Gujarat High Court
Mahesana District Co-Operative Milk ... vs Commissioner Of Income-Tax on 24 December, 1999
Equivalent citations: [2002]258ITR780(GUJ)
JUDGMENT
1. At the instance of the assessee, the present reference is made before this court where in the following questions have been referred :
"(i) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the contribution paid as per the provisions of Section 69 of the Gujarat Rajya Co-operative Societies Act, 1961, is not deductible in the computation of the total income ?
(ii) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that depreciation was not admissible on 30 per cent value of the plant and machinery received from Indian Dairy Corporation ?
(iii) Whether, on the facts, the Appellate Tribunal was right in law in holding that 30 per cent. of value of the plant and machinery received from Indian Dairy Corporation was not to be included in the computation of the capital employed for the purpose of granting relief under Section 80J ?"
The assessee, Mehsana District Co-operative Milk Producers' Union Limited, Mehsana, a co-operative society registered under the provisions of the Gujarat Co-operative Societies Act, 1961, was assessed for the assessment years 1976-77 and 1978-79.
2. So far as question No. 1 is concerned, in the case of the present assessee, for the earlier assessment years, a Division Bench of this court was required to consider similar facts Mehsana District Co-operative Milk Producers' Union Ltd. v. CIT [1993] 203 ITR 601. The question raised before the court was as under (page 604) :
"(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the contribution made by the assessee to the Gujarat Co-operative Education Fund was not an allowable deduction in computing the total income of the assessee for the assessment years 1967-68 to 1972-73 ?"
The contribution was in compliance with Section 69 of the Gujarat Cooperative Societies Act, 1961. The relevant provision of Section 69 reads as under :
"Every society which declares out of current year's profit, a dividend to its members at the rate of 30 per cent. or more, shall contribute towards the educational fund of the Gujarat State Co-operative Union at such rate as may be prescribed."
Rule 31 of the Gujarat Co-operative Societies Rules, 1965, lays down the rates at which the society was required to contribute. Reading the provisions under Section 69(1) of the Act and Rule 31 of the Gujarat Co-operative Societies Rules, 1965, it transpires that it was the duty of the co-operative society to contribute the amount on the basis of profits and gains. The Tribunal in para. 25 of its judgment considered the aforesaid provisions and also Section 40(a) of the Income-tax Act, 1961, which reads as under :
"Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',--(a) in the case of any assessee--. . .
(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains."
The Tribunal expressed its opinion that the amount is to be paid not in order to earn income, but by way of application of income. Therefore, there can be no question of treating the said amount as expenditure. For the aforesaid purpose, the Tribunal relied on the decision of the Madras High Court in CIT v. South Arcot District Co-operative Supply and Marketing Society Ltd. [1981] 127 ITR 467.
3. The Division Bench in the case of Mehsana District Co-operative Milk Producers' Union Ltd. v. CIT [1993] 203 ITR 601 (Guj), considered this case and the Division Bench pointed out that (page 613) :
"The provisions of our Act cannot be said to be in pari materia with the provisions of the Madras Act and, therefore, the said provisions would not be applicable to a case arising under the Gujarat Act. We need not, however, consider the correctness of the reasons given by the Madras High Court as we are of the opinion that the contribution made by the assessee to the co-operative education fund is an allowable deduction under Section 37 of the Act."
The Division Bench considered the provisions of law and held that (page 613) :
"Thus, the assessee's claim for deduction was under Section 37 of the Act and when its claim is decided on the merits, it would not be proper to reject that claim only on the ground that the assessee had not made a specific claim in that behalf by reference to Section 37 of the Act."
The court held that the Tribunal was not right in holding that such contribution did not amount to a legitimate business outgoing.
4. It is required to be noted that the payment was required to be made out of net profits made by the assessee and only because it had declared dividend. The said contribution, being statutory one, while computing real profit, the amount should be taken into consideration or not is the real question.
5. In the case of CIT v. Kaira District Co-operative Milk Producers' Union Ltd. [1994] 209 ITR 898 (Guj), the question referred to the court was as under (page 899) :
"3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in allowing a deduction of Rs. 21,203 being the contribution made to the Gujarat State Co-operative Union under Section 69 of the Gujarat State Co-operative Societies Act ?"
In view of the decisions referred to above, viz., in the case of Mehsana District Co-operative Milk Producers' Union Ltd. v. CIT [1993] 203 ITR 601 (Guj) and CIT v. Kaira District Co-operative Milk Producers' Union Ltd. [1994] 209 ITR 898 (Guj), it must be held that the contribution to the Gujarat Co-operative Federal Education Fund was allowable as business expenditure. In our opinion, answer to question No. 1 must be in the negative, i.e., in favour of the assessee and against the Revenue.
So far as the second question is concerned, one has to refer to the decision of the apex court in CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830. In that case, Government subsidy was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries. The specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly to meet any portion of the "actual cost". The expression "actual cost" in Section 43(1) of the Act needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from "actual cost". The amount of subsidy is not to be deducted from the "actual cost" under Section 43(1) for the purpose of calculation of depreciation, etc. The Tribunal appears to have been guided by the view that depreciation should be allowed only on "actual cost" to the assessee. The Tribunal's order cannot be said to be a reasoned order on this question. But reading the order, it appears that the Tribunal was guided by the reasoning recorded by the Commissioner of Income-tax (Appeals), the relevant portion of which is reproduced hereunder :
"Indian Dairy Corporation had imported the machinery in question and supplied the same to the appellant under loan-cum-grant assistance scheme. To the extent to which the cost of the machinery was covered by the grant, it amounts to the cost being met directly or indirectly by any other person or authority and, therefore, the value of such grant is rightly reduced by the Income-tax Officer from the actual cost of the machinery in question while allowing the depreciation. The appeal on this point fails ."
The apex court has pointed out that the expression, "actual cost" needs to be interpreted liberally. The subsidy of the nature we are concerned with, does not partake of the incidents which attract the conditions for their deduc-tibility from "actual cost".
6. In view of that, the answer to question No. 2 must be in the affirmative, i.e., in favour of the assessee and against the Revenue.
7. So far as question No. 3 is concerned, the same is covered by the decision of the Division Bench of this court in Banaskantha District Co-operative Milk Pro-ducers Union Ltd. v. CIT [1994] 210 ITR 962. The question raised before the court in the said case was as under (page 964) :
"(1) Whether, on the facts and in the circumstances of the case, the cost of the assets of the assessee to the extent of Rs. 10,92,237 being the amount given to it by the Gujarat Government by way of grant and loan should be taken into account in computing the capital employed by it for the purpose of Section 80J of the Income-tax Act, 1961 ?"
Considering the provisions of law, the court partly answered the question in the affirmative and partly in the negative by holding that the written down value of the assets of the assessee to the extent of the amount received by it as grant from the Government should not be taken into account in computing the capital employed by it for the purpose of Section 80J, whereas the loan amount is required to be taken into account. In other words, question No. 1 in so far as it relates to grant is answered in the negative, i.e., in favour of the Revenue and against the assessee and as regards loan, the same is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
8. In the instant case, it is clear from the record that the Government of Gujarat passed a resolution dated February 16, 1975, a copy of which is produced at page 57 of the paper book. According to the same, the amount of 30 per cent. was to be treated as grant. Therefore, in view of the decision in the case of Banaskantha District Co-operative Milk Producers Union Ltd. v. CIT [1994] 210 ITR 962 (Guj), the amount received by way of grant should not have been taken into account for considering the capital employed by it for the purpose of Section 80J. Consequently, we answer question No. 3 in the affirmative, i.e., in favour of the Revenue and against the assessee.
9. We answer the questions referred to us accordingly.