Serum Institute of India (P.) Ltd. vs. Union of India – Bombay High Court Upholds Constitutional Validity of Section 2(24)(xviii) on Taxation of Subsidies (2024)

⚖️ Serum Institute of India (P.) Ltd. vs. Union of India – Bombay High Court Upholds Constitutional Validity of Section 2(24)(xviii) on Taxation of Subsidies (2024)

📌 Background

The Finance Act, 2015 introduced Section 2(24)(xviii) to the Income-tax Act, 1961, expanding the definition of “income” to include all subsidies, grants, cash incentives, duty drawbacks, concessions, reimbursements, or other forms of financial assistance received by an assessee from the Central or State Government or any authority.

This amendment marked a significant shift from the earlier judicial approach, where courts applied the “purpose test”—distinguishing between capital receipts (non-taxable) and revenue receipts (taxable) based on the purpose for which a subsidy was granted.

The Serum Institute of India (P.) Ltd. v. Union of India [(2024) 463 ITR 582 / 336 CTR 6 (Bom HC)] case challenged this amendment on constitutional grounds, arguing that it violated the basic principles of tax jurisprudence and the Constitution.

📂 Facts of the Case

• Petitioner: Serum Institute of India Pvt. Ltd.
• Respondents: Union of India and others.
• Issue: Constitutional validity of Section 2(24)(xviii) introduced by the Finance Act, 2015.

Assessee’s Contention:

• The new clause deemed all forms of subsidies and incentives as income, irrespective of their nature (capital or revenue).
• This effectively overruled judicial precedents, such as CIT v. Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC), which applied the purpose test to determine the taxability of subsidies.
• It was contended that the amendment violated:
  • Article 14 (Right to Equality) – as it created arbitrary classifications.
  • Article 19(1)(g) (Freedom of Trade and Business) – by imposing unreasonable fiscal restrictions.
  • Article 265 (No tax without authority of law) – as it allegedly taxed non-income items.
  • Article 246 and 289 – concerning distribution of taxation powers between the Union and the States.
• The petitioner also argued that the amendment was retrospective in spirit, adversely affecting ongoing and settled assessments, and was contrary to Sections 4 and 5 of the Act governing the charging provisions.

❓ Point of Dispute

Whether Section 2(24)(xviii)—which deems all subsidies, grants, and incentives as income—violates the Constitution of India by:

1. Overruling established judicial interpretations of capital vs. revenue subsidy, and
2. Imposing an arbitrary and excessive tax burden on taxpayers, thereby infringing Articles 14, 19, 246, and 265.

📑 Submissions by the Petitioner (Assessee)

• Overriding Judicial Precedents:
  The amendment effectively nullified the purpose test established by the Supreme Court in Ponni Sugars and Sahney Steel, where the nature of subsidy was determined based on its purpose—whether for setting up new units (capital) or for day-to-day operations (revenue).
• Violation of Constitutional Rights:
  The clause was argued to be arbitrary and excessive, violating Article 14 (equality) and Article 19(1)(g) (freedom of business).
• Beyond Legislative Competence:
  By deeming capital receipts as income, Parliament allegedly acted beyond its legislative competence under Article 246, as capital receipts do not constitute “income” in the first place.
• Contrary to Charging Sections:
  Sections 4 and 5 tax only real income that “accrues or arises” to the assessee. Deeming inherently non-income items as income violates the fundamental charging principle.
• Economic Hardship Argument:
  The inclusion of developmental subsidies (e.g., for setting up industries in backward areas) as taxable income would discourage investment and impair industrial growth.

📑 Submissions by the Revenue

• Legislative Competence:
  Parliament has plenary powers under Entry 82 of List I (Union List) to legislate on income taxation. The definition of “income” can be expanded to include deemed categories.
• Purpose of the Amendment:
  The insertion of Section 2(24)(xviii) was intended to bring clarity and uniformity, eliminating litigation caused by conflicting judicial interpretations on the taxability of subsidies.
• Presumption of Constitutionality:
  Every fiscal enactment enjoys a presumption of constitutionality, and courts should not interfere with legislative policy decisions unless manifestly arbitrary or discriminatory.
• No Discrimination:
  The provision applies uniformly to all taxpayers, without creating unreasonable classifications.
• Policy Objective:
  The amendment was a transparent recalibration of fiscal policy to ensure better tax administration and prevent misuse of subsidies under the guise of capital assistance.

⚖️ Legal Principles & High Court’s Findings

1. Presumption of Constitutionality

The Court held that every legislative enactment, especially in fiscal matters, carries a strong presumption of validity. Courts should intervene only if there is a clear transgression of constitutional limits.

“Taxation is a matter of economic policy, and courts cannot substitute their own judgment for that of the legislature.”

2. Legislative Competence and Fiscal Policy

The High Court found that Parliament was competent to amend the definition of income. Expanding the scope of “income” under Section 2(24) falls well within its authority under Entry 82, List I of the Constitution.

3. No Violation of Fundamental Rights

• The amendment does not discriminate between taxpayers; it applies equally to all.
• Article 14 cannot be invoked merely because a fiscal measure has economic consequences or impacts profitability.
• Article 19(1)(g) is not violated as taxation by itself does not curtail business freedom.

4. Judicial Restraint in Economic Legislation

The Court reiterated that taxation statutes are policy-driven instruments, and judicial interference is limited to cases of manifest arbitrariness or lack of competence.

“The courts cannot strike down an economic law merely because it affects profitability or alters pre-existing benefits.”

5. Purpose of the Amendment

The Finance Act, 2015 aimed to rationalize and simplify the taxation of subsidies by removing the ambiguity between capital and revenue receipts. This was a transparent fiscal measure, not an arbitrary imposition.

6. Consequences of Invalidation

Striking down Section 2(24)(xviii) would have led to massive refund claims and fiscal chaos, undermining the stability of the tax system.

🏁 Held

✅ Section 2(24)(xviii) of the Income-tax Act, 1961, is constitutionally valid.
✅ Parliament has the legislative competence to expand the scope of “income.”
✅ The amendment does not violate Articles 12, 14, 19, 246, 265, or 289 of the Constitution.
✅ The provision is a legitimate fiscal policy decision, and courts cannot interfere merely on grounds of perceived hardship or economic impact.

“Courts cannot substitute their wisdom for that of the legislature in matters of economic or fiscal policy.”

✅ Practical Impact on Taxpayers

• All subsidies taxable: Subsidies, grants, incentives, reimbursements, and concessions are now treated as income, unless specifically exempted.
• Capital vs. revenue distinction irrelevant: The “purpose test” no longer determines taxability; all such receipts are included in income by default.
• Need for legislative exemptions: Taxpayers must rely on specific exemption notifications or provisions (e.g., Section 10 or Section 10AA) for relief.
• Policy certainty: The judgment reinforces legislative authority to redefine “income” in fiscal law.

🔑 Key Takeaways

1. Legislative policy prevails: Taxation is a matter of economic discretion, not judicial correction.
2. Uniform application: Section 2(24)(xviii) applies across industries and sectors, avoiding ambiguity.
3. Purpose test overridden: All forms of government financial assistance now fall under “income.”
4. Judicial restraint reaffirmed: Courts will not invalidate fiscal laws merely for economic hardship.
5. Constitutional presumption upheld: Unless proven discriminatory or ultra vires, fiscal statutes remain valid.

📢 Why This Case Matters

The Serum Institute of India (P.) Ltd. v. Union of India (2024) judgment is a landmark reaffirmation of legislative supremacy in fiscal policymaking. By upholding Section 2(24)(xviii), the Bombay High Court has clarified that taxation of subsidies is a matter of legislative intent and economic policy—not judicial interpretation.

This ruling ensures consistency in the treatment of subsidies and grants, marking a decisive shift from the judicial “purpose test” era to a uniform statutory inclusion model, providing certainty for both taxpayers and the Revenue.

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