1. This appeal by the Revenue is against the order of the Commissioner of Income-tax (Appeals), Coimbatore dated 18-12-1986 for the assessment year 1983-84, for which the previous year ended on 30-9-1982.
2. The assessee is a co-operative society engaged in the business of manufacture and sale of sugar.
4. Ground Nos. 2 to 4 are to the effect that the CIT (Appeals) erred in allowing deduction for the sum of Rs. 65 lakhs as claimed by the assessee under Section 35CCA of Income-tax Act, 1961 towards contribution to Tamil Nadu Rural Reconstruction Association (hereinafter referred to as 'TARRA' for short), that he failed to note that the date on which the payment was made, there was no approved programme of rural development and the execution of the projects was carried out by the assessee itself and not by TARRA, the approved institution, and that he failed to note that the programmes implemented were not in accordance with the projects approved by the relevant authority.
According to the assessing officer, the assessee had claimed deduction of Rs. 70 lakhs under Section 35CCA being the amount paid to TARRA for rural development. TARRA is an association recognised for the purposes of Section 35CCA. From the details furnished by the assessee, it was observed that four out of five programmes of rural development were approved by the State Level Committee on 11-11-1982 only, i.e., after the closure of the previous year. As one of the preconditions for the allowance of deduction under Section 35CCA is that the programme of rural development has to be approved before payment was made, the Inspecting Assistant Commissioner, Salem Range, who examined the records, required the assessee to show cause under Section 144A as to why direction should not be issued to the Income-tax Officer to disallow the claim. In response to the letter issued, the assessee filed its reply in writing on 18-3-1986. After hearing the assessee, the IAC held that the assessee was not entitled to deduction under Section 35CCA in respect of the payment of Rs. 65 lakhs made by it to TARRA. Accordingly, the claim made by the assessee was allowed to the extent of Rs. 5 lakhs only and the balance of Rs. 65 lakhs was added back. A copy of the IAC's directions under Section 144A dated 27-3-1986 was made part of the assessment order passed by the assessing officer on 31-3-1986.
5. According to the IAC, on the date on which the payment was made, there was no approved programme of rural development and it was a pre-condition under Section 35CCA that both the association as well as the programme should be approved by the prescribed authority, as held by the Gujarat High Court in the case of Kaka Ba & Kala Budh Public Charitable Trust v. CIT [1984] 146 ITR 9. He found that out of the payment of Rs. 70 lakhs, a sum of Rs. 65 lakhs had been paid towards programmes which had not been approved on the date when such payment was made. After inspection and survey of the business premises of the assessee, the IAC found that there were several snags in the implementation of the so-called approved programmes which in effect violated the spirit of Section 35CCA. Tracing the chronological sequence of events leading to the payment, the IAC had argued that the approved programmes were not completed before 31-3-1983 and none of the assets like building etc. were handed over to the Government as stipulated. In the course of personal inspection, the IAC also found out that instead of construction of a building for a primary school at a cost of Rs. 55.94 lakhs, only a Polytechnic with vocational sheds had been put up. Two buildings were also constructed on a property belonging to the assessee without transferring the same in the name of TARRA. All the construction work including calling for the lenders, appointing contractors, supervision, negotiation with architect and actual financing were being done by the assessee-society only and therefore, there was clear evidence to show that TARRA had not carried out any approved programmes of rural development. Therefore, the IAC came to the conclusion that the conditions spelt out by the State Level Committee while giving approval for the programmes had been openly and flagrantly violated by the assessee in collusion with TARRA and that whole episode smacked of a tax avoidance device and that such devices were not permissible as was held by the Supreme Court in McDowell & Co.
Ltd. v. CTO [1985] 154 ITR 148.
6. In the appeal before the CIT (Appeals), the assessee's counsel assailed the allegation of the IAC that the payment made to TARRA was a kind of tax planning device resorted to avoid payment of tax. He objected to the allegation of the IAC that there was collusion between the assessee and TARRA with a view to hoodwink the Revenue authorities and to gain some wrongful advantage. He pointed out that the assessee was under the administrative and financial control of the Director of Sugar and came under the purview of the Industries Department of the Government of Tamil Nadu and the payment of Rs. 70 lakhs in question was given with the tacit approval of the Government and as per the specific direction of the Director of Sugar, Government of Tamil Nadu.
Comparing the provisions of Section 35CC A with the provisions of Section 3 5CC of the Income-tax Act, 1961, the assessee's counsel pointed out that prior approval of the programmes of rural development was a pe-condition only for the purposes of Section 35CC and that if the legislature intended that such prior approval of the programmes was necessary for Section 35CCAalso.it could have been explicitly mentioned in the said Section itself. While Section 35CC of the Act clearly stipulated that the approval of the prescribed authority should be obtained by the assessee in respect of rural development programmes before incurring the expenditure, there was no such pre-condition in Section under Section 35CCA. Therefore, the IAC was wholly erroneous to argue that the programme should be approved by the prescribed authority on the date when the payment was given and that the sum paid should be actually meant for such approved programmes. The assessee's counsel further pointed out that the very intention behind the amendment of Sub-clause (2) of Section 35CCA with effect from 1-4-1983 prescribing a time limit for approval of the rural development programme and commencement of such programme would clearly indicate that before such amendment, prior approval of the rural development programme was not a pre-condition for allowing deduction 35CCA of the Act. The only pre-condition for allowing deduction under Section 35CCA was that the payment should be made to an approved association or an institution engaged in rural development programmes and such payment must be used for carrying out the programmes duly approved by the prescribed authority. No other condition could be imported into the section that would defeat the very purpose and object of the particular provisions for promoting rural development programmes. Adverting to the various inconsistencies and defects in the actual implementation of the programmes by TARRA as pointed out by the IAC, in his directions under Section 144A, the assessee's counsel contended that the assessing officer had no jurisdiction at all to enquire into the actual spending of the amount by the recipient and on that basis disallow the claim under Section 35CCA. The assessing officer had to satisfy himself that the donation/payment had been given to an agency engaged in rural development programme and that such programmes had been duly approved by the prescribed authority and nothing more. Referring to the various circulars issued by the CBDT in this regard, the assessee's counsel argued that it was not a condition precedent for the purposes of Section 35CC A that any snags, delay or defects in the actual implementation of the programmes would debar the assessee from claiming the deduction. He submitted that the assessee was assisting TARRA in the implementation of the approved programmes as the former was interested in the completion of such programmes without much delay. The programmes were implemented only by TARRA through the assistance of the Assistant Executive Engineer (PWD) at the assessee's premises under the control and supervision of Superintending Engineer, P.W.D. of Tamil Nadu Sugar Corporation. The counsel also filed before the CIT(A) the following documentary evidence to prove that the programmes were in fact carried out by TARRA with the assistance of the assessee : 1. Expenditure incurred as on date on the programme by TARRA duly certified by the Assistant Executive Engineer, P.W.D. 2. Minutes from TARRA appointing Assistant Engineer, P.W.D. to implement the programme with the supervision of Superintendent Engineer, Tamil Nadu Sugar Corporation.
3. Minutes of the meeting held on 27-9-1984 at the Chamber of Chief Executive Engineer, TARRA regarding school building including vocational training.
4. Auditor's certificate regarding the use of funds received from TARRA.As the above evidences were filed for the first time before him, the IAC(Asst.) was given an opportunity by the CIT (A) to go through these evidences and offer his comments. The IAC had submitted that only a polytechnic had been constructed in the assessee's premises euphemistically styled as vocational training school and, therefore, there was no construction of primary school building for education and to that extent the user of funds had not been in accordance with the approval of the programmes approved by the State Level Committee. The IAC was of the opinion that the assessee would not be entitled to any deduction under Section 35CCA to the extent of Rs. 55.94 lakhs only being expenditure on the construction of a polytechnic.
7. The CIT (Appeals) observed that a simple issue had been complicated and blown out of proportion by the assessing officer. According to him, the real controversy between the assessing officer and the assessee was with regard to the time of approval of the rural development programmes of TARRA by the State Level Committee. He found that by four separate proceedings - all dated 11-11-1982 - the State Level Committee had approved certain rural development programmes to be launched by TARRA and subsequently by their proceedings dated 31-8-1984 and 21-2-1985, the State Level Committee had granted revised approval for the following rural development programmes to be carried out by TARRA :4. Construction of hostel .. Rs. 5.00 Rs. 65.00 He also found that the State Level Committee had also extended the time limit for construction of the above projects up to 31-3-1985. After analysing the provisions of Section 35CCA, the CIT(A) did not agree with the IAC that it is a pre-condition for deduction under Section 35CCA that the rural development programmes should have been approved on the date when the assessee gives over moneys to an approved association. He held that it is not a pre-condition that the approval of the rural development programmes should precede the payment by way of donation to an approved agency. He further found that none of the circulars of the CBDT dated 17-5-1978, 18-7-1978 or 14-6-1979 clarify that donation under Section 35CCA should be made to an already approved rural development programme only. He finally held that the approval of the programmes in the assessee's case on 11-11-1982 did not stand in the way of the assessee claiming the deduction. He further observed that it had to be inferred that the State Level Committee had given its implied as well as tacit approval for the construction of a school building so as to accommodate higher secondary classes as well as vocational courses euphemistically referred to as polytechnic, and that the approval of the State Level Committee had not been violated in the matter of construction of school building. He also observed that there was ample evidence to show in the assessment records that TARRA had appointed an Assistant Executive Engineer, P.W.D. to implement the programmes with the supervision of Superintending Engineer of Tamil Nadu Sugar Corporation and the programmes of work had also been reviewed from time to time. He also observed that the assessee had been assisting TARRA in the matter of speedy implementation of the programmes. Finally he held that there was ample material evidence available in the records to indicate that the payment of Rs. 70 lakhs given by the assessee to TARRA had been used or being used by the latter only towards approved rural development programmes and there was nothing to indicate any collusion or deliberate attempt to defraud the Revenue by taking subterfuge under Section 35CCA or by misusing fiscal concessions. In that view he directed the assessing officer to allow deduction for the entire sum of Rs. 70 lakhs as claimed by the assessee under Section 35CCA of the Income-tax Act, 1961. Aggrieved by the order of the CIT (Appeals), the Revenue preferred the present appeal before the Tribunal.
8. The arguments of the Departmental Representative, who incidentally happened to be the IAC, who gave directions in the assessee's case under Section 144A, were to the following effect: The claim of the assessee is under Clause (a) of Sub-section (7) of Section 35CCA of the Income-tax Act, 1961. The assessee's accounting year ended on 30-9-1982. Admittedly the cheque for Rs. 70 lakhs was given by the assessee to TARRA on 30-9-1982. The programmes of rural development were approved by the State Level Committee on 11-11-1982. The wordings occurring in Section 35CCA(1)(a) are "programme of rural development approved by the prescribed authority". The word "approved" is in past tense and it is not equivalent to "to be approved". No support can be drawn from the first proviso to Section 35CC(1). So the rural development programme should have been approved by the prescribed authority before the payment was made by the assessee. Reliance is placed on the decision of the Gujarat High Court in the case of Kaka Ba & Kala Budh Public Charitable Trust's case, (supra). In the assessee's case before the Tribunal two questions arise for consideration: (7) Whether the approval of the programme of rural development and the association should precede the expenditure (2) even if the first condition that the approval of the programme need not precede the expenditure is accepted, can the amount be spent by the association i.e., the recipient on programmes other than approved programmes and in such circumstances whether the assessee is entitled to the deduction In this assessee's case, TARRA constructed a polytechnic instead of a primary school as approved by the State Level Committee. In addition to the above arguments, attention is invited to the discrepancies or irregularities pointed out in the directions under Section 144 A issued on 27-3-1986.
9. The assessee's counsel filed a paper book of 46 pages and reiterated his contentions advanced before the CIT(A) and supported the order of the CIT(A). He submitted that the assessee and TARRA are two Government institutions and are alarm's length. The payment of Rs. 70 lakhs has been made to the TARRA as per the permission of the Industries Department, Government of Tamil Nadu dated 30-9-1982placedatpage34ofthepaper book. TARRA and the rural development programmes were approved before 1-3-1983 as laid down in the amended Section 35CCA(2)(a). The IAC in his directions under Section 144A alleged collusion between the assessee and TARRA and flouting of the provisions of Section 35CCA in the guise of tax avoidance and tax planning and invoked the judgment of the Supreme Court in McDowell & Co. Ltd.'s case (supra). As already mentioned above, the assessee and TARRA are Government bodies and the invoking of the case of McDowell is an argument in desperation. Further, the decision of the Gujarat High Court in the case of Kaka Ba & Kala Budh Public Charitable Trust (supra) is not applicable.
10. We have considered the rival submissions, papers filed before us and the case law cited. Section 35CCA(1)(a) and Section 35CCA(2) relevant to the assessee's case read as under : Section 35CCA. (1) where an assessee incurs any expenditure by way of payment of any sum- (a) to an association or institution, which has as its object the undertaking of any programme of rural development, to be used for carrying out any programme of rural development approved by the prescribed authority.
The assessee shall, subject to the provisions of Sub-section (2), be allowed a deduction of the amount of such expenditure incurred during the previous year.
(2) The deduction under Clause (a) of Sub-section (1) shall not be allowed in respect of expenditure by way of payment of any sum to any association or institution referred to in the said clause unless the assessee furnishes a certificate from such association or institution to the effect that - (a) the programme of rural development had been approved by the prescribed authority before the 1st day of March, 1983.
11. The C.B.D.T. in its Circular No. 240 dated 17-5-1978 stated that the deduction under Section 35CCA will not be allowed unless (a) the association or institution has as its object the undertaking of programmes of rural development; (b) the association or institution is for the time being approved by the prescribed authority and (c) the programme of rural development for which the sums are paid are approved by the prescribed authority. Neither the above section nor the above Circular does say that as on the date of incurring of the expenditure by the assessee, the association and the rural development programme should be approved by the prescribed authority. In simple words, the section as well as the Circular do not lay down that the approval of the association and the rural development programme should precede the expenditure. Even the Gujarat High Court in the case of Kaka Ba & Kala Budh Public Charitable Trust (supra), does not lay down that approval of the rural development programme should precede the expenditure. The said decision is on a different issue altogether. In this connection first proviso to Section 35CC (1) can be usefully referred. There it was laid down that the deduction under Section 35CC was allowable only when the assessee had obtained prior approval of the prescribed authority in respect of the programme of rural development before incurring the expenditure. (Emphasis supplied). Had the legislature intended that prior approval of the rural development programme before incurring the expenditure is necessary, it would have provided for the same in such explicit terms in Section 35CCA itself. In this view of the matter, we uphold the decision of the CIT (A) that it was not a pre-condition that the approval of the rural development programme should precede the payment by way of donation to an approved agency.
12. The other arguments of the Departmental Representative that the execution of the rural development programmes was carried out by the assessee itself and not by TARRA and that the programmes implemented were not in accordance with the programmes approved by the relevant authority are all irrelevant. It is not the concern of the assessing officer as to how the rural development programmes have been executed and implemented or whether such rural development programmes have been executed or not. In the same manner, the assessee is also not concerned with the same. However, in the present case, the assessee had only assisted TARRA in the speedy execution of the rural development programmes. The rural development programmes were in fact carried out by TARRA itself. In this regard the CIT(A) has given a specific finding in his appellate order and that finding has not been challenged in this appeal before us. Further, we are unable to agree with the argument by the Departmental Representative before us that TARRA has not constructed any polytechnic. It only constructed a school to accommodate "higher secondary classes and vocational courses" as mentioned in TARRA's letter dated 1-11-1984 and approved by the State Level Committee on 21-2-1985.
13. On the above facts and circumstances of the case, we hold that the CIT(A) is justified in allowing deduction of the sum of Rs. 65 lakhs claimed by the assessee under Section 35CCA towards the contribution to TARRA.14. Ground Nos. 5 and 6 are to the effect that the CIT (A) erred in allowing the assessee's claim for allowance of contribution towards molasses storage fund reserve.
15. According to the assessing officer, the assessee had deducted from the sale of molasses a sum of Rs. 3,49, 519 being the amount credited to molasses storage fund. In his directions under, Section 144A the IAC held that the transfer of Rs. 3,49,519 from the sale price to the molasses storage fund account was only an appropriation of profits and has directed - the ITO to add back the same. Accordingly the said amount was added in the assessee's total income by the ITO in his assessment order.
16. On appeal, the CIT (A), following the order of the Tribunal in the case of Sakthi Sugars Ltd. [IT Appeal No. 1121 (Mad.) of 1985], directed the assessing officer to allow the sum of Rs. 3,49,519 as deduction. The Revenue is aggrieved over this.
17. The Departmental Representative contended that the matter is to be held against the assessee in view of the decisions in the cases of CIT v. South Arcot District Cooperative Supply & Marketing Society Ltd. [1981] 127 ITR 467 (Mad.) and Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182. On the other hand, the assessee's counsel filed a copy of the Tribunal's order dated 24-10-1990 in the assessee's own case for the assessment year 1982-83 in IT A No. 1540/Mds/87in support of his contention that the amount of Rs. 3,49,519 was rightly directed to be deducted by the CIT(A).
18. We have considered the rival submissions. The matter is already concluded in favour of the assessee by our order dated 24-10-1990 in the assessee's own case for the assessment year 1982-83 (supra).
Following the said order, we uphold the direction of the CIT(A) in this regard.