1972 (1) TMI 27 - HC - Income Tax

Business of the manufacture and sale of sugar - contributions to a scheme for raising average yield of sugarcane - direct benefit to the business carried on by the assessee - enduring advantage - Tribunal was not right in holding that the contribution of Rs. 24,000 made by the assessee to the Development Council was not an allowable deduction under the Income-tax Act

Summary

Issues:
1. Allowability of deduction for contribution to Development Council for intensive cane development in the area for assessment year 1964-65.
2. Allowability of deduction for similar contribution made for assessment year 1965-66.

Analysis:
1. The assessee, a private limited company engaged in the sugar business, contributed Rs. 24,000 to a Development Council for intensive cane development in the area. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal rejected the deduction claim, citing an enduring benefit and capital nature of the expenditure. The Tribunal held that the expenditure was outside the legitimate purposes of the assessee's business. The High Court disagreed, emphasizing that the payment was made to benefit the business, and the scheme's formulation by the government did not negate this purpose. The Court found that the expenditure was for the day-to-day carrying on of the business, making it revenue in nature. The Tribunal's considerations were deemed insufficient to reject the claim, and the deduction was allowed for the assessment year 1964-65.

2. For the assessment year 1965-66, a similar contribution of Rs. 24,000 was made to the Development Council. Initially disallowed by the Income-tax Officer and Appellate Assistant Commissioner, the claim was accepted by the Tribunal upon considering additional material. The Tribunal found that the canegrowers were bound to sell their produce to the assessee and that the assessee voluntarily joined the scheme. The High Court concurred with the Tribunal's decision, highlighting that the expenditure directly benefited the business by increasing sugarcane yield. Citing a Supreme Court case, the Court emphasized that the expenditure was incurred for running the business without conferring an enduring benefit. Consequently, the deduction claim for the assessment year 1965-66 was allowed.

3. The High Court's decision in favor of the assessee for both assessment years was based on the business-centric perspective and the direct benefit derived from the contributions to the Development Council. The Court found that the expenditures were revenue in nature, aimed at enhancing the business operations without creating enduring benefits. Therefore, the deductions were deemed allowable under the Income-tax Act. The assessee was awarded costs for the legal proceedings.