JUDGMENT
R.K. Agrawal, J.
1. The Income-tax Appellate Tribunal, New Delhi, has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for the opinion of this court:
Whether, on the facts and in the circumstances of the case, the Inspecting Assistant Commissioner (Tribunal) is correct in law in holding that the commission and subsidy paid to the cane growers formed part of the purchase price of the cane and thus allowable for deduction under Section 37(1) of the Income-tax Act, 1961?
2. The reference relates to the assessment years 1985-86 and 1986-87.
3. Briefly stated, the facts giving rise to the present reference are as follows:
The previous years to the assessment years 1985-86 and 1986-87 ended on September 30, 1984, and September 30, 1985, respectively. The asses-see-company was engaged in the manufacture of sugar, country liquor as also Indian made foreign liquor at its factories at Shamli and Pilkhani. The assessee-company purchased its requirements of sugarcane from two sources, i.e., at the mill premises and from village centres, earmarked for the purpose by the District Cane Officer appointed by the Government of Uttar Pradesh. The assessee paid the following sums and claimed them as deductions under Section 37(1) of the Act in computing its income for the two assessment years:
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1985-86 1986-87
Rs. Rs.
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Society commission 11,44,636 10,18,406
Cane development subsidy 2,07,387 3,56,341
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4. The assessee entered into an agreement with Jagat Jeet Industries Ltd., on July 22, 1981, for manufacture of Indian made foreign liquor under the technical supervision, trade mark and brand name of Jagat Jeet and the secret formula in the form of premix development to be supplied by Jagat Jeet Industries, under the terms of the said agreement, the assessee was to receive only royalty at a fixed rate while the other income from the manufacture was to go to M/s. Jagat Jeet Industries Ltd., although the-assessee had to maintain the accounts in respect of the entire manufacturing operations and also lease out a portion of its vacant land. The assessee disclosed the royalty received from these operations in the assessment year 1986-87 as its income. The Inspecting Assistant Commissioner (Assistant) Range I, Muzaffarnagar, accepted the assessee’s claim for the deduction of the commission and subsidy and also taxed the royalty as income of the assessee. However, the Commissioner of Income-tax, acting under Section 263 of the Act was of the opinion that the commission and subsidy were allowable only under Section 35C of the Act and since that Section was not operative for expenditure incurred after February 28, 1984, that expenditure should not have been allowed under Section 37(1) and the allowance by the Inspecting Assistant Commissioner (Assistant) of that expenditure was, therefore, erroneous and prejudicial to the interests of the Revenue. The Commissioner was also of the opinion that the arrangement the assessee-company had made with Jagat Jeet Industries Ltd., to receive only royalty by making over the other income to them, was not a real and genuine agreement and if proper enquiries were made, it would have come out that the assessee was the owner of the income while Jagat Jeet Industries would only be entitled to receive the royalty. The converse proposition was thus accepted as real by the Inspecting Assistant Commissioner (Assessment) without making proper enquiries. In order to rectify these mistakes, he initiated proceedings under Section 263 of the Act and eventually cancelled the assessments made by the Inspecting Assistant Commissioner (Assessment) and directed him to make fresh assessments, after giving certain positive directions. According to the Commissioner of Income-tax, the commission and subsidy was allowable only under Section 35C and not under Section 37 of the Act since the Finance Act, 1984, by amendment of Section 35C, had discontinued the tax concession in respect of the expenditure incurred after February 29, 1984. The expenditure incurred thereafter should not have been allowed.
5. The Tribunal has allowed the appeal preferred by the respondent-assessee on the ground that the subsidy paid was part of the purchase price, so as the commission paid by the respondent. They were part of the expenditure incurred by the assessee towards purchase of sugar cane and was clearly allowable under Sub-section (1) of Section 37 of the Act.
6. We have heard learned Counsel for the parties.
7. We find that it is not in dispute that the amount of subsidy and commission had actually been paid by the respondent-assessee to the cane growers. It does form part of the cane price and, thus, was allowable under Sub-section (1) of Section 37 of the Act.
8. In view of the foregoing discussions, the question referred to us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs.