JUDGMENT
G. T. NANAVATI J. – The Income-tax Appellate Tribunal has referred the following four questions to this court under section 256(1) of the Income-tax Act, 1961 :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Government subsidy of Rs. 15,25,000 was required to be deducted from the written down value of the assets for the purposes of computing depreciation on the two milk plants at Anand and Mehsana for the assessment years 1967-68 to 1972-73 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the contribution made by the assessee to the Gujarat Co-operative Education Fund was not an allowable deduction in computing the total income of the assessee for the assessment years 1967-68 to 1972-73 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in declining to entertain the additional ground of appeal relating to the computation of capital under section 80J for the assessment years 1967-68 to 1972-73 ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the subsidy of Rs. 15,25,000 was required to be deducted from the value of the depreciable assets for the purposes of computing capital employed in the business undertaking of the assessee for the purpose of section 84/80J of the Act ?”
The reference has been made on the basis of six applications which came to be made to the Tribunal in respect of six different assessment years, viz., assessment years 1967-68 to 1972-73. As the assessment years were different, assessment orders were different and the appeals were separate, the Tribunal ought to have made six separate references. As the Tribunal has failed to do so, we order that separate reference numbers be given to each of the references arising out of Reference Applications Nos. 327 to 332 of 1978-79. Income-tax Reference No. 268 of 1980 shall be treated as reference arising out of Reference Application No. 327 of 1978-79.
The assessee is a co-operative milk producers union. It is a co-operative society registered under the Gujarat Co-operative Societies Act, 1961 (“the said Act”, for short). In 1962, it was decided by the Government of Gujarat in consultation with the Planning Commission that two milk drying plants be set up in the co-operative sector, one at Anand and another at Mehsana. The Government by its resolution dated June 15, 1963, approved the scheme which was to cost Rs. 1 crore and resolved that amount invested in the scheme should be treated as a loan to the Kaira District Co-operative Milk Producers Union Ltd. and the Mehsana District Co-operative Milk Producers Union Ltd. The terms as regards interest, repayment or conversion of part of it into share capital contribution by the Government was to be settled in due course. By that very resolution, the Government sanctioned Rs. 50 lakhs (i.e., Rs. 25 lakhs to each of the unions) and it was further decided that the expenditure by both the unions should be met initially from the said advance of Rs. 50 lakhs. The amount was expected to be spent by the unions by the end of September, 1963. As the cost of the projects had risen from Rs. one crore to Rs. 141 lakhs, the Government by its resolution passed in 1964 sanctioned a further sum of Rs. 41 lakhs out of which Rs. 30 lakhs were to be paid to the Kaira District Milk Producers Union Ltd., and Rs. 11 lakhs were to be paid to the Mehsana District Co-operative Milk Producers Union Ltd. Subsequently, by its resolution dated October 11, 1967, the Government further decided that an amount of Rs. 35,25,000 received by way of assistance from the Government of India as subsidy should be treated as subsidy for the two projects. Thus, the assessee in all received Rs. 61 lakhs for the purpose of setting up the milk drying plant at Mehsana. Out of the total amount of Rs. 61 lakhs, Rs. 15,25,000 were to be regarded as subsidy in view of the Government Resolution of 1967. The assessee had received the first instalment in July, 1963, the second in March, 1964, and the last one in December, 1964. During the assessment proceedings for the assessment proceedings for the assessment years 1967-68, a question arose as to what should be regarded as the written down value of the new asset acquired by the assessee in view of the subsidy received by it. The Income-tax Officer held that as part of the cost of the project was met by the Government, the actual cost to the assessee was less to that extent. Therefore, the value of the asset acquired from the loan was required to be reduced by Rs. 15,25,000. He further held that as the information in that behalf became available while the assessment for the assessment year 1967-68 was being finalised, the written down value of the asset deserved to be adjusted. Benefit of development rebate was, therefore, granted on that basis. The assessee had also paid Rs. 3,104 during the accounting year relevant to the assessment year 1967-68 towards education fund as required by section 69 of the said Act. The claim of the assessee was that it was a revenue expenditure and that it was incurred in connection with the business of the assessee and solely and exclusively for the purpose of its business. This claim of the assessee was rejected on the ground that the said amount was paid while appropriating the profits of the assessee and the assessee itself had debited the said amount not to the profit and loss account but to the profit and loss appropriation account. The Income-tax Officer also did not accept the submission made on behalf of the assessee that it was a charge on the profits. The Income-tax Officer was further of the view that once income is earned, tax becomes leviable notwithstanding how the income is utilised subsequently. He was of the view that the said expenditure had no direct connection with the business of the assessee nor was it possible to say that the said expenditure was incurred solely and exclusively for the purpose of business. The claim of the assessee was, therefore, disallowed.
In appeal, the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer that the written down value of the asset acquired with the loan received from the Government was required to be reduced by the subsidy amount of Rs. 15,25,000 as that was the actual cost to the assessee for valuing its assets. A contention was raised on behalf of the assessee that the actual loan received was entirely utilised for acquiring the asset and the subsidy granted by the Government came to be effected at a later date. Therefore, acquisition of the assets had nothing to do with the grant of subsidy and the written down value of the asset could not be reduced in the manner resorted to by the Income-tax Officer. It was urged that, in view of these facts, the “first in first out” method should have been followed. In the alternative, it was contended that adjustment in the written down value should have been made effective only from October 11, 1967, the date on which part of the amount of loan was treated as subsidy. The Appellate Assistant Commissioner also held that, in view of the provision of section 43(1) of the Act, only the actual cost to the assessee was required to be taken into consideration and as part of the loan was converted into subsidy to that extent, the cost of assessee was met directly or indirectly by the Government and not by the assessee. The “first in first out” method suggested by the assessee was not found to be quite appropriate in this regard. The alternative plea that adjustment in the cost to the assessee of the asset should have been made only from October 11, 1967, was rejected on the ground that loans which were given to the assessee were in regard to the entire project of the assessee and not for any other purpose and, therefore, the actual date of conversion of the loan into subsidy was not at all material for the purpose of computation of actual cost to the assessee. As regards the claim of the assessee for deduction of Rs. 3,104 being the amount contributed to the Gujarat Co-operative Education Fund, the Appellate Assistant Commissioner held that the said contribution was in reality application of income of the assessee and it cannot be considered as an item of expenditure incurred by the assessee for the purposes of carrying on its business. The view taken by the Income-tax Officer was thus confirmed by the Appellate Assistant Commissioner.
Before the Tribunal, the contention raised by the assessee was that the actual cost of the asset which was put into use by the assessee for the purposes of business should not have been reduced by the subsidy amount for the assessment years previous to the assessment year 1969-70 for determining the written down value of the asset, as on the first day of the according year relevant to the assessment years 1967-68 and 1968-69. It was not permissible to take into consideration the subsequent event of conversion of loan into subsidy. In the alternative, it was also contended that it was wrong to adjust the entire subsidy against the loan utilised for purchases of depreciable asset as some assets purchased by the assessee with the loan were not depreciable. It was also prayed that an opportunity may be given to make proper adjustment in the event its main contention was not accepted.
The Tribunal took notice of the fact that the assessee had repaid only part of the loan when the Government by its resolution dated October 11, 1967, decided to convert part of it into subsidy. As a result of that resolution, the entire loan given to the assessee stood reduced by 25 per cent. Considering this fact along with the definition of “actual cost” as given in section 43(1), the Tribunal held that actual cost of the asset to the assessee was thus reduced by that portion of the cost which was met directly or indirectly by the Government. The Tribunal thus confirmed contention that reduction of cost should have been confined to depreciable assets only that an opportunity in that behalf should be given to the assessee for making appropriate adjustment, the Tribunal held that as the loan was given for the purpose of setting up the milk drying plant, it was for the assessee to prove by correlating the loan to the depreciable and non-depreciable items, if it has utilised the loans otherwise than by purchasing plant and machinery items. This contention raised on behalf of the assessee was also thus rejected. With respect to the contribution made to the Gujarat Co-operative Education Fund, it was contended on behalf of the assessee that the said payment was compulsory and that it amounted to diversion of income before it was earned. It was also urged that it being a legitimate business outgoing, the claim of the assessee should have been allowed. The Tribunal held that the contribution which is required to be made under section 69 of the said Act is not levy and it should be considered as a pre-condition for starting or doing business. It is not a levy and the assessee had not to pay it irrespective of its profits. It was required to be paid by it in the event of declaring a dividend of three per cent. or more. It further held that as dividends are only declared after the profits are earned, it would not amount to diversion of income by an overriding title. Thus, the Tribunal considered the said payment as mere application of income after the profit are earned and dividends are distributed are distributed. Thus, the contention of the assessee that it amounted to diversion of income by an overriding title was rejected. The Tribunal also held that the same cannot be regarded as a legitimate business outgoing. Thus, the contention in respect of both the claims was rejected by the Tribunal.
The assessee then moved the Tribunal for referring the above-stated four questions to this court. The Tribunal was of the view that the said four questions of law do arise out of the judgment delivered by it and, therefore, they have been referred to this court.
At the time of hearing of these references, learned counsel for the assessee stated that he was not pressing question No. 3 in view of the judgment of the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308.
As regard question No. 1 pertaining to subsidy of Rs. 15,25,000 and consequent reduction from the written down value of the assessee for the purpose of computing depreciation on the milk drying plant, Mr. Shah for the assessee stated that he was not now questioning the finding of the Tribunal that the written down value could be reduced right from the assessment year 1967-68. He, however, submitted that the loan which was given to the assessee was for the whole project of setting up the milk drying plant. The loan was not confined to purchase of plant and machinery only. The items which were receivable under the resolution were for the purpose of indicating which plant and machinery was required to be imported with the help of foreign credit or by utilising foreign exchange. He submitted that out of the loan amount, the assessee had purchased land worth Rs. 1,11,416 and constructed buildings thereon worth Rs. 19,77,776 during the accounting years 1963-64 and 1964-65. According to him, these were parts of the project for which the Government had sanctioned the loan. He submitted that though all these relevant facts were disclosed before the Tribunal, they have not been properly considered and the Tribunal erroneously rejected its contention that it should be given an opportunity to correlate the loan with depreciable and non-depreciable assets purchased out of it. He stated that, unless this exercise is undertaken, no definite reply can be given to question No. 1. In our opinion, what the assessee contends before us has got substances in it. As indicated by the resolution of 1963, the loan was given for the purpose of setting up the milk drying plant at Mehsana. It would not mean that the loan was given for the purpose of purchasing plant and machinery only. The Tribunal has not at all considered this aspect. The fact that the loan was sanctioned for the project of setting up a milk drying plant at Mehsana also becomes clear if we look at the resolution dated October 5, 1964, passed by the Government, wherein it is stated “owing to some reasons, the cost of the projects has risen to Rs. 141 lakhs”. Again, in the resolution dated October 11, 1967, it is further stated that “25 per cent. of the amount of loan sanctioned to the unions should be treated as subsidy for the projects”. It is not in dispute between the parties that necessary material as regards the expenditure made by the assessee out of this amount was on record. The Tribunal, therefore, ought to have permitted the assessee to correlate the loan with the purchase of depreciable and non-depreciable assets. In this view of the matter, we decline to answer question No. 1 with the result that the matter will now go back to the Tribunal and the Tribunal will have to undertake that exercise with the help of the assessee as to whether depreciable and non-depreciable assets were purchased out of the said loan and to what extent and whether, as a result of conversion of part of the loan into subsidy, what should have been regarded as the written down value of the asset for the purpose of computing depreciation.
With respect to the contribution made by the assessee to the Gujarat Co-operative Education Fund during the accounting years relevant to the assessment years 1967-68 to 1972-73, it was contended that the said contributions were made because it was a statutory obligation and, therefore, such payment should be regarded as diversion of profits at source. Section 69 of the Act as it stood then was as under :
“(1) Every society which declares out of the current years profit, a dividend to its members at a rate of three per cent. Or more, shall contribute towards the education fund of the Gujarat State Co-operative Union at such rate as may be prescribed.
(2) No society, liable to contribute towards the educational fund, shall pay a divided to its members unless the said contribution is made to the Gujarat State Co-operative Union. An officer wilfully failing to comply with the requirement of this section, shall be personally liable for making good the amount to the Gujarat State Co-operative Union.”
As a result of these provisions, every society which declares a dividend at the rate of three per cent, or more has to contribute towards the education fund at the rate prescribed by the Rules. Rule 31 of the Gujarat Co-operative Societies Rules prescribes different rates ranging from one per cent. to two per cent, of the net profit of the year depending upon the rate of dividend paid by the society to its members. It, therefore, cannot be disputed that such payment was required to be made by the assessee for declaring a dividend at the rate of three per cent. or above. Even learned counsel for the Revenue has not disputed that every society declaring a dividend at the rate of three per cent. or above had to make contribution to the Gujarat Co-operative Education Fund. He, however, submitted that this payment was required to be made out of the net profits made by the assessee and only because it had declared a dividend at a higher rate. The assessee was required to incur that expenditure while making the appropriation of its profits. Therefore, the said contribution also amounted to appropriation of profits of the assessee. What was submitted on behalf of the assessee was that the said contribution being a statutory obligation, the effect of it was not provided by the assessee at source and, therefore, while computing the real profit of the assessee, such amount cannot be taken into consideration. In support of his submission Mr. Shah relied upon the decision of the Karnataka High Court in CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd. [1988] 174 ITR 475. In that case, the question which was referred to the Karnataka High Court was (at page 476) : “Whether, on the facts and in the circumstance of the case, the Tribunal was correct in holding that the amount of Rs. 9,431 paid by the assessee to the co-operative education fund was allowable as a deduction in computing the assessable income ?” After examining the relevant provisions of the Karnataka Co-operative Societies Act, 1957, the Karnataka High Court observed (at page 477) :
“The language of section 57(4)(a) of the Societies Act makes it clear that though the contribution is to be made with reference to the profits, it is not out of profits and the rate is with reference to the rate of dividend. What is provided in the section is an obligation to contribute to the co-operative education fund under certain contingencies and is a statutory liability which is an overriding charge on the income or profits of the society.”
Learned counsel also drew our attention to the subsequent judgment of the Karnataka High Court in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690, wherein the court followed its earlier decision. In our opinion, the said decisions of the Karnataka High Court can be of no help to the assessee because section 69 has by itself clearly provided that the contribution should be made out of the current years profits; whereas under the relevant provisions of the Karnataka Co-operative Societies Act, the contribution was required to be made with reference to the dividend but not out of the profits. Under the Gujarat Act, contribution is required to be made out of the profits.
Learned counsel also relied upon a Full Bench decision of this court in Karjan Co-operative Cotton Sales Ginning and Pressing Society v. CIT [1993] 199 ITR 17. In that case, the assessee had claimed Rs. 2,29,386 incurred in giving presents to the members of the society on the occasion of its silver jubilee celebrations. The question which arose for consideration was whether the said expenditure can be said to have been incurred solely with the object of preserving and bettering business prospects for the future. This court held that if the society as a corporate body decided to give presents to its members, it could not be said that the society was not doing something as a prudent businessman. It was further observed that the expenditure was incurred by the assessee for preservation of its business and to see to it that its members continued to deal with the society in future in the same way they had done in the past 25 years. For this reason, it was held that the said expenditure incurred by the assessee-society was deductible as business expenditure. In taking that view, this court relied upon the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, wherein it is held that the expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. The Supreme Court further observed that the scope and ambit of section 10(2)(xv) of the Act is wide; it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of assets and property from expropriation, coercive process or assertion of hostile title, it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business. This court also referred to another decision of the Supreme Court in CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756, wherein it is observed (at page 26 of 199 ITR) :
“The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader.”
Though the Full Bench decision does not directly help the assessee, it does help to the extent it has held that if any expenditure is wholly or exclusively incurred by an assessee-businessman with a view to preserving and augmenting his business prospects in future, such expenditure would be allowable and permissible expenditure as per section 37 of the Income-tax Act, 1961. Learned counsel for the assessee relied upon this decision mainly for the purpose of contending that declaration of a dividend at a rate higher than three per cent. was very much in the interest of the assessee. He submitted that declaration of the dividend at a rate higher than three per cent. was necessary for keeping the members of the assessee-society satisfied and making them continue to carry on business with the assessee-society. While considering whether expenditure can be said to be proper expenditure laid out or expended wholly and exclusively for the purposes of ones business, one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading and the main consideration that has to weigh with the court is as to whether the expenditure was a part of the process of profit-making. If the expenditure helps or assists the assessee in making or increasing the profits, then, undoubtedly, that expenditure would be regarded as wholly and exclusively for the purposes of business. It could not be seriously disputed that the declaration of dividend at a rate higher than three per cent. by the assessee-society to its members would have helped or assisted the assessee in making or increasing its business. The main object in giving dividend at a higher rate to its members is to keep the members satisfied and that was obviously in the interest of the society. No doubt, the expenditure was required to be incurred so as to enable the assessee-society to declare the dividend at the rate of three per cent. and above. But, as pointed out above, the declaration of dividend at the rate of three per cent. and above was very much necessary in the interest of the assessee-society. If the members of the society were not rewarded with sufficient returns for the capital contributed by them, then there was a possibility of the members leaving the assessee-society and doing business with others. Therefore, if, on the ground of commercial expediency, the assessee-society though it necessary to pay dividend to its members at the rate of three per cent. and above, it cannot be said that the expenditure required for that purpose was not expended wholly and exclusively for the purpose of its business. The Tribunal, therefore, was not right in holding that the said contribution did not amount to a legitimate business outgoing.
Learned counsel for the Revenue had strongly contended that the assessee not having made any claim under section 37 of the Act, this court should not hold that it was an allowable deduction under section 37 of the Act. Though the assessee was not specific in its claim for deduction, it appears from the order of the Tribunal that the assessee had contended before the Income-tax Officer that the said expenditure was incurred wholly and exclusively for the purpose of business. It was contended before the Income-tax Officer that deduction was permissible under section 37 of the Act. Even before the Appellate Assistant Commissioner, it was contended that the said contribution should be considered as revenue expenditure incurred by the assessee for the purpose of carrying on its business. The said deduction was claimed as revenue expenditure. Even before the Tribunal, it was contended that the said contribution should be treated as legitimate business outgoing. Thus, the assessees claim for deduction was under section 37 of the Act and when its claim is decided on the merits, it would not be proper to reject that claim only on the ground that the assessee had not made a specific claim in that behalf by reference to section 37 of the Act.
Before we conclude our judgment, it is necessary to refer to a judgment of the Madras High Court in CIT v. South Arcot District Co-operative Supply and Marketing Society Ltd. [1981] 127 ITR 467, on which heavy reliance was placed by learned counsel for the Revenue for contending that such contribution cannot be regarded as diversion of income by overriding title. The Madras High Court, after considering the relevant provisions of the Madras Co-operative Societies Act, 1961, and the Rules framed thereunder, held that there was a clear indication in section 62 that the appropriation is out of or after the net profits were arrived at. Profits, on coming into existence, attract tax at that point and the Revenue is not concerned with the subsequent application of the profits. The Madras High Court also held that such payments were conditional on profits being earned and, therefore, though that part of the profits which may have to be paid for earning the income can be allowed as deduction, contribution to education fund would cease to be a distribution out of profits. The provisions of our Act cannot be said to be in pari materia with the provisions of the Madras Act and, therefore, the said provision would not be applicable to a case arising under the Gujarat Act. We need not, however, consider the correctness of the reasons given by the Madras High Court as we are of the opinion that the contribution made by the assessee to the co-operative education fund is an allowable deduction under section 37 of the Act.
For the reasons stated above, we decline to answer question No. 1. As question No. 4 is dependent upon question No. 1, we decline to answer question No. 4 also. Question No. 2 is answered in the negative, that is in favour of the assessee and against the Revenue. Question No. 3 is not answered as it was not pressed. The reference is disposed of accordingly with on order as to costs.