M/S. MEPCO INDUSTRIES LTD. v. COMMISSIONER OF INCOME TAX, MADURAI

2026 INSC 1090 REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8694 OF 2012

M/S. MEPCO INDUSTRIES LTD. … APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX, MADURAI ... RESPONDENT(S)

JUDGMENT

PRASHANT KUMAR MISHRA, J.

1. The present Appeal concerns the nature of the electricity subsidy of Rs.

16,20,745/- received by the appellant-assessee, M/s. Mepco Industries Ltd.,

from the Government of Pondicherry for the Assessment Year 1997-98, and

the question whether the said subsidy constituted a capital receipt, as

claimed by the appellant, or a revenue receipt liable to tax under the Income-

tax Act, 19611, as held by the Courts below. The appellant is a limited

company engaged in the manufacture of potassium chlorate. For the relevant

assessment year, it received the aforesaid amount as electricity subsidy and

treated the same as a capital receipt.

2. The subsidy was granted under the Scheme of Power Subsidy2 of the

Government of Pondicherry, which had been in operation since 27.11.1975.

The scheme was framed with the object of fostering industrial growth in the Signature Not Verified

Digitally signed by NISHA KHULBEY Date: 2026.10.07 17:13:00 IST Reason:

CIVIL APPEAL NO. 8694 OF 2012 Page 1 of 12

Union Territory and, under the relevant pattern, provided subsidy on power

charges for a specified period after commencement of production. The rate of

subsidy was 33⅓% of the power charges for the first three years, 20% for the

fourth year and 10% for the fifth year, subject to the applicable ceiling. The

appellant's case was that the scheme was intended to encourage the

establishment of new industries in backward areas, whereas on the other

hand, the Revenue Authorities have treated the subsidy as assistance towards

the cost of power consumed in the course of the existing business.

3. The appellant filed its return of income on 27.11.1997. In the return, it

claimed the electricity subsidy of Rs. 16,20,745/- as a capital receipt not

liable to tax. The assessment was thereafter taken up for scrutiny and

completed under Section 143(3) of the IT Act, by the Joint Commissioner of

Income Tax, Special Range-II, Madurai3, by order dated 31.03.2000. The

Assessing Officer treated the subsidy as a revenue receipt and included the

amount of Rs. 16,20,745/- in the taxable income. In doing so, it was held that

the subsidy was given towards revenue expenditure and, while relying upon

the judgment of this Court in Sahney Steel & Press Works Ltd., Hyderabad

vs. Commissioner of Income Tax, A.P.-I, Hyderabad4, treated it as revenue

in character.

4. Aggrieved by the assessment, the appellant approached the

Commissioner of Income Tax (Appeals), Madurai5. Vide order dated

12.03.2002, the CIT (Appeals) dismissed the appeal and had sustained the

3 Hereinafter referred as ‘Assessing Officer’ 4 (1997) 7 SCC 764 5 Hereinafter referred as ‘CIT (Appeals)’

CIVIL APPEAL NO. 8694 OF 2012 Page 2 of 12

treatment of the subsidy as a revenue receipt. On examining the terms of the

subsidy, it noted that the subsidy was calculated with reference to the power

charges, and concluded that its effect was to reduce the cost of power

consumed by the assessee and consequently assist the profitability of the

business. The addition made by the Assessing Officer on this account was

accordingly confirmed.

5. The appellant thereafter preferred ITA No. 857 (MDS)/2002 before the

Income Tax Appellate Tribunal, Chennai6. By order dated 28.07.2005, the

ITAT dismissed the appeal, and proceeded on the basis that the subsidy was

available only after the industrial unit had been set up and production had

commenced and that it was granted with reference to the cost of electricity.

Placing reliance on the decision in Sahney Steel (supra), ITAT regarded the

subsidy in the instant case as assistance in carrying on the business rather

than as a contribution towards the capital outlay of the industrial

undertaking. ITAT further held that there was no case that the subsidy was

granted for bringing any new asset into existence. Consequently, it held that

the power subsidy, being assistance received after commencement of

production and operating to reduce the cost of electricity consumed by the

appellant, was revenue in character.

6. Aggrieved, the appellant preferred Tax Case (Appeal) No. 1614 of 2005

before the High Court of Judicature at Madras. Vide its judgment dated

09.07.2012, the High Court dismissed the appeal and had affirmed the view

taken by Courts below. Essentially, the High Court followed its earlier decision

6 Hereinafter referred as ‘ITAT’

CIVIL APPEAL NO. 8694 OF 2012 Page 3 of 12

in Commissioner of Income-tax vs. Karaikal Chlorates Ltd.7, concerning

the nature of the power subsidy under the same scheme, and held the receipt

to be revenue in character, thereby taxable under the IT Act.

7. It is against these concurrent findings, the appellant-assessee has

preferred the present Appeal.

8. We have heard the learned counsel appearing for the appellant and the

learned ASG appearing for the respondent and have perused the materials on

record.

9. The short question which arises now is whether the electricity subsidy

of Rs.16,20,745/- received by the appellant under the scheme of the

Government of Pondicherry is a capital receipt or a revenue receipt. The

answer must necessarily depend upon the true character and purpose of the

subsidy scheme under which the amount was granted. It is in this context

that the decision of this Court in Sahney Steel (supra), on which complete

reliance has been placed by the Courts below, needs to be examined and

understood.

10. In Sahney Steel (supra), this Court examined the nature of various

incentives granted under the Andhra Pradesh Government's scheme,

including relief in electricity and water charges and other concessions

available to new industries. The Court noticed that the said subsidies were

available only after the industry had been set up and production had

commenced, and were intended to assist the assessee in carrying on its

72011 SCC OnLine Mad 2604 [The Madras High Court has relied on the decision of this Court in Sahney Steel (supra)].

CIVIL APPEAL NO. 8694 OF 2012 Page 4 of 12

business. They were not granted for bringing into existence any new capital

asset or as a contribution towards the capital outlay of the industrial

undertaking. The Court, therefore, characterised them as operational

assistance and held them to be revenue receipts. Some of the important

observations of this Court in Sahney Steel (supra) are reproduced

hereinbelow:

“10. … The amount paid to the assessee in the instant case is in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. In our view, having regard to the scheme of the notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably.

13. In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives was given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries.

17. This precisely is the question raised in this case. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies.”

(emphasis supplied)

11. The decision in Sahney Steel (supra) examines the substance of the

assistance and draws the distinction between a subsidy which assists an

assessee in setting up or completing its capital structure and one which

assists it in carrying on the business which has already been established. In

the latter situation, the subsidy bears the character of a revenue receipt. Thus

CIVIL APPEAL NO. 8694 OF 2012 Page 5 of 12

understood, Sahney Steel (supra) does not lay down that every subsidy

linked to production or electricity consumption is invariably revenue in

nature, rather it requires the character of the particular assistance to be

determined in the light of the scheme under which it is granted.8

12. This understanding was specifically reaffirmed by this Court in

Commissioner of Income Tax, Madras vs. Ponni Sugars and Chemicals

Limited9, where the decision in Sahney Steel (supra) was described to have

laid down the basic test for determining the character of a subsidy and held

that the character of the receipt must be determined with reference to the

purpose for which the subsidy is given. The Court termed this the “purpose

test” and clarified that the point of time at which the subsidy is paid, its source

and its form are not decisive, but the decisiveness is on the object sought to

be achieved by the scheme. Where the object is to enable the assessee to run

its business more profitably, the receipt is held to be on revenue account, and

where the object is to enable the assessee to set up a new unit or substantially

expand an existing unit, the receipt is on capital account. The relevant

observation of this Court is reproduced hereinbelow:

“14. The importance of the judgment of this Court in Sahney Steel case [Sahney Steel & Press Works Ltd., Hyderabad vs. Commissioner of Income Tax, A.P.-I, Hyderabad, (1997) 7 SCC 764 : (1997) 228 ITR 253] lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the Scheme with which we are concerned in this case is that the incentive must be utilised for repayment

8 Sahney Steels (supra) at Para 10, 13, 17, 19, 23 to 26, 32, 33. 9 (2008) 9 SCC 337 at Para 14.

CIVIL APPEAL NO. 8694 OF 2012 Page 6 of 12

of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the Subsidy Scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.”

(emphasis supplied)

13. Following the decisions in Sahney Steel (supra) and Ponni Sugars

(supra), this Court in Commissioner of Income Tax-I, Kolhapur vs.

Chaphalkar Brothers, Pune10 had applied the “purpose test” by examining

the object of the scheme. The subsidy there took the form of exemption from

entertainment duty, but the Court looked beyond the form of the incentive

and found that the object of the scheme was to encourage the setting up of

highly capital-intensive multiplex theatre complexes. Therefore, the subsidy

was consequently held to be capital in nature with the Court specifically

reiterating that the time of payment, source and form of the subsidy are not

determinative as there is no straightjacket formula for determining whether

an incentive is capital or revenue in nature.

14. Thus, the jurisprudence developed post Sahney Steel (supra) makes it

clear that the “purpose test” is the governing test, but the purpose has to be

ascertained from the scheme as a whole and not merely from a general

statement of policy or from the nomenclature employed by the Government.

The fact that a scheme of subsidy is intended to encourage industrial growth,

employment or development of a backward area cannot, by itself, conclude

CIVIL APPEAL NO. 8694 OF 2012 Page 7 of 12

the character of the receipt, and the Court must examine the manner in which

the incentive actually operates and the benefit which it is designed to confer

upon the recipient.

15. Tested on this principle, the subsidy scheme referred in the present

case assumes considerable significance. The original scheme, published in

the Gazette dated 27.11.1975, provided for power subsidy to new industries,

both LT and HT consumers, with the stated object of fostering industrial

growth in the Union Territory. More importantly, the subsidy itself was tied to

power charges, and the scheme itself contemplated that the consumer would

pay the electricity charges and claim subsidy with reference to the electricity

consumed for the manufacturing process. The revised pattern approved on

09.12.1985 makes the operational character of this assistance even clearer,

wherein the subsidy was to be paid for five years from the date the unit went

into production and was quantified at 33⅓% of the actual energy charges paid

during the first three years, 20% during the fourth year and 10% during the

fifth year. The Government of Pondicherry, by G.O.Ms. No. 47/87 dated

12.08.1987, similarly described the measure as a power subsidy to industrial

units on a tapering basis from the date of commencement of production.

16. A perusal to the scheme for subsidy would reveal that it required the

industrial consumer to establish the electricity consumed for the

manufacturing process and the electricity charges paid, and the subsidy was

quantified on that basis. The subsequent arrangement authorised deductions

from the current consumption bills of eligible industrial units towards the

power subsidy. Thus, it can be clearly seen that the subsidy was not an

CIVIL APPEAL NO. 8694 OF 2012 Page 8 of 12

independent grant calculated with reference to the capital invested in the

industrial undertaking, rather its quantum moved directly with the electricity

charges incurred in the course of production. According to us, this aspect

would squarely fall within the principles in Sahney Steel (supra) as there

too, this Court was concerned with incentives connected with the running of

an industrial undertaking, including relief in electricity charges. The decisive

circumstance was that the assistance was not a contribution towards the

creation of a capital asset or capital outlay but was available in the course of

carrying on the business. Therefore, this Court had held such assistance to

be a revenue receipt.

17. Learned counsel for the appellant had placed considerable emphasis on

the fact that the broader object of the scheme of subsidy was to encourage

industrial growth and the establishment of industries in a backward area. We

are of the view that this object cannot be viewed in isolation since an industrial

incentive may undoubtedly have the broad economic objective of encouraging

industrialisation, employment or development of a backward region, while the

particular financial assistance granted under the scheme may nevertheless

be intended to meet an operational cost of an industry which has already

commenced production. Therefore, the relevant inquiry is not whether the

scheme, viewed at a high level, seeks to promote industry, but what the

particular subsidy provided by the scheme is intended to achieve in the hands

of the recipient.

18. In the present case, the answer emerges from the scheme itself as the

benefit is calculated as a specified percentage of the actual energy charges,

CIVIL APPEAL NO. 8694 OF 2012 Page 9 of 12

and it is available for a limited period commencing with production, and its

immediate and direct effect is to reduce the electricity cost incurred in the

manufacturing process. The scheme does not require the subsidy to be

applied towards acquisition of plant or machinery, construction of the factory,

repayment of a capital borrowing, or creation of any other capital asset. The

record before us does not disclose that the amount received by the appellant

was earmarked for any such capital purpose. On the contrary, the very basis

of quantification is the expenditure on power consumed in production.

19. Moreover, the circumstance that the appellant may have taken steps

towards establishing the industrial unit before commencement of production

does not alter this conclusion. The scheme makes commencement of

production the point from which the five-year subsidy period runs, and the

amount thereafter depends upon the actual energy charges incurred. Equally,

the fact that the subsidy was released only after commencement of production

cannot be regarded as the sole reason for treating it as revenue. The decision

of this Court in Ponni Sugars (supra) makes it clear that the point of time of

payment is not itself determinative, but once the purpose and mechanism of

the scheme are examined, the commencement-of-production condition

assumes significance as one part of the overall scheme.

20. Similarly, this Court in Chaphalkar Brothers (supra) examined the

issue of subsidy against the background of a scheme specifically designed to

encourage the construction of highly capital-intensive multiplex complexes,

with the incentive directed towards facilitating their establishment. This

Court, therefore, in that case, found a capital purpose. However, the scheme

CIVIL APPEAL NO. 8694 OF 2012 Page 10 of 12

in the present case, in contrast, gives a quantified concession against

electricity charges incurred after the industrial undertaking has commenced

production. The two schemes, therefore, lead to different results precisely

because the “purpose test” requires the scheme in each case to be examined

on its own terms.

21. We are also unable to accept the contention of the appellant that the

expression “to foster the growth of industries” occurring in the subsidy

scheme, by itself, determines the character of the receipt. The “purpose test”

cannot be applied by isolating one general object clause while disregarding

the operative provisions of the scheme. The scheme must be read as a whole,

and when so read, the general object of industrial development is

implemented through a specific subsidy on power charges, calculated with

reference to actual energy charges and available only for a defined period after

production commences. It is this immediate and operative purpose of the

financial assistance that determines its character in the hands of the

assessee.

22. Another aspect which goes against the appellant-assessee is that the

subsidy does not lose its revenue character merely because, as a matter of

business economics, reduction in electricity expenditure may leave more

funds available with the assessee for its business. The relevant inquiry is

whether the Government intended to make a contribution towards the capital

structure or capital assets of the undertaking. A perusal of the record would

reveal no such feature in the scheme. Rather, the subsidy substitutes for, or

reduces, a part of an expense which the assessee incurs in the ordinary

CIVIL APPEAL NO. 8694 OF 2012 Page 11 of 12

course of manufacturing operations. This is the very distinction which

Sahney Steel (supra) draws between an operational subsidy and assistance

towards capital outlay.

23. In light of the above analysis, we find that the Assessing Officer, CIT

(Appeals) and ITAT had correctly appreciated the nature of subsidy as a

revenue receipt and as being given after the establishment of the industrial

unit and commencement of production; that it was calculated with reference

to power charges; that it reduced the cost of electricity consumed by the

appellant-assessee; and that it was not shown to be a contribution towards

bringing any new capital asset into existence.

24. More so, the High Court was, in our view, equally correct in affirming

the above conclusion. Therefore, no interference is called for. Accordingly, the

Appeal is dismissed.

………………………………………J. (PRASHANT KUMAR MISHRA)

………………………………………J. (SHREE CHANDRASHEKHAR)

NEW DELHI; OCTOBER 07, 2026.

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