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2022 (10) TMI 552 - HC - Income TaxDeduction u/s 36(1)(viii) - long term finance for agricultural and industrial development - AO declined to allow the deduction on the ground that notification declaring the assessee as a financial institution was issued on 23.02.2004, which fell in the subsequent year - Assessee in computation of the income has claimed deduction contending that it has provided long term financing for agricultural development and therefore eligible for deduction under section 36(1)(viii) of the Act to the extent of profit derived from such activities subject to creation of special reserve - HELD THAT - In determining the liability of a subject to tax, regard must be had to the strict letter of law and if the revenue would satisfy the Court that case falls strictly within the provisions of the law, necessarily the assessee has to be taxed. In interpreting the Taxing Statute, equitable construction are entirely out of place. The Court would look into the words of Statute and interpret them. Taxing Statute cannot be interpreted on any presumption or assumptions. It cannot import the provisions in the Statute so as to supply any assumed deficiency. It is trite law that exemption notification is to be read strictly and burden is on the assessee to prove that item falls within the four corners of such exemption notification. An exemption notification should be given a liberal meaning. Recourse to other principles or cannons of interpretation of Statute would be resorted to only in the event of the same giving rise to anomaly or absurdity. The exemption given under the notification or Statute must be construed having regard to the purpose and object sought to be achieved. Insofar as the contention of assessee that section 35C also provided for allowing deduction, the amount of expenditure relatable to agricultural development and the expression used in section 36(1)(viii)(b)(i)(A) requires to be considered for the purposes of outright rejection, inasmuch as the very provision namely section 35C itself provides that where any Company or a co-operative society is engaged in the manufacture or processing of any article or thing which is made from, or uses in such manufacture or processing as raw material, any product of agriculture, animal husbandry, or diary or poultry farming, and has incurred after the 29th day of February, 1968 but before the 1st day of March, 1984 , whether directly or through an association or body which has been approved for the purposes of this section by the prescribed authority, any expenditure in the provision of any goods, services or facilities specified in clause (b) to a person (not being a person referred to in clause (b) of sub-section (2) of section 40A) who is a cultivator, grower or producer of such product in India, the company (or co-operative society) shall, subject to the provision of this section, be allowed a deduction of the amount of such expenditure incurred during the previous year. Whereas said provision pressed into service would not include or extend to the expression or phrase Industrial or agricultural development by taking within its sweep the dairy or animal husbandry activity. Contention raised by assessee cannot be accepted. Hence, we are of the considered view that providing long term finance for industrial or agricultural development to various diary cooperations cannot be covered as long term finance extended for agricultural or industrial development. Decided in favour of revenue. Deduction on account of payment of gratuity u/s 43B - amount was contributed to NDDB employees group gratuity cum life assurance scheme and as such claimed deduction - assessee was awaiting the approval and non approval does not amount to non recognition . Hence, it was contended that in terms of section 43B(b) - HELD THAT - A mere intimation is to be made in absence of any withdrawal of earlier approval, at this stage, we may state that for long period of 15 years, scheme remained inoperative, without continuance of approval and when we see communications which are sought to be relied upon clearly indicate that even assessee was also in clear understanding about the requirement of approval. In no uncertain terms, said communications dated 23.9.2003, 1.4.2004, 12.4.2004 and 17.8.2004 indicate that it is the appellant assessee who submitted deed of variation on 23.9.2003 onwards and sought specific approval. Not only this communication dated 23.9.2003 but subsequent reminders also clearly suggest that what has been sought for is approval and as such, the assessee itself was conscious about the situation of seeking approval. As a result of this, a conjoint effect of sequence of events, as stated above, and in view of the literal meaning of relevant provisions, we are of the considered opinion that no error is committed by the authorities below in disallowing deduction sought for by the assessee and as such, we hereby answer the substantial question No.(F) in favour of the revenue.
Issues Involved:
1. Disallowance of deduction under Section 36(1)(viii) for Rs.9,90,00,000. 2. Classification of 'dairying' as an industry or agricultural development under Section 36(1)(iii). 3. Deduction under Section 36(1)(viii) in the absence of share capital. 4. Deductibility of grants given to cooperative societies under Section 36(1)(xii). 5. Allowance of contributions to National Dairy Development Board Employees Group Gratuity Funds without approval. Detailed Analysis: Issue 1: Disallowance of Deduction under Section 36(1)(viii) The court examined whether the assessee, engaged in providing long-term finance for agricultural and industrial development, was entitled to a deduction of Rs.9.90 Crores under Section 36(1)(viii). The assessing officer disallowed the deduction, stating the assessee was notified as a Public Financial Institution (PFI) only after the relevant assessment year, and the activity of dairy business was not considered agricultural or industrial development. The court upheld this view, emphasizing that the terms "agricultural development" and "industrial development" cannot be interpreted to include dairy activities, and the deduction requires a special reserve not exceeding twice the paid-up share capital, which the assessee lacked. Issue 2: Classification of 'Dairying' The court addressed whether 'dairying' could be classified as an industry or agricultural development for the purpose of Section 36(1)(iii). The court concluded that dairy activities do not fall under the category of agricultural or industrial development as per the definitions in the Income Tax Act and related statutes. The court emphasized that definitions from other statutes, like the Industrial Development Regulation Act, cannot be imported for interpreting tax provisions unless explicitly referenced. Issue 3: Deduction in Absence of Share Capital The court examined the requirement of share capital for claiming deductions under Section 36(1)(viii). The assessee argued that its own funds should be considered equivalent to share capital. However, the court rejected this argument, stating that the statute clearly requires paid-up share capital for creating a special reserve, and the absence of such capital makes the deduction indeterminable and hence not allowable. Issue 4: Deductibility of Grants to Cooperative Societies This issue was deemed academic as the Tribunal had already recalled its earlier order and remitted the matter to the Assessing Officer, who subsequently allowed the deduction. Since the revenue did not appeal against this decision, the court did not examine this issue further. Issue 5: Contributions to Gratuity Funds The court analyzed whether the contribution of Rs.5,61,56,408 to the National Dairy Development Board Employees Group Gratuity Funds was allowable without specific approval. The court noted that the original approval of the gratuity fund had lapsed, and the assessee had not obtained renewed approval during the relevant period. The court emphasized that contributions to an unapproved gratuity fund are not deductible under Section 43B and Section 40A(7) of the Income Tax Act. The court upheld the disallowance, stating that the statutory provisions require strict compliance, and the absence of approval rendered the contribution non-deductible. Conclusion: The court upheld the disallowance of deductions under Section 36(1)(viii) due to the lack of share capital and the non-classification of dairy activities as agricultural or industrial development. It also upheld the disallowance of contributions to the gratuity fund due to the lack of approval. The issue of grants to cooperative societies was not examined further as it had already been resolved in favor of the assessee by the Tribunal.
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