2014 (11) TMI 602 - HC - Income Tax

Court allows weighted deduction under section 35C of Income Tax Act for rural area development.

KAIRA DISTRICT CO-OP. MILK PRODUCERS' UNION LTD. Versus CIT. GUJARAT

The Court held that the entire qualifying expenditure is eligible for weighted deduction under section 35C of the Income Tax Act, emphasizing the ... Interpretation of application of section 35C – entire expenses eligible for weighted deduction or not - Held that:- The Tribunal rightly was of the view that Kaira Dist. Co-Op. Milk Producers Union Ltd. Versus Commissioner Of Income Tax [2001 (7) TMI 71 - GUJARAT High Court] – u/s 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 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 - 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 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 – decided in favour of assessee. Issues:1. Interpretation of application of sec. 35C of the I.T. Act, 1961.2. Eligibility of entire expenditure for weighted deduction u/s. 35C of the I.T. Act.3. Eligibility of specific percentage of expenses for deduction u/s. 35C of the I.T. Act.Analysis:Issue 1: The Tribunal's interpretation of the application of sec. 35C of the I.T. Act was challenged. The Court held that the entire qualifying expenditure is eligible for weighted deduction under section 35C. The Court emphasized that the nexus between the supplier of raw material and the services provided by the assessee is crucial. The expenditure incurred should aim at developing the recipient and the rural area. The Court clarified that the nature of expenditure is not limited, and the weighted allowance is granted to promote rural area development.Issue 2: The Tribunal's decision regarding the eligibility of the entire expenditure for weighted deduction u/s. 35C was questioned. The Court ruled in favor of the assessee, stating that the Tribunal's interpretation was incorrect. The Court held that the assessee is entitled to deduction of the claimed expenditure except for specific items already allowed by the Income-tax Officer. The Court directed that the figure mentioned in the second question should be reduced accordingly.Issue 3: The Tribunal's decision on the eligibility of only 10% of the expenses for deduction u/s. 35C was disputed. The Court rejected this interpretation and held that the assessee is entitled to claim the expenditure in its entirety, except for specific items dealt with by the Income-tax Officer. The Court answered the second and third questions in favor of the assessee and against the Revenue.Conclusion: The Court found that the questions of law were covered by the decision of the jurisdictional High Court. Therefore, the Reference was answered in favor of the assessee. The judgment benefitted the assessee by allowing the claimed expenditure except for specific items already addressed by the Income-tax Officer. Ultimately, all questions were answered in favor of the assessee, leading to the disposal of the Income Tax Reference in favor of the assessee.