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Informist, Wednesday, Oct. 7, 2026

 

NEW DELHI – The Supreme Court Wednesday held that electricity subsidies received by companies that are not contributing towards bringing any new capital asset into existence is revenue receipt and, therefore, liable for taxation under the Income Tax Act, 1961. If a company is given electricity subsidy by a government after the establishment of its industrial unit and commencement of production, it reduced the cost of electricity consumed by the assessee, and it was not shown to be a contribution towards bringing any new capital asset into existence, then it is revenue receipt.

 

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, said a bench of Justice Prashant Kumar Mishra and 

and Justice Shree Chandrashekhar. The relevant inquiry is whether the government intended to make a contribution towards the capital structure or capital assets of the undertaking, it said. 

   

The top court rejected Mepco Industries Ltd.'s plea seeking to treat its electric subsidy of INR 1.6 million received from the Puducherry government for assessment year 1997-98 (Apr-Mar) as capital receipt. The court dismissed Mepco's argument that the broader object of the scheme of power 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," said the court.

 

Therefore, the relevant inquiry is not whether the power subsidy 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, said the court. In the current case, the benefit is calculated as a specified percentage of the actual energy charges, 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, said the court. 

 

The scheme of power subsidy 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, said the top court. The record before the court does not disclose that the amount received by Mepco was earmarked for any such capital purpose, it said. On the contrary, the very basis of quantification is the expenditure on power consumed in production, it said.       

 

In 1975, the Puducherry government had granted subsidy to Mepco under the scheme of power subsidy. The scheme was framed with the object of fostering industrial growth in the Union territory and, under the relevant pattern, provided subsidy on power charges for a specified period after commencement of production. Mepco's case was that the scheme was intended to encourage the establishment of new industries in backward areas, whereas on the other hand, the income tax department has treated the subsidy as assistance towards the cost of power consumed in the course of the existing business.  End         

 

Reported by Surya Tripathi

Edited by Avishek Dutta

 

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