Electricity subsidy for existing businesses is taxable, Supreme Court rules

New Delhi: Electricity subsidies received by companies that do not contribute towards the creation of any new capital asset are revenue receipts and, therefore, liable to tax under the Income Tax Act, the Supreme Court ruled on Wednesday.

The apex court said a subsidy does not lose its revenue character merely because, as a matter of business economics, lower electricity expenditure may leave more funds available with the assessee for its business. The relevant inquiry is whether the government intended to contribute towards the capital structure or capital assets of the undertaking, a bench comprising Justices Prashant Kumar Mishra and Shree Chandrashekhar said.

In the case of Mepco Industries vs Commissioner of Income Tax, the top court upheld the Madras High Court and Income Tax Appellate Tribunal orders that treated the subsidy as a revenue receipt and included it in the taxable income.


The subsidy in the case was provided as assistance for carrying on the business rather than as a contribution towards the capital outlay of the industrial undertaking, the court said. It noted that the subsidy was calculated with reference to the power charges. The issue before the apex court was whether the electricity subsidy received by Mepco from the Pondicherry government for assessment year 1997-98 constituted a capital receipt, as claimed by the assessee, or a revenue receipt liable to tax under the Income Tax Act, 1961. The company had argued that the 1975 subsidy scheme was intended to encourage the establishment of new industries in backward areas. The revenue authorities, however, treated the subsidy as assistance towards the cost of power consumed in the course of the existing business.

Rejecting the company's appeal seeking to treat its ₹16.20 lakh electricity subsidy as a capital receipt, the apex court said the objective of encouraging industrial growth and the establishment of industries in a backward area "cannot be viewed in isolation".

An industrial incentive may have the broader economic objective of promoting industrialisation, employment or development of a backward region, while the particular financial assistance granted under the scheme may nevertheless be intended to meet the operational costs of an industry that has already commenced production, it said.