Income Tax | Govt Grant/Subsidy Under Rehabilitation Scheme Is Capital Receipt, Not Taxable As Revenue: Madras High Court

The Madras High Court held that the grant-in-aid/subsidy received by the assessee under a government rehabilitation scheme is a capital receipt and is not taxable as revenue. Chief Justice Manindra Mohan Shrivastava and G. Arul Murugan examined whether the grant-in-aid/subsidy received by the assessee from the Government under the rehabilitation scheme should be treated as a revenue receipt in the hands of the assessee or as a capital receipt, taking it out of the purview of the taxable income. In the case at hand, the assessee/appellant was a co-operative society engaged in the procurement of milk, manufacturing by-products and distribution of milk and related items and is a subsidiary of Aavin. For the assessment year 2007-2008, the assessee filed its return of income admitting a loss of Rs.58,46,770/-. The assessment was completed under Section 143(3) of the Income Tax Act, 1961. A sum of Rs.3,50,00,000/- received as grant in aid was treated as a revenue receipt. The addition was challenged by the assessee by filing an appeal before the Commissioner of Income (Appeals), which was dismissed. The assessee further filed an appeal before the Income Tax Appellate Tribunal, which was also dismissed. The Appellate Tribunal held that the grant-in-aid/subsidy received from the Government under a rehabilitation scheme was revenue. The bench referred to the Supreme Court decision in the case of Commissioner of Income Tax v. Ponni Sugars & Chemical Limited and others [(2008) 9 SCC 337], wherein the principles applicable in order to ascertain whether the receipt is in the nature of a revenue receipt or a capital receipt were enunciated. The Supreme Court in the aforesaid decision clearly enunciates the principle that it is the object for which the subsidy/assistance is given, which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. The bench noted that the object and purpose of the grant of financial assistance and consequent receipt in the hands of the appellant was to pull it out of the financial crunch, as a part of rehabilitation. The funds were to be first utilised for clearing its loan liabilities. The bench stated that in any case, even if we accept the submission of learned counsel for the revenue that the purpose of the grant of financial assistance was also to scale up performance, in such a case, the dominant purpose shall be a decisive factor for considering the nature of receipt. Quite obviously, the dominant purpose of providing financial assistance was towards the rehabilitation of the loss-making society/assessee, and the funds were to be utilised for the purpose of clearing all loans and liabilities, which the assessee was unable to clear because of the financial stringency, added the bench. The bench held that the receipt in the hands of the assessee was a capital receipt and could not be treated as a revenue receipt. In view of the above, the bench allowed the petition. Case Title: The Dharmapuri District Co-operative Milk Producers Union Ltd. v. The Deputy Commissioner of Income Tax Case Number: T.C.A.No.285 of 2021 Counsel for Appellant/Assessee: T. Vasudevan Counsel for Respondent/Department: V. Mahalingam and P.E.R. Mangala Suvigaran Click Here To Read/Download Order

Income Tax | Govt Grant/Subsidy Under Rehabilitation Scheme Is Capital Receipt, Not Taxable As Revenue: Madras High Court

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