Delhi High Court
Commissioner Of Income Tax vs National Agricultural Co-Op. ... on 3 May, 2011
Author: M. L. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITAs No.839/2009 & 1037/2010
%
Date of Decision: 03.05.2011
Commissioner of Income Tax .... APPELLANT
Through: Ms. Prem Lata Bansal, Sr. Advocate with
Mr. Deepak Anand, Advocate for the
appellant.
Versus
National Agricultural Co-op. .... RESPONDENT
Marketing Federation of India
Limited
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Satyen Sethi, Advocate for the
respondent
CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
1. Whether reporters of Local papers be No
allowed to see the judgment?
2. To be referred to the reporter or not? Yes
3. Whether the judgment should be Yes
reported in the Digest?
M.L. MEHTA, J. (Oral)
*
1. These two appeals are under Section 260(A) of the Income Tax
Act (hereinafter referred to as "the Act"). ITA No.839/2009 is
against the impugned order dated 07.11.2008 of the Income Tax
Appellate Tribunal (hereinafter referred to as the "Tribunal") and
the ITA No.1037/2010 is against the impugned order dated 14th
May, 2009 of the Tribunal. In both these appeals, there is one
common question regarding the correctness of the order of the
Tribunal in deleting the addition made by the Assessing Officer
on proportionate basis out of total indirect expenses related to
PSS operations of the assessee.
2. In addition to this, there were raised two other questions in ITA
No.839/2009 - one related to the order of the Tribunal deleting
the addition made by the Assessing Officer on account of
disallowance of prior period expenses and the second regarding
the direction given by the Tribunal to the Assessing Officer to
allow deduction to the assessee under Section 80P(2)(d) of the
Act. Before dealing with the common question arising in both
the appeals regarding the expenses related to PSS operations of
the assessee, we may take up the additional questions which
were raised in ITA No.839/2009, as noted above.
3. With regard to the addition made by the Assessing Officer on
account of disallowance of the prior period expenses of the
assessee, it may be stated that assessee preferred an appeal
against the said order of the Assessing Officer before CIT(A)
which passed the order in this regard in the following manner:
"b) In respect of the amount of Rs.15,29,671/-
pertaining to the prior period expenditure, the
appellant‟s arguments are that the AO did not
consider that as per the accounting policy being
followed by the appellant the expenses below
Rs.5,000/- are always accounted for in the year in
which they are incurred. This issue has been decided
in the appellant‟s own case for the immediately
preceding assessment year i.e. A.Y. 2003-04 in
Appeal No.226/06-07 vide appellate order dated
15.03.2007 under para 7.17 pages 85-87. It has
been held that following the order of ITAT "C" bench
for A.Y. 1989-90 in appellant‟s own case in ITA
No.226/D/88, the prior period expenses could not be
disallowed."
4. The Revenue filed appeal against the aforesaid order of the
CIT(A) before the Tribunal, which confirmed the aforesaid
findings of the CIT(A) on the said issue. In making such a
confirmation, the Tribunal followed the decision of its Co-ordinate
Bench in the assessee‟s own case for the assessment year 1984-
85 in ITA No.2296/D/88 dated 12.8.1991. Faced with this
situation, learned counsel for the Revenue did not press this
ground. In view of this, nothing survives for us to dwell on this
issue.
5. With regard to the second issue that arises for consideration in
ITA No.839/2009 regarding the direction of the Tribunal to the
Assessing Officer to allow deductions under Section 80P(2)(d) of
the Act to the assessee, it may be noted that the assessee had
claimed deductions under this Section in respect of the dividend
received from other co-operative societies as per details as
mentioned in Annexure 9 of the Tax Audit Report. The
rectification order under Section 154 dated 7th February, 2007
was passed by the Assessing Officer in this regard. The
Assessing Officer disallowed the deduction vide the said order
and held the same to be not falling within the scope of Section
154 of the Act being not an error apparent on the record. The
CIT(A) in appeal while allowing the claim referred the matter
back to the Assessing Officer to verify the amount of claim. The
order in this regard came to be passed by the CIT(A) in the
following manner:
"10.5 ... It is noted that similar issue has been
decided in appellant‟s own case for A.Y. 2003-
04 in appeal No.226/06-07 vide appellant order
dated 15.3.2007. In para 20.6 page 329 of the
aforesaid order, it has been held that the
provisions of section 80P(2)(d) are very clear
about the income being exempt in respect of
investment made by one Society in another
Society. The action of the AO was, therefore,
directed to be deleted. Following the same, it
is held that the appellant is entitled to
deduction of Rs.10,54,409/- in respect of
dividend income received from other Co-
operative Societies u/s 80P(2)(d). The AO may,
however, verify the exact amount of claim in
this regard from annexure 9 of the Tax Audit
Report and allow the same as per law."
6. In appeal before the Tribunal, the Revenue again submitted that
the assessee was not entitled to deduction under Section
80P(2)(d) of the Act. While maintaining the order of the CIT(A),
the Tribunal recorded a finding in this regard as under:
"15.2 .... A perusal of para 10.5 of the order of the
learned CIT(Appeals) clearly shows that even
though the learned CIT(Appeals) has held that
the assessee is entitled to the deduction in
respect of the dividend received from other co-
operative societies as rightly provided in
section 80P(2)(d), he has given liberty to
Assessing Officer to verify the exact amount of
the claim in this regard from annexure 9 of the
tax audit report and to allow the same as per
law. This being so, it is noticed that the issue
has been restored to the file of Assessing
Officer and consequently no interference to the
findings of learned CIT(Appeals) is called for
and consequently ground No.3 is dismissed."
7. We have considered the submissions made by the learned
counsel for the Revenue as well as the assessee. There is no
dispute that the assessee was entitled to claim deduction in
respect of the dividend received from other co-operative
societies as per provisions of Section 80P(2)(d), in case it was so
able to prove the same on record. We do not see any infirmity or
perversity in the order of the CIT(A) and the Tribunal in this
regard whereby the matter has been remitted back to the
Assessing Officer to verify the exact amount of the claim from
Annexure 9 of the Tax Audit Report and allow the same as per
law. The contentions raised by the learned counsel for the
Revenue stand rejected.
8. With regard to the common question that arises regarding the
claim of indirect expenses relating to PSS operations of the
assessee, we may state that the order of the Tribunal dated 14 th
May, 2009 was passed for the assessment year 2003-2004
(related to ITA No.1037/2010) relying upon the order of the
Tribunal dated 07.11.2008 passed for the assessment year 2004-
05 (related to ITA No.839/2009). Therefore, we will confine to
the facts as borne out from ITA NO.839/2009 for considering this
question.
9. During the assessment year 2004-05, assessee filed return
declaring loss of Rs.2,96,87,782/-. During the assessment
proceedings, AO noticed that the assessee had not allocated any
direct expenses to PSS operations while it was acting as nodal
agency to the Government of India (GOI) according to which
profits of PSS were to be given to GOI and losses were to be
recovered from GOI. In the absence of any details, the assessee
allocated indirect expenses on proportionate basis in the ratio of
turnover of PSS operations to turn over of other activities, which
came to Rs.20,34,42,180/-. The Assessing Officer did not allow
deduction on this account of indirect expenses stating that it had
not furnished any computation as regard to the proportionate
allocation of indirect expenses for the PSS operations.
10. It may be stated that the assessee was carrying out PSS
operations on the part of the GOI. As per this scheme, assessee
was responsible for procuring and marketing a particular
agricultural commodity solely and exclusively on behalf of GOI in
order to provide minimum support price to the farmers. Any loss
or profit on account of such PSS operations is to the account of
GOI. The assessee was paid service charges at the rate of 1.5%
for non-perishable commodities and 2.5% for perishable
commodities on procurement cost in lieu of administrative and
overhead expenses.
11. In the assessment year 2004-05, the AO had stated that the
assessee had furnished letter dated 21st December, 2006 from
the Ministry of Agriculture, Government of India stating the
operations of PSS and that the assessee is to be paid service
charges at the rate of 1.5% for non-perishable commodities and
2.5% for perishable commodities on procurement costs under
PSS. The AO had further stated that non-charging of indirect
expenses attributable to the PSS operations is adversely
affecting the profitability of the assessee. Not being satisfied
with the explanation given by the assessee, the AO held that the
indirect expenses claimed in the P&L account of the assessee are
required to be apportioned in the ratio of turnover of PSS
operations to the turnover of other activities of the assessee. In
this way, the AO calculated a sum of Rs.20,34,42,180/- being
68.19% of the total turnover as indirect expenses related to PSS
operations. However, subsequently in the rectification order of
7th February, 2007 under Section 154 of the Act, the AO
recomputed the disallowance by reckoning the percentage of
PSS sales to the total sales at 5.87% and, therefore, reduced the
quantum of addition to an amount of Rs.1,78,11,260/-.
12. The assessee preferred appeal against the order of the AO before
CIT(A). The CIT(A) relying upon the order of the CIT(A) of the
same very assessee of the assessment year 2003-04 in appeal
No.226/06-07 dated 15th March, 2007 allowed the appeal of the
assessee on this account and proceeded to order the deletion of
the additions. The CIT(A) while disagreeing with the
proportionate disallowance of the indirect expenses of PSS
operations recorded as under:
"It has been held that there is no case for any
proportionate disallowance of the administrative
overheads being attributed by the AO to PSS
operations in appeal related to A.Y. 2003-04). It has
been also held that the expenditure in question has
been incurred on account of business expediency
which is ultimately designed to further the object and
purpose of the appellant‟s business and any
incidental benefit to a third party should not come in
the way of allowing such expenditure as business
expenditure. In view of the similar facts involved,
following the earlier appellate decision for A.Y. 2003-
04 discussed (supra), the addition on this account is
deleted."
13. In the appeal preferred by the Revenue against the order of
CIT(A) on this account, the Tribunal confirmed the order of the
CIT(A). In arriving at this the Tribunal gave the reasoning as
under:
"It is noticed that assessee is deriving a service
charge at 1.5% for non-perishable commodities and
2.5% for perishable commodities on the procurement
cost under the PSS scheme. It is also noticed that
the profits and losses on account of the PSS scheme
is on account of the Government. Thus, what
becomes evident here when the assessee is acting
as an agent of the Government in regard to the PSS
operations. The service charges received by the
assessee which is in the nature of commission is
included in the total receipts of the assessee. Thus,
what is done by assessee by acting as an agent of
the Government in the PSS operation is one of the
business activities of the assessee. Just because an
assessee does not make adequate profit or any profit
in a particular transaction it does not mean that
there can be any proportionate disallowance of
expenditure. The expenditure incurred by the
assessee are in the course of its normal business
activities and the genuineness of the same having
not been doubted, no disallowance is called for. In
this circumstance, the findings of the learned
CIT(Appeal) on this issue stands confirmed."
14. In both the cases before us, AO had worked out the percentage
of 68.19% (later reduced to 5.87%) for assessment year 2004-05
and 65.73% for assessment year 2003-04 on account of PSS
sales. We may note that Section 37 of the Act deals with
deletion of all expenses allowed wholly or exclusively for the
purpose of business or profession not being expenditure of the
nature particularly and specifically described under Sections 30
to 36. Analyzing the provisions of Section 37, the conditions
precedent for deduction of expenses under this Section are as
under:
(i) Expenditure must be revenue expenditure and
not in the nature of capital expenditure;
(ii) It must be laid out or expended wholly and
exclusively for the purpose of the business or
profession;
(iii) It must not be of the nature described in
Sections 30 to 36 and;
(iv) Expenditure should not be personal
expenditure of the assessee.
15. Considering to the above conditions laid down for claiming the
expenses as deductible, we may note that the assessee satisfies
all the conditions referred to above. It is not the case of the
Revenue that the expenses had not been incurred by the
assessee for the purpose of business or that they are not
genuine. In totality, we see that CIT(A) and the Tribunal rightly
recorded the gross impropriety committed by the AO in assuming
indirect expenses on proportionate basis to the total sale of the
assessee. It has been seen from the tenor of the scheme of PSS
that the assessee was only entitled to reimbursement of the
direct expenses as prescribed by GOI and this
arrangement/scheme is not challenged either by the Revenue or
by the Special Auditor. All the calculations done by the AO in
both the cases are based on surmises and conjectures.
16. We do not find any perversity or illegality in the orders of the
Tribunal in both the cases. Accordingly, the appeals are
dismissed.
M.L.MEHTA
(JUDGE)
A.K. SIKRI
MAY 03, 2011 (JUDGE)
„Dev‟
