Rehabilitation Grant Received By Milk Producers’ Cooperative Is Capital Receipt, Not Taxable Revenue: Madras High Court
The High Court held that financial assistance granted under a rehabilitation scheme to a loss-making cooperative milk producers’ union was a capital receipt, as its dominant purpose was to revive the society and clear accumulated liabilities, and not to supplement its trading profits.
The Madras High Court has held that a grant-in-aid received by a cooperative milk producers’ union under a government rehabilitation scheme constitutes a capital receipt and cannot be treated as taxable revenue income.
The Court ruled that the character of such a receipt must be determined by applying the “purpose test,” and that the dominant object of the financial assistance in the present case was rehabilitation of a financially distressed cooperative, rather than enhancement of profitability.
A Bench comprising Chief Justice Manindra Mohan Shrivastava and Justice G Arul Murugan, relying on the “purpose test” put forward by the Supreme Court in Commissioner of Income Tax v. Ponni Sugars & Chemical Limited (2008), observed: “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”.
Advocate T. Vasudevan represented the petitioners, while V Mahalingam, Senior Standing Counsel, represented the respondents.
Background
The appellant, Dharmapuri District Co-operative Milk Producers Union Ltd., is engaged in the procurement, processing, and distribution of milk and milk products, and functions as a subsidiary of the Tamil Nadu Cooperative Milk Producers’ Federation Limited (Aavin).
For the Assessment Year 2007–2008, the appellant filed its return declaring a loss. During assessment proceedings, a sum of ₹3.50 crore received as a grant-in-aid under a rehabilitation scheme was treated by the Assessing Officer as a revenue receipt and brought to tax.
The appellant challenged this treatment before the Commissioner of Income Tax (Appeals) and thereafter before the Income Tax Appellate Tribunal. Both authorities upheld the addition, leading the appellant to approach the High Court under Section 260A of the Income Tax Act, 1961.
Court’s Observation
The Madras High Court examined the settled legal position governing the characterisation of subsidies and grants, with specific reference to the principles laid down by the Supreme Court in Commissioner of Income Tax v. Ponni Sugars & Chemical Limited.
Relying on the Supreme Court’s exposition, the Bench reiterated that the decisive test is the purpose for which the subsidy is granted. The Court emphasised that the source of the subsidy, the timing of payment, or the mechanism through which it is disbursed is irrelevant. What is determinative is whether the assistance is intended to support ongoing business operations or to enable rehabilitation, expansion, or capital restructuring.
Applying this principle, the Court closely examined the administrative approval issued by the Government of India, Ministry of Agriculture, under the Central Sector Plan Scheme “Assistance to Cooperatives.” The approval expressly described the financial assistance as part of a rehabilitation proposal for the appellant milk union, with a clearly defined seven-year rehabilitation period.
The Court noted that the conditions attached to the grant required the appellant to first clear its accumulated liabilities in a specified order, including dues payable to primary cooperative societies, other milk unions, and employees.
The Bench further took note of the corresponding order passed by the Tamil Nadu Cooperative Milk Producers’ Federation, which imposed similar conditions, including maintenance of separate accounts, restricted utilisation of funds, and submission of audited statements.
Rejecting the Revenue’s contention that performance-linked conditions indicated a revenue character, the Court held that such conditions merely ensured proper utilisation of funds granted for rehabilitation. Even assuming a dual objective, the Court observed that the dominant purpose of the grant remained rehabilitation of a loss-making cooperative by enabling it to discharge its liabilities.
The Court concluded that the funds were not available for unfettered use in the course of business and were strictly earmarked for revival and debt clearance, bringing the receipt squarely within the category of capital receipts under the purpose test.
Conclusion
The Madras High Court concluded that the grant-in-aid received by the appellant under the rehabilitation scheme was a capital receipt and could not be treated as revenue income liable to tax.
The appeal was accordingly allowed, with no order as to costs.
Cause Title: The Dharmapuri District Co-operative Milk Producers Union Ltd. v. Deputy Commissioner of Income Tax
Appearances
Appellant: Advocate T. Vasudevan
Respondent: V. Mahalingam, Senior Standing Counsel; P.E.R. Mangala Suvigaran, Junior Standing Counsel
