1990 (11) TMI 199 - AT - Income Tax

Tribunal affirms deductions for Society Commission & Cane Development Subsidy, upholds validity of royalty agreement

SIR SHADI LAL ENTERPRISES LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.

The Tribunal allowed the appeals, affirming the deductions under Section 37(1) for Society Commission and Cane Development Subsidy. It held that these ... - Issues Involved:1. Allowability of Society Commission and Cane Development Subsidy under Section 37(1) versus Section 35C of the IT Act.2. Validity of the agreement between the assessee and M/s Jagat Jeet Industries Ltd. regarding royalty income.Issue-wise Detailed Analysis:1. Allowability of Society Commission and Cane Development Subsidy under Section 37(1) versus Section 35C of the IT Act:The assessee company claimed deductions for Society Commission and Cane Development Subsidy under Section 37(1) of the IT Act for the assessment years 1985-86 and 1986-87. The CIT contended that these expenditures should have been claimed under Section 35C, which was not operative for expenditures incurred after 29th Feb. 1984. The CIT held that the IAC erroneously allowed these deductions under Section 37(1), causing prejudice to the interests of the Revenue.The Tribunal examined the nature of the expenditures and concluded that the Society Commission was part of the purchase price of cane, mandated under the U.P. Sugarcane (Reg. of Supply and Purchase) Act, 1953. Consequently, it did not fall under Section 35C but was allowable under Section 37(1). The Tribunal also noted that the Cane Development Subsidy was incurred as per the requisitions of the Ganna Vikas Parishad and was part of the business expenditure. The Tribunal emphasized that Section 37(1) is a residuary section allowing business expenditures not covered by Sections 30 to 36, provided they are not capital or personal expenses.The Tribunal further clarified that since Section 35C was inoperative from 1st March 1984, the expenditures incurred for business purposes were still allowable under Section 37(1). The Tribunal criticized the CIT for not properly considering the legislative intent and the specific nature of the expenditures. The Tribunal concluded that the expenditures were rightly allowed under Section 37(1) and that the CIT's order was erroneous.2. Validity of the Agreement between the Assessee and M/s Jagat Jeet Industries Ltd. Regarding Royalty Income:The CIT questioned the genuineness of the agreement between the assessee and M/s Jagat Jeet Industries Ltd., suggesting that the arrangement was designed to divert profits to M/s Jagat Jeet Industries Ltd. while the assessee received only royalty. The CIT argued that the IAC failed to make proper inquiries into the agreement, causing prejudice to the interests of the Revenue.The Tribunal analyzed the agreement and found that it was a genuine business arrangement. The assessee provided land and excise licenses, while M/s Jagat Jeet Industries Ltd. invested capital, provided technical know-how, and managed the manufacturing and marketing of Indian made foreign liquor. The Tribunal noted that the assessee did not incur any capital expenditure or working capital and only received royalty, which was a significant gain without any risk.The Tribunal rejected the CIT's view that the profits belonged to the assessee and that the arrangement was a mere facade. It highlighted that M/s Jagat Jeet Industries Ltd. bore all the risks and expenses, including bad debts, and that the arrangement was in line with business practices. The Tribunal also noted that the CIT's conclusions were based on a change of opinion rather than new facts.The Tribunal concluded that the agreement was genuine and that the royalty income was correctly assessed. The Tribunal found that the CIT's order was based on suspicion and incorrect interpretation of the facts.Conclusion:The Tribunal set aside the CIT's order, holding it erroneous in law. The appeals were allowed, affirming the deductions under Section 37(1) and the validity of the agreement with M/s Jagat Jeet Industries Ltd.