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  • provisions of section 68 of the Maharashtra Co-operative Societies Act read with rule 53 of the Rules
  • section 68 of the Maharashtra Co-operative Societies Act read with rule 53 of the Rules
  • assessee.7. Section 68 of the Maharashtra Co-operative Societies Act, 1960,
  • rule 53 of the Maharashtra Co-operative Societies Rules, 1961.
  • section 68 of the Maharashtra Co-operative Societies Act
  • Maharashtra Co-operative Societies Act, 1960
  • section 256(1) of the Income Tax Act, 1961,
  • Gujarat Co-operative Societies Act, 1961
  • section 37(1) of the Income Tax Act, 1961.
  • Co-operative Societies Act
  • INCOME TAX ACT 1961
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
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Acts
  • provisions of section 68 of the Maharashtra Co-operative Societies Act read with rule 53 of the Rules
  • section 68 of the Maharashtra Co-operative Societies Act read with rule 53 of the Rules
  • assessee.7. Section 68 of the Maharashtra Co-operative Societies Act, 1960,
  • rule 53 of the Maharashtra Co-operative Societies Rules, 1961.
  • section 68 of the Maharashtra Co-operative Societies Act
  • Maharashtra Co-operative Societies Act, 1960
  • section 256(1) of the Income Tax Act, 1961,
  • Gujarat Co-operative Societies Act, 1961
  • section 37(1) of the Income Tax Act, 1961.
  • Co-operative Societies Act
  • INCOME TAX ACT 1961
Smart Summary

Case Summary — Reference under section 256(1) of the Income Tax Act, 1961

Factual and Procedural Background

This reference arises under section 256(1) of the Income Tax Act, 1961, when the Income Tax Appellate Tribunal referred a question of law to this Court at the instance of the assessee. The assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960, engaged in the manufacture and sale of sugar. Under section 68 of that Act (as read with rule 53 of the Maharashtra Co-operative Societies Rules, 1961) the assessee was required to contribute annually to the education fund of the State federal society at prescribed rates (25 paise per ton of sugar crushed, subject to a maximum of Rs. 50,000 per year). The assessee paid Rs. 50,000 in each of the two relevant previous years and claimed those amounts as business expenditure deductions under section 37 of the Income Tax Act.

The Income Tax Officer initially allowed the deductions. The Commissioner of Income Tax, invoking section 263 of the Income Tax Act, revised that order saying the allowance was erroneous and prejudicial to the revenue, and directed recomputation disallowing the education fund contributions. The assessee appealed to the Income Tax Appellate Tribunal, which followed a Special Bench decision in Shri Panzara-Kan Sahakari Sakhar Karkhana Ltd. v. I.T.O and dismissed the appeals. The Tribunal's decision prompted this reference of the legal question by the assessee.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the contribution to the education fund under section 68 of the Maharashtra Co-operative Societies Act, 1960, is not allowable as business expenditure (i.e., not deductible under section 37 of the Income Tax Act, 1961)?

Arguments of the Parties

Assessee's Arguments (Appellant)

  • The contribution to the State federal society's education fund is an expenditure "wholly and exclusively for the purpose of the business" within the meaning of section 37(1) of the Income Tax Act because it is directly connected to carrying on the assessee's business of running a sugar factory (contribution levied per ton of sugar crushed).
  • The contribution is a statutory obligation under section 68 of the Maharashtra Co-operative Societies Act and thus should be allowable under section 37(1).
  • Reliance was placed on the Supreme Court decision in Sri Venkata Satyanarayan Rice Mill v. C.I.T (1997) 223 ITR 101 and the Gujarat High Court decision in M.D. Co-op. M.P. Union Ltd. v. C.I.T (1993) 203 ITR 601, which supported allowance of similar contributions.

Revenue's Arguments (Respondent)

  • The contribution is not an allowable deduction under section 37 because it was not incurred "wholly and exclusively" for the benefit of the assessee society; there is no sufficient relation between the contribution and any advantage obtained by the assessee.
  • Any benefit to the assessee from the education fund, if at all, is too meagre to establish even a causal relationship between payment and benefit.
  • There is no provision in the Co-operative Societies Act requiring deduction of such contributions in computing net income under the Income Tax Act; the payment was made only because the assessee was a co-operative sugar manufacturer (i.e., more of a statutory imposition than a business expenditure conferring benefit).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Shri Panzara-Kan Sahakari Sakhar Karkhana Ltd. v. Income-Tax Officer (Special Bench, ITAT, Pune, 29 April 1983) Tribunal Special Bench decision followed by the Tribunal below, which had held the contribution not allowable. The Court noted the Tribunal's reliance on this Special Bench decision but examined the legal position afresh and concluded that, on the facts and law, the contribution was allowable under section 37(1).
C.I.T v. Malayalam Plantations Ltd., (1964) 53 ITR 140 (Supreme Court) Defines the scope of the phrase "for the purposes of the business" in section 37: wider than "for the purpose of earning profits" and includes statutory dues and other acts incidental to carrying on a business. The Court applied this principle to hold that payment required because sugar was crushed (a statutory levy per ton) is directly connected to the carrying on of the business and thus can fall within section 37(1).
Sri Venkata Satyanarayan Rice Mill v. C.I.T, (1997) 223 ITR 101 (Supreme Court) Holds that a contribution to a public welfare fund which is directly connected to or results in benefit to the assessee's business is an allowable deduction under section 37(1), whether voluntary or made at the instance of authorities. The Court relied on this decision as a supporting precedent that contributions to public or welfare funds can be deductible if directly connected with the business; it analogised the facts and treated the precedent as supportive.
M.D. Co-operative M.P. Union Ltd. v. C.I.T, (1993) 203 ITR 601 (Gujarat High Court) Held that contribution to the education fund under the Gujarat Co-operative Societies Act was an allowable deduction under section 37. The Court cited this decision as an analogous High Court authority supportive of allowing deduction for statutory contributions to a co-operative education fund.

Court's Reasoning and Analysis

The Court analyzed the matter principally under section 37(1) of the Income Tax Act, 1961, which allows deduction of any expenditure "laid out or expended wholly and exclusively for the purposes of the business" subject to specified exceptions. The key legal question was whether the contribution to the education fund under section 68 of the Maharashtra Co-operative Societies Act—computed at 25 paise per ton of sugar crushed, capped at Rs. 50,000 per year—was "wholly and exclusively for the purposes of the business."

The Court first recalled the settled meaning of "for the purposes of the business" from C.I.T v. Malayalam Plantations Ltd.: the phrase is wide, broader than "for the purpose of earning profits," and can encompass statutory dues and acts incidental to carrying on business, provided the expenditure is incurred by the assessee in the capacity of a person carrying on the business and is connected to the business.

The Court then considered the statutory scheme: section 68 of the Maharashtra Co-operative Societies Act, read with rule 53 of the Rules, imposed a levy tied directly to the activity of crushing sugar—if no sugarcane were crushed, no contribution would be payable. Because the obligation to pay arose by virtue of carrying on the business of the sugar factory (the contribution rate being per ton crushed), the Court held the expenditure to be directly connected or related to the carrying on of the assessee's business.

The Court examined and relied on relevant authorities that treat contributions to public or welfare funds as deductible where a direct connection to business can be shown. It cited Sri Venkata Satyanarayan Rice Mill v. C.I.T, where the Supreme Court held that contributions to a public welfare fund directly connected with business are deductible under section 37(1), and the Gujarat High Court decision in M.D. Co-operative M.P. Union Ltd. v. C.I.T, which held that contributions to an education fund under the Gujarat Co-operative Societies Act were allowable.

Taking the statutory obligation and the causal nexus between the levy and the business activity together, the Court concluded that the contribution was an expenditure incurred in the carrying on of business and thus fell within the scope of section 37(1). The Court observed that the assessee's case was on stronger footing because the contribution was not voluntary but a statutory obligation arising directly out of the business activity.

Holding and Implications

Holding: The reference is answered in the negative — in other words, the Tribunal was not correct in holding that the contribution under section 68 of the Maharashtra Co-operative Societies Act was not allowable as business expenditure. The Court answered the question in favour of the assessee and disposed of the reference accordingly.

Implications and direct consequences (as stated in the opinion):

  • The contribution paid by the assessee to the education fund of the State federal society for the assessment years in question is an allowable deduction under section 37(1) of the Income Tax Act, 1961.
  • The reference was disposed of in favour of the assessee, and the Court recorded "no order as to costs."

Reference answered in the negative.

    Krishna Sahakari Sakhar Karkhana Ltd. v. Commissioner Of Income Tax

    Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following question of law to this court for opinion at the instance of the assessee:

    “Whether on the facts and in the circumstance of the case, the Tribunal was right in holding that the contribution to Education Fund under Maharashtra Co-operative Societies Act, 1960 is not allowable as business expenditure?”

    2. This reference pertains to assessment years 1978–1979 and 1979–1980. The assessee is a Co-operative Society registered under the Maharashtra Co-operative Societies Act, 1960. It is engaged in the manufacture and sale of sugar. Under section 68 of the Maharashtra Co-operative Societies Act, it was required to make contribution to the education fund of the State federal society at the prescribed rates. The assessee society paid a sum of Rs. 50,000/- in each of the two previous years relevant to the assessment years 1978–1979 and 1979–1980. The assessee claimed deduction of the above amount in its assessments under the Income Tax Act, 1961 (“Act”) for the two assessment years as an allowable expenditure. The Income Tax Officer allowed the deduction. However, the Commissioner of Income Tax initiated proceedings under section 263 of the Act for suo motu revision of the above order of the Income Tax Officer as, in his opinion, the decision of the Income Tax Officer to allow the deduction of the amounts contributed by the assessee to the education fund was erroneous and prejudicial to the interest of the revenue and after hearing the assessee reversed the order of the Income Tax Officer and directed firm to re-compute the income by disallowing the claim of the assessee for deduction of the amount of contribution paid in the two assessment years to the education fund of the State federal society.

    3. Aggrieved by the order of the Commissioner of Income Tax, the assessee appealed to the Tribunal. The Tribunal, following a decision of its Special Bench in Shri Panzara-Kan Sahakari Sakhar Karkhana Ltd. v. Income-Tax Officer, dismissed the appeals of the assessee. Hence, this reference at the instance of the assessee.

    4. We have heard Mr. S.N Inamdar, learned counsel for the assessee. We have also heard Mr. K.B Bhujle, learned counsel for the assessee in Income Tax Reference No. 63 of 1986 wherein also identical question is involved. The contention of the learned counsel is that the contribution made by the assessee to the education fund of the State federal society is an expenditure incurred wholly and exclusively for the purpose of the business of the assessee which falls under section 37 of the Act. According to the learned counsel, the contribution to the education fund under section 68 of the Maharashtra Co-operative Societies Act is directly connected to the carrying on of the assessee's business. It was further contended that the contribution to the education fund being a statutory obligation of the assessee under the Co-operative Societies Act, it was an allowable deduction under section 37(1) of the Act. Reliance was placed in support of this contention on the latest decision of the Supreme Court in Sri Venkata Satyanarayan Rice Mill v. C.I.T; (1997) 223 ITR 101. Reliance was also placed on a decision of the Gujarat High Court in M.D Co-op. M.P Union Ltd. v. C.I.T, (1993) 203 ITR 601 where contribution made by the co-operative society to the education fund under the Gujarat Co-operative Societies Act, 1961 was held to be an allowable deduction under section 37 of the Act.

    5. Dr. V. Balsubramanian, learned counsel for the revenue, on the other hand, submitted that the contribution made by the assessee to the education fund was not an allowable deduction under section 37 of the Act inasmuch as the payment was not wholly and exclusively for the benefit of the assessee society. It was contended that there was no relation between the contribution made by the assessee society and any advantage gained by it as a result thereof. It was further contended that even if any advantage was obtained by the assessee from the education fund, it was too meagre to establish even a casual relationship between the contribution and the benefit. It was pointed out that there was no provision in the Co-operative Societies Act which required deduction of the amount of contribution made by the assessee in arriving at its net income. It was also contended that the payment was made only because the assessee was a manufacturer of sugar and a Co-operative Society.

    6. We have carefully considered the rival submissions. We have also perused the decision of the Special Bench of the Income Tax Appellate Tribunal, Pune dated 29th April, 1983 in Shri Panzara-Kan Sahakari Sakhar v. I.T.O which has been followed by the Tribunal in this case. Section 37 of the Act provides for deduction of any expenditure laid out or expended wholly and exclusively for the purposes of the business in computing the income chargeable under the head “Profits and gains of business or profession”. The only exception is capital expenditure or personal expenses of the assessee or expenditure of the nature described in other sections of Chapter IV of the Act. There is no dispute in this case about the fact that the expenditure incurred by the assessee by way of contribution to the education fund is not a capital expenditure or expenditure in the nature of personal expenses, or expenditure described in any of the sections in Chapter IV of the Act. The only controversy is whether the contribution to the education fund is an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee. So far as the scope and ambit of the expression “for the purpose of the business” is concerned, is well settled by the decision of the Supreme Court in C.I.T v. Malayalam Plantations Ltd., (1964) 53 ITR 140, that the expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. The only limitation is that the purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for carrying on business and the assessee should incur it in his capacity as a person carrying on the business. It cannot include sums spent for the purpose unconnected with the business. Therefore, the question that requires consideration in this case is whether the contribution to the education fund under section 68 of the Maharashtra Co-operative Societies Act is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee.

    7. section 68 of the Maharashtra Co-operative Societies Act, 1960, as it stood at the material time, reads as follows:

    “68. Contribution to education fund of the State federal society.— (1) Every society shall contribute annually towards the education fund of the State federal society which may be notified in this behalf by the State Government at such rate as may be prescribed, and different rates may be prescribed for different societies or classes of societies depending on their financial condition.

    (2) Every society shall pay its contributions to the said fund within two months from the date on which its accounts are adopted by the general body of members. Any officer wilfully failing to comply with the requirement of this section, shall be personally liable for making good the amount to the federal society notified as aforesaid.”

    8. The rates at which the contribution is to be made have been prescribed under rule 53 of the Maharashtra Co-operative Societies Rules, 1961. Under the said rule, different rates of contribution have been prescribed for different classes of societies. The rate of contribution applicable to co-operative sugar factories at the material time was 25 paise per ton of sugar crushed subject to a maximum of Rs. 50,000/- per year. Thus a co-operative society was obliged under section 68 of the Maharashtra Co-operative Societies Act to contribute to the education fund of the State federal society at the rate of 25 paise per ton of sugar crushed, the maximum contribution being Rs. 50,000/- per year. In the instant case, the assessee paid the maximum contribution in both the years.

    9. It is clear from the provisions of section 68 of the Maharashtra Co-operative Societies Act read with rule 53 of the Rules that it is a statutory obligation of the Co-operative Society to contribute to the education fund at the rates prescribed in rule 53. In the instant case, the assessee was liable to pay to education fund at the rate of 25 paise per ton of sugarcane crushed per year, subject, however, to maximum of Rs. 50,000/-. This contribution the assessee had to pay because it was carrying on business of running the sugar factory and was engaged in crushing sugarcane. If no sugarcane was crushed, no contribution was required to be paid to the education fund. That being so, it is clear that the contribution made by the assessee to the State federal society under section 68 of the Maharashtra Co-operative Societies Act read with rule 53 of the Rules was an expenditure directly connected or related to the carrying on of the assessee's business.

    10. As stated above, law is well settled that for the purpose of income tax, any contribution made or expenditure incurred by the assessee which is directly connected or related to the carrying on of the assessee's business or which results in the benefit to the assessee's business has to be regarded as allowable deduction under section 37(1) of the Income Tax Act, 1961. In the instant case, it is difficult to say that the contribution made by the assessee was not directly connected or related to the carrying on of the business of the assessee. In fact, it was a statutory obligation of the assessee to contribute the amounts in question to the education fund of the State federal society. It is, therefore, an allowable deduction under section 37(1) of the Act.

    11. Reference may be made in this connection to the decision of the Supreme Court in Sri Venkata Salyanarayan Rice Mill v. C.I.T, (1997) 223 ITR 101. In that case, the controversy was whether the contribution made by the assessee to the public welfare fund for getting permits from Andhra Pradesh for export of rice constituted business expenditure within the meaning of section 37 of the Act. The District Welfare Fund had been established pursuant to a scheme which had been evolved by the Rice Mills' Association in consultation with the District Collector. According to the said scheme, each member of the association was to deposit an amount of 50 paise per quintal of rice if he proposed to export the same from Andhra Pradesh. The deposit was to be made in Andhra Bank. The application for the export permit was in a form wherein the applicant had to state the amount of contribution deposited by him and the particulars of the bank, the challan number and the date. The assessee claimed the amount of contribution made by it to the District Welfare Fund as an allowable deduction under section 37 of the Act. The Income Tax Appellate Tribunal held that the contribution made by the assessee in pursuance of the above scheme was allowable under section 37(1) of the Act. While arriving at the above conclusion, the Tribunal observed that though there was no compulsion on the appellant to make a contribution to the welfare fund, still the contributions made in pursuance of the scheme which was evolved by the Rice Millers' Association in consultation with the District Collector would show that an advantage would ensue on the payment of the contribution and, therefore, the deduction was allowable under section 37(1) of the Act. The Tribunal also repelled the contention of the revenue that such contributions were opposed to public policy. However, on a reference at the instance of the revenue, the High Court held that the payment to the welfare fund was opposed to public policy and hence no deduction was allowable under section 37(1) of the Act. On appeal by the assessee, the Supreme Court reversed the decision of the High Court and held that any contribution made by the assessee to a public welfare fund which is directly connected or related with the carrying on of business or which results in benefit to the assessee's business has to be regarded as an allowance deduction under section 37(1) of the Act. It was further held that such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It was pointed out that the payment made by the assessee into the District Welfare Fund was not made as an illegal gratification. The legal position was summed up by the Supreme Court as follows:

    “……….any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of 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. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the asscssce's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of the amount under section 37(1) of the Act when such payment had been made for the purpose of the assessee's business.

    12. Reference may also be made in this connection to a decision of the Gujarat High Court in M.D Co-operative M.P Union Ltd. v. C.I.T, (1993) 203 ITR 601. In that case also, the controversy was regarding the allowability of deduction under section 37 of the Act of the amount paid by the assessee to the education fund under the Gujarat Co-operative Societies Act, 1961. Nanavati, J. (as his Lordship then was), on perusal of the scheme of the Act, held that the contribution made by the assessee to the education fund was an allowable deduction under section 37 of the Act.

    13. In the instant case, the claim of assessee for deduction is on a still stronger footing. The contribution made by the assessee to the education fund of the State Federal Society was not voluntary. It was a statutory obligation of the assessee under section 68 of the Maharashtra Co-operative Societies Act and the making of the contribution was directly connected or related to the carrying on of the assessee's business. Such an expenditure squarely falls within the scope and ambit of section 37 of the Act and the same is an allowable deduction. That being so, the Tribunal was not correct in holding that the contribution made by the assessee under section 68 of the Maharashtra Co-operative Societies Act to the education fund of the State federal society was not allowable as a business expenditure.

    14. In view of the above, the question referred to us is answered in the negative and in favour of the assessee. Reference is disposed of accordingly with no order as to costs.

    Reference answered in the negative.
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    Krishna Sahakari Sakhar Karkhana Ltd. v. Commissioner Of Income Tax
    (Jul 17, 1997)