M/S Kerala Agro Machinery Corporation Ltd., Athani v. Deputy Commissioner of Income Tax (Assessments), Special Range-I, Ernakulam & Commissioner of Income Tax, Cochin

**IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT :** **THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR** **&** **THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR** **THURSDAY, THE 21ST FEBRUARY 2008 / 2ND PHALGUNA 1929** **ITA.No. 128 of 2002()** **--------------------ITA.139/CO/1997 of I.T.A.TRIBUNAL,COCHIN BENCH** **....................** **APPELLANT IN ITA.139/C/97:-** **------------------------------------------** **M/S.KERALA AGRO MACHINERY CORPORATION LTD., ATHANI.** **BY ADV. SRI.P.BALACHANDRAN SMT.PREETHA S.NAIR** **RESPONDENTS: RESPONDENT IN ITA.139/C/97:-** **-------------------------------------------------------------------** ## **1. THE DEPUTY COMMISSIONER OF INCOMETAX** **(ASSMT), SPECIAL RANGE-I, ERNAKULAM.** **2. THE COMMISSIONER OF INCOME TAX, COCHIN** **BY** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/02/2008 ALONG WITH ITA.NO.144/2002, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ## **C.N. Ramachandran Nair & T.R. Ramachandran Nair, JJ.** **- - - - - - - - - - - - - - - - - - - - - - - -** **I.T.A.NOs.128 & 144 of 2002 - - - - -- - - - - - - - - - - - - - - - - - - - - Dated this the 21[th] day of February, 2008.** ## **JUDGMENT** ## C.N. Ramachandran Nair, J. These two appeals, one filed by the assessee and the other filed by the Revenue, arise from a common order passed by the Tribunal disposing of two appeals, one filed by the assessee and the other filed by the department for the assessment year 1994-95. The assessee, a fully owned Government of Kerala company, paid a contribution of Rs.40 lakhs during the previous year towards Kissan Nidhi Fund of the Government of Kerala. Similarly, an amount of Rs.12 lakhs was paid towards advance sales tax. The items of business expenditure claimed by the assessee included an amount of Rs.1,52,747/- towards cost of different components purchased for palm climbing devices. The assessing officer disallowed this amount on the ground that the expenditure was not for business purposes and in case was capital in nature. 2. In the first appeal, the first appellate authority allowed two items of expenditure above referred except the one pertaining to contribution paid ITA 128 & 144/2002 -2- to Kissan Nidhi Fund of the Government of Kerala. The assessee filed second appeal before the Tribunal against the confirmation of disallowance of contribution paid to Kissan Nidhi Fund and the department filed appeal against the order of the Commissioner of Income Tax (Appeals) allowing deduction of sales tax paid in advance and expenditure incurred for purchase of tree climbing devices. It is against the common order of the Tribunal that the assessee as well as the department have come up before this court in these appeals filed under Section 260A of the Income Tax Act. 3. We have heard learned Senior Counsel appearing for the Revenue and learned Senior Counsel appearing for the assessee. 4. The only question raised in the appeal filed by the assessee is whether the contribution paid by the company to Kissan Nidhi Fund at the request of the Government is allowable or not. While the case of the assessee is that it is engaged in production of agricultural equipments and the giving of awards by the Government to agriculturists, agricultural officers, scientists, etc. indirectly promotes the business of the company and so much so, it is an allowable deduction, learned Standing Counsel for the Revenue submitted that it is only a donation at the request of the Government and has nothing to do with the business of the company. The ITA 128 & 144/2002 -3- assessee has also relied on the decision of the Supreme Court in **Sri Venkata Satyanarayana Rice Mill Contractors Co. v. Commissioner of Income Tax** (223 ITR 101). On going through the orders of the authorities including that of the Tribunal, we find that Kissan Nidhi Fund formed by the Government of Kerala was part of the agricultural development policy. The amount is utilised for giving awards to outstanding farmers, agricultural officers, agricultural scientists, etc. The assessee is engaged in manufacture of agricultural equipments and implements like power tiller, tractors, etc. It is pertinent to note that the largest purchaser of agricultural equipments manufactured by the assessee is the Government of Kerala and in fact it is through various incentives in the farm sector, the Government encourages purchase of these items manufactured by the assessee. In the course of developing the agricultural sector, Government promotes marketing of the assessee's products. Further, the assessee being a fully owned Government of Kerala company, is bound by the instructions of the Government. The payment made is based on Government Orders and the payment is to a Fund which is operated by the Government for achieving all round development of agricultural sector. The Supreme Court in the decision above referred, held that any contribution made by the assessee to a public welfare fund ITA 128 & 144/2002 -4- which is directly connected or related to the carrying on the assessee's business or which results in benefit to the assessee's business, has to be regarded as an allowable deduction under Section 37(1) of the Act. Even though the expenditure has no direct nexus to the business of the assessee, we find that the activity for which the amount is spent by the company namely, agricultural development encourages mechanisation in agricultural operations which directly promotes sale of assessee's products. We are therefore of the view that the expenditure incurred is for business purpose and so much so, it is an allowable deduction under Section 37(1) as held by the Supreme Court in the decision above referred. 5. We, therefore, allow the appeal filed by the assessee by reversing the order of the Tribunal, with a direction to the assessing officer to allow the deduction. 6. So far as the appeal filed by the department is concerned, learned Standing Counsel submitted that the decision relied on by the Tribunal in allowing payment of sales tax paid in advance, is reversed by the decision of this court in I.T.R. No.181/2001. However, learned counsel for the assessee contended that every year sales tax is demanded in advance by the assessing officer and it is so paid. Sales tax is certainly an allowable ITA 128 & 144/2002 -5- deduction and it is to be allowed on actual payment basis, as provided under Section 43-B of the Act. If it is a regular practice of the assessee to pay advance tax every year based on demand by the officer and the same was being allowed on payment basis, then, it will not be correct to disallow the item for this year alone. Even if the claim is disallowed this year, the assessing officer is bound to allow it in the next year as the advance tax paid this year will be adjusted against liability for next year. This is a matter for verification by the officer and if the system followed by the assessee was accepted for other years by allowing claim on payment basis irrespective of the year of liability, we find nothing wrong in following the same on a regular basis. On the other hand, if the assessing officer finds that assessments are completed for other years also disallowing advance payments and by allowing liability of the year paid in that year, then he can sustain disallowance for this year. The matter is remanded to the assessing officer for reconsideration after verifying the provisions and subsequent years' assessments. 7. The last item involved is the expenditure incurred for purchase of equipment for tree climbing devices. The facts are not very clear. Since the department has no case that the assessee has created any asset, it cannot be ITA 128 & 144/2002 -6- treated as a capital expenditure. Since the two appellate authorities found that the expenditure did not result in development of any new item, it was rightly held that the same should be treated as revenue expenditure. We find no ground to interfere with the finding of the Tribunal. The appeal filed by the assessee is allowed and the appeal filed by the department is partly allowed remanding one issue and dismiss the other issue as stated above. **(C.N. Ramachandran Nair, Judge.)** **(T.R. Ramachandran Nair, Judge.)** **kav/** ITA 128 & 144/2002 -7- C.N. Ramachandran Nair & T.R. Ramachandran Nair, JJ. - - - - - - - - - - - - - - - - - - - - - - **I.T.A.NOs.128 & 144 of 2002** - - - - - - - - - - - - - - - - - - - - - - JUDGMENT 21[th] February, 2008. ITA 128 & 144/2002 -8-