2017 (4) TMI 1558 - HC - Income Tax

Business expenditure u/s 37 - contribution to PACs development fund and PACs managers salary security fund - HELD THAT - There is nothing in the statute to suggest, as argued, that the amount standing to its credit cannot be taken into consideration in arriving at the purchase price. For the purposes of sale to a State Board or Government, a different statute lays down how the price is to be fixed, and with it we are not here concerned. We must add that we asked Mr. Sachar to whom, in his submission, the amounts credited to the Contingencies Reverse were diverted. Mr. Sachar replied that they were diverted to and vested in the State Government. This, for the reasons set out above, is quite unacceptable. We hold that the amount credited to the Contingencies Reserve is not diverted by reason of an (3 of 4) ITA-254/2011 overriding obligation or title and, in determining the business profits of the assessee, it must be taken into account. Mr. Sachar contended that if the amount credited to the Contingencies Reserved was includible in the computation of the business income of the assessee, the amount so appropriated should be allowed as a business deduction, being expenditure necessary to carry on the assessee's business. As the Calcutta High Court has pointed out, there is no expenditure. The amount appropriated to the Contingencies Reserve is set apart to meet possible exigencies. It is not a provision for known, existing liabilities. - Decided against assessee.

Summary

Issues:
1. Deductibility of contribution to PACs development fund and PACs manager's salary security fund as business expenditure under section 37 of the Act.

Analysis:
The main issue in this case revolves around the deductibility of certain amounts as business expenditure under section 37 of the Act. The Tribunal had disallowed the deduction of a sum of ?3,24,000 towards contribution to PACs development fund and ?17,90,240 towards PACs manager's salary security fund. The Court framed the issue to determine whether the Tribunal was justified in holding that these amounts were not deductible as business expenditure. The Counsel for the respondent relied on the decision of the Supreme Court in the case of Associated Power Company Ltd. vs. Commissioner of Income Tax. The Supreme Court in this case clarified the application of the doctrine of diversion of income by reason of an overriding title, emphasizing that the monies which have to be put into reserves are not diverted away from the company. The Court concluded that the amounts credited to the Contingencies Reserve were not diverted and must be taken into account in determining the business profits of the assessee. Therefore, the Court upheld the Tribunal's decision disallowing the deduction of these amounts as business expenditure.

Another aspect of the judgment refers to the decision in the case of Liberty India vs. Commissioner of Income Tax, where the Supreme Court held that duty drawback, rebate, and similar items should not be treated as adjustments to the cost of purchase or manufacture of goods. These should be accounted for separately as revenue or income. The Court emphasized that duty drawback, DEPB benefits, and rebates cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for the purposes of Sections 80IA/80IB. The Court stated that such remissions would constitute an independent source of income beyond the direct nexus between profits and the industrial undertaking. The issue in this case was deemed to be squarely covered by the decisions in the aforementioned cases.

In conclusion, the Court answered the issue in favor of the department and against the assessee. The appeal challenging the Tribunal's decision was dismissed, affirming the disallowance of the deduction for contribution to PACs development fund and PACs manager's salary security fund as business expenditure under section 37 of the Act.