DUDH SAGAR DAIRY'S EMPLOYEES CREDIT & SUPPLY CO-OP.SOC.LTD. vs. A.C.I.T.

Facts

The assessee, Dudh Sagar Dairy's Employees Credit & Supply Co.Op.Sco.Ltd., is a co-operative society. The revenue, represented by the Assistant Commissioner of Income Tax, challenged orders of the Income Tax Appellate Tribunal (ITAT) for Assessment Years 1991-92 to 1995-96. The ITAT had set aside the orders of the Commissioner of Income Tax (Appeals) [CIT(A)], which had deleted additions made by the Assessing Officer (AO). The AO had disallowed the assessee's claims for losses incurred on the sale of ghee and notebooks to members and their children, and for expenditure on presentation articles given to members. The assessee's appeals are against the ITAT's decision confirming the AO's disallowances.

Held

The High Court held that the Tribunal erred in invoking Section 40A(2) of the Act for the first time. The Court found that the Tribunal committed an error in not allowing the disallowance of expenditure incurred on the sale of notebooks and ghee to the members of the society. The Court was of the opinion that the allowance of such loss against business profit ought to have been permitted, and that the same is an allowable business expenditure. The Court also referred to the decision in *Madras Industrial Investment Corporation Ltd. vs. Commissioner of Income-Tax* (supra) in relation to the expenditure on presentation articles. Consequently, both questions were answered in favour of the assessee and against the revenue. The impugned order of the Tribunal was set aside, and the order of the CIT(A) was confirmed. The appeals were allowed.

Key Issues

The Tribunal had to decide the following questions of law: 1. Whether, on the facts and in the circumstances, losses incurred by the assessee in the sale of ghee to members and notebooks to their children, in accordance with society resolutions, are allowable in the computation of total income and not covered by Section 40A(2) of the Income-tax Act, 1961. 2. Whether, on the facts and in the circumstances, expenditure incurred on providing presentation articles to members, in accordance with managing committee resolutions, is allowable business expenditure under Section 37(1) of the Income-tax Act, 1961. Assessee's contentions: - The Tribunal erred in holding that losses on ghee and notebooks are not allowable. - Ghee was sold at concessional rates only on festive occasions. - The expenditure on presents is an allowable business expenditure. - The issue regarding presentation articles is covered by the Supreme Court decision in *Madras Industrial Investment Corporation Ltd. vs. Commissioner of Income-Tax* (225 ITR 802). Revenue's contentions: - The revenue strongly supported the impugned orders of the Tribunal, submitting that the expenditures incurred are not admissible under the Act based on the Tribunal's observations.