TMI Blog1993 (2) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... ? (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 84/801 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 refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial 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 purpose 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 purpose 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 accounting 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 ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits are earned and dividends 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 regards 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 assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 year's 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 dividend to its members unless the said contribution is made to the Gujarat State Co-operative Union. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 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 year's 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gmenting 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 one's 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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