Case Note & Summary
The writ petition arose from a challenge to the constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961, inserted by the Finance Act, 2015 with effect from 1 April 2016. The petitioner, Serum Institute of India Private Limited, a biotechnology company manufacturing drugs and vaccines, had manufacturing units at Hadapsar and Manjari, Pune, eligible for deduction under Section 10AA of the Income Tax Act. The State of Maharashtra had introduced the Package Scheme of Incentives, 2013, effective from 1 April 2013, to promote industries in less developed areas. The petitioner's project qualified as an ultra mega project under the scheme, requiring investment of Rs.1500 Crores or direct employment of 3000 employees. The petitioner made capital investment exceeding Rs.1500 Crores and received approval from the State on 12 October 2018, with eligibility certificate dated 25 January 2019. The benefits included electricity duty exemption, 50% stamp duty exemption, VAT/CST/SGST subsidy, and PF/ESIC incentives, totaling 75% of eligible investment. The impugned sub-clause expanded the definition of 'income' to include assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement from Central or State Governments, except subsidies taken into account for actual cost of asset under Explanation 10 to Section 43. The petitioner contended that prior to this amendment, capital subsidies were not taxable as income, as held by Supreme Court in Ponni Sugars and Chemicals Ltd., Sahney Steel & Press Works Ltd., Chaphalkar Brothers, and Shree Balaji Alloys. The petitioner argued that the amendment obliterated the distinction between capital and revenue receipts, violated the real income theory, and sought to tax capital receipts as income contrary to the constitutional scheme. Further, it was argued that the provision had unintended retrospective application, as it applied to benefits availed under schemes operative before the amendment, and that taxing State incentives by the Central Government indirectly taxed State revenue in violation of Article 289 of the Constitution, and also violated Articles 12, 14, 19, 246, and 265. The court, after hearing arguments on 6 November 2023, reserved judgment and pronounced it on 4 December 2023. The provided excerpt does not include the final operative decision or ratio decidendi. The petition raised substantial questions of law regarding the constitutional validity of the impugned provision, the purpose test for distinguishing capital and revenue subsidies, and the limits of retroactive taxation. The court issued rule and made it returnable forthwith, indicating the matter was heard finally at the admission stage. The final holding and directions are not available in the extracted portion.
Headnote
A) Constitutional Law - Taxation of Capital Receipts - Definition of Income - Income Tax Act, 1961, Section 2(24)(xviii) - The Finance Act, 2015 inserted sub-clause (xviii) to include subsidies, grants, cash incentives, duty drawback, waivers, concessions, reimbursements from government in definition of income, taxable under the Act; exemption under Explanation 10 to Section 43 applies only to subsidies taken into account for actual cost of asset; petitioner challenged constitutionality arguing capital subsidies previously held non-taxable under real income theory; court issued rule and examined substantial constitutional questions (Paras 7-11). B) Direct Taxation - Capital vs Revenue Subsidy - Purpose Test - Income Tax Act, 1961, Sections 4, 5, 28 - Supreme Court laid down purpose test to determine whether subsidy is capital or revenue: if object is to enable setting up new unit or expansion, receipt is capital and not income; impugned sub-clause does away with distinction and taxes capital receipts, contrary to real income theory and established law; Held that character of receipt determined by purpose for which subsidy given, not by time, source, or form (Paras 9, 11, 12). C) Constitutional Law - Federalism and Taxation - Article 289 of Constitution of India - Central Government taxing incentives disbursed by State from its funds amounts to indirect tax on State revenue and violates Article 289; petitioner contended provisions also violate Articles 12,14,19,246,265; court to examine whether impugned sub-clause encroaches on State's fiscal autonomy (Para 11). D) Constitutional Law - Retrospective Application - Accrued Rights - Income Tax Act, 1961, Section 2(24)(xviii) - Provision inserted with effect from 1 April 2016 but applies to benefits availed under schemes operative before that date; petitioner argued accrued rights cannot be taken away without retrospective amendment and provision has unintended retrospective application; court considered whether retrospective effect violates constitutional rights (Para 11). E) Writ Jurisdiction - Admission and Rule - High Court Rules - Bombay High Court Rules - Court decided to hear petition finally at admission stage, rule made returnable forthwith; arguments heard on 6 November 2023 and judgment reserved; demonstrates urgency and significant legal issues (Paras 1-2).
Issue of Consideration
Whether sub-clause (xviii) to Section 2(24) of Income Tax Act, 1961, which includes subsidies, grants, incentives, waivers, concessions, reimbursements in definition of income, is constitutionally valid; whether capital subsidies received under Package Scheme of Incentives, 2013 can be taxed as income; whether provision has retrospective application; whether it violates Articles 12,14,19,246,265,289 of Constitution.
Law Points
- Subsidies
- grants
- cash incentives
- duty drawback
- waivers
- concessions or reimbursements provided by Central or State Governments are included in definition of income under Section 2(24)(xviii) of Income Tax Act
- 1961
- capital subsidies are not taxable under Act if purpose test shows capital receipt
- real income theory restricts tax to actual income
- purpose test determines nature of subsidy
- taxing State incentives may violate Article 289
- impugned sub-clause may have retrospective effect
