CHENNAI: The Madras High Court has said that grant-in-aid provided by the government for the purpose of rehabilitation cannot be treated as revenue receipt but only as capital receipt, and so it is not taxable. A division bench of Chief Justice Manindra Mohan Shrivastava and Justice G Arul Murugan gave the ruling recently while allowing the appeals filed by the Dharmapuri District Cooperative Milk Producers Union Limited challenging the 2018 order of the Income Tax Appellate Tribunal.
The appellant society filed its return of income admitting a loss of Rs 58.46 lakh for the assessment year 2007-08. A sum of Rs 35 crore received as grant-in-aid was treated as revenue receipt by the I-T department. Against which, the appellant filed an appeal before the Commissioner of Income (Appeals) and then before the ITAT but its appeals were not allowed. Challenging the ITAT order, it filed the appeal in the HC.
The division bench dealt with the primary issue of whether the grant-in-aid/subsidy which was received by the society from the government under rehabilitation scheme should be treated as revenue receipt or as capital receipt taking it out of the purview of the taxable income. The bench said the conditions mentioned in the 2005 letter of the Union Ministry of Agriculture clearly show that the appellant was first required to clear up their liabilities and the text and tenor of the letter leaves no manner of doubt that the financial assistance was provided towards rehabilitation.
“Thus, it is clear 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,” it said.
Quite obviously, the dominant purpose of providing the financial assistance was towards rehabilitation of the loss-making society and the funds were to be utilised for the purpose of clearing all loans and liabilities which the society was unable to clear because of the financial stringency, the bench observed.
“Therefore, in our firm view, the receipt in the hands of the appellant was capital receipt and cannot be treated as revenue receipt, in view of the principle enunciated by the Supreme Court and applying the purpose test,” the bench ruled.