Subsidy tied to post-production electricity charges is a revenue, not capital, receipt.

The appellant, a manufacturer of potassium chlorate, received electricity subsidy of ₹16,20,745 for Assessment Year 1997–98 under the Government of Pondicherry’s Power Subsidy Scheme.

The subsidy was calculated as a percentage of actual electricity charges for a limited period after production commenced.

The Assessing Officer treated it as a revenue receipt under Section 143(3) of the Income-tax Act, 1961; the CIT (Appeals), ITAT and Madras High Court affirmed that treatment.

The appellant appealed to the Supreme Court, claiming the subsidy was a capital receipt.

Whether the electricity subsidy received under the Pondicherry scheme was a capital receipt or a revenue receipt taxable under the Income-tax Act, 1961

Under the “purpose test,” the character of a subsidy is determined by the purpose for which it is granted, assessed from the scheme as a whole; its timing, source and form are not decisive.

Assistance intended to enable an assessee to conduct business more profitably is a revenue receipt, whereas assistance intended to establish a new unit or substantially expand an existing one is a capital receipt (*Sahney Steel & Press Works Ltd. v. CIT*; *CIT v. Ponni Sugars and Chemicals Ltd.*).

The scheme’s operative provisions—not merely a general policy statement or its stated label—must disclose the purpose and effect of the assistance (*CIT-I, Kolhapur v. Chaphalkar Brothers, Pune*).

Section 143(3) was the provision under which the assessment was completed.

The subsidy was available for five years from commencement of production, tapered over that period, and was calculated by reference to actual power charges incurred in manufacturing.

Its immediate effect was to reduce an ordinary operating expense; it was not linked to capital investment, repayment of capital borrowing, or creation of an asset.

The scheme’s broader aim of fostering industrial growth did not alter the character of this particular assistance, and neither the timing of payment nor the possibility that the resulting savings could be used for other business purposes was determinative.

The subsidy therefore fell within the operational-assistance principle in *Sahney Steel*, rather than the capital-purpose category in *Ponni Sugars* or *Chaphalkar Brothers*.

It affirmed the concurrent decisions below and dismissed the appeal.