Supreme Court rules electricity subsidy for existing businesses taxable

The Supreme Court on Wednesday, 7 October, ruled that electricity subsidies received by companies that do not contribute to the creation of a new capital asset are revenue receipts and therefore taxable under the Income Tax Act. A bench of Justices Prashant Kumar Mishra and Shree Chandrashekhar dismissed an appeal by Mepco Industries, which had sought to treat its Rs 16.20 lakh electricity subsidy from the Puducherry government for the assessment year 1997-98 as a capital receipt.

The court held that the purpose test determines the nature of a subsidy. Since the scheme calculated the benefit as a percentage of actual energy charges and was available for a limited period from production commencement, its direct effect was to reduce electricity cost, not to fund capital investment. The judgment upheld the Madras High Court and Income Tax Appellate Tribunal's orders that treated the subsidy as a revenue receipt.