Facts
The appellant, M/s. Mepco Industries Ltd., received electricity subsidy of ₹16,20,745 for Assessment Year 1997-98 under the Government of Pondicherry’s Power Subsidy Scheme. The appellant claimed it as a capital receipt. The Assessing Officer treated it as a revenue receipt taxable under the IT Act.
The CIT (Appeals), ITAT and Madras High Court affirmed the assessment, relying principally upon Sahney Steel & Press Works Ltd. v. CIT. The appellant approached the Supreme Court.
Issues Framed
Whether the electricity subsidy of ₹16,20,745 received under the Government of Pondicherry’s Power Subsidy Scheme was a capital receipt or a revenue receipt.
Court’s Reasoning
(a) Governing “purpose test”
The Court held that the character of a subsidy must be determined with reference to the purpose for which the subsidy is given. The point of payment, source and form of subsidy are not decisive. The scheme must be examined as a whole.
(b) Application to the Power Subsidy Scheme
The subsidy was available for five years from commencement of production and was calculated as a specified percentage of the actual electricity charges—33⅓% for the first three years, 20% for the fourth year and 10% for the fifth year.
The Court observed that the subsidy was not calculated with reference to capital invested and was not earmarked for acquisition of plant or machinery, construction of the factory, repayment of capital borrowing, or creation of another capital asset. Its immediate and direct effect was to reduce electricity costs incurred in manufacturing.
(c) General object of industrial growth
The Court held that the general object of fostering industrial growth could not, by itself, determine the character of the receipt. The operative provisions showed that the particular financial assistance was intended to meet an operational cost after production had commenced.
Accordingly, the subsidy was an operational subsidy, falling within the principle laid down in Sahney Steel.
Held
The Supreme Court dismissed the appeal and affirmed the concurrent findings that the electricity subsidy was a revenue receipt taxable under the IT Act.
Conclusion
The character of a subsidy is determined by the “purpose test”: where the subsidy operates to meet an operational cost rather than contribute towards capital assets or capital outlay, it is a revenue receipt.
Relevant Para
18. “In the present case, the answer emerges from the scheme itself as the benefit is calculated as a specified percentage of the actual energy charges, and it is available for a limited period commencing with production, and its immediate and direct effect is to reduce the electricity cost incurred in the manufacturing process. The scheme does not require the subsidy to be applied towards acquisition of plant or machinery, construction of the factory, repayment of a capital borrowing, or creation of any other capital asset. The record before us does not disclose that the amount received by the appellant was earmarked for any such capital purpose. On the contrary, the very basis of quantification is the expenditure on power consumed in production.”
Case Details
Citation: 2026 INSC 1090
Decided on: 07 October 2026
Case Title: M/s. Mepco Industries Ltd. v. Commissioner of Income Tax, Madurai
Court: Supreme Court of India
Bench: Prashant Kumar Mishra, J.; Shree Chandrashekhar, J.