2021 (3) TMI 528 - HC - Income Tax

Allowable business expenditure - monetary incentive provided to various District Central Co-operative Banks (DCCB's) and Primary Agricultural Co-operative Societies (PACS) - HELD THAT - AO as relying on Circular issued by Central Board of Direct Taxes dated 22.08.1973 has already allowed the incentive paid to member bank by the assessee for the Assessment Year 2008-09 as revenue expenditure. The Commissioner of Income Tax (Appeals) has also while placing reliance on the circular issued by the Central Board of Direct Taxes (CBDT) has held that the Assessing Officer has misunderstood the term 'net profit' used in Act, which differs from the expression 'net profit' as used in the context of provisions of Income Tax Act, 1961. It has further been held that the aforesaid circular allows payment which are made in the nature of incentives and since, the payment in question has been made by the assessee to its member banks as incentives, the aforesaid amount is allowable as expenditure. The assessee has incurred the expenditure during the course of the business which was duly approved by the board of the assessee in its meeting. Revenue is not opposed to the action of the assessee giving incentives to the member banks but is only opposed to the manner in which the incentive has been paid. It is not for the revenue to decide how the incentive has to be paid by the assessee to its member banks and the revenue cannot sit in an armchair of the businessman and to decide as to the manner in which payment has to be made. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered in favour of the assessee.

Summary

Issues:
Whether the incentive payments made by a Co-operative Apex Bank to various District Central Co-operative Banks and Primary Agricultural Co-operative Societies constitute allowable expenditure under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Allowability of Incentive Payments as Business Expenditure
The appeal pertains to an assessment year where the Co-operative Apex Bank made incentive payments totaling ?4,45,00,000 to member banks. The Assessing Officer disallowed this amount as expenditure, considering it an appropriation of net profits. The Commissioner of Income Tax (Appeals) partly allowed the appeal, but the Income Tax Appellate Tribunal reversed this decision, disallowing the incentive payments. The central question is whether these payments qualify as business expenditure under Section 37 of the Act.

Issue 2: Assessee's Argument
The Senior Counsel for the assessee argued that the incentive payments were authorized by the Board of Directors for the development of the co-operative sector, not as an appropriation of net profits. They contended that the expenditure was solely for the business's purpose and not a mere distribution of profits. The counsel highlighted that the revenue should not dictate how incentives are paid to member banks, citing relevant case laws and Circular No.117 issued by the CBDT.

Issue 3: Revenue's Argument
In contrast, the revenue argued that the burden of proof lies with the assessee to show that expenses were incurred for business purposes. They claimed that since the expenses were paid before tax, they were personal in nature. The revenue supported the tribunal's decision, asserting that the incentive payments were a direct appropriation of profits, not a legitimate business expense.

Issue 4: Judicial Analysis
The High Court examined the legal framework, citing precedents such as SASSOON J. DAVID AND CO. P. LTD and MALAYALAM PLANTATIONS LTD. The Court emphasized that expenses need not be a compelling necessity to be deductible and that the business purpose criterion is broader than mere profit-making. The Court also noted that the revenue should adopt a prudent business perspective in assessing expenditure claims.

Issue 5: Court's Decision
After evaluating the arguments and legal principles, the Court found in favor of the assessee. The Court emphasized that the incentive payments were genuine business expenses, duly authorized and debited in the profit and loss account. The Court referenced a circular by the CBDT supporting the allowance of such payments as deductions. Consequently, the Court quashed the tribunal's decision and allowed the appeal, ruling that the incentive payments constituted legitimate business expenditure for the Co-operative Apex Bank.

In conclusion, the High Court's judgment clarified the criteria for determining allowable business expenditure under the Income Tax Act, emphasizing the broader scope of business purposes beyond mere profit-making and the need for a prudent business perspective in assessing expenditure claims.