Proportionate disallowance u/s 35AD justifiable as only one godown used for non-agricultural purpose

Rushay Commodities Pvt. Ltd. Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that proportionate disallowance u/s 35AD of the Income Tax Act is justifiable as only one godown is used for non-agricultural purposes, whereas, other four go-downs are used for agricultural purposes only.

Facts- The assessee company is engaged in the business of warehousing agricultural products. During the course of assessment proceedings, AO observed that the assessee had claimed deduction u/s. 35AD being 150% of the amount capitalized on the date of commencement of its operation.

AO observed that the assessee had constructed several go-downs and had leased the same to various parties from various dates as mentioned in the respective agreements. AO observed that from the reply from one of the parties i.e. Banas Dairy, the items stored in the go-down is skimmed milk powder. AO was of the view that the said item is not an agricultural produce.

AO was of the view that the assessee was not carrying out the specified business in respect of go-down leased to Banas Dairy, since Banas Dairy was using the go-down for storing skimmed milk powder, which was not an “agricultural produce”.

AO rejected the contentions of the assessee and disallowed the entire claim of deduction u/s. 35AD of the Act. CIT(A) partly allowed the appeal filed by the assessee. Being aggrieved, revenue has preferred the present appeal.

Conclusion- We are of the considered view that CIT(A) has not erred in holding that the entire amount of deduction claimed by the assessee u/s. 35AD of the Act cannot be disallowed, when admittedly four out of the five go-downs were leased out for specified purposes as mentioned in the Act viz. storage of agricultural produce.

Held that since the assessee had undisputably leased four out of the five properties/go-downs for the purpose of storage of “agricultural produce” and there was discrepancy only with respect to one leased out go-down to Banas Dairy, the whole deduction claimed by the assessee could not be denied u/s. 35AD of the Act and in view of the provisions of section 35AD(7B) of the Income Tax Act as it stood at the relevant time, in our considered view, the CIT(A) had correctly restricted the disallowance only with respect to the go-down leased out to Banas Dairy for the “non-agricultural” purposes. In view of the above discussion, the appeal of the Department is dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is an appeal filed by the Department against the order of the ld. Commissioner of Income Tax (Appeals)-4, Ahmedabad, in proceeding u/s. 250 vide order dated 05/08/2019 passed for the assessment year 2015-16.

2. The assessee has taken the following grounds of appeal:-

“1) “that the Ld. CIT(A) has erred in law on facts in restricting the disallowance of deduction u/s 35AD of the IT Act, 1961 to Rs. 2,78,09,352/- as against disallowance of Rs. 12,84,85,530/-, thereby by giving relief of Rs. 10,06,76,178/-“

3. The brief facts of the case are that the assessee company is engaged in the business of warehousing of agricultural products. During the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed deduction u/s. 35AD of Rs. 12,84,85,530/- being 150% of the amount capitalized on the date of commencement of its operation. The Assessing Officer observed that the assessee had constructed several go-downs and had leased the same to various parties from various dates as mentioned in the respective agreements. The Assessing Officer observed that the assessee had leased five go-downs to three different parties and he issued notice u/s. 133(6) to all the three parties. The Assessing Officer observed that from the reply from one of the parties i.e. Banas Dairy, the items stored in the go-down is skimmed milk powder. The Assessing Officer was of the view that the said item is not an agricultural produce. The Assessing Officer on reading of the section 35AD was of the view that the assessee shall be allowed deduction of capital nature for the purpose of specified business. Further, as per section 35AD, specified business was setting up and operating warehousing facilities for storage of “agricultural produce”. Considering the above product, the Assessing Officer was of the view that the assessee was not carrying out the specified business in respect of go-down leased to Banas Dairy, since Banas Dairy was using the go-down for storing skimmed milk powder, which was not an “agricultural produce”. Before the Assessing Officer, the contentions of the assessee were two fold, firstly, that skimmed milk constituted “agricultural produce” and secondly, even if deduction were to be disallowed u/s. 35AD of the Act, then, it has to be only in proportionate to the go-down leased to Banas Dairy and the entire deduction claimed u/s. 35AD of the Act cannot be disallowed, since there is no allegation that the balance four go-downs were not leased out for “agricultural purposes”. However, the ld. Assessing Officer rejected both the contentions of the assessee and disallowed the entire claim of deduction u/s. 35AD of the Act amounting to Rs. 12,84,85,530/- while making the addition, the ld. Assessing Officer observed as under:-

“3.4 In the submission, assessee has admitted that one of the godowns is not used for specified business. However, assessee claims that deduction u/s 35AD should be disallowed in respect of the godown which has not been used for specified business and not entire deduction claimed u/s 35AD Here, it will relevant to reproduce section 35AD (7B) which as under:

“Where any asset, in respect of which a deduction is claimed and allowed under this section, is-used for a purpose other than the specified business during the period specified in sub-section (7A), otherwise than by way of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provision of section 32, as if no deduction under this section was allowed shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.”

Thus, section 35AD itself provides that if any asset is not used for specified business for the specified period, specified in sub section (7A) of section 35AD then total amount of deduction has to be disallowed as if no deduction under this section was allowed. Therefore, total deduction claimed u/s 35AD is to be disallowed if any asset is used for a purpose other than specified business. In view of the said provisions, assessee’s claim for deduction u/s 35AD of Rs. 12,84,85,530/- is disallowed and added back to the total income of the assessee.

Addition of Rs. 12,84,85,530/-“

4. In appeal before the ld. CIT(A), the ld. CIT(A) partly allowed the appeal of the assessee. With regards to the contentions of the assessee that skimmed milk is “agricultural produce”, the CIT(A) rejected the argument of the assessee and held that skimmed milk does not constitute “agricultural produce”. Accordingly, the ld. CIT(A) was of the view that the 5^th go-down leased out to Banas Dairy was not used for the purpose of storage of agricultural produce. However, the ld. CIT(A) concurred that the alternate contention of the assessee that since only one go-down is not used being for specified business and accordingly, the disallowance should be restricted to that particular go-down only. The ld. CIT(A) held that as per section 35AD(7B), rental income less depreciation on specified asset as mentioned in the aforesaid section should be granted. Accordingly, the ld. CIT(A) directed the Assessing Officer to grant proportionate relief to the assessee in terms of section 35AD(7B) of the Act. While partly allowing the appeal of the assessee, the ld. CIT(A) made the following observations:-

“4.2 Ground no.2 & 3 are relating to deduction u/s.35AD of I.T. Act, 1961. Appellant has constructed the godowns which are used for the purpose of warehousing of agriculture products. Appellant is claiming deduction as per section 35AD of the Act. Section 35AD grants; deduction in respect of expenditure incurred on specified; business. During the course of assessment proceedings, AO issued ^notice u/s. 133(6) of the Act to-all the persons / entities and in response to that all the persons / entities has submitted the details as to for which purpose godowns are used. From that information, AO gathered that Godown No.; 5 which is used by Banaskantha Dist. Co-op. Milk Producers Union Ltd., Palanpur( Hereinafter referred as Banas Dairy) is using the godowns for the purpose of storage of skimmed milk and skimmed milk is not agriculture products. The appellant during appellate proceedings also submitted that skimmed milk is prepared from drying of milk to extends its longetivity as milk is perishable in nature. Appellant also submitted that after mixture of water with skimmed milk it gains the original form of milk and which is an agriculture product and accordingly deduction should be allowed as all the assets are used for specified business. Appellant also relied on order of CESTAT in case of H.M.M. Ltd. 1993 taxniann.com 164 (CEGAT – New Delhi) (SB) for this proposition. I perused the submissions of the appellant and does not found weight in this contention that skimmed milk is agriculture product as much as that even the mixing or packing has been held as manufacturing activity ton various sections of u/s.801 of the Act. Therefore, the contention raised by the appellant is rejected.

Appellant alternately submitted that as only one godown is not used for specified business and accordingly disallowance should be restricted to that particular godown. Appellant relied on the ratio laid down in following case laws:

1) AkashNidhi Builders & Developers 76 com 36 (SC)

2) Saket Corporation 62 com 38 (Gujarat)

I perused the above judgments and ratio laid therein. Although both the judgments are on allowably of i deduction u/s 8016(10) of the Act, but ratio laid down by Hon’ble Apex court and Hon’ble jurisdictional high court such as “where assessee is not complying with all the conditions for project as a whole then proportionate deduction to the extent of units of the project which are complying with the conditions should be granted, “After carefully understanding the ratio laid down in the case laws (Supra) i agree with, the contention that deduction u/s.34AD should be allowed for all other godowns which are used for specified business. Accordingly deduction for godowns no. 1,2,3,4 & 6 is allowable. Accordingly, AO is directed to allow deduction in respect godowns no. 1,2,3,4 & 6. With respect to godown no.5, appellant submitted rental income earned less depreciation of specified assets as mentioned in section 35AD(7B) should be granted. It is operational part of computation which can be handled as per law. The ground no.2 & 3 are partly allowed accordingly.”

5. The Department is in appeal before us against the aforesaid relief of Rs. 10,06,76,178/- granted to the assessee by the ld. CIT(A). The ld. Departmental Representative primarily relied upon the observations made by the ld. Assessing Officer and submitted that the ld. Assessing Officer has correctly concluded that even if the default is committed in respect of one of the go-downs which has not been used for specified purposes i.e. for storage of agricultural produce”, then, the entire amount claimed by the assessee u/s. 35AD of the Act is liable to be disallowed. In response, the counsel for the assessee submitted that in this case out of total of five go-downs, four go-downs were leased out for storage of “agricultural produce” and this fact has not been disputed by the Department. Even if it were accepted that the 5th go-down leased out to Banas Dairy was used for storage of non-agricultural produce, even then, the disallowance should be proportionately disallowed in view of the express language of 35AD(7B) of the Act.

6. We have heard the rival contentions and perused the material on record. We are of the considered view that CIT(A) has not erred in holding that the entire amount of deduction claimed by the assessee u/s. 35AD of the Act cannot be disallowed, when admittedly four out of the five go-downs were leased out for specified purposes as mentioned in the Act viz. storage of agricultural produce. In the case of Akash Nidhi Builders and Developers 77 taxman.com 88 the Tribunal held that assessee was entitled to deduction u/s. 80IB(10) proportionately out of the profit in respect of wings “ A to F”, whereas assessee had claimed deduction for the entire project. The Department approached the High Court on the legal question whether the Tribunal justified in holding that assessee could proportionately allowed the deduction u/s. 80IB(10) out of profits in respect of wings “ A to F” appreciating that assessee had claimed deduction for entire project i.e. apart from wing “A to F” the assessee had also claimed the deduction with respect other wings as well. The High Court dismissed the appeal of the department and held that Tribunal was right in allowing proportionate deduction u/s. 10IB(10) to the assessee. The SLP filed by the Department against the order of High Court was also dismissed by the Supreme Court in favour of the assessee. In the case of ITO vs. Saket Corporation 62 taxman.com 38 (Gujarat), the assessee claimed deduction u/s. 80IB with respect to housing project consisting of 43 units, it was disallowed on the ground that building use permission and completion certificate was granted only with respect to 20 units within the period of four years from date of approval of project by local authority and the permission was not granted with respect to the entire housing project consisting 43 units. The Gujarat High Court held that since assessee had completed construction of all 43 units and had applied for building use permission/completion certificate within four years from date of approval by competent authority, it was entitled to deduction u/s. 80IB(10) and notwithstanding the fact that building use permission was granted with respect to only 20 units. In the light of the above decisions, in the facts of the instant case, we are of the considered view that since the assessee had undisputably leased four out of the five properties/go-downs for the purpose of storage of “agricultural produce” and there was discrepancy only with respect to one leased out go-down to Banas Dairy, the whole deduction claimed by the assessee could not be denied u/s. 35AD of the Act and in view of the provisions of section 35AD(7B) of the Income Tax Act as it stood at the relevant time, in our considered view, the CIT(A) had correctly restricted the disallowance only with respect to the go-down leased out to Banas Dairy for the “non-agricultural” purposes. In view of the above discussion, the appeal of the Department is dismissed.

7. In the result, the appeal of the Department is dismissed.

Order pronounced in the open court on 21-03-2023