Are subsidies taxable?

We have many clients whose assessments are subject to litigation in respect of amounts received by way of subsidies mainly meant for industries located in backward areas or backward States. The subsidies are given for meeting the extra cost to be incurred for establishing or running an industrial undertaking in places with poor infrastructure. It is odd that after the decision of the Supreme Court in

It is true that the issue of taxation of subsidies is clouded by controversies. Too much is being read by revenue from the decision of Sahney Steel and Press Works Ltd. v CIT (1997) 228 ITR 253 (SC), which was a decision rendered with reference to the terms of the power subsidy granted by the Andhra Pradesh Government under its subsidy scheme. In fact, the decision in Sahney Steel and Press Work’s case (supra) itself had been relied upon for exempting subsidies in some cases as in the case of a subsidy meant for hotel industry in CIT v Udupi Builders P. Ltd. (2009) 319 ITR 440 (Kar). The Supreme Court had also occasion, recently in Mepco Industries Ltd. v CIT (2009) 319 ITR 208 (SC), to point out that taxability or otherwise of the subsidy would depend on the terms of the scheme so that no rectification of a decision so as to withdraw exemption already granted can be made solely with reference to Sahney Steel and Press Works’ case (supra).

As pointed out in the query, there is a case for exempting subsidy, since the object of the subsidy is to compensate the extra amount of expenditure incurred by the assessee. Where a scheme envisages that it should be reimbursement of profits so as to require taxation, such subsidies may be granted subject to income-tax so that tax could be deducted at source. Since such schemes are not many, all subsidy schemes could be vetted by the Central Board of Direct Taxes before they are brought into force and where there is liability for income-tax, it may be indicated in the scheme itself so as to reduce the scope of litigation, which continue to overload the Tribunal and the courts in matters pending adjudication.

Keywords: taxabletaxsubsidiesIT

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