Subsidy from Govt Rehabilitation Scheme Milk Producers’ Co-operative is Capital Receipt, Not Taxable as Revenue Receipt: Madras HC [Read Order]

The Madras High Court has directed the income tax department to treat the subsidy/grant-in-aid of Rs. 3.5 crores received from the government rehabilitation scheme for the Milk producers’ cooperative union as a capital receipt.

In an appeal filed by the The Dharmapuri District Co-operative Milk Producers Union Ltd, it challenged the decision of the income tax appellate tribunal. The appellant raised 4 issues including the treatment of the subsidy as capital or revenue receipt.

In response to these issues, Chief Justice Manindra Mohan Shrivatsava and Justice G. Arul Murugan, in view of the Supreme Court purpose test, ruled that the aid is capital receipt.

The appellant is a co-operative society engaged in procurement of milk, manufacturing by-products and distribution of milk and related items and is a subsidiary to Aavin (Apex Co-operative Society - engaged in distribution of milk).

Apart from the procurement, the appellant was also involved in farmer-support initiatives, including implementation of milch animal schemes, development of society infrastructure, and provision of veterinary health services free of cost, awareness programmes. It also acts as a bridge between village-level producers and the marketing system.

The appellant submitted its income tax return for the Assessment year ( AY ) 2007-2008 was filed showing loss Rs.58,46,770/-. The income tax department completed the assessment under Section 143(1) of the Income Tax Act, 1961. It treated the grant of Rs. 3.5 crores from the government as revenue receipt.

The union filed its appeal before both the Commissioner of Income Tax ( Appeals ) [CIT(A)] and the Income Tax Appellate Tribunal ( ITAT ), which resulted in unsuccess. Therefore it appealed before the High Court.

The Revenue contended that the conditions listed in the Government of India’s sanction letter and the Federation’s order showed that the financial assistance was performance-linked in nature.

However, the Court rejected this argument, holding that the performance conditions were merely oversight mechanisms to ensure that the rehabilitation funds were properly and purposefully utilised, and did not alter the essential character of the assistance as rehabilitation-oriented.

Coming to the decision of the issue, the court, before examining the taxability of the grant, referred to the Supreme Court case of CIT v. Ponni Sugars & Chemical Ltd. In this matter, the apex court has laid down a ‘purpose test’ for determining the same.

The court noted the observation of the apex court that the object of the grant given determines the nature of the incentive subsidy and the form of mechanism through which the grant is given is not relevant.

In the present case, the financial assistance was granted under a Central Sector Plan Scheme titled “Assistance to Cooperatives” for the rehabilitation of the Dharmapuri Milk Union, with equal contribution from the Union and State Governments, noted the bench. And from the administrative approval given to the appellant showed that it was for rehabilitation purposes.

Additionally, the conditions referred to in the letter while providing the grant was to pay off the liabilities in the order of DCS, other milk unions and employers. Therefore, the court viewed that “the object and purpose of 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.”

According to the court, the prime purpose of providing the finance aid to the union was to clear off the liabilities, therefore it should be treated as capital receipt, instead of revenue. The appeal was allowed in favour of the appellant-union and against the revenue.

Adv. T. Vasudevan appeared for the appellant. Adv. V.Mahalingam, Sr. Standing Counsel and Adv. P.E.R.Mangala Suvigaran, Jr. Standing Counsel appeared for the department.

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