Case Note & Summary
Serum Institute of India Private Limited, a biotechnology company manufacturing drugs and vaccines with a plant at Hadapsar, Pune, filed the writ petition challenging the constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961. The petitioner's units were eligible for deduction under Section 10AA of the Act, and it had also commissioned a manufacturing facility in the Special Economic Zone at Manjari, Pune, which commenced production in financial year 2019-2020. The Government of Maharashtra had issued the Package Scheme of Incentives, 2013, effective from 1 April 2013 for five years, to promote industries in less developed areas. The scheme provided incentives such as stamp duty concessions, exemption from electricity duty, and VAT/CST/SGST subsidy. The petitioner qualified as an ultra mega project with investment exceeding Rs.1500 crores and received approval on 12 October 2018, later amended on 25 March 2019, with eligibility certificate dated 25 January 2019 and letter dated 17 December 2019. The benefits included electricity duty exemption for 10 years from 1 April 2015 to 31 March 2025, 50% stamp duty exemption, VAT/CST for 1 April 2015 to 30 June 2017, SGST from 1 July 2017 to 31 March 2035, and PF/ESIC for 15 years from 1 April 2015 to March 2030, totaling 75% of eligible investment. The impugned sub-clause (xviii) was inserted into Section 2(24) of the Act by the Finance Act, 2015, with effect from 1 April 2016. It included in the definition of income any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement by Central or State Government or any authority or body or agency, subject to exclusions under Section 43 Explanation 10 for subsidies taken into account for actual cost of asset. The petitioner contended that prior to this amendment, subsidies in the nature of capital receipts were not taxable as income, as held by the Supreme Court in decisions like CIT v. Ponni Sugars and Chemicals Ltd. and Sahney Steel & Press Works Ltd. v. CIT applying the purpose test. The amendment, by including all subsidies regardless of capital or revenue nature, allegedly obliterated the fundamental distinction between income and capital receipts, violated the real income theory, and was unconstitutional under Articles 12, 14, 19, 246, 265 and 289. It also had unintended retrospective effect because the scheme predated the amendment. The petitioner argued that State incentives meant to attract investment cannot be taxed by the Central Government without indirectly taxing State revenue under Article 289. The matter was heard finally at the admission stage; rule was issued and made returnable forthwith. The judgment was reserved on 6 November 2023 and pronounced on 4 December 2023, but the extracted text does not include the court's final analysis, reasoning or decision.
Headnote
A) Constitutional Law - Validity of Tax Legislation - Definition of Income - Income Tax Act, 1961, Section 2(24)(xviii) - Petitioner challenged inclusion of subsidies, grants, cash incentives, duty drawback, waivers, concessions or reimbursements in the definition of income as unconstitutional. Petitioner contended that the amendment obliterates the distinction between capital receipts and income and violates Articles 12,14,19,246,265 and 289 of the Constitution. The court heard the petition at admission stage and issued rule. (Paras 7-11) B) Income Tax - Capital vs Revenue Receipts - Purpose Test - Income Tax Act, 1961, Sections 4,5,28 - Petitioner relied on Supreme Court decisions in Sahney Steel & Press Works Ltd. and Ponni Sugars and Chemicals Ltd. to argue that subsidies granted to set up or expand a unit are capital receipts, not taxable as income. The object for which subsidy is given determines its nature; source, form and timing are immaterial. (Paras 9,12) C) Constitutional Law - State Immunity from Union Taxation - Article 289 Constitution of India - Petitioner argued that State-provided incentives funded from State coffers cannot be taxed by the Central Government as income of recipients; such taxation is an indirect tax on State revenue and impermissible under Article 289. (Para 11(d)) D) Income Tax - Real Income Theory - Subsidies - Income Tax Act, 1961, Section 2(24), Section 4 - Petitioner contended that only real income is taxable; capital subsidy does not constitute monetary return and remains outside taxable income. Amendment disregards real income theory. (Paras 11(c), 11(e)) E) Interpretation of Statutes - Retrospective Operation - Accrued Rights - Income Tax Act, 1961, Section 2(24)(xviii) - Inserted by Finance Act, 2015 with effect from 1 April 2016, but petitioner argued unintended retrospective application as scheme predated amendment. Accrued rights cannot be taken away except by clear retrospective amendment. (Paras 11(a), 11(g))
Issue of Consideration
Whether sub-clause (xviii) to Section 2(24) of Income Tax Act, 1961 is constitutionally valid; Whether subsidies, waivers, concessions granted under Package Scheme of Incentives, 2013 are capital receipts not taxable as income; Whether impugned provision violates Articles 12, 14, 19, 246, 265 and 289 of Constitution of India
Law Points
- capital receipts not taxable as income
- purpose test for determining capital vs revenue subsidy
- real income theory
- definition of income under Section 2(24)
- Article 289 immunity of State revenue from Union taxation
- Article 265 no tax without authority of law
