The Commissioner Of Income Tax v. The Shahbad Co-Op. Sugar Mills Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.A. No.104 of 2007 Date of decision: 17.12.2010 The Commissioner of Income Tax Vs. The Shahbad Co-op. Sugar Mills Ltd. -----Appellant. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE AJAY KUMAR MITTALHON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. Yogesh Putney, Sr.Standing Counselfor the appellant. for the appellant. Mr. S.K. Mukhi, Advocate andMs. Jyoti, Advocatefor the respondent. --- ADARSH KUMAR GOEL, J. 1. The revenue has preferred this appeal under Section260-A of the Income Tax Act, 1961 (for short, “the Act”) againstthe order of the Income Tax Appellate Tribunal, New Delhi inI.T.A. No.4830/DEL/2002 for the assessment year 1996-97 whichwas admitted to consider following substantial questions of lawclaimed in the appeal:- “1. Whether on the facts and in the circumstances of thecase, the Ld. ITAT was right in law in allowing theassessee’s claim of Rs.2,32,400/- on account ofannual subscription of sugar federation, ignoring thefact that the assessee had been following thecase, the Ld. ITAT was right in law in allowing theassessee’s claim of Rs.2,32,400/- on account ofannual subscription of sugar federation, ignoring thefact that the assessee had been following the 2. mercantile system of accounting and that the liabilityof the annual subscription for the earlier asstt. Year ofwhich the assessee was well aware was notallowable in the year relevant to the Asstt. Year 1996-97? Whether on the facts and in the circumstances of thecase, the Ld. ITAT was right in law in allowing theclaim of Rs.13,00,000/- on account of contributionmade specifically for the construction of the officebuilding of the apex body i.e. Haryana StateFederation of Sugar Mills by following the decision ofthe Hon’ble Supreme Court in the case of CIT Vs.Bombay Dyeing Manufacturing Co. Ltd. ignoring thefact that the assessee had not advanced the amountfor construction of houses under a subsidizedIndustrial Scheme for its employees as in the casedecided by the Apex Court and that the ratio of thedecision of the Hon’ble Supreme Court in the casementioned above was not applicable to the facts ofthe case of the assessee?” 2. The assessee is a co-operative society engaged inmanufacture and sale of sugar. During the assessment, theAssessing Officer noticed that the assessee claimed`2,32,400/- as deduction on account of annual subscription paidto its apex body. Since the assessee was following mercantilesystem of accountancy and the payment related to the year1994-95, the same was disallowed in the assessmentyear 1996-97. The Assessing Officer also disallowed sum of `13 lacs, claimed by the assessee as deduction towards contribution for office building of the apex body. The AssessingOfficer held that the expenditure was capital in nature and was tobe spent on a building which was yet to be constructed. Theassessee was not to get enduring benefit on the said payment.The expenditure was not allowable under Section 37 of the Act. 3. The CIT(A) dismissed the appeal of the assessee buton further appeal, the Tribunal upheld the plea of the assesseewith the following observations:- “7. We have seen the letter dated 21.6.1995 of theHaryana State Federation of Coop. Sugar Mills Ltd. acopy of which has been filed at page 4 of the paperbook. Since the demand has crystalised during theyear under consideration and was paid during theyear, the authorities below erred in disallowing thisexpenditure. contribution for office building of the apex body. The AssessingOfficer held that the expenditure was capital in nature and was tobe spent on a building which was yet to be constructed. Theassessee was not to get enduring benefit on the said payment.The expenditure was not allowable under Section 37 of the Act. 3. The CIT(A) dismissed the appeal of the assessee buton further appeal, the Tribunal upheld the plea of the assesseewith the following observations:- “7. We have seen the letter dated 21.6.1995 of theHaryana State Federation of Coop. Sugar Mills Ltd. acopy of which has been filed at page 4 of the paperbook. Since the demand has crystalised during theyear under consideration and was paid during theyear, the authorities below erred in disallowing thisexpenditure. 8. Ground No.1(III) relates to contribution to sugarfederation for construction of building. The same wasdisallowed by the Assessing Officer on the groundthat the expenditure is capital in nature and has to bespent on the office building which was yet to beconstructed during the previous year relevant to theassessment year 1996-97. It was further observedthat the expenditure claimed by the assessee is not atall commensurate with the profits earned by theassessee and hence the claim is not justified andcannot be allowed as deduction under section 37 ofthe Act. The decision of the departmental authoritieson this issue does not appear to be in conformity withthe law laid down by the Supreme Court in the case ofCIT v. Bombay Dyeing Manufacturing Co. Ltd. 219ITR 521. It was held in that case that where the amount was advanced to the Govt. which purchasedthe land in its own name and the building constructedthereon became property of the Govt. and not of theassessee, the amount contributed constitute revenueexpenditure. In the case in hand also the amount wascontributed specifically for the construction of theoffice building of the apex body i.e. Haryana StateFederation Coop. Sugar Mills Ltd. Such a claim isallowable as revenue expenditure.” 4. We have heard learned counsel for the parties. 5. Learned counsel for the revenue submitted thatliability of the assessee for annual subscription related to the year1994 relevant to assessment year 1995-96 and could not beallowed in assessment year 1996-97. The Tribunal noted theletter dated 21.6.1995 and on that basis held that the demandcrystalised only during the year under consideration. The saidletter in fact mentions that the payment related to the bills for theyear 1994. Relevant contents of the said letter are as under:- “A perusal of the accounts reveals that a sum ofRs.232406-77 is still outstanding against your bills forthe year 1994-95. You are, therefore, requested to sendRs.232406-77 to this Federation by way of Bank Draftimmediately so that we may enable to meet our day-to-day expenditure.” In view of above, the finding recorded by the Tribunalthat demand crystalised during the year under consideration, is based on misreading of the letter and is, thus, perverse. It isfurther submitted that the payment made for construction ofbuilding was wrongly held to be revenue expenditure by followingjudgment of the Hon’ble Supreme Court in CITv. BombayDyeing Manufacturing Company Ltd.219 ITR 521, which wasdifferent on facts. 6. Learned counsel for the assessee supported theimpugned finding. 7. We are of the view that question No.1 has to bedecided in favour of the revenue while question No.2 has to bedecided in favour of the assessee. In view of above, the finding recorded by the Tribunalthat demand crystalised during the year under consideration, is based on misreading of the letter and is, thus, perverse. It isfurther submitted that the payment made for construction ofbuilding was wrongly held to be revenue expenditure by followingjudgment of the Hon’ble Supreme Court in CITv. BombayDyeing Manufacturing Company Ltd.219 ITR 521, which wasdifferent on facts. 6. Learned counsel for the assessee supported theimpugned finding. 7. We are of the view that question No.1 has to bedecided in favour of the revenue while question No.2 has to bedecided in favour of the assessee. 8. We find merit in the submission that the Tribunalmisread the letter dated 21.6.1995 and wrongly held that thedemand crystalised during the year under consideration, whileaccording to the said letter, the demand related to the year 1994.Accordingly, we hold that the assessee could not get deductionfor the payment of subscription for the year 1994 relating toassessment year 1995-96 during the assessment year inquestion. The question will stand answered accordingly. 9. As regards contribution for construction of officebuilding, it is clear that the assessee did not get any benefit ofenduring nature from the payment for building of the apex body.The building did not belong to the assessee which situation issimilar to the facts of judgment of the Hon’ble Supreme Court.This being so, the principle laid down therein was rightly applied by the Tribunal to the present case. Accordingly, question No.2has to be answered in favour of the assessee and against therevenue. 10. In view of above, the appeal is partly allowed, asindicated above. (ADARSH KUMAR GOEL) JUDGE December 17, 2010ashwani (AJAY KUMAR MITTAL) JUDGE