The court applies the "purpose test" to classify the financial assistance for Dharmapuri District Co-operative as a capital receipt, aligning with Supreme Court guidelines.
In a significant judgment, the Madras High Court has ruled that the grant-in-aid received by Dharmapuri District Co-operative under a government rehabilitation scheme is to be treated as a capital receipt, not a revenue receipt. The ruling was delivered by a division bench comprising Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan on December 17, 2025.
The case centered on whether the financial assistance received by the co-operative society from the government should be classified as a capital or revenue receipt under the Income Tax Act, 1961. The co-operative, engaged in the procurement and distribution of milk, received Rs. 3.5 crore as part of a rehabilitation scheme aimed at clearing liabilities and ensuring the entity's sustainable operation.
The court's decision hinged on the application of the "purpose test," a principle laid down by the Supreme Court in the landmark case of Commissioner of Income Tax v. Ponni Sugars & Chemical Limited. This test determines the nature of a subsidy based on its intended purpose rather than the method or conditions of payment.
In its judgment, the High Court elaborated that the principal objective of the financial aid was rehabilitation, specifically for the clearance of existing liabilities, which classified it as a capital receipt. The court meticulously examined the conditions under which the subsidy was granted, noting that the funds were to first address debts owed to milk unions and employees before any profits could be utilized for repayment to government entities.
The bench also referenced the administrative approval letter from the Ministry of Agriculture, which clearly outlined that the financial assistance was part of a central sector plan for cooperative rehabilitation. The court found that the performance-related conditions attached to the grant were primarily intended to ensure proper utilization of the funds for rehabilitation purposes.
By applying the purpose test, the court overruled the decisions of the Income Tax Appellate Tribunal, which had previously categorized the subsidy as a revenue receipt. The judgment emphasized the dominant purpose of the subsidy, which was to rehabilitate the financially struggling co-operative by clearing its debts, thus qualifying it as a capital receipt.
The court further clarified that since the first three substantial questions of law were resolved in favor of the appellant, the fourth question, concerning deductions under a different section, became irrelevant. Consequently, the appeal was allowed, providing a legal precedent for similar cases involving financial assistance classifications.
Bottom Line:
Income Tax - Subsidy/grant-in-aid received under a rehabilitation scheme is to be treated as a capital receipt if the purpose of the subsidy is to clear liabilities and rehabilitate the entity, as per the purpose test enunciated by the Supreme Court.
Statutory provision(s): Income Tax Act, 1961 Section 143(3)
