Case Law Details
CIT Vs National Agricultural Co-Op. Marketing Federation of India Ltd (Delhi High court)
The Delhi High Court considered an appeal involving three substantial questions of law. The first two questions related to the allowability of interest payable under an arbitral award as revenue expenditure and whether such interest could be allowed despite the provisions of Section 40(a)(i) of the Income Tax Act. The third question concerned the allowability of expenditure of ₹42,89,207 incurred on gifts, boarding, lodging, and related expenses during a General Body Meeting as business expenditure under Section 37 of the Act.
At the outset, counsel for the assessee submitted that the first two questions no longer required adjudication because the Supreme Court, in its judgment dated 22.04.2020 in National Agricultural Co-operative Marketing Federation of India v. Alimenta S.A., had set aside the arbitral award. Consequently, the question of payment of interest arising from that award no longer survived. The Revenue did not dispute that the underlying award had been set aside.
The High Court agreed that since the Supreme Court had set aside the award granting additional compensation, the liability to pay interest under that award also ceased to exist. Therefore, the issue relating to the allowability of interest expenditure did not survive. The Court further observed that since the assessee was not required to pay such interest, the allowability of the provision created for interest had to be reconsidered. Accordingly, it directed the Assessing Officer to disallow the deduction of ₹7,46,44,929 claimed by the assessee as provision for interest.
The third issue related to expenditure of ₹42,89,207 incurred towards gifts, boarding, lodging, and related expenses during the General Body Meeting of the society. The Revenue argued that the expenditure was excessive and could not be regarded as expenditure incurred wholly and exclusively for business purposes under Section 37. It was contended that such expenditure did not fall within the ambit of allowable business expenditure and had rightly been disallowed by the Assessing Officer.
The High Court rejected the Revenue’s contention and upheld the Tribunal’s view that the expenditure was allowable as business expenditure. The Court observed that holding a General Body Meeting is a statutory requirement for a company or society. Therefore, expenditure incurred for convening and conducting such a meeting cannot be regarded as unrelated to business purposes.
The Court held that the expression “business expenditure” under Section 37 should not be given a narrow or restrictive interpretation. According to the Court, business expenditure is not confined only to expenses directly connected with purchase, sale, or other core commercial transactions. It must be construed purposively and objectively. If expenditure is incurred to discharge a statutory obligation or to meet legitimate business requirements, such expenditure qualifies as business expenditure.
The Court further observed that the Assessing Officer cannot assume the role of the Board of Directors or financial controller to determine whether the amount spent was excessive. There was no dispute that the expenditure had actually been incurred for the General Body Meeting. The Court noted that providing small gifts and arranging boarding and lodging facilities for members, employees, and directors was a normal courtesy associated with such meetings.
The High Court also observed that the Tribunal’s conclusion was based on appreciation of facts and evidence available on record and essentially involved a finding of fact. Finding no legal error in the Tribunal’s approach, the Court answered the third substantial question of law in favour of the assessee and against the Revenue.
Accordingly, the appeal was dismissed. However, in view of the Supreme Court’s subsequent decision setting aside the arbitral award, the Court directed that the deduction of ₹7,46,44,929 claimed towards provision for interest be disallowed, since no liability to pay such interest survived.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. Following substantial questions of law had been framed in the instant appeal vide order dated 04.08.2014:-
“(i) Whether the Income Tax Appellate Tribunal was right in holding that interest due and payable under the award, operation of which had been stayed by the Supreme Court subject to furnishing of a bank guarantee, could be treated/allowed as revenue expenditure in the Profit and Loss Account of the respondent-assessee?
(ii) Whether the Income Tax Appellate Tribunal was right in holding that interest mentioned in question No.(i) above could be allowed as an expenditure, though it attracted disqualification stipulated in Section 40 (a) (i) of the Income Tax Act, 1961, as the respondent-assessee had not deducted tax at source and deposited the same?
(iii) Whether the Income Tax Appellate Tribunal was right in holding that expenditure of Rs. 42,89,207/- as gifts, boarding, lodging, etc. purportedly incurred on the occasion of General Body Meeting should be allowed as business expenditure under Section 37 of the Income Tax Act, 1961?”
2. Mr. Satyen Sethi, learned counsel for the respondent, at the outset submitted that so far as first two questions are concerned, they don’t require any adjudication as framed, because Hon’ble the Supreme Court vide its judgment dated 22.04.2020 rendered in the case of National Agricultural Co-operative Marketing Federation of India v. Alimenta S.A. reported in [2020] 7 SCR 789 has set aside the award of the learned Arbitrator and hence, the question of payment of interest would not arise.
3. Learned counsel argued that so far as third question is concerned, the same too has been decided by the Gujrat High Court in the case of Karjan Co-operative Cotton Sales Ginning & Pressing Society v. CIT reported in [1993] 199 ITR 17 (Guj).
4. Mr. Apoorv Agarwal, learned Junior Standing Counsel for the Department, argued that so far as the third question is concerned, the Tribunal has not correctly considered the facts and law.
5. In this regard, he submitted that the respondent-Society had incurred a huge expenditure to the tune of Rs. 42,89,207/- as gifts and boarding and lodging expenses on the occasion of General Body Meeting, which amount cannot be claimed to be an expenditure incurred for the purpose of business of the Society. He argued that the expenses therefore, do not fall within the ambit of business expenditure as per Section 37 of the Income Tax Act, 1961.
6. He further submitted that the amount spent was excessive and thus, rightly been disallowed by the Assessing Officer.
7. Heard learned counsel for the parties.
8. So far as first two questions are concerned, Hon’ble the Supreme Court vide its judgment in the case of National Agricultural Co-operative Marketing Federation of India (supra) has set aside the basic award of additional compensation passed by the Arbitrator. Therefore, question of payment or provision for due interest does not arise.
9. Moving on to the third question, we are of the view that the Tribunal has committed no error of law in holding that the expenditure of Rs. 42,89,207/- as gift boarding and lodging etc. incurred on the occasion of the General Body Meeting was allowable as business expenditure.
10. We are of the considered opinion that regardless of the quantum of amount spent, General Body Meeting of a Company/Society is a statutory requirement and if any expenditure has been incurred on convening and in relation to meeting, it cannot be said that it is not a business expenditure.
11. According to us, business expenditure cannot be given restricted meaning and cannot be confined to only those expenditures which relate to purchase and sale or other directly relatable activities. Business expenditure as given under Section 37 of the Income Tax Act, 1961, has to be construed purposively and objectively.
12. If the society incurs certain expenditure to fulfill its statutory obligation or even other business needs, the same are required to be allowed under the head of business expenditure.
13. The Assessing Officer cannot sit in the chair of Board of Directors or financial controller to contend that the amount spent was excessive. In any case, there is no denial of the fact that said amount was spent for the General Body Meeting of members. Giving small gifts and providing boarding and lodging to the Members/Employees and Directors etc. is a usual courtesy.
14. That apart, the decision of the Tribunal is essentially a determination of question of fact based on appreciation of available material. We, therefore, answer the question no. 3 above in affirmative, that is against the Revenue.
15. The appeal is, therefore, dismissed in totality.
16. We may add that since the Tribunal had allowed the interest the award so also consequential interest thereupon itself has been set aside by Hon’ble the Supreme Court vide its judgment rendered in National Agricultural Co-operative Marketing Federation of India (supra), the very issue of allowability of the interest shall be considered afresh, as the assessee is not supposed to or required to pay interest.
17. The Assessing Officer shall disallow the deduction of Rs.7,46,44,929/- on account of provision of interest made by the assessee.
18. The appeal is disposed of accordingly.
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