Bombay HC Rejects Serum Institute's Plea Challenging Amendment Of Income Tax Act Making Subsidies, Grants Etc. Taxable

The Bombay High Court rejected a petition filed by the Serum Institute of India, which challenged the amendment to Income Tax Act that made subsidies, grants etc. taxable.

Notably, the amendment had inserted sub-clause (xviii) to Section 2(24) of the Act, which defines taxable "income".

The Bench of Justice KR Shriram and Justice Neela Gokhale observed that, "The amendment to Section 2(24) by insertion of the impugned sub-clause that includes various subsidies and concessions only indicates the well established jurisprudential path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital cog in the nation's fiscal machinery. As submitted by ASG, it is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources."

Senior Advocate Arvind Datar, along with others, appeared for the petitioner, while ASG Devang Vyas, along with others, appeared for the respondents.

The Serum Institute had sought incentives under Maharashtra's 2013 incentive scheme, offering benefits like stamp duty concessions and tax subsidies. When the Finance Act made these incentives taxable, Serum Institute challenged it, asserting that the retrospective application was unintended. They argued that taxing incentives amounted to indirectly taxing the State's revenue, violating the Constitution. Serum Institute contended that, under the amended Finance Act, all incentives, whether capital or revenue, were treated as taxable income. Previously, capital receipts were non-taxable.

The Centre defended its position, emphasizing Parliament's exclusive power to tax income and urging deference to legislative judgment in economic matters unless arbitrary.

The High Court upheld the argument of the Centre, and observed as follows:

"It is trite that the legislature is the best forum to weigh different problems in the fiscal domain and form policies to address the same including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures." 

"Subsidies and concessions are inherently designed to stimulate certain economic activities or to steer the economy in a desired direction. They are not, however, intended to serve as permanent fixtures beyond the scope of taxation, especially when such benefits have fulfilled their economic purpose. The imposition of tax on these subsidies under the amended provision does not constitute “taking away” of a benefit but rather represents a recalibration of fiscal advantages in line with broader economic and policy considerations."

It was also stressed that the amendment only indicated the well-established jurisprudential path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital cog in the nation's fiscal machinery. In that context, it was further said that, "As submitted by ASG, it is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources."

Subsequently, the petition was dismissed.

Cause Title: Serum Institute of India Private Limited vs Union of India & Ors.

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