Madras high court has clarified that a grant or aid provided by the Union govt cannot be considered as the income of the institution that received the financial assistance for tax assessment.
The dominant purpose of providing financial assistance was for the rehabilitation of the loss-making society/assessee, and the funds were to be utilised for clearing all loans and liabilities, which the assessee was unable to clear due to financial stringency, the first bench of Chief Justice Manindra Mohan Shrivastava and Justice G Arul Murugan stated.
“In our firm view, the receipt in the hands of the society was a capital receipt and cannot be treated as a revenue receipt. This is in line with the principle enunciated by the Supreme Court and applying the purpose test,” the court added.
The bench passed the order on a plea by Dharmapuri District Co-operative Milk Producers Union Ltd, challenging the income tax department’s order that treated 3.5 crore received from the Union govt as a revenue receipt during 2007-2008.
Relying on Supreme Court orders, the bench noted that the apex court has clearly enunciated the principle that the object for which the subsidy/assistance is given determines the nature of the incentive subsidy.
The form of the mechanism through which the subsidy is given is irrelevant.
Therefore, the grant in aid/subsidy received by the society from the govt under a rehabilitation scheme cannot be treated as a revenue receipt in the hands of the assessee.
It must be treated as a capital receipt, taking it out of the purview of taxable income, the court said.
Source from: https://timesofindia.indiatimes.com/city/chennai/rehabilitation-aid-is-capital-not-taxable-income-says-hc/articleshow/126165670.cms
