Income Tax Appellate Tribunal - Cochin
Deputy Commissioner Of Income-Tax vs Co-Operative Sugars Ltd. on 12 January, 2001
Equivalent citations: [2003]84ITD237(COCH)
ORDER
M.V.R. Prasad, Accountant Member
1. This appeal is directed against the order of the Commissioner of Income-tax (Appeals) dated 21-1-1994 for the assessment year 1991-92, wherein he allowed the claim of the assessee for the deduction of a sum of Rs. 25 lakhs paid to the Irrigation Department of the State Government of Kerala, as revenue expenditure. The ground taken reads as under :
The learned Commissioner of Income-tax (Appeals) erred in deleting the disallowance of Rs. 25 lakhs paid by the assessee as contribution to the State Government towards the cost of lining of Moolathara Right Bank Canal on the view that it was revenue expenditure incurred for ensuring the smooth conduct of the business in an efficient and profitable manner. The Appellate Authority ought, to have noticed that the expenses incurred were not for developing any area in the premises owned by the assessee but only as contribution in the work undertaken by Government department to help the cultivators who were under no compulsion-to sell their sugarcanes to the assessee. The Commissioner of Income-tax (Appeals) ought to have sustained the disallowance following the decision of the Kerala High Court reported in 135 ITR 540.
2. The assessee is a co-operative society carrying on the business of manufacture and sale of sugar. It filed a return of income on 31-10-1991 declaring an income of Rs. 69,34,600. It claimed deduction, inter alia, of an amount of Rs. 25 lakhs being the amount contributed to the Irrigation Department of the State Government of Kerala for cement lining of an irrigation canal, called Moolathara Right Bank Canal. The assessee entered into consultation with the Irrigation Department and agreed to contribute the amount of Rs. 25 lakhs as its share towards the cost of lining the canal. The background of the proposal is contained in a note submitted to the Board of Directors of the assessee-company for its meeting held on 14-2-1991 and the said note reads as under :
Item No. 27 :
Consideration of payment of substantial amount towards cost of lining of Moolathara Right Bank Canal by the Society - Reg :
Managing Director mentioned that Minister for Industries has taken a meeting on 24-1-1991 on this wherein it was agreed to take up this project in association with Irrigation Department and that the Society will make available an amount of Rs. 25 lakhs for this purpose. It was also pointed out that this will give an additional area of 1500 acres for drawal of sugarcane for the society. Managing Director also stated that the society can give a maximum of Rs. 25 lakhs for the purpose, in instalments. The Board was of the view that it is essential to develop sugarcane area, otherwise the very survival of the Sugar Division will be in danger. Therefore, it is imperative for the society to take up this work even with its own funds. However, the Society has to prepare a scheme to obtain necessary funds lor the development of sugarcane from agencies like Sugar Development Funds. It was also felt that the amount should be released by the Society on after ensuring that the matching funds are tied-up by the Irrigation Department individually or in association with CADA authorities. Managing Director was accordingly asked to discuss and work the details of implementing the scheme with Irrigation Department/CADA officials.
Sd/- Secretary Sd/- Managing Director Sd/-Chairman.
3. The minutes of the said meeting of the Board of Directors held on 14-2-1991 reads as under :
Sub. : Consideration of payment of substantial amount towards cost of lining of Moolathara Right Bank Canal by the Society - Regarding.
Present Position.
The Moolathara Right Bank Canal takes off from the right bank of Moolathara Regulator which comes under Chitturpuzha Project. The existing Moolathara Right Bank Canal is designed to take 64 cusecs of water to find out ayacut of 3200 acres in Kozhinjampara village mainly intended lor sugarcane cultivation. The canal is about 14 km. long. It is an earthen canal. It has got four branches. It is envisaged to feed 3,000 acres of sugarcane and 200 acres of paddy field.
Proposals with reasons :
Even though water is being supplied through right bank canal, being an earthen canal there is heavy losses due to seepage and percolation to the order of 40 to 45 per cent in addition to the transmission and evaporation losses of 121/2 per cent. This loss of water can be "conserved" by modernising of canal by lining. The water thus saved can be better utilised even the eris and tanks can be filled up frequently. The Minor Irrigation systems like Ankarath Valieri, Karadippara, Tharaganchalla lift irrigation systems can be supplemented if the Moolathara Right Bank Canal is lined and water could be assured to all the Ayacut areas and sugarcane could be grown in about 1500 acres without any difficulty. The existing cane area is about 500 acres which arc supplemented through wells and cries lying in the beginning of canal. The project report has already been prepared by the Executive Engineer, Irrigation Division, Chitturpuzha Project, Chittur vide his letter A8.3286/90 dt. 30-8-1990. The total estimate is worked out to Rs. 112 lakhs @ Rs. 8 lakhs per km. 14 km. length. The copy of the above letter with details of estimates are submitted herewith for kind perusal.
In the meeting, conveyed by the Hon'ble Minister for Industries, Trivandrum on 24-1-1991 at Trivandrum, our Cane Department Officers and Government Irrigation Engineers attended; the Hon'ble Minister assured substantial financial assistance from the sugar factory towards the total cost of lining and remaining by Government Irrigation Department. The work is to be taken up as a deposit work in two phases. According to the present estimate of Rs. 112 lakhs. Our contribution will have to be remitted in two instalments to the Executive Engineer, Irrigation Division, Chittur for deposit work.
Points for decision :
The Board may, therefore, be pleased to consider the above proposal of lining of Moolathara Right Bank Canal by meeting a substantial portion of the estimate of Rs. 112 lakhs.
4. The genuineness of the above minutes have not been doubted before us or at any earlier stages.
In pursuance of the above decision of the Board, the Managing Director entered into further consultations with the Irrigation Department and ultimately the assessee contributed a sum of Rs. 25 lakhs towards the lining of the said canal. The assessce-company claimed deduction for the said sum as revenue expenditure in its return for the assessment year 1991-92. Before the Assessing Officer, it relied upon a Circular of the C.B.D.T. No. 578, dated 12-9-1990, according to which the expenditure incurred by a sugar factory on account of cane development programme would be eligible for deduction, provided the expenditure satisfies the conditions laid down in Section 37(1) of the Act. The Assessing Officer rejected the claim with the following remarks :
As regards Board's Circular, it is to be mentioned that, any expenditure incurred by the Sugar Factory on account of Cane Development Programme would be eligible for deduction only if the Assessing Officer is satisfied that having regard to the facts and circumstances of the case, the conditions laid down in Section 37(1) are fulfilled. According to Section 37(1), any expenditure (not being expenditure of the nature described in Sections 30 to 36) and not being in the nature of capital expenditure or personal expenses of the assessee; laid out or expended wholly and exclusively for the purposes of the business or profession should be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The above expenditure does not come under the purview of the deduction under Sections 30 to 36. However, it would clearly come under the "capital expenditure". When an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit, such expenditure is properly attributable to capital only. In the instant case, the contribution is made for the lining of Moolathara Right Bank Canal. The benefit earned by the assessee is that an additional area of 1500 acres can be used for drawal of sugarcane for the society, which is an advantage of enduring benefit only. The expenditure is not for developing any existing area in order to increase the existing yield.
9. The decision of the Hon'ble Supreme Court reported in 125 ITR 293 is distinguishable from the facts of the present case. In the reported case, the assessee expended an amount of Rs. 50,000 for the purpose of construction of roads to facilitate the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the Market Centres, thereby making the business more efficient and profitable without an advantage of enduring benefit. In the instant case, the expenditure of Rs. 25,00,000 is made for getting an additional area of 1500 acres for drawal of sugarcane by which the assessee earned only the advantage of enduring benefit. In the circumstances, I am not satisfied that the conditions laid down in Section 37(1) of the Act are fulfilled. I, therefore, hold that the contribution of Rs. 25,00,000 paid by the assessee for the purpose of Lining Moolathara Right Bank Canal is a capital expenditure and accordingly the assessee's claim for deduction of Rs. 25,00,000 under Cane Development expenses is disallowed.
5. The CIT (Appeals) allowed the claim of the assessee holding that the expenditure of Rs. 25 lakhs is of a revenue nature. For this proposition he relied upon the following decisions :
1. L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 : 4 Taxman 5 (SC).
2. CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 : 38 Taxman 110A (SC).
3. National Organic Chemical Industries Ltd. v. CIT [1993] 203 ITR 410 : 69 Taxman 160 (Bom.).
4. CIT v. Excel Industries Ltd. [1980] 122 ITR 995 : 4 Taxman 89 (Bom.).
6. Before us, the learned Departmental Representative relied on the decision of the Hon'ble Kerala High Court in the case of Thirumbadi Rubber Co. Ltd. v. CAIT [1982] 135 ITR 540 and pleaded that in the light of this decision, the CIT(Appeals) erred in holding that the expenditure of Rs. 25 lakhs is of a revenue nature. He also pleaded that the expenditure is not wholly and exclusively for the purpose of the business and so the conditions laid down in Section 37 of the Income-tax Act are not satisfied and therefore the circular of the CBDT No. 578, dated 12-9-1990 referred to by the Assessing Officer in para 7 of his order is of no avail to the assessee. In response to a specific query, he mentioned that the contribution was of the nature of a donation to the Government. He also mentioned that the Apex Court decisions relied upon by the learned CIT(Appeals) are quite distinguishable. He pleaded that the decision of the Apex Court in the case of L.H. Sugar Factory & Oil Mills (P.) Ltd. (supra) considered the deductibility of a contribution made by the assessee of Rs, 22,332 at the request of the Collector for the construction of a dam and the Apex Court held that this deduction was not allowable as revenue expenditure. The contention made out is that while the CIT(Appeals) relied upon the same decision in respect of the deduction of a contribution of Rs. 50,000 made by the assessee in that case to the State of U.P. for meeting the cost of construction of certain roads, he totally ignored the same decision where the contribution towards the construction of a dam was held not allowable. So, it is pleaded that this decision actually supports the case of the revenue and it was wrongly relied upon by the CIT(Appeals) to allow the claim of the assessee. It is also mentioned that the decision of the Apex Court in the case of Associated Cement Companies Ltd. (supra), relied upon by the CIT (Appeals) is quite distinguishable, because in that case the assessee received a remission of Municipal taxes for the contribution made to the Municipality for laying pipe lines. There is no such quid pro quo received by the assessee-company in the present case from the Irrigation Department and so it is pleaded that the ratio of the said decision of the Apex Court is not applicable to the facts of the present case.
7. The learned counsel for the assessee pleaded that the assessee-company was located in a Draught-prone area of Palakkad District and it could never achieve the installed capacity of crushing 1200 tons of sugarcane per day because of the scarcity of sugarcane. The maximum it could achieve was 900 tons per day and by the said contribution of Rs. 25 lakhs, about 1500 acres of land could be brought under irrigation and it facilitated the securing of sugarcane. He conceded the contention of the learned Departmental Representative that there was no agreement between the assessee and the growers of sugarcane that they would either cultivate sugarcane or that they would supply it to the assessee-company. They were free to cultivate any crop or to supply the sugarcane to any other sugar factory. But it is pleaded that the assessee-company made the contribution only with the idea that the Ayacut would get irrigation facility and hopefully it would result in a secure source of supply of raw material to the assessee-company. He supported the order of the CIT (Appeals) in the light of the decisions relied on by the CIT (Appeals). He also referred to the decision of the Hon'ble Bombay High Court in the case of Excel Industries Ltd. (supra).
8. We have considered the rival submissions. We are of the view that the assessee deserves to succeed. There is no basis at all for the plea taken by the Id. Departmental Representative that the contribution of Rs. 25 lakhs is not for business purposes and is of the nature of a donation. The minutes of the meeting of the Board of Directors clearly showed the purpose of the donation and, as already mentioned by us, those minutes were never doubted or questioned by the revenue authorities. To our mind, the decision of the Hon'ble Kerala High Court in the case of Thirumbadi Rubber Co. Ltd. (supra) is distinguishable. The relevant portion of the head note of this decision reads as under :
The contribution made by the assessee for the construction of a bridge on a public road outside the estate of the assessee by a welfare committee, with which the assessee had no direct connection, is not deductible as the amount expended was not wholly and exclusively for deriving agricultural income. Further, since the construction of the bridge was not undertaken by any authority in charge of Community Development Programme Work, as required by rule-8D of the Kerala Agrl. I.T. Rules, 1951, the assessee cannot invoke the aid of that rule for the purpose of claiming deduction of the amount contributed by it towards the expenditure for the construction of the bridge.
The road was outside the rubber plantation of the assessee-company and in that case no benefit to the assessee from the laying of the road could be proved. In the case before us, the contribution of Rs. 25 lakhs is directly linked to the anticipated additional irrigation facilities which would result in a more assured supply of sugarcane. The learned Departmental Representative relied upon this decision in the context of his argument that the assessee did not derive any benefit from the contribution of Rs. 25 lakhs. That the assessee did not derive any benefit from the contribution of Rs. 25 lakhs is altogether a new case made out by the learned Departmental Representative before us. It was not at all the case of the Assessing Officer, as is evident from the extract of his order given by us hereinabove. The case of the Assessing Officer was that the assessee derived an enduring benefit and so the expenditure was of a capital nature. This is altogether different from saying that the assessee did not derive any benefit from the contribution. We are constrained to hold that the learned Departmental Representative tried to make out altogether a new case, which is not permissible. At any rate, the minutes of the meeting of the Board of Directors were before the Assessing Officer and this minutes, to our mind, clearly prove that the contribution was made only with the intention of getting water supply for 1500 acres in the Ayacut and to secure more assured supply of sugarcane. The contention of the learned Departmental Representative that the decision of the Apex Court in the case of L.H. Sugar Factory & Oil Mills (P.) Ltd. (supra) does not support the case of the assessee also does not appeal to us. In respect of the contribution of Rs. 22,332 made by the assessee in that case at the request of the Collector, the relevant portion of the head notes reads as under :
Held, (i) that the sum of Rs. 22,332 was not deductible expenditure under Section 10(2)(xv) because the amount was contributed long after the dam and road were constructed and there was nothing to show that the contribution of the amount had anything to do with the business of the assessee or that the construction of the dam and the road was in anyway advantageous to the assessee's business; it could not be said to have been laid out wholly and exclusively for the purpose of the assessee's business;
It may be observed that the contribution was made long after the dam was constructed and so there was nothing to show that the contribution had anything to do with the business of the assessee. We may reiterate that it was not the case of the Assessing Officer at all that the contribution of Rs. 25 lakhs had nothing to do with the business of the assessee. His only case was that the assessee derived an enduring benefit from the said contribution. The stand taken by the learned Departmental Representative departs by miles from the position of the Assessing Officer and to our mind, it is not permitted at this stage and at any rate is not warranted by the facts of the case, as we have sought to explain hereinabove. The relevant portion of the head note of the same decision in respect of the other contribution made by the assessee in the case of L.H. Sugar Factory & Oil Mills (P.) Ltd. (supra), of Rs. 50,000 for the laying of the roads reads as under :
(ii) that the sum of Rs. 50,000 contributed under the sugarcane development scheme was deductible expenditure under Section 10(2)(xv). The roads under the scheme were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centres. The construction of these roads facilitated the business operations of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. It was true that the advantage secured for the business of the assessee was of long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The amount of Rs. 50,000 was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable without the assessee getting an advantage of an enduring benefit to itself and was an expenditure on revenue account; and was laid out wholly and exclusively for the purpose of the assessee's business.
The test enumerated by Lord Cave L.C. in British Insulated & Helsby Cables Ltd. v. Atherton [1925] 10 TC 155 at 192 (HL) to distinguish between capital and revenue expenditure is not of universal application and it must yield where there are special circumstances leading to a contrary conclusion.
We are of the view that the present case before us is more akin to the contribution made by the assessee for the laying of the roads. While coming to its conclusion that the amount of Rs. 50,000 is allowable as a deduction in the computation of the income as revenue expenditure, the Apex Court relied upon its own earlier decision in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 : 3 Taxman 69, which lays down the proposition that even if an enduring advantage is derived from an expenditure, if the expenditure is not in the capital field, but on revenue account, it is allowable as a deduction. We are of the view that the contribution of Rs. 25 lakhs by the assessee is also on revenue account. There is an enduring advantage, but it is only on revenue account because the contribution does not give any ownership rights to the assessee either in the canal, which had been lined up, or in the Ayacut brought under cultivation. There is no assurance of cane supply from the ryots because of the contribution, but there is every likelihood of a more assured cane supply and so the contribution has been made only for facilitating the running of the business on more profitable lines. So, to our mind the contribution is only on revenue account and is clearly governed by the ratio of the decision of the Apex Court in the case of Empire Jute Co. Ltd. (supra). The other decisions cited by the learned counsel for the assessee also supports the case of the assessee. We are in entire agreement with the reasoning of the CIT(Appeals). We uphold his order.
9. In the result, the appeal is dismissed.