AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (12) TMI 1529
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....ng that the purpose test was to be seen in the context of the subsidy granted was to keep the society operational in the interests of the milk growers and not profitability and hence the grant was a capital receipt? (iv) Whether the Tribunal was right in law in not considering that the assessee as a primary cooperative society satisfies the parameters for deduction u/s. 80P(2)(b) and thus ought to have granted the deduction?" 3. The appellant is a co-operative society engaged in procurement of milk, manufacturing by-products and distribution of milk and related items and is a subsidiary to Aavin (Apex Co-operative Society - engaged in distribution of milk). The appellant procures milk in Dharmapuri and Krishnagiri Districts from 536 Primary Milk Cooperative Societies daily, which in turn, collect milk from individual members at village level. The milk collected is transported to Dharmapuri and Denkanikotta Milk Chilling Centres and Krishnagiri Feeder Balancing Dairy. The appellant pays for the procurement on the basis of quality of milk. As a part of the process, the appellant also implements milch animal schemes, society infrastructure schemes and gives veterinary heal....
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....n the production capacity. In other words, the extent of the increase of free sale sugar quota depended upon the increase in the production capacity. (iv) The benefit of the scheme had to be utilized only for repayment of term loans." 9. The Supreme Court took note of the nature of controversy by observing that the incentives were given through the mechanism of price differential and the duty differential. According to the department therein, price and costs are essential items that are basic to the profit making process and any price related mechanism would normally be presumed to be revenue in nature. Further, the assessee's case was that what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment. 10. In the aforesaid factual premise and the issue raised for consideration, the Supreme Court proceeded to examine the legal position as below: "13. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in Sahney Steel and Press Works Ltd. [(1997) 7 SCC 764 : (1997) 228 ITR 253] In that case, on behalf of the assessee, it was contended that the subsid....
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.... case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the Subsidy Scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 15. In the decision of the House of Lords in Seaham Harbour Dock Co. v. Crook [(1931) 16 TC 333] Harbour Dock Co. had applied for grants from the Unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed; the payments were made several times for some years. Dock Co. had undertaken the work of extension of its docks. The extended dock was for relieving the unemployment. The main purpos....
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....subsidy we are satisfied that such payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. Accordingly, the first question is answered in favour of the assessee and against the Department." 11. The Supreme Court in the aforesaid decision clearly enunciates the principle that it is the object for which the subsidy/assistance is given, which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 12. Keeping in mind the aforesaid principle, we shall now examine as to what was the purpose of extending the financial assistance to the appellant in the present case. 13. The letter dated 28.09.2005 of the Ministry of Agriculture, Department of Animal Husbandry, Dairying and Fisheries, Government of India, shows that the financial assistance was part of Central Sector Plan Scheme, titled as "Assistance to Cooperatives" on 50:50 sharing basis between Government of India and the State Government concerned during 10th Plan period - Administrative approval for rehabilitation proposal in respect of Dharmapuri Milk Union in Tamil Nadu. The contents of the said letter....
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.... 8.This sanction is issued with the concurrent of Integrated Finance Division of this Department vide Dy.No.2163/FA/2005 dated 26.9.2005. 9. Receipt of this letter may please be acknowledged." 13. The text and tenor of the said letter leaves no manner of doubt that the financial assistance which was provided to the appellant was towards rehabilitation. One of the important conditions was that the milk union should first clear up their liabilities in the order of DCS, other milk unions and employers, respectively. On similar lines, as sanctioned by the Government of India, the Tamil Nadu Cooperative Milk Producers' Federation Limited (Federation) also passed an order on 14.03.2007. The conditions, on which the Federation has provided financial assistance as part of its share towards rehabilitation, are reproduced below: "1) Deposit the amount in a separate bank account and shall not be used for any other purpose than the purposes mentioned therein. 2) Union should first clear up their liabilities in the order of DCS, other milk unions and employers respectively. 3) Repayment to NDDB/State Federation/State Government will commence only after mi....