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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-IV, Ahmedabad [Ld. CIT (A) in short] dated 28/08/2014, arising in the matter of assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") relevant to Assessment Year (A.Y) 2009- 10. The assessee has raised the following grounds of appeal:
1.0 The grounds of appeal mentioned hereunder are without prejudice to one another.
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2.0 The learned Commissioner of Income-tax( Appeal)-IV, Rajkot [hereinafter referred to as the "CIT(A)"] erred on facts as also in law in confirming the disallowance of Rs.13,79,996/- made by the AO alleging that the expenditure incurred on erection of statue of founder is of personal nature and not a business expenditure and that the same cannot be claimed as revenue expenditure in terms provision of section 37 of the Income-tax Act,1961 [hereinafter referred as to the "Act"] as the same was for creating new asset. The disallowance is totally unjustified on facts as also in law and may kindly be deleted.
3.0 The Ld. CIT(A) grievously erred on facts as also in law in alleging that the appellant had failed to (i) substantiate with any cogent evidence, the nature of sugarcane development expenditure payable to sugarcane farmers, (ii) establish nexus between such expenditure and business carried on by it, (iii) demonstrate as to how the profits of the appellant had been increased by such expenditure, and that the appellant's outstanding liabilities of Rs.1,98,83,655/- based on accrual system of accounting constituted contingent liabilities and not actual liabilities. The allegations leveled by the Ld. CIT(A)'s are totally baseless and in total disregards to the past history of the appellant's business as also the business activities being carried out under the same line of business and unjustified on facts as also in law and deserves to be quashed and the addition may kindly be deleted.
4.0 The Ld. CIT(A) grievously erred in law and on facts in retaining addition of Rs.2,72,42,900/- being based on the allegations mentioned in above Ground No. 3.0 on account of sugarcane development expenses. The Ld. CIT(A)'s retention is without considering the submission made before him as also before the AO and deserves to be deleted and therefore, it is prayed that the disallowance of Rs.2,72,42,900/- retained by the Ld. CIT(A) be deleted.
5.0 Your Honor's appellant craves leave to add, amend, alter or withdraw any or more grounds of appeal on or before the hearing of appeal.
The 1st issue raised by the assessee is that the learned CIT (A) erred in confirming the addition made by the AO by treating the expenditure of Rs. 13,79,996/- being personal in nature.
The facts in brief are that the assessee in the present case is a co- operative society and engaged in the business of manufacturing and sale of sugar and its by-products. It also operates the patrol pump. The assessee in the year under consideration has claimed an expenditure of Rs 13,79,996/- under the head repair of building which was actually incurred on construction of the statue of late Shri R.N. Vala, the founder chairman of the society. As per the assessee, such expenditure was incurred and approved by general body of the society to provide tribute to the founder member. The assessee
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also claimed that the statue has inspired the persons engaged in the business of the assessee and therefore the same is eligible for deduction under section 37 of the Act.
2.1 However, the AO disregarded the contention of the assessee by observing that such expenditure is representing personal in nature and having no connection with the business of the assessee.
2.2 The AO also observed that such expenditure cannot be treated as revenue in nature. As such it is capital expenditure as new asset has come into existence which has no connection with the business.
In view of the above, the AO disallowed the expenditure and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A).
Before the learned CIT (A) it was submitted that it is the domain of the assessee to decide the expenses to be incurred wholly and exclusively for the purpose of the business. As such the assessee knows the benefit of the expenditure incurred by it.
3.1 However the learned CIT (A) disregarded the contention of the assessee by observing that such expenditure has not been incurred in connection with the business activities of the assessee.
3.2 The learned CIT (A) was of the view that such expenditure at the most, might be treated as goodwill which cannot be allowed as deduction under section 37 of the Act.
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Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 72 and submitted as follows: “The co-operative movement was initiated by the Late Shri R.N. Vala sometimes in 1956 and became founder president of the society. Due to his efforts the society reached the present level in the filed of co-operative movement. Thus, the expense has direct nexus with the activities of the society and the. statue provides motivation and encouragement to the members and new generation in the field of cooperative movement.
The expenditure was approved by the AGM by passing a resolution on 29.12.2007 and the same has not been objected by the Registrar of the Co-Operative society who is monitoring the activities of the appellant. Detailed explanation was furnished vide letter dated 19.12.2011 [page no. 12 & 13 of paper book].
The appellant being a registered co-operative society cannot have any personal element in its expenditure If any expenditure goes to benefit its members, it would only for the purpose of business of the appellant society and in any term, expenditure cannot be equated with the personal expenditure.
The appellant incurred such expenditure wholly and exclusively for the purpose of its business and no one except the appellant itself would have been benefitted by such expenditure. It was only the nomenclature given to such expenditure that misguided the AO to treat such expenditure as not incurred wholly and exclusively for the purpose of the business.
Reliance is placed on decision of Hon'ble ITAT-Ahmedabad Bench ’A’ in case of ACIT vs. Chanasma Nagrik Sahakari Bank ltd [2017] 86 taxmann.com 8 (Page 83 to 67 of Paper book).”
On the other hand, the learned DR vehemently supported the orders of the authorities below by reiterating the findings contained therein.
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We have heard the rival contentions of both the parties and perused the materials available on record. The provision of section 37 of the Act is a residuary section allowing the deduction of the business expenditure and the same is given below: “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 shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. [Explanation.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.]”
From the above provisions, the following conditions for allowance of the expenditure need to be satisfied under section 37 of the Act.
• Such expenditure should not be covered under the specific section i.e. sections 30 to 36. • Expenditure should not be of capital nature. • The expenditure should be incurred during the previous year. • The expenditure should not be of personal nature. • The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
Now, we have to adjudicate whether the impugned expenditure incurred by the assessee on the building of the statue as discussed above represents the expenses incurred personal in nature. In this regard, we note that the assessee is a co-operative society having separate legal entity from the persons who are the members of such society as well as holding the post of the governing body. Such expenditure incurred was approved in the annual general meeting of the society. Moreover, the assessee being a separate legal entity in the form of co- operative society, does not have any personal relations like an individual. Therefore, there cannot be any expenditure to be called for the personal benefit of the society. As such, there cannot be any benefit to the governing body/members of the society out of such expenditure incurred by the society.
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However there is no such allegation by the AO/learned CIT (A) that the benefits were derived by the members of the governing body of the society or members of the society. Thus we disagree with the finding of the authorities below that there was some personal benefit out of the impugned expenses to the society. There is no doubt about the genuineness of the expenses viz a viz the approval of such expenses in the AGM of the society.
We also find that ITAT in case of ACIT vs. Chanasma Nagrik Sahkari Bank Ltd reported in 86 taxmann.com 8 has decided the similar issue in favour of assessee by holding as under “We have considered the rival submissions on the issue. We find ourselves in agreement with the contention raised on behalf of the assessee that the expenses incurred are revenue in nature and no enduring benefit can be stated to be derived by the assessee. We take notice of the plea that the property in statue also did not vest in the assessee-bank. Similarly, we observe that the expenses can be said to have been incurred for the purposes of business for the simple reason that such incurring of expenses adds to the visibility of the assessee-bank amongst its stakeholders. The expenditure thus incurred can be rationally said to have been incurred for the promotion of the assessee's ongoing business and thus an allowable business expenditure. Such incurring of expenditure would presumably enhance the brand image of the assessee. The expenditure incurred is thus for business purposes when not alleged for any extraneous consideration. It is another matter to question the expediency of such expenditure which in any case is not for the Revenue look into. It is trite that 'for the purpose of business' contemplated under s.37 is wider in scope than the expression 'for the purpose of earning profits' and may comprehend many acts incidental to the carry on of a business. Thus, so long as the expenditure has been incurred on the grounds of commercial expediency and in order to directly or indirectly facilitate the carry of the business, the fact that there was no compelling necessity to incur the expenditure on which deduction is claimed is an irrelevant consideration. The expenditure in the instant case has gone irretrievably in the course of carrying on of business. The expenses incurred has potential to increase the visibility of the assessee in the public at large and thus has bearing on business acceleration. Therefore, we find considerable merit in the claim of the assessee. Consequently, claim of the assessee towards urban development expenditure of Rs.4,35,821/- deserves to be allowed.”
In view of the above, we hold that the assessee is eligible for deduction of such expenditure under the provisions of section 37(1) of the Act. Accordingly, we set aside the order of the ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.
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The issue raised by the assessee in ground No. 3 and 4 is interconnected. Therefore we have clubbed both of them for the sake of convenience and adjudication.
The 2nd issue raised by the assessee is that the learned CIT (A) erred 7. in confirming the addition made by the AO for Rs. 2,72,42,900/- on the ground that such expenditure was not incurred in connection with the business.
The assessee in the year under consideration has incurred certain expenses under the head “sugar development scheme” which was paid to the members of the society for the sugarcane development. The details of the expenses stand as under:
Sr.No. Description Amount 1 Paid for better quality of seeds of 53,45,294/- sugarcane at the time of plantation 2. Paid against pesticides and medicines 10,24,933 3 Paid for the quality of sugarcane which are 9,89,018 grow fast and gives more recovery (qty. No.671 and 86032) 4 Provided for supply of better quality of 1,98,83,655 sugarcane for crushing and payment has been made before filing of return of income u/s.139(1) TOTAL 2,72,42,900/-
8.1 The assessee further submitted that the impugned amount has been paid to the members for the development of the sugarcane except a sum of Rs. 1,98,83,655/- which was incurred during the year but paid in the subsequent year. The assessee also submitted that the impugned payment was made to the members of the society over and above the regular price paid to them for the development of the sugarcane.
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8.2 However, the AO during the assessment proceedings disregarded the contention of the assessee by observing as under: i. The assessee out of the impugned expenditure has shown outstanding liability for Rs. 1,98,83,655/- which cannot be treated as an expense of the current year. ii. In case the assessee claimed the deduction of such expenses on payment basis then the same cannot be allowed on accrual basis. iii. There was no documentary evidence filed by the assessee that the expenditure was incurred for the development of sugarcane and the payment was made to the farmers/growers of sugarcane over and above the price of the sugarcane.
In view of the above the AO held that the impugned expenditure is not genuine and accordingly added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A). The assessee before the learned CIT (A) claimed that it has incurred the impugned expenses for the development of the sugarcane. Therefore the same should be allowed as deduction.
However the learned CIT (A) observed that the assessee failed to substantiate its contention that the impugned expenses were incurred wholly and exclusively for the purpose of the business and there was no commercial expediency for such expenses.
10.1 There was no evidence with the assessee suggesting that it has received any benefit by incurring such expenses.
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The impugned expenses were representing the gifts/welfare expenses for the farmers and therefore the same cannot be allowed as deduction under section 37 of the Act.
10.2 There was an outstanding liability of Rs. 1,98,83,655/- out of the impugned expenses which is representing a contingent liability. Therefore, the same cannot be allowed as deduction under section 37 of the Act.
10.3 In view of the above, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO.
Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.
The learned AR before us submitted as under:
“a. The appellant is used to purchase sugarcane from registered farmers for manufacture of sugar. Its business is mainly seasonal, and its period is ranging from October to April every year (normally as crushing season).
b. The appellant’s 100% manufacturing is mainly carried out during crushing season. However, the appellant has to start purchase/procurement of sugarcane as soon as the monsoon starts and therefore for cultivation of sugarcane, the appellant is supposed to make payment to growers of sugarcane, who are members of the appellant, for early cultivation or quality of sugarcane to be grown. Thus, it happens that due to difference between season’s period and period of previous year, some part of liabilities relating to purchase of sugarcane may be incurred in the ensuing previous year depending upon grower’s sugarcane quality and other factors. Such liabilities, which is very small in percentage term as compared to total liabilities of sugarcane development, is always crystallized only when the management of the appellant society and growers reached to consensus regarding quality, quantity, delivery schedule etc of sugarcane by the growers.
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c. The pattern/modus operandi of the appellant’s business is from its inception and nothing was changed during the relevant previous year Part of total liabilities is treated as crystallized only on acrtual disbursement time since its inception and the said treatment is accepted as its is. d. The appellant’s profitability depends upon inter alia quality of sugar and quality of sugar in turn is purely depends upon quality of sugarcane. For procuring higher standards of sugarcane, the appellant has been since its inception assisting its members/suppliers n cultivation of sugarcane by providing funds for procurement of pesticides, better quality of seeds, timely supply of sugarcane, etc.
Sr.No. Description Amount 4 Provided for supply of better quality of 1,98,83,655 sugarcane for crushing and payment has been made before filing of return of income u/s.139(1) TOTAL 2,72,42,900/-
(i) During the period 27.11.2007 to 25.04.2008, sugarcane weighing 4,12,608.300 MT were received. Out of this 3,59,155.360 was received till 31.03.2008 therefore subsidy of ₹3,59,15,536 @ 100/MT on 3,59,155.360 M.T was accounted for in AY 2008-09. The subsidy for the period 0l.04.2008 to 25.04.2008 for 53,452.940 MT amounting to ₹53,45,294 has been accounted for in AY 2009-10. (ii).The incentives of ₹1,98,83,655 on 1,98,836.550 MT on the .quality of sugar cane which are grown fast during 07.11.2008 to 31.03.2009 relevant to AY 2009-10 was incurred and debited to the income and expenditure account. (iii) Pesticides of ₹10,25,933 provided to the farmers who had reported their sugarcane to be sold to the factory, to fight with the decay etc, in the crops. (iv) In order to get more crops on 671 and 36032 quality of sugarcane, it was decided that the factory shall bear ‘380/MT and ' 1000/-‘ shall be borne by the farmers. Thus, expense of 9,89,018 was incurred on seeds of sugarcane during the year. e. The appellant's income for the earlier assessment year had been finalized by t:e department and sugarcane development expenses were allowed without
ITA No.633/RJT/2014 A.Y. 2009-10 - 11 - any modification. During the year under consideration no new facts had been emerged and therefore, decision of earlier year must be followed and accepted if the facts are the same and no new facts have come uP which may require the authority to take a different view. !n this connection, the appellant relied on the decision of Hon'ble Supreme Court in Bharat Sanchar Nigam Ltd. vs. Union of India (282 ITR.273). f. Regarding genuineness of expenditure, copies of abstract from Sugarcane plantation register, sample copy of sugarcane cultivation program showing details of member wise cultivation plans, sample copies of weighing slips of sugarcane, abstract from register showing details of member farmer weight of sugarcane, vehicle numbers etc, abstract from register fro advances given to members, copies of vouchers for sugarcane development expenses payable to members, copies of. accounts of members showing sugarcane development expenses and list for sugarcane development incentive payable to member for FY 2008-09 are attached at Page 55 to 82 of Paper book. g. As regards AO's allegation as to provision for expenses of ₹1,98,83,655/- was not paid by the end of relevant previous year and thereby made disallowance of the same, it is submitted that the AO was not clear with his proposal for disallowance. At first, he contended to disallow ₹53,45,294/- because claim thereof was alleged to have been made on payment basis and then argued to disallow ₹1,98,83,655/-because claim thereof was made on accrual basis. h. The appellant is also relying on the following decisions: (i) Hon'ble ITAT Ahmedabad Bench 'D' in the case of ACIT vs. Shree Khedut Sahakari Khand Udhyog Mandli Ltd. 51 taxmann.com 129 [Page 68 to 71 of Paper book]. (ii) Hon'ble ITAT Banglore Bench"B"; Banglore in the case of Mysore Sugar Co. Ltd.. Vs. DCIT [(2006) 8 SOT 486.] (iii) Hon'ble High Court of Gujarat in the case of CIT vs. Synpase Systems Pvt Ltd. [(2012) 80 CCH 068 (Guj HC)] (vi) Hon'ble Supreme Court in the case of CIT vs. Panipat Woollen & General Mills Co. Ltd. [(1976) 103 ITR 66, 71 (SC)] (v) Hon'ble Supreme Court in the case of C!T vs. Dhanrajgirji Raja Naransingirji [91 ITR 544]
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(vi) Hon'ble High Court of Delhi in the case of ITO vs. Dalrnia Cement (Bharat) Limned 254 ITR 377 (Del)
(viii) Hon'ble Supreme Court in the case of S.A. Builders vs. CIT [288 ITR 1 (SC)”.
On the other hand, the learned DR submitted that the assessee failed to establish the genuineness of the expenses. Accordingly the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the instant case relates to the provision made by the assessee for the expenses to be incurred for Rs. 2,72,42,900.00 on account of sugar development expenses. There is no dispute to the facts of the case as elaborated in the preceding paragraphs. Therefore, we are not inclined to repeat the same for the sake of brevity. At the outset we note that there was similar claim made by the assessee in the own case pertaining to the AY 2005-06 and 2007-08 dated 10-12- 2007 and 29-07-2009 respectively which was admitted by the Revenue. This fact can be verified from the assessment orders for the AYs 2005- 06 and 2007-08 available on record. Thus, we are of the view that the assessee should be allowed for the deduction of such expenses on the basis of principles of consistency. In this regard we find support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT versus Excel Industries Ltd reported in 358 ITR 295 wherein it was held as under: “28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a
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different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue. 29. In Radhasoami Satsang Saomi Bagh v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.” In view of the above and after considering the facts in totality, we are of the view that the assessee is eligible for deduction of the sugar cane development expenses as discussed above. The ld. DR has also not brought anything on record suggesting any material change in the facts and circumstances of the case for the year under consideration viz a viz earlier assessment year. It is also pertinent to note that the outstanding payment of Rs. 1,98,83,655.00 to the parties was made before the due date of filing the Income tax return under section 139(1) of the Act. This fact has not been doubted by the authorities below.
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In view of the above, the assessee succeeds on the principle of consistency. Accordingly we set aside the order of the learned CIT (A) and direct the AO to allow the claim of the assessee. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed. This Order pronounced in Open Court on 25/10/2019
Sd/- Sd/-
(राजपाल यादव) (वसीम अहमद) �या�यक सद�य लेखा सद�य (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated 25 /10 /2019 manish /TC Nair
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)- II, Rajkot 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण,राजोकट/DR,ITAT, Rajkot 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, राजोकट / ITAT, Rajkot 1. Date of dictation 19/09/2019 (word processed by Hon’ble AM in his computer by dragon). 2. Date on which the typed draft is placed before the Dictating Member 24.10.2019 3. Other Member... 4. Date on which the approved draft comes to the Sr.P.S./P.S…………….. 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S……25/10/2019. 7. Date on which the file goes to the Bench Clerk 25/10/2019 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………