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Home > Judiciary > Taxation > Section 37(1) of the Income-tax Act, 1961 - Business expendi



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Section 37(1) of the Income-tax Act, 1961 - Business expendi

Posted on 06 September 2009 by Nirav Pankaj Shah

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Brief



Citation



Judgement

[2009] 32 SOT 9 (PUNE)
IN THE ITAT PUNE BENCH ‘A’
Deputy Commissioner of Income-tax
v.
Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd.
MUKUL SHRAWAT, JUDICIAL MEMBER
AND AHMAD FAREED, ACCOUNTANT MEMBER
IT APPEAL NOS. 534 (PUNE) OF 1998, 693, 862 TO 864 (PUNE) OF 2001, 20 (PUNE) OF 2003 AND 955 (PUNE) OF 2005
C.O. NO. 19 (PUNE) OF 1999
[ASSESSMENT YEARS 1993-94, 1995-96 TO 1999-2000 AND 2001-02]
MARCH 28, 2008
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1993-94, 1995-96 to 1999-2000 and 2001-02 - Whether for an expenditure to be allowable under section 37(1), it may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is incurred for promoting business and to earn profits, assessee can claim deduction under section 37(1), even though there was no compelling necessity to incur such expenditure - Held, yes - Whether fact that somebody other than assessee is also benefited by expenditure should not come in way of an expenditure being allowed by way of deduction under section 37(1) - Held, yes - Assessee, a federal co-operative society, was engaged in business of collecting, processing and selling milk and milk products - It collected milk from its members, which were primary co-operative societies and which in turn collected milk from their members, who were cattle owners - Assessee participated in a programme (Operation Flood II) of Government of India through National Dairy Deve-lopment Board - It claimed deduction of certain sum towards animal husbandry expenses - Assessing Officer disallowed same on ground that assessee was not collecting milk from cattle owners and impugned expenditure benefited cattle owners and not business of assessee and animal husbandry being not a business activity of assessee, expenditure could not be treated as incidental to its business - Whether since impugned expenditure resulted in increasing quality and productivity of milk which assessee was purchasing as part of its business, it could be said that impugned expenditure did benefit assessee’s business and that it was incurred on account of commercial expediency - Held, yes - Whether, therefore, assessee would be entitled to deduction - Held, yes
Words and phrases : Expression ‘wholly and exclusively’ as appearing in section 37(1) of the Income-tax Act, 1961
FACTS
The assessee, a federal co-operative society, was engaged in the business of collecting, processing and selling milk and milk products. It collected milk from its members, which were primary co-operative societies and which in turn collected milk from their members, who were cattle owners. The assessee participated in a programme (Operation Flood II) of the Government of India through National Dairy Development Board (NDDB) and was getting financial support for the participation. It provided free/subsidized technical support services to the farmers/producers in the area of animal health, as per the guidelines laid down by NDDB. The assessee claimed deduction of certain sum towards animal husbandry expenses. The Assessing Officer disallowed the same. The Commissioner (Appeals) allowed the said expenditure on grounds that the expenditure was aimed at strengthening of infrastructure which was to contribute in increasing the collection of milk; that the overall turnover of the assessee had gone up considerably over earlier years; that the nexus between the assessee’s business and the health of the cattle owned by the farmers could not be lost sight of and; that there was no material on record to show that the genuineness of the said expenditure could be doubted. He, therefore, held that the expenditure relating to animal husbandry was one which was laid out wholly and exclusively for the purpose of the assessee’s business. In the instant appeal, the revenue submitted that the said expenditure incurred was not incidental to the business of the assessee. Further it was stated that the guidelines laid down by NDDB were not binding on the assessee and that all genuine expenses could not be allowed as deduction, if not incurred for the purpose of business of the assessee.
HELD
In the instant case, the Assessing Officer appeared to have proceeded on the basis that the animal husbandry expenditure benefited the cattle owners and not the business of the assessee, particularly because the assessee-society was not buying milk directly from the cattle owners. He had noted in his order that the assessee did not own any cattle; that it did not procure milk directly from the cattle owners; that it collected milk from the primary societies and; that providing services for ‘animal husbandry’ was not a business activity of the assessee, and therefore, the expenditure was not incidental to the business of the assessee. [Para 18]
The Commissioner (Appeals), while disagreeing with the Assessing Officer had noted that the assessee was participating in a programme (Operation Flood II) of the Government of India through NDDB and was getting financial support for that participation, and that the impugned expenditure incurred by the assessee resulted in increasing the quality and productivity of milk which the assessee was purchasing as part of its business. [Para 19]
One might argue that the assessee could have carried on its business without incurring the above expenditure and that it was not ‘necessary’ for the assessee to incur that expenditure in order to carry on its business of purchase and sale of milk. But such an argument was not relevant for deciding the question whether an expenditure was allowable under section 37(1). The expression ‘wholly and exclusively’, used in section 37(1), does not mean ‘necessarily’. It is for the assessee to decide whether an expenditure should be incurred in the course of his business. An expenditure may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 37(1) even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 37(1). [Para 20]
Further, it was nobody’s case that the impugned expenditure incurred by the assessee was either benefiting the cattle owners of Punjab or the apple growers of Himachal Pradesh. The expenditure did benefit the assessee’s business and it was incurred on account of ‘commercial expediency’ as perceived by the assessee. The Assessing Officer’s perception with regard to ‘commercial expediency’ was not material. Also the Commissioner (Appeals) had noted in his order that the genuineness of the expenses was never doubted by the Assessing Officer. Therefore, in view of the facts of the case and the legal position discussed above, the conclusion reached by the Commissioner (Appeals), was to be accepted. [Para 21]
EDITOR’S NOTE
(1) The assessee was running a cattle feed unit for supplying better cattle feed to primary societies from which it was purchasing milk. It had suffered loss in respect of said unit. Since profit from, said activity had been offered for taxation in earlier years, assessee would be entitled to deduction of loss in year under consideration.
(2) Where assessee claimed a sum of Rs. 1,08,842 incurred on account of advertisement in various periodicals/weekly on account of good wishes, since these were bona fide advertisements and the payments had, in all cases, been made through crossed cheques/drafts, and that the genuineness of the payment was not in doubt, in view of decision in case of CIT v. Shree Panchaganga Sahakari Sakhar Karkhana Ltd. [2001] 250 ITR 772/118 Taxman 122 (Bom.). Commissioner (Appeals) was justified in allowing said claim.
(3) In view of decision in case of CIT v. Shree Warna Sahakari Sakhar Karkhana Ltd. [2002] 253 ITR 226/[2001] 119 Taxman 422 (Bom.), the audit fees payable for earlier years, claimed by the assessee was to be allowed.
CASE REVIEW
Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) (para 21); CIT v. Panipat Co-operative Sugar Mills Ltd. [2002] 256 ITR 371/123 Taxman 67 (Punj. & Har.) (para 25); CIT v. Shree Panchaganga Sahakari Sakhar Karkhana Ltd. [2001] 250 ITR 772/118 Taxman 122 (Bom.) (para 29) and CIT v. Shree Warna Sahakari Sakhar Karkhana Ltd. [2002] 253 ITR 226/[2001] 119 Taxman 422 (Bom.) (para 34) followed.
CASES REFERRED TO
State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC) (para 4), Dy. CIT v. Churu Zila Sahakari Dugdh Utpadak Sang Ltd. [2004] 1 SOT 127 (Jodh.) (para 4), Kaira District Co-operative Milk Producers Union Ltd. v. CIT [2002] 120 Taxman 910 (Guj.) (para 4), Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) (para 10), CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756/8 Taxman 1 (SC) (para 10), Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) (para 12), CIT v. Panipat Co-operative Sugar Mills Ltd. [2002] 256 ITR 371/123 Taxman 67 (Punj. & Har.) (para 23), CIT v. Shree Panchaganga Sahakari Sakhar Karkhana Ltd. [2001] 250 ITR 772/118 Taxman 122 (Bom.) (para 27) and CIT v. Shree Warna Sahakari Sakhar Karkhana [2002] 253 ITR 226/[2001] 119 Taxman 422 (Bom.) (para 34).
C.S. Reddy and Pradeep Sharma for the Appellant. S.N. Inamdar and S. Phadnis for the Respondent.




Tags :- section 37 1income act1961 business expendi




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