Subsidy as reimbursement of operating costs is taxable revenue income, with related expenditure allowed and section 14A inapplicable.

Subsidy receipts that merely reimburse transportation, seed bank maintenance and similar operational expenditure are not agricultural income exempt under section 10; they are taxable as revenue receipts, with the related expenditure deductible so that only the net amount is brought to tax. Where the receipts are not exempt income, section 14A has no application and no disallowance can be made in respect of those receipts.

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Issues: (i) Whether the subsidies received from the Government were agricultural income exempt under section 10 or were revenue receipts taxable after deducting the related expenditure; (ii) Whether section 14A could be invoked in respect of the subsidy receipts.

Issue (i): Whether the subsidies received from the Government were agricultural income exempt under section 10 or were revenue receipts taxable after deducting the related expenditure.

Analysis: The subsidy amounts were found, on the basis of the sanction letters and surrounding material, to be reimbursements of expenditure incurred for transportation, maintenance of seed bank and similar operational outlays. On that footing, the receipts were not agricultural income. At the same time, the expenditure incurred for earning those receipts had to be allowed against them, so that only the net amount remained taxable as revenue receipt.

Conclusion: The subsidy receipts were held to be taxable revenue receipts and not exempt agricultural income, but only after allowing the related expenditure set off.

Issue (ii): Whether section 14A could be invoked in respect of the subsidy receipts.

Analysis: Since the receipts were not held to be exempt income, there was no occasion to apply the disallowance principle under section 14A.

Conclusion: Section 14A was held to be inapplicable.

Final Conclusion: The consolidated result was that the Revenue succeeded on the taxability of the subsidy as a non-agricultural receipt, while the assessee obtained relief only to the extent of deduction of the related expenditure from the subsidy amount.

Ratio Decidendi: A subsidy that is merely a reimbursement of operational expenditure is taxable as a revenue receipt, and section 14A has no application where the receipt is not exempt income.

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