KAIRA DISTRICT CO-OP. MILK PRODUCERS' UNION LTD. vs. C.I.T. GUJARAT
What did the High Court hold?
The High Court held that the Appellate Tribunal was not right in its interpretation and application of Section 35C of the Act. The Court referred to its own decision in Kaira Dist. Co-op. Milk Producers Unions Ltd. v. Commissioner of Income-Tax (253 ITR 766), which stated that the Tribunal was incorrect in holding that only 10% of the expenditure was eligible for weighted deduction. The Court reasoned that Section 35C does not permit bifurcating qualifying expenditure, and the entire qualifying expenditure is eligible for weighted deduction. The nexus requirement under Section 35C(1)(a) is met if the assessee incurs expenditure to provide goods, services, or facilities to a person who would be a supplier of raw material, with the underlying idea being to obtain raw material and develop the recipient and their rural area. The Court concluded that merely because certain activities might not directly disseminate information does not disqualify otherwise eligible expenditure. The questions were answered in favour of the assessee. The second question's figure would stand reduced as expenses for 'Amul Patrika' were allowed by the AO and development/research expenditure was restored to the AO's file. The assessee is entitled to deduction of expenditure claimed in its entirety, except for the two items dealt with by the AO.
What were the facts?
The assessee, Kaira District Co-operative Milk Producers' Union Ltd., is a co-operative society assessed as an AOP. For Assessment Year 1980-1981, it claimed weighted deduction under Section 35C of the Income Tax Act, 1961, for various expenses including salary, veterinary medicines, transport, artificial insemination, advertisement ('Amul Patrika'), and fodder development, totaling Rs. 67,31,611. The Assessing Officer (AO) allowed deduction only for Rs. 70,328 related to advertisement. The Commissioner of Income Tax (Appeals) directed the AO to allow deduction as per a prior Tribunal decision. The Tribunal upheld the CIT(A)'s findings. This reference concerns the interpretation and application of Section 35C.
What were the issues?
1. Whether, on the facts and circumstances, the Tribunal was correct in law in interpreting the application of Section 35C of the Income Tax Act, 1961? 2. Whether, on the facts and circumstances, the Tribunal was correct in law in holding that the entire expenditure of Rs. 67,31,611 was not eligible for weighted deduction under Section 35C of the Income Tax Act? 3. Whether, on the facts and circumstances, the Tribunal was correct in law in holding that only 10% of the expenses incurred on dissemination of information or demonstration of modern techniques in agriculture, animal husbandry, or dairy farming, or advice on such techniques, is eligible for deduction under Section 35C? Assessee's Contentions: The assessee argued that the entire qualifying expenditure should be eligible for weighted deduction, as Section 35C does not permit bifurcating expenses. They contended that the nexus between the supplier of raw material and the services provided by the assessee, as stipulated in Section 35C(1)(a), is fulfilled even if not direct, and the expenditure is for obtaining raw material and developing the recipient and their rural area. The assessee relied on the High Court's decision in Kaira Dist. Co-op. Milk Producers Unions Ltd. v. CIT. Revenue's Contentions: The judgment does not record specific contentions from the Revenue regarding these issues.
Which sections of the Income-tax Act were involved?
Section 35C
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1.Heard learned Advocates for the parties. 2.The following substantial questions arise for consideration in this Reference :- “1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in interpreting of application of sec. 35C of the I.T. Act, 1961?
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire expenditure of Rs.67,31,611 was not eligible for weighted deduction u/s. 35C of the I..T. Act?
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that only 10% of the expenses incurred
on dissemination
of information of demonstration of modern technique or method of agricultural animal husbandry or dairy or poultry farming or advice on such technique or method is eligible for deduction u/s. 35C of the Act?” 3.The facts in brief giving rise to this Reference are as under :- The assessee is a Co-operative society and assessed in the status of AOP. The assessment year under reference is 1980-1981 and the relevant previous year is F.Y. Ended on 31.03.1980. The assessee is carrying on business of dairy at Ahmedabad – Kanjari Plant and Plant at Mogar. Activities are purchasing of milk from primary societies and processing the same and sale thereof as butter, ghee, and whole milk powder, cattle food known as 'Amul Dan'. There is also Bal Amul Plant and Choclate Plant. For the assessment year 1980-1981 the assessee had claimed weighted deduction u/s. 35C (Agricultural Development Allowance) in respect of the following items :- Salary Rs.20,29,058.00 Veterinary medicines Rs.20,04,811.00 Veterinary transport Rs.18,75,784.00 Artificial insemination expenses Rs. 3,13,431.00 Advertisement & public- ity “AMUL PATRIKA” Rs. 70,328.00 Fodder Development expenses Rs. 4,38,199.00 The A.O. allowed weighted deduction on expenses
of Rs.70,328
relating
to advertisement and publicity. As regards the other items the A.O. rejected the claim on the ground that the said items do not fall u/s. 35C read with Rule 6A(ii) of the I.T. Rules. The assessee carried the matter in appeal before the CIT(A). The CIT(A), following the decision of the Tribunal in ITA No.1120 to 1122/82 dated 18.1.84 directed the A.O. to allow deduction u/s. 35C in accordance with the directions contained in the said order. The Tribunal upheld the findings of the CIT(A) on the issue. 4.The reference which has been referred by the Tribunal is squarely covered by the decision of this Court in the case of Kaira Dist. Co- op. Milk Producers Unions Ltd. v. Commissioner of Income-Tax reported in 253 Income Tax Reports 766. 5.On a reference, the Court in the case of Kaira Dist. Co-op. Milk Producers Unions Ltd. (supra) held that :- “(iii) That the Appellate Tribunal was not right in holding that only 10 per cent of such expenditure was eligible for weighted deduction, because the recipients of the services or facilities obtained only incidental benefit. The provisions of section 35C did not permit bifurcating
the qualifying expenditure. The entire qualifying expenditure was eligible for weighted deduction. Under section 35C(1)(a) the nexus between the supplier of raw material to the assessee and the providing of services by the assessee has been stipulated. Though the nexus may not be direct yet the requirement is to the effect that the assessee, to qualify for weighted deduction under that section, shall incur expenditure of the specified nature to provide the goods, services or facilities to a person who would in turn be the supplier of raw material. The underlying idea is that the assessee should incur expenditure for the purpose of obtaining raw material, while at the same time incur such expenditure in a manner so as to undertake
development
of the recipient and the area in which the recipient is located, i.e. rural area. If this test or condition stands fulfilled then the assessee would become entitled to claim weighted deduction. The words used are “any expenditure” and thus the weighted allowance is not limited by the nature of expenditure : the only limitation prescribed is in relation to specified goods, services or facilities. Therefore, merely because the assessee undertakes certain activities which may not directly disseminate information or demonstrate modern techniques or methods of agriculture, animal husbandry or poultry farming it cannot be said that expenditure, which is otherwise eligible for weighted deduction, does not fall within the nature of expenditure described in clause (a) of section 35C(1). The only requirement is that the recipient and the surrounding areas should benefit by way of development and weighted deduction is granted so as to subserve the purpose of development of the rural area. The condition that such recipients should be in a position to undertake such activities on their own is not borne out on a plain reading of the provisions. The Explanation which lays down the mode of computing the eligible amount of expenditure indicates that it is not necessary that the recipient of services or facilities must himself imbibe the mode or technique to the extent that the recipient can himself undertake such activity. It is not possible to read section 35C(1)(b)(ii) to the effect that the activities specified therein have to be restricted only to the limited purpose
of educating
the agriculturist, grower or producer, and if over and above the process of educating such recipient some more services or facilities were rendered the assessee should be denied the benefit.” The Court held that :- “We, therefore, hold that the Appellate Tribunal was not right in its interpretation and application of section 35C of the Act. The first question referred to us is therefore answered in the negative, i.e. in favour of the assessee and against the Revenue. In so far as the second question is concerned the figure mentioned therein shall stand reduced in view of the fact that the expenses in relation to Amul Partika have already been allowed by the Income- tax Officer and the expenditure relatable to development and research stands restored by the Tribunal to the file of the Income-tax Officer. The assessee is entitled to deduction of expenditure claimed in entirety except the aforesaid two items which have been dealt with the by the Income-tax Officer. The second and third questions are accordingly answered in then negative, i.e., in favour of the assessee and against the Revenue.” 6.In that view of the matter, the questions of law will be covered by the decision of the juri ictional High Court and hence, we are of the opinion that the Reference has to be answered accordingly. 7.Hence, we do not think that we can take a different view in the facts of the case and therefore, this judgment will inure further for the benefit of the assessee. 8.We therefore, are of the view that all the questions are answered in favour of the assessee and this Income Tax Reference stands disposed of in the above terms. (K.S. JHAVERI, J.) (K.J. THAKER, J) CAROLINE
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