THE COMMR. OF INCOME TAX, TRICHUR vs. THE CO-OP. SUGARS LTD., PALAKKAD

The Tribunal has extracted the minutes of the Board Meeting of the respondent-assessee which explains the nature of contribution made. It is clear from the minutes that the amount was paid at the suggestion of the Minister to the assessee to meet the cost of 2 expenditure incurred by the Irrigation Department for improving an irrigation canal which supplies water to an area under sugarcane cultivation. The total cost was stated to be Rs. 112 lakhs and the assessee's contribution was Rs. 25 lakhs. The canal until improvement under the scheme was a FL canal and the purpose of cement lining was to prevent loss of water in transit thereby providing better supply of water for irrigation of farm lands mainly cultivated with sugarcane. Since sugarcane is the raw material of the assessee and since extensive cultivation of sugarcane ensures supply to the assessee, the assessee claimed the expenditure as a business expenditure allowable under Section 37(1) of the I.T. Act. However, the assessing officer denied the claim on the ground that it is a capital expenditure not allowable under Section 37(1) of the Act.

On first appeal, the first appellate authority allowed the claim following the decisions of the Supreme Court in L.H. SUGAR FACTORY AND OIL MILLS (P) LTD. V. C.I.T., 125 I.T.R. 293 (SC), C.I.T. V. ASSOCIATED CEMENT COMPANIES LTD., 172 I.T.R. 257 (SC), and the decision of the Bombay High Court in NATIONAL

On second appeal the Tribunal endorsed the view of the CIT (Appeals) and dismissed the departmental appeal against which this appeal is filed.

Senior counsel appearing for the appellant relied on a Full Bench decision of this Court in C.I.T. V. GLENVIEW RUBBER CO.P.LTD., (2007) 291 I.T.R. 1 (Ker.) (FB) and contended that the expenditure is a capital expenditure in nature. However, counsel appearing for the respondent-assessee contended that the decision is not applicable to the facts of this case because it was found by this Court that the assessee in that case has incurred expenditure for construction of a water treatment plant for itself which was a capital asset. It is the contention of the assessee that in this case the assessee had no right over the irrigation canal and the assessee has not created any asset as such. We find force in this contention because it is a case where the assessee has not created any asset and even though it derives benefit out of the same, it is in an indirect manner. The improvement of irrigation canal obviously will lead to increase of water supply for 4 irrigation to the sugarcane cultivated area. This will necessarily lead to increase in production of sugarcane and there is every reason for the assessee to expect better supply of sugarcane which is it's raw material and which is otherwise a scarce commodity as the assessee was not able to utilise its capacity on account of non-availability of sugarcane.