Commissioner of Income Tax vs Vazir Sultan Tobacco Co. Ltd.

Syed Shah Mohammed Quadri, J.—In this reference u/s 256(1) of the Income Tax Act, 1961, the following question is referred to this court at the instance of the Revenue :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that the assessee is entitled to a deduction u/s 35CC in respect of the expenditure incurred by it prior to the date with effect from which the programme of rural development has been approved?"

The assessee is a company registered under the Companies Act, 1956, and is carrying on the business of manufacture and sale of cigarettes. With a view to take initiative for implementation of a rural development programme in respect of which the expenditure incurred is liable to be deducted from the total income u/s 35CC of the Income Tax Act, 1961, the assessee implemented the rural development programme between October 1, 1977, and September 30, 1978, which is the accounting period relevant to the assessment year 1979-80. It applied to the prescribed authority for approval of the programme on December 12, 1977. By order dated March 10, 1978, the authority approved the programme with effect from February 21, 1978. The Income Tax Officer allowed the expenditure incurred by the assessee for the period commencing from February 21, 1978, to September 30, 1978, amounting to Rs. 3,57,673 and declined to allow the expenditure incurred by the assessee between October 1, 1977, and February 20, 1978, amounting to Rs. 99,225. Dissatisfied with the order of the Income Tax Officer, the assessee filed an appeal before the Commissioner of Income Tax Officer (Appeals)-II, Hyderabad. The Appellate Commissioner upheld the action of the Income Tax Officer and thus dismissed the appeal of the assessee. Challenging the correctness of the order of the Appellate Commissioner dated March 22, 1983, the assessee filed an appeal before the Income Tax Appellate Tribunal. By its order dated January 21, 1984, the Tribunal held that the total expenditure incurred in the relevant assessment year was to be deducted. On these facts, the above question is referred to this court.

Mr. S. R. Ashok, learned standing counsel for the Income Tax, submits that the requirement of section 35CC is that no expenditure incurred by the assessee should be deducted except with the approval of the prescribed authority and as that authority granted approval with effect from February 21, 1978, the assessee is not entitled to deduction of the expenditure incurred by it before the date of approval and the Tribunal was clearly in error in holding to the contra. Mr. Y. Ratnakar, learned counsel appearing for the assessee, submits that the requirement of obtaining approval though mandatory, the action of the authority in prescribing the date is not contemplated under the Act. Therefore, it must be held that the expenditure incurred for the whole accounting year for the implementation of the programme should be allowed. He further submits that the purpose of granting the benefit u/s 35CC is to encourage the people for implementation of the rural programme and, therefore, section 35CC should be liberally construed. He further submits that an analogous provision, i.e., section 80-O, has received a beneficial construction from the Calcutta High Court in Commissioner of Income Tax, Central-I Vs. Birla Bros. P. Ltd., and as such the same approach may be taken by this court in regard to interpretation of section 35CC.

To appreciate the contentions of learned counsel, it would be useful to read section 35CC of the Income Tax Act here :

"35CC. (1) Where the assessee, being a company or a co-operative society, incurs any expenditure on any programme of rural development, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of the amount of such expenditure incurred during the previous year :

Provided that the approval of the prescribed authority has been obtained by the assessee in respect of such programme before incurring the expenditure....

(3) No deduction shall be allowed in respect of the expenditure referred to in sub-section (1) unless the assessee furnishes, along with the return of income for the assessment year for which the deduction is claimed, a statement of such expenditure in the prescribed form duly signed and verified by an accountant as defined in the Explanation below sub-section (2) of section 288 and setting forth such particulars as may be prescribed."

A careful reading of this section shows that it directs the Revenue to allow deduction of the amount of any expenditure incurred on any programme of rural development by an assessee being a company or a co-operative society. This permissible deduction is subject to the provisions of that section. The expenditure allowed is that which is incurred during the previous year. However, the proviso enjoins that the expenditure incurred during the previous year by any assessee on any programme of rural development is subject to the condition that the approval of the prescribed authority has been obtained by the assessee in respect of such programme before incurring the expenditure. The Memorandum explaining the provisions in the Finance (No. 2) Bill, 1977 (see [1977] 107 ITR 167), says that with a view to encouraging companies to undertake the work of rural welfare and uplift, it is proposed to provide that expenditure incurred by companies after June 30, 1977, on any programme of rural development will be deducted in computing their taxable profits. It is specifically mentioned therein that the deduction under that provision will be allowed only where the company obtains the prior approval of the prescribed authority in respect of the programme of rural development undertaken by the company.

Thus, it is clear that undertaking the implementation of the rural programme per se with whatever laudable objective it may be, does not entitle an assessee to claim deduction of expenditure on such rural development programme. It is only the approval of the prescribed authority that entitles an assessee to claim deduction of the expenditure incurred by it in respect of such programme. Therefore, the order of approval passed by the prescribed authority becomes relevant. Paragraph 2 of the order which is extracted by the Tribunal in its order reads thus :

"2. The approval of the prescribed authority is subject to the following conditions :

(b) The programme has been approved for the period beginning 21st February, 1978, up to the end of the previous year commencing after the 21st February, 1978."

It is not disputed before us that in the event of the prescribed authority declining to grant its approval, any expenditure incurred by the assessee cannot be claimed as deduction u/s 35CC. In our view, it must necessarily follow that the extent of deductibility of such expenditure, depends upon the scope of the order granting approval. The order extracted above shows that the programme has been approved for the period beginning February 21, 1978, up to the end of the previous year commencing after February 21, 1978; the last phrase in our view means for the balance of the previous year commencing from February 21, till the end of the previous year.

What is contended before us is that the approval contemplated u/s 35CC is the approval of the programme and not of the expenditure, therefore, the abovesaid order of approval cannot be construed to mean that it has placed a restriction or embargo on the expenditure incurred by the assessee. It is true that the proviso contemplates only the approval of the programmes. But the fact that the approval ought to be obtained before incurring the expenditure cannot be lost sight of. We may also keep in mind the fact that the prescribed authority is competent to grant approval for implementation of the programme either for the whole of the year or any part of the previous year or it can even decline to grant the approval. Just as refusal of approval for the whole year would not entitle an assessee to claim deduction of the expenditure, so also grant of approval only for part of the previous year does not give a right to claim deduction of all the expenditure which was incurred in the period of the year which is not the subject-matter of approval. As has been noticed above, the approval granted is from February 21, 1978. Therefore, the expenditure incurred for the period earlier than that date cannot be said to be an expenditure incurred with the approval of the prescribed authority. As such, in our view, the Tribunal was not right in coming to the conclusion that the expenditure was allowable for the whole of the assessment year and that mentioning of the date from which approval is given by the approving authority is only recommendatory but not mandatory. The question of treating the date as mere recommendatory but not mandatory will not arise for the simple reason that the proviso itself does not specify any date before which the approval should be sought. The mentioning of the date by the prescribed authority from which the programme was approved even if not strictly in accordance with section 35CC cannot be ignored in this proceeding. If the assessee was aggrieved by that order he could have questioned the same before the competent forum. Not having done so, it cannot contend that the order of approval in so far as it approves the programme from February 21, 1978, has to be ignored.

Now, we shall refer to the decision of the Calcutta High Court in Commissioner of Income Tax, Central-I Vs. Birla Bros. P. Ltd., . In that case, the question before the Calcutta High Court was the interpretation of section 80O of the Income Tax Act. That provision allowed deduction in respect of royalties, etc., received from a foreign company by an Indian company assessee. A limited relief was conferred on the Indian company in respect of the income received by way of royalty, commission, fees or any similar payment received by it from a foreign company in consideration for the use of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to the foreign company by the assessee, or in consideration of technical services rendered or agreed to be rendered to the foreign company by the assessee, under an agreement. The requirement of that section was that the agreement should have the approval of the Central Government and that it should have been given before the 1st day of October of the relevant assessment year. In that case, there was a delay in granting approval as the order of approval was made on May 21, 1971, for the assessment year 1969-70. Interpreting section 80O, Sabyasachi Mukharji J., as he then was, speaking for the Division Bench, held that the requirement of approval of the agreement under which the payments were received was mandatory, but the date mentioned therein was merely recommendatory. In our view, the ratio of this decision has no application to the facts of the present case.

We may also make a mention of the judgment of a Division Bench of the Bombay High Court in Commissioner of Income Tax Vs. Phalton Sugar Works Ltd., . In that case, the assessee-company received technical fees from a foreign company. The assessee-company claimed tax concession in respect of the amount of technical fees received by it in consideration of the services rendered by it in the previous year relevant to the assessment year 1971-72. It made an application to the concerned authority for approval of the agreement in terms of section 80O of the Act. That application was rejected. However, the assessee claimed the benefit of section 80O contending that the requirement of approval was merely recommendatory or directory but not mandatory. The High Court having considered the provisions of section 80O and the circulars issued by the Central Board of Direct Taxes held that the requirement cannot be held to be merely procedural formality and as such directory. Referring to the judgment of the Calcutta High Court in Commissioner of Income Tax, Central-I Vs. Birla Bros. P. Ltd., , the Bombay High Court agreed that the provision is mandatory. In that view of the matter, the Bombay High Court came to the conclusion that the Tribunal has no jurisdiction to dispense with the statutory requirement of approval of the agreement and concluded that the assessee was not entitled to claim deduction u/s 80O.

For the above reasons, we answer the above question in the negative, i.e., in favour of the Revenue and against the assessee. Reference is accordingly answered.