2015 (10) TMI 404 - HC - Income Tax

Court partially allows appeal on education fund and cane penalty but rules in favor of assessee on rehab and office building contributions.

The court partly allowed the appeal. The issues regarding the annual subscription for education fund and the addition of cane penalty recoverable from ... Annual subscription for education fund disallowed - Held that:- The assessee had been following mercantile system of accounting and therefore, the expenses claimed on account of annual subscription for education fund relating to the assessment years 1994-95, 1995-96 and 1996-97 were not permissible in the current assessment year 1999-2000. It was not disputed by the learned counsel for the parties that similar issue had been decided against the assessee in The Commissioner of Income Tax Vs. The Shahbad Coop. Sugar Mills Limited [2010 (12) TMI 952 - Punjab and Haryana High Court] - Decided against the assessee. Contribution towards rehabilitation fund - whether a business expenditure allowable under section 37(1)? - Held that:- Tribunal had allowed the claim of the assessee by noticing in its order dated 30.5.2008, Annexure A.3 that the amount of ₹ 10,05,000/- paid by the assessee was towards rehabilitation fund which was created for the benefit of all the mills including the assessee in case of need. The payment made to the said fund was in the nature of insurance and directly related to the business of the assessee. In such circumstances, the contribution of amount equivalent to 5% of the net profits towards rehabilitation fund was held to be expended wholly and exclusively for business purposes and admissible under Section 37 of the Act. Learned counsel for the revenue could not demonstrate any error or perversity in the approach of the Tribunal warranting interference by this Court. Accordingly, question No.(ii) is answered in favour of the assessee and against the revenue. Disallowance on account of contribution made specifically for the construction of office building of the Apex body i.e. Haryana State Federation of Sugar Mills - Held that:- The impugned expenditure of ₹ 5 lakhs incurred by the assessee towards the construction of head office of Haryana State Federation of Cooperative Sugar Mills Limited, Chandigarh is allowable as a revenue expenditure and the tax authorities below erred in disallowing the same and hence their orders in this regard are set aside. Accordingly, assessee's appeal is allowed Addition of business expenditure paid to the farmers - whether resulting in double deduction on the same head - Held that:- The assessee had received penalty imposed on the farmers who had failed to supply the contracted quantity of the sugarcane to the assessee. Further, the assessee had claimed deduction in calculating the taxable Income on account of amount paid to farmers out of penalty imposed in earlier years. When the assessee had reduced the amount of penalty paid back to the farmers as it had been added back in the earlier years, then in that situation, the amount of penalty imposed on the farmers during the previous year from 1.4.1998 to 31.3.1999 relevant to assessment year 1999-2000 was taxable in this year i.e. assessment year 1999-2000 as it was revenue receipt in the hands of the assessee. The Tribunal was, thus, in error in reversing the orders of the Assessing Officer as well as the CIT(A). The issue before the Madras High Court in Salem Cooperative Sugar Mills Limited's case (1996 (9) TMI 40 - MADRAS High Court) was that where the Central Government had by way of a Molasses Control Order directed that certain amount had to be kept in a fund and it did not belong to the assessee. The assessee could not utilize the amount in the fund for any other purpose. On that basis, it was held that there was no income which had accrued while the amount was deposited in the said fund. Such is not the position in the present case. Accordingly, Question is thus answered in favour of the revenue and against the assessee. Issues Involved:1. Allowability of annual subscription for education fund for earlier assessment years.2. Allowability of contribution towards rehabilitation fund as business expenditure under Section 37(1) of the Income Tax Act, 1961.3. Allowability of contribution towards the construction of the office building of the Haryana State Federation of Sugar Mills.4. Addition of cane penalty recoverable from farmers as income.Detailed Analysis:Issue (i): Allowability of Annual Subscription for Education FundThe court addressed whether the assessee's claim of Rs. 3 lakhs on account of annual subscription for the education fund relating to assessment years 1994-95, 1995-96, 1996-97 was allowable in the assessment year 1999-2000. The court noted that the assessee followed the mercantile system of accounting, and such expenses were not permissible in the current assessment year. This issue had been previously decided against the assessee in ITA Nos.515 of 2008. Therefore, the court answered this question against the assessee.Issue (ii): Contribution Towards Rehabilitation FundThe court examined whether the amount of Rs. 10,05,000 contributed by the assessee towards the rehabilitation fund was allowable as business expenditure under Section 37(1) of the Income Tax Act, 1961. The Tribunal had allowed the claim, noting that the rehabilitation fund was created for the benefit of all mills, including the assessee, and was akin to insurance directly related to the business of the assessee. The court found no error in the Tribunal's approach and upheld that the contribution was expended wholly and exclusively for business purposes. Thus, this question was answered in favor of the assessee.Issue (iii): Contribution Towards Construction of Office BuildingThe court considered whether the Rs. 5,00,000 contribution towards the construction of the office building of the Haryana State Federation of Sugar Mills was allowable as revenue expenditure. The Tribunal had allowed this expenditure, referencing a similar case where the Supreme Court held such contributions as revenue expenditure since the building did not belong to the assessee. The court noted that the facts were identical to a previous case decided in favor of the assessee and upheld the Tribunal's decision. Accordingly, this question was answered in favor of the assessee.Issue (iv): Addition of Cane Penalty Recoverable from FarmersThe court analyzed whether the addition of Rs. 57,28,554 on account of cane penalty recoverable from farmers was valid. The assessee had received this amount as a penalty from farmers who failed to supply the contracted quantity of sugarcane. The Tribunal had deleted this addition, but the court found that since the assessee had claimed deductions for penalties paid back to farmers in earlier years, the penalties received during the relevant assessment year should be taxable. The court distinguished this case from a Madras High Court judgment cited by the assessee and concluded that the Tribunal erred in its decision. Thus, this question was answered in favor of the revenue.Conclusion:The appeal was partly allowed. Questions (i) and (iv) were answered in favor of the revenue, while questions (ii) and (iii) were answered in favor of the assessee.