 August 1974. Its subject is 31. Taxability of subsidy - Revenue receipt or capital receipt - "10 per cent Central Outright Grant of Subsidy Scheme, 1971".

What it does

Treats a subsidy under the 10 per cent Central Outright Grant of Subsidy Scheme, 1971, for industrial units set up in selected backward districts and areas, as a capital receipt in the recipient's hands. The Board reasons that the subsidy is given primarily to help the growth of industry, not to supplement profits, that its quantum is fixed by reference to fixed capital with working capital expressly left out of that computation, and that the unit must remain in production for at least five years after it goes into production. Being intended as a contribution towards the capital outlay of the unit, it is not a revenue receipt.

Why it was issued

The Board had to decide whether the subsidy under this scheme was a revenue or a capital receipt for income-tax.

Who it reaches

• Industrial units set up in notified backward districts and areas
• Promoters computing the cost of plant and buildings for depreciation
• Assessing Officers taxing subsidies as trading receipts
• Appellate authorities on the capital or revenue character of grants

The instrument, as the Board published it

31. Taxability of subsidy - Revenue receipt or capital receipt - "10 per cent Central Outright Grant of Subsidy Scheme, 1971"
1. The Board had occasion to consider whether the amount of subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme for industrial units to be set up in certain selected backward districts/areas would constitute revenue receipt or capital receipt in the hands of the recipient for the purpose of income-tax.
2. I am directed to say that the payment of subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits. Under the scheme, the quantum of subsidy is determined with reference to the fixed capital and not the profits. The working capital has been specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of five years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient.
Circular : No. 142 [F. No. 204/25/74-IT(A-II)], dated 1-8-1974.

What to watch

• The reasoning is scheme-specific: it turns on the subsidy being measured by fixed capital and on the five-year production condition. A subsidy computed on sales or profits does not follow from it.
• The circular says the receipt is capital; it does not say what happens to the cost of the asset for depreciation, and later statutory provisions deal with that.
• Working capital is expressly outside the fixed capital base on which the subsidy is measured.
• Section 2(24) has since been amended to bring specified subsidies to tax, so the position for later years must be read from the statute.

Where you meet it

In an assessment adding a State or Central subsidy to business income, and in the depreciation working where the subsidy is sought to be reduced from the cost of assets.

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