2006 (8) TMI 148 - HC - Income Tax

Subsidy receipt - disbursement to bhandars to meet the expenses of the salary of certain employees of those bhandars - the amount received by the assessee was not its income and should have been deleted? - HELD THAT - We are of the considered opinion that the amount in question was given by the State Government for specific purpose. It did not partake of the nature of income of the respondent-assessee. Even if it is to be treated as an income, it would not be liable to be taxed as it is stated that there was diversion of the income by way of overriding title on the said amount by way of a condition to distribute it as the salary to the employees of the bhandars. In this view of the matter, we do not find any error in the order of the Tribunal and the Tribunal was justified that the amount was not the income of the assessee. We, accordingly, answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue.

Summary

Issues:
Interpretation of whether the amount received by the assessee was income and should have been deleted for the assessment year 1983-84.

Analysis:
The case involved a co-operative society receiving a sum of Rs. 2,75,000 from the Government of Uttar Pradesh for disbursement to its bhandars to cover the expenses of certain employees. The Assessing Officer treated this amount as income, but the Commissioner of Income-tax (Appeals) ruled that it was not income but a receipt for distribution. The Tribunal upheld this decision based on the State Government's instructions. The Revenue argued that the amount was a subsidy without any strings attached as the co-operative society had earned interest on it. However, the court disagreed, emphasizing that the amount was specifically given for a purpose and did not constitute income for the society. The court noted that even if it were considered income, it would not be taxable due to the overriding title condition for distribution as employee salaries. Therefore, the Tribunal's decision that the amount was not the income of the assessee was upheld, ruling in favor of the assessee and against the Revenue.

This judgment clarifies the distinction between a subsidy receipt and a specific-purpose fund allocation, emphasizing that the latter may not be considered income for taxation purposes. The court's analysis focused on the nature of the amount received, the purpose for which it was given, and the absence of any discretionary use by the assessee. The decision highlights the importance of considering the source and intended use of funds in determining their taxability, especially when funds are allocated for specific disbursement purposes by a governmental entity.