The Madras High Court has ruled that when the dominant purpose of providing financial assistance was towards the rehabilitation of the loss-making society, and the funds were to be utilised for clearing all loans and liabilities, which the society was unable to clear because of the financial stringency, then the receipt in the hands of the society would be capital receipt and not a revenue receipt.
The ruling came after observing that the object and purpose of the grant of financial assistance and consequent receipt in the hands of the taxpayer society 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.
Emphasising that the dominant purpose shall be a decisive factor for considering the nature of receipt, the Division Bench comprising the Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan observed that the financial assistance which was provided to the appellant was towards rehabilitation. One of the important conditions was that the milk union should first clear up their liabilities in the order of DCS, other milk unions and employers, respectively.
The Bench pointed out that the character of a subsidy is determined by the purpose for which it is given, not the source, form, or timing of the payment. If the object of the subsidy is to enable the taxpayer to run the business more profitably, the receipt is on the revenue account. However, if the object is to enable the taxpayer to set up a new unit or expand an existing one, the receipt is on a capital account.
The Bench also explained that a crucial factor is whether the taxpayer is obliged to use the money for a specific purpose. If the funds must be used for a particular purpose (e.g., repayment of term loans for setting up new units), it points towards a capital receipt.
Coming to the nature of the Scheme, the Bench observed that the grant was provided under a Central Sector Plan Scheme titled “Assistance to Cooperatives” as part of a “rehabilitation proposal” for the Dharmapuri Milk Union. The cost was shared 50:50 between the Government of India and the State Government.
Lastly, the Bench concluded that the “text and tenor” of the sanction letters made it clear that the assistance was for rehabilitation, and any check on performance was merely to ensure the proper utilisation of the funds for the intended purpose of rehabilitation. The “dominant purpose” remained the rehabilitation of the loss-making society.
Briefly, the appellant is a co-operative society involved in procuring milk from 536 Primary Milk Co-operative Societies, manufacturing by-products, and distributing milk. After the appellant filed its return declaring a loss of Rs. 58.46 lacs, the AO completed the assessment by treating the sum of Rs. 3.50 crores received by the appellant as a grant-in-aid, as a revenue receipt. On appeal, the CIT(A) and the ITAT upheld the additions made by the AO.
Appearances:
Advocate T. Vasudevan, for the Appellant/Taxpayer
Advocates V. Mahalingam and P.E.R. Mangala Suvigaran, for the Respondent/Revenue
