COMMISSIONER OF INCOME-TAX VS M. P. STATE HANDLOOM WEAVERS' COOPERATIVE SOCIETY, 2000 PTD-MADHYA-PRADESH-HIGH-COURT-INDIA 835 (1997)

Income-tax---

----Business expenditure---Disallowance---Expenditure on sales promotion-- Cooperative society---Amount spent on propaganda on directive of State Government---Cannot tie disallowed---Indian Income Tax Act, 1961, Ss.37(3A), (3B) & 80P---Madhya Pradesh Cooperative Societies Act, 1960, S.49C.

The assessee was the Madhya Pradesh State Handloom Weavers' Cooperative Society, Jabalpur. The assessee incurred expenses of Rs.6,78,177 towards propaganda, publicity and van expenses. The Assessing Officer, therefore, disallowed 20 percent. of the claim at Rs.1,15,625, as per the provisions of section 37(3A) and section 37(3B) of the Income Tax Act, 1961. This was upheld by the Commissioner of Income-tax (Appeals). The Tribunal observed that since this expenditure was incurred under the directives of the State Government, it did not partake of the character of sales promotion, so far as the assessee was concerned. Accordingly, the Tribunal deleted the addition of Rs.1,15,625. On a reference:

Held, that as per provisions of section 49C of the M. P. Cooperative Societies Act, 1960, a cooperative society is bound to comply with the directions given by the State Government and in case the said directions are not complied with, then action can be initiated against it by the Registrar of Cooperative Societies; even to the, extent of supersession of the committee of the society. The directions given by the State Government to the assessee/society were, thus, statutory directions and in compliance. therewith the expenditure incurred by the society was part of the business expenditure of the society. Since it happened to be a statutory direction pursuant to which expenditure had been incurred by- the society, it was a business expenditure and it was totally exempt from tax under section 80P(2) of the Act.

Abhay Sapre for the Commissioner.

A. K. Shrivastava for the Assessee.

JUDGMENT

A. K. MATHUR C, J.---This is an income-tax reference under section 256(1) of the Income Tax Act, 1961, at the instance of the Revenue and the following two questions of law have been referred by the Tribunal for answer by this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs.1,15,625 disallowed by the Assessing Officer as per provisions of section 37(3A)l 37(3B) and confirmed by the Commissioner of Income-tax (Appeals) could not be disallowed simply because the expenses were incurred on publicity, propaganda and vehicle maintenance on directives of the State Government?

(2) Whether, on the facts of the case, the Tribunal was justified in law to hold that simply because the expenditures were incurred as per directives of the State Government, they did not partake of the character of sales promotion in so far as the assessee is concerned?"

The assessee is the M. P. State Handloom Weavers' Cooperative Society, Jabalpur. The assessee incurred expenses of Rs.6,78,177 towards propaganda, publicity and van expenses. The Assessing Officer, therefore, disallowed 20 percent. of the claim at Rs.1,15,625 as per provisions of section 37(3A) and section 37(3B). The Commissioner of Income-tax (Appeals) upheld the findings of the Assessing Officer. Thereafter, the matter was taken up before the Tribunal by the assessee and the Tribunal held that the income is exempted. The Tribunal also observed that since this expenditure was incurred under the directives of the State Government, it did not partake of the character of sales promotion, so for as the assessee is concerned. Accordingly, the Tribunal deleted the addition of Rs.1,15,625. The Revenue approached the Tribunal for referring the aforesaid questions of law before this Court and, accordingly, the Tribunal has referred both the aforementioned questions of law for answer by this Court.

We have heard learned counsel for the parties and perused the record. It is not in dispute that income, profits and gains of Cooperative Societies is totally exempted from tax under section 80P of the Act. This has already been held by this Court also in a case between the some parties. In the present case, a directive had been issued by the State to the Cooperative Societies that in order to popularise the Cooperative movement in the State, they should take out the popularising measures and pursuant to the direction issued by the State Government under section 49C of the M. P. Cooperative Societies Act, 1960, the assessee incurred expenses of Rs.6, 78,177 towards publicity and propaganda. The contention of the Revenue is that since this amount was in the nature of publicity and propaganda, it is taxable in terms of section 37(3A) and. section 37(3B) of the Income-tax Act and accordingly an amount of tax to the extent of Rs.1,15,625 was levied. Learned counsel for the Revenue submits that since publicity was undertaken by the society, therefore, it is liable to be assessed in terms of section 37(3A) and section 37(3B) of the Income-tax Act. As against this, learned counsel for the assessee submitted that so far as the income of the society is concerned, it is totally exempted under section 80P of the Income-tax Act, and whatever expenditure for publicity, etc., had been incurred was in pursuance of the statutory direction issued by the State Government under section 49-C of the Cooperative Societies Act. Section 49C reads as under:

"49C. Government's powers to give directions in public interest, etc.---(1) If the State Government, on receipt of a report from the Registrar or otherwise is satisfied that in the public interest or for the purpose of securing proper implementation of Cooperative production and other development programmes approved or undertaken by the Government or to secure the proper management of the business of the society generally, or for preventing the affairs of the society being conducted in a manner detrimental to the interests of the members or of the depositors or the creditors thereof, it is necessary to issue directions to any class of societies generally or to any society or -societies in particular, the State Government may issue directions to them from time to time, and all societies or the societies concerned, as the case may be, shall be bound to comply with such directions. ,

(2) The State Government may modify or cancel any directions issued under subsection (1), and in modifying or cancelling such directions may impose such conditions as it may deem fit.

(3) Where the Registrar is satisfied that any person or committee responsible for complying with any directions or modified directions issued to a society under subsection (1) or (2) has failed without sufficient reason or justification to comply with the directions, the Registrar may--

(i) in case of a committee, proceed against such committee in accordance with the provisions of section 53; and

(ii) in case of a person, if the person is a member of committee of the society or an employee of the society, proceed against such person in accordance with the provisions of section 53B or the rules framed under subsection (1) of section 55 as the case may be."

As per the provisions of section 49C of the M. P. Cooperative Societies Act, a cooperative society is bound to comply with the directions given by the State Government and in case the said directions are not complied with, then action cart be initiated against it by the Registrar of Co operative Societies, even to the extent of supersession of the committee of the society. The directions given by the State Government to the assessee/society were, thus statutory directions and in compliance therewith the expenditure incurred by the society was part of the business expenditure of the society. Since it happens to be a statutory direction pursuant to which expenditure has been incurred by the society, it is a business expenditure and it is totally exempted from tax under section 80P(2) of the Income-tax Act. It is true that it has some potent of publicity character, but none the less, it is quoted as a statutory direction violation whereof may lead to supersession of the committee of the society; and as such, it has to be treated as business expenditure and will have the protective umbrella of section 80P(2) of the Income-tax Act. Viewing this matter in the above perspective we are of the opinion that the approach of the Tribunal was correct.

Consequently, we answer both the questions in favour of the assessee and against the Revenue.

M.B.A/3327/FC Reference answered.