Government subsidy under rehabilitation scheme, a capital receipt not revenue receipt; Purpose test to be applied

For the assessment year 2007-08, the appellant 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 revenue receipt.

The question which arises for consideration is whether the grant in aid/subsidy which was received by the appellant from the Government under rehabilitation scheme should be treated as revenue receipt in the hands of the assessee or as a capital receipt taking it out of the purview of the taxable income.

Madras High Court allows Assessee’s appeal observing that basis the ‘purpose test’ enunciated by the Supreme Court in CIT v. Ponni Sugars & Chemical Ltd. and others (2008) 9 SCC 337, the receipt in the hands of the Assessee is capital receipt and not revenue receipt; High Court states that the Supreme Court in Ponni Sugars decision clearly enunciated that the nature of the incentive subsidy is determined by the object for which the subsidy/assistance is given; High Court articulates that the form of mechanism through which the subsidy is given is completely irrelevant; Consequent to considering the letter issued by the Ministry of Agriculture, Department of Animal Husbandry, Dairying and Fisheries, Government of India, High Court observes that the text and tenor of the said letter leaves no manner of doubt that the financial assistance which was provided to the Assessee was towards rehabilitation, and one of the most important conditions was that the Assessee first clears its liabilities in the order of DCS, other milk unions and employers, respectively; High Court opines that the object and purpose of grant of financial assistance and consequent receipt in the hands of the Assessee, was to extract it from the financial hardship, as part of the rehabilitation; High Court asserts that the funds were to be utilized for clearing its liabilities; Rejecting Revenue’s submissions, High Court observes that the dominant purpose is the decisive factor for considering the nature of receipt; High Court states that the dominant purpose in the present case was towards rehabilitation of the loss making society/Assessee and the funds were to be utilized for the purpose of clearing all loans and liabilities, which the Assessee was unable to clear due to financial stringency.

[In favour of assessee]
(Related Assessment year : 2007-08) – [The Dharmapuri District Co-operative Milk Producers Union Ltd. v. DCIT, Salem [TS-1694-HC-2025(MAD)] – Date of Judgement : 17.12.2025 (Mad.)]