Government Grants for Specific Purposes Not Recognized as Income Until Utilized: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that government grants received for specific purposes, such as the ₹50,00,000 grant under the Rashtriya Krishi Vikas Yojana (RKVY), are not recognized as income until utilized.

Gandhinagar District Coop.Milk Producers Union Ltd.,the appellant assessee,was a co-operative society registered under the Gujarat Co-operative Societies Act, 1961, and engaged in collecting raw milk. For the Assessment Year (AY) 2020-21, it filed a return of income declaring ₹3,12,33,210, claiming deductions under Section 80P amounting to ₹1,44,48,096.

Get a Complete Kit of Essential Books for Daily Practice, Click Here

During scrutiny under CASS, the Assessing Officer ( AO ) disallowed the deductions under Section 80P(2)(d) and treated ₹50,00,000 received as government grants as revenue receipts. The disallowed deductions included interest from Ahmedabad District Co-Op Bank (₹1,04,14,746), dividend from Gujarat Co-Op Milk Marketing Federation Ltd. ( ₹40,25,100 ), and dividend from Ahmedabad District Co-Op Bank ( ₹8,250 ).

The AO noted that a grant of ₹50,00,000 was deposited in a joint account but remained unused during the year. He deemed it a revenue receipt, assessable as income, as it was intended to enhance profitability. The AO argued that the grant accrued as income despite being in a joint account, lacking evidence to classify it as a capital receipt.

The assessee appealed to the Commissioner of Income Tax (Appeals)[CIT(A)] against the AO's order. The CIT(A) upheld the AO's addition of ₹50,00,000 as  revenue income. Dissatisfied with the order of the CIT(A) the assessee appealed before the tribunal.

Get a Complete Kit of Essential Books for Daily Practice, Click Here

The tribunal observed that the ₹50,00,000 grant received under the Rashtriya Krishi Vikas Yojana (RKVY) was intended for specific agricultural infrastructure and development activities. The grant was kept in a joint account with the Department of Horticulture, as per the MOU, and was subject to strict conditions, including the return of unutilized funds to the government.

The bench noted that the assessee did not have unrestricted control over the funds, which could not be used for general business purposes.

The revenue argued that the grant was taxable as income under Section 2(24)(xviii) of the Act, which includes government subsidies. However, the tribunal found that the grant did not provide an immediate economic benefit, as it was tied to specific project guidelines and not fully accessible during the year of receipt.

Get a Complete Kit of Essential Books for Daily Practice, Click Here

The tribunal relied on the Tax Audit Report, which showed that the grant was unutilized and classified as a "Reserve Fund" rather than income. It also cited judicial precedents that supported treating such grants as capital receipts until utilized.

The two member bench comprising T.R Senthil Kumar ( Judicial Member ) and Makarand V.Mahadeokar ( Accountant Member ) based on these findings, ruled that the addition made by the AO, confirmed by the CIT(A), was incorrect. The grant was not taxable as income in the year of receipt, and the ₹50,00,000 addition was deleted.

In conclusion, the ITAT allowed the appeal.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates