The Commissioner of Income Tax The Shahbad Co-op. Sugar Mills Ltd v. Bombay Dyeing Manufacturing Co. Ltd. 219 ITR

Judgment

1. The revenue has preferred this appeal under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order of the Income Tax Appellate Tribunal, New Delhi in I.T.A. No.4830/DEL/2002 for the assessment year 1996-97 which was admitted to consider following substantial questions of law claimed in the appeal:- “1. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in allowing the assessee’s claim of Rs.2,32,400/- on account of annual subscription of sugar federation, ignoring the fact that the assessee had been following the I.T.A. No.104 of 2007 2 mercantile system of accounting and that the liability of the annual subscription for the earlier asstt. Year of which the assessee was well aware was not allowable in the year relevant to the Asstt. Year 1996- 97?

2. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in allowing the claim of Rs.13,00,000/- on account of contribution made specifically for the construction of the office building of the apex body i.e. Haryana State Federation of Sugar Mills by following the decision of the Hon’ble Supreme Court in the case of CIT Vs. Bombay Dyeing Manufacturing Co. Ltd. ignoring the fact that the assessee had not advanced the amount for construction of houses under a subsidized Industrial Scheme for its employees as in the case decided by the Apex Court and that the ratio of the decision of the Hon’ble Supreme Court in the case mentioned above was not applicable to the facts of the case of the assessee?”

2. The assessee is a co-operative society engaged in manufacture and sale of sugar. During the assessment, the Assessing Officer noticed that the assessee claimed `2,32,400/- as deduction on account of annual subscription paid to its apex body. Since the assessee was following mercantile system of accountancy and the payment related to the year 1994-95, the same was disallowed in the assessment year 1996-97. The Assessing Officer also disallowed sum of `13 lacs, claimed by the assessee as deduction towards I.T.A. No.104 of 2007 3 contribution for office building of the apex body. The Assessing Officer held that the expenditure was capital in nature and was to be spent on a building which was yet to be constructed. The assessee was not to get enduring benefit on the said payment. The expenditure was not allowable under Section 37 of the Act.

3. The CIT(A) dismissed the appeal of the assessee but on further appeal, the Tribunal upheld the plea of the assessee with the following observations:- “7. We have seen the letter dated 21.6.1995 of the Haryana State Federation of Coop. Sugar Mills Ltd. a copy of which has been filed at page 4 of the paper book. Since the demand has crystalised during the year under consideration and was paid during the year, the authorities below erred in disallowing this expenditure.

8. Ground No.1(III) relates to contribution to sugar federation for construction of building. The same was disallowed by the Assessing Officer on the ground that the expenditure is capital in nature and has to be spent on the office building which was yet to be constructed during the previous year relevant to the assessment year 1996-97. It was further observed that the expenditure claimed by the assessee is not at all commensurate with the profits earned by the assessee and hence the claim is not justified and cannot be allowed as deduction under section 37 of the Act. The decision of the departmental authorities on this issue does not appear to be in conformity with the law laid down by the Supreme Court in the case of CIT v. Bombay Dyeing Manufacturing Co. Ltd. 219 ITR 521. It was held in that case that where the I.T.A. No.104 of 2007 4 amount was advanced to the Govt. which purchased the land in its own name and the building constructed thereon became property of the Govt. and not of the assessee, the amount contributed constitute revenue expenditure. In the case in hand also the amount was contributed specifically for the construction of the office building of the apex body i.e. Haryana State Federation Coop. Sugar Mills Ltd. Such a claim is allowable as revenue expenditure.”

We have heard learned counsel for the parties. Learned counsel for the revenue submitted that liability of the assessee for annual subscription related to the year 1994 relevant to assessment year 1995-96 and could not be allowed in assessment year 1996-97. The Tribunal noted the letter dated 21.6.1995 and on that basis held that the demand crystalised only during the year under consideration. The said letter in fact mentions that the payment related to the bills for the year 1994. Relevant contents of the said letter are as under:- “A perusal of the accounts reveals that a sum of Rs.232406-77 is still outstanding against your bills for the year 1994-95. You are, therefore, requested to send Rs.232406-77 to this Federation by way of Bank Draft immediately so that we may enable to meet our day- to-day expenditure.” In view of above, the finding recorded by the Tribunal that demand crystalised during the year under consideration, is I.T.A. No.104 of 2007 5 based on misreading of the letter and is, thus, perverse. It is further submitted that the payment made for construction of building was wrongly held to be revenue expenditure by following judgment of the Hon’ble Supreme Court in CIT v. Bombay Dyeing Manufacturing Company Ltd. 219 ITR 521, which was different on facts.

6. Learned counsel for the assessee supported the impugned finding.

7. We are of the view that question No.1 has to be decided in favour of the revenue while question No.2 has to be decided in favour of the assessee.

8. We find merit in the submission that the Tribunal misread the letter dated 21.6.1995 and wrongly held that the demand crystalised during the year under consideration, while according to the said letter, the demand related to the year 1994. Accordingly, we hold that the assessee could not get deduction for the payment of subscription for the year 1994 relating to assessment year 1995-96 during the assessment year in question. The question will stand answered accordingly.

9. As regards contribution for construction of office building, it is clear that the assessee did not get any benefit of enduring nature from the payment for building of the apex body. The building did not belong to the assessee which situation is similar to the facts of judgment of the Hon’ble Supreme Court. This being so, the principle laid down therein was rightly applied I.T.A. No.104 of 2007 6 by the Tribunal to the present case. Accordingly, question No.2 has to be answered in favour of the assessee and against the revenue.

10. In view of above, the appeal is partly allowed, as indicated above. (ADARSH KUMAR GOEL) JUDGE December 17, 2010 ashwani (AJAY KUMAR MITTAL) JUDGE