ORDER
Per Shri M. M. Cherian, Accountant Member – These appeals filed by the assessee are against the orders of the CIT (Appeals) for the assessment year 1977-78 to 1984-85. The ground which is common for all the years is regarding the claim for weighted deductions under section 35C of the IT Act. For the assessment years 1983-84 and 1984-85, apart form deduction under section 35C, there are also other grounds raised by the assessee. Since the aforesaid appeals involve common ground, they are heard together and disposed of this common consolidated order for the sake of convenience.
2. The assessee is a co-operative society, running a sugar factory at Palacode in Dharmapuri District. For manufacturing sugar in the factor, the assessee purchases sugar-cane form registered cane growers. In computing the total income for the years under consideration, the assessee claimed weighted deduction of 11/5 times under section 35C of the I. T. Act on the amounts paid to the cane growers as early and late planting subsidy. In the assessment, the claim was disallowed on the view that the section does not provide for weighted deduction on expenditure incurred as lumpsum payment to the agriculturists. The assessees appeal before the CIT (Appeals) was not successful as he conquered with the view of the Assessing Officer that the claim for deduction was not on expenditure in the provision of any goods, services or facilities specified in clause (b) of section 35C. The assessee is in appeal before this Tribunal with the plea that the CIT (Appeals) was not justified in confirming the denial of the weighted deductions, on the early and late planting subsidy paid to the cane growers.
3. On behalf of the assessee, Shri Sankararaman C. A., submitted that the reason given by the Assessing Officer to deny weighted deduction on the ground that the payment was cash subsidy to the cane growers was not justified in law as there was nothing in the section to support the view that cash payment was outside the purview of the section. The learned counsel explained that the Society was operating a sugar mill as a seasonal business and after crushing sugar-cane received during the regular season, the mill would remain closed for some months in the year. Normally, the crushing season is form November to April and during the remaining period, the mill would remain idle. The learned counsel for the assessee further stated that it was in the interest of the Society to see that sugar-cane come to the factory in the remaining months also so that crushing season con be prolonged and that was possible only by encouraging the farmers to bring a sugar-cane beyond the normal crushing season. The learned counsel for the assessee submitted that the farmers would not be interested in early cultivation or late cultivation as that would adversely affect crop on account of climatic conditions and also for low sugar content. The sugar mills encourage the farmers to make early or late cultivation for which for they would be compensated for the loss resulting from unseasonal cultivation. It was explained. That such compensation was given as early planting subsidy or late planting subsidy. Shri Sankararaman clarified that sugar-cane growers would receive subsidy at a fixed rate as per the quantity of sugar-cane supplied to the mill during specified periods, i.e. earlier or later that the normal crushing season. It is in respect of such payments, the assessee has claimed weighted deduction under section 35C.
4. According to the counsel for the assessee, though the assessee was paying cash to the agriculturists, it was only a reimbursement of the expenditure incurred by them in making out of season cultivation and such payment should be viewed as expenditure falling under clause (b) for the purpose of relief under section 35C. According to the learned counsel for the assessee, instead of the assessee providing the goods, services and facilities to the cane growers, they were allowed to incur the expenditure first and then when the society paid the cash subsidy and so it was only case of reimbursement of the expenditure incurred by them. Referring to the decision of Punjab and Haryana High Court in the case of CIT v. Saraswati Industrial Syndicate Ltd. (No. 1) [1989] 178 ITR 171, Shri Sankararaman submitted that what was important is the substance of the transaction and that merely because the payment was shown as cash subsidy, it was not correct to deny the deduction without appreciating the real nature of the payment.
5. The learned counsel for the assessee also placed reliance on the decision of the Special Bench of the ITAT, in the case of K. C. P. Ltd. v. ITO [1990] 34 ITD 50 (Hyd.). It was pointed out that in the case K. C. P. Ltd. (supra), the assessee was allowed deduction on the cash subsidy paid to the agriculturists towards higher price of superior variety of seeds. Shri Sundararaman submitted that in the present case also, what the assessee paid to the cane growers as cash subsidy was entitled to deduction in view of the decision of the Special Bench of the ITAT and that the CIT (Appeals) was not correct in relying on the Circular No. 6-7-1968 issued by the C. B. D. T., to take a contrary view.
6. The learned Departmental Representative drew our attention to the provisions of sections of section 35C which appears under the heading “Agricultural development expenses” and explained that the intention behind the legislation introduced by Finance Act 1968 was to encourage agricultural development. Referring to Circular 6P dated 6-7-1968, the learned Departmental Representative submitted that the Finance Act 1968 introduced the provision with a view to encouraging the industries to incur expenditure on providing input other services for the improvement of agricultural productivity, Scientific research in spheres of agriculture, husbandry etc., and that in the present case, by giving cash payment by way of subsidy to the cane growers the assessee was not incurring any expenditure on providing goods, services or facilities for the improvement of the agricultural productivity. The learned Departmental Representative laid emphasis on the wording of the section to show that for getting the benefit of weighted deduction, the expenditure should be incurred in the provision of any goods, services or facilities specified in clause (b) and that from a reading of clause (b) it was clear that the expenditure should be relatable to any to one or more of the three types of expenses mentioned therein. It was pointed out that the assessee had made a lumpsum payment to the cultivators on the basis of the weight of sugar-cane supplied during certain periods and that the same was not relatable to any of the goods, services or facilities appearing in clause (b) Referring to the decision of the Special Bench of the I. T. A. T., reported in K. C. P. Ltd.s case (supra). the learned Departmental Representative stated that that was a case where the payment made by the assessee towards the additional expenses incurred on the purchase of special variety of seeds by the agriculturists and that the assessee had encouraged them to make such purchases. It was submitted that there was a finding by the Tribunal that instead of the assessee purchasing and supplying the seeds to the cultivators, they were encouraged to purchase the seeds directly and so, it was the expenditure incurred by the assessee indirectly on the supply of seeds According to the learned Departmental Representative, the present case was distinguishable as the amount paid by the assessee was not relatable to the purchase of any items like seeds, fertilizers or supply of any services or facilities to the agriculturists. It was argued that the CIT (Appeals) was justified confirming the denial of weighted deduction as the conditions under section 35C of the IT Act were not fulfilled.
7. Section 35C, providing for weighted deduction on agricultural development allowance reads as under :-
“35C (1)(a) Where any company or a co-operative society is engaged in the manufacture or processing of any article or thing which is made from, or used in such manufacture or processing as raw materials, any product or agriculture, animal husbandry, or dairy or poultry farming, and has incurred, after the 29th day of February, 1968, whether directly or through an association or body which has been approved for the purpose of this section by the prescribed authority, any expenditure in the provision of any goods, services or facilities specified in clause (b) to a person (not being a person referred to in clause (b) of sub-section (2) of section 40 (A) who is cultivator, grower or producer of such product in India, the company or co-operative society shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-fifth times the amount of such expenditure incurred during the previous year.
(b) the goods, services or facilities referred to in clause (a) are the following :-
(i) fertilisers, seeds, concentrates for cattle and poultry feed, tools or implements for use by such cultivators, grower or producer,
(ii) dissemination of information on, or demonstration of, techniques or method of agriculture, animal husbandry or dairy or poultry farming or advice on such techniques or methods;
(iii) such other goods, services or facilities as may be prescribed.
Explanation : In computing the expenditure with reference to which deduction under this section is to be allowed, the amount, if any, received by the company or co-operative society in consideration of or as compensation for, such goods, services or facilities shall be deducted.
2. Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure of the nature specified in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.”
8. The expression “incurred” any expenditure in the provision of any goods, services or facilities specified in clause (b) used in section 35C does indicate that the claim should be in respect of expenditure incurred on the items specified in clause (b). It is for the assessee to show that the claim is in respect of the expenditure incurred on the supply of goods, services or facilities. In the present case, it is not the assessees claim that they have incurred the expenditure on any of the items falling in clause (b). It is also not the case of reimbursement to the cane growers, the expenditure incurred by them on the purchase of fertilisers, seeds, pesticides or other goods or on services or facilities falling in clause (b). Admittedly, an amount was paid to the cane growers on the basis of the tonnage of sugarcane supplied during certain periods outside the normal crushing season. As pointed out by the learned Departmental Representative, the payment is not relatable to any goods, services or facilities appearing in clause (b). In the case of K. C. P. Ltd. (supra), the following observation of the Special Bench of the ITAT is quite relevant :-
“The expression incurred…. any expenditure in the provision of any goods…. specified in clause (b) used in section 35C does not necessarily mean that the assessee itself must have directly purchased the goods and supplied the same to the agriculturist…. In other words, from the method adopted by the assessee, it can be specifically said that the assessee was providing high quality seeds though the expenditure incurred on such seeds was incurred as cash subsidy. The reimbursement of expenditure incurred by the agriculturists in the purchase of specified goods is none-the-less expenditure incurred by the assessee in the provision of specified goods and what the section requires is that the assessee must have incurred the expenditure in the provision of specified goods and there is no necessity to import into the section the meaning as canvassed by the Revenue that the expenditure must be incurred on the provision of goods by the assessee itself before the same provided by the agriculturist.”
9. In that case, the Tribunal noticed that the assessee has provided high quality seeds though the expenditure on providing such seeds was described as cash subsidy in its accounts. In the present case, the claim is not on wrong nomenclature made in respect of any expenditure incurred on the provision of any goods, services or facilities to the cane growers. The decision of the special bench of the Tribunal is thus distinguishable on facts. In only supports the view that for becoming eligible for weighted deduction under section 35C, the expenditure must have been incurred in the provision of goods, services or facilities. The other decision relied upon by the assessees counsel in Saraswati Industrial Syndicate Ltd. (No. 1) s case (supra) is concerned with the relief under section 80G and the Court held that the provision of section 80G were not to be strictly construed. Even if this is accepted, as argued by the assessees counsel that what is important is the substance of the transaction for considering the deduction under section 35C still it is difficult to see how the transaction in the present case being payment of cash on the basis of the weight of the sugar-cane supplied by the agriculturists to compensate for the loss incurred by them on early or late planting, would amount to reimbursement of the expenditure incurred on items specified in clause (b). Having regard to the provisions of section 35C of the I. T. Act, it is to be held that the payment made by the assessee as early and late planting subsidy to the cane growers does not quality for the weighted deduction. The CIT (Appeals) is, therefore, justified in confirming the order of the Assessing Officer, denying the deduction under section 35C.
10. The next ground which is common for the assessment years 1983-84 and 1984-85 is that the CIT (Appeals) erred in upholding the disallowance of the provision for Molasses Storage Fund. Before the Assessing Officer, the assessees plea was that the provision created towards Molasses Storage Fund was entitled to deduction in view of the decision of the I. T. A. T., in the case of other sugar factories. The CIT (Appeals) felt that in view of the decision of the Madhya Pradesh High Court in the case of Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182, the assessee was not entitled to deduct the provision for Molasses Storage Fund. It has been brought to our notice that this Tribunal has been taking the consistent view that such fund was to be allowed as a deduction in computing the total income. It is noticed that the SLP filed by the Revenue before the Supreme Court against the decision of the Karnataka High Court on this issue in the case of CIT v. Pandavapura Sahakari Sakhare Kharkhane has been dismissed vide 195 ITR (St.) 136. In view of the decision of the Supreme Court, it is to be held that the CIT (Appeals) is not justified in upholding the disallowance of the amount transferred to the Molasses upholding the disallowance of the amount transferred to the Molasses Storage Fund. The assessees appeal on this ground is, therefore, allowed.
11. There is another ground remaining to be disposed for the assessment year 1984-85 regarding the assessability of the amount shown as Excise Duty relief. In the case of Tamilnadu Sugar Mills Co-operative Society Ltd. [IT Appeal Nos. 3709 and 3710 (Mad.) of 1988 dated 19-10-1993], this Tribunal has taken the view that Excise Duty rebate should regarded as capital receipt and not forming part of the taxable income. We notice that in the assessees own case for the assessment years 1988-89 to 1990-91, the Tribunal has taken the same view regarding the Excise Duty rebate. Following the aforesaid decisions on this issue, the assessees appeal is allowed and the Assessing Officer is directed not to include Excise Duty rebate in computing the taxable income for the Assessment year 1984-85.
12. In the result, the appeals filed by the assessee for the Assessment years 1977-78 to 1982-83 are dismissed and the appeals for the Assessment year 1983-84 and 1984-85 are partly allowed.