• Monday, 14 Apr 2025, 03:29:23 am

Income Tax Act, 1961 – Sections 28(iv), 36(1)(xii) and 14A – The assessee a government entity, acting as a nodal agency for various government schemes, claimed interest-related deductions for funds like RIDF, WIF, and FPF and promotional expenses under Section 36(1)(xii). The AO disallowed claims for interest on funds credited to specific accounts and additional disallowance under Section 14A for exempt income-related expenses - Whether interest credited to funds like FIF, WDF, and TDF qualifies as income of the assessee or is diverted at the source by overriding title - Whether expenses incurred for promotional activities under PODF are deductible under Section 36(1)(xii) or need further examination - Whether the additional disallowance under Section 14A for future exempt income investments is justified - HELD - The funds credited under the direction of RBI for implementing government schemes do not belong to the assessee but are held in a fiduciary capacity. The income from these funds was diverted at source by overriding title. This principle was supported by prior judicial precedents, including those for similar funds, and the AO's addition was deleted - Promotional expenses linked to PODF were restored to the AO for a fresh examination to determine if these were incurred wholly and exclusively for the assessee's business purposes or on behalf of the government. Guidelines were provided to classify expenses based on fund ownership - Additional disallowance was deleted as the AO failed to record specific satisfaction regarding the inadequacy of the assessee's suo moto disallowance. The ITAT noted that Section 14A could not apply retrospectively to income not earned during the assessment year - The ITAT dismissed the Revenue's appeal and partially allowed the assessee's appeal, affirming that funds held in fiduciary capacity were not taxable, and expenses required a detailed review under specific principles. The additional disallowance under Section 14A was deemed unjustified

 

2024-VIL-1804-ITAT-MUM

 

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH ‘B’ MUMBAI

 

ITA No.3006/Mum/2024

Assessment Year: 2020-21

 

Date of Hearing: 25.09.2024

Date of Pronouncement: 06.12.2024

 

DCIT

 

Vs

 

THE NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT

 

ITA No.2522/Mum/2024

Assessment Year: 2020-21

 

THE NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT

 

Vs

 

DCIT

 

Assessee by: Shri J.D. Mistry, Sr. Advocate & Shri Niraj Sheth

Revenue by: Shri Kailash C. Kanojiya, CIT, DR & Kaveeta Punit Koushik, Sr. DR

 

BEFORE

SHRI AMARJIT SINGH, HON’BLE ACCOUNTANT MEMBER

SHRI RAHUL CHAUDHARY, HON’BLE JUDICIAL MEMBER

 

ORDER

 

PER AMARJIT SINGH, AM:

 

These are the cross appeals filed by the assessee and by the revenue directed against the order of ld. CIT(A), NFAC passed u/s 250 of the Act on 31.03.2024. Both the appeals filed by the assessee and revenue are adjudicated by this common order.

 

2. Fact in brief is that return of income declaring income of Rs.54,98,45,85,810/- was filed on 15.02.2024. The case was subject to scrutiny assessment. The assessee is wholly owned by the Govt. of India and came into existence as NABARD on 12.07.1982 by an Act of Parliament by transferring the agricultural credit function of RBI and re-finance function of the Agricultural Re-finance Development & Corporation (ARDC). The NABARD as a development bank is mandated for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries in rural area with a view to in promoting integrated rural development of rural area. The assessment u/s 143(3) r.w.s. 144B of the Act was finalized on 20.09.2022 and total income was assessed at Rs. 62,71,01,03,213/-. Further, the fact of the case are discussed while adjudicating the appeal filed by the revenue and the assessee.

 

ITA No. 3006/Mum/2024 (Revenue Appeal)

 

“1. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in disregarding that in the absence of express provisions of the Act, no income can be held as not taxable when it should have been subjected to tax in one or the other hands and the principle of diversion of income by overriding title ought to be applied in that perspective?

 

2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in ignoring the observation of the AO that contribution to the RIDF, WIF, FPF was made completely out of the profit after tax of the assessee and hence subsequent contributions ought to be also from post tax profit?

 

3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in holding that the transfer to RIDF, WIF, FPF as diversion of income at source by overriding title without appreciating that the surplus income arising out of interest receipts as netted by interest payment were shown in P & L A/c by crediting and debiting interest receipts and payment respectively and therefore, this surplus reached the hands of the assessee and transfer to RIDF, WIF, FPF is only application of surplus profit ?"

 

4. Whether on the facts of the case and in circumstances in law the Ld. CIT(A) was right in deleting the addition of Rs. 613,62,75,607/- in RIDF, Rs. 31,68,34,867/- in WIF and Rs. 1269197/-in FPF without appreciating the fact that the said receipts were liable to be taxed as income of the assessee since the said receipts were not shown as income of Government of India or Reserve Bank of India or Reserve Bank of India or any other assessee?

 

5. Whether on the facts of the case and in circumstance in law the Ld. CIT(A) was right in holding that the assessee was eligible for claiming deduction u/s 36(1)(xii) of the IT Act, 1961 in respect of the expenses incurred by it on promotional activities only on the basis of CBDT notification on 25/2014 dated 29.04.2014 which has notified the assessee as one notified entities for claiming deduction u/s 36(1)(xii) of the Act without appreciating the fact that the expenses on promotional activities were developmental in nature and were not incurred wholly and exclusively for the purpose of business and also that the expenses on promotional activities under the various funds which were established by P&L appropriation account should be out of these funds only and the expenditure should not be debited to the P&L account?

 

6. The appellant craves leave to amend, alter, delete or add grounds which may be necessary.”

 

3. During the course of assessment, the AO noticed that assessee has received interest on Rural Infrastructure Development Fund (RIDF) of Rs. 613,62,75,607/-. The AO has further noticed that assessee has also claimed interest on Warehouse Infrastructure Fund (WIF) of Rs. 31,68,34,867/- and also shown interest on the Food Processing Fund (FPF) of Rs. 12,69,197/-. During the course of assessment, the AO found that component of interest debited was not actually paid rather the same was credited to the respective accounts. Therefore, the interest debited but not actually paid was added to the total income of the assessee.

 

4. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the claim of the assessee.

 

5. During the course of appellate proceedings before us, at the outset, the ld. Counsel submitted that similar issue on identical fact has been adjudicated by the ITAT for A.Y. 2010-11 wherein the issue has been decided in favour of the assessee. In support, he referred the decision of ITAT vide ITA No. 3650/M/2016 dated 24.08.2022.

 

6. On the other hand, ld. DR supported the order of assessing officer.

 

7. Heard both the sides and perused the material on record. The assessee has debited interest payment in its P & L A/c on deposits under Rural Infrastructure Development Fund (RIDF), Warehouse Infrastructure Fund (WIF) and Food Processing Fund (FPF). Out of the total interest debited on account of aforesaid funds, some portion had actually not been paid to banks as interest but the same had been credited to funds namely ‘Financial Inclusion Fund (FIF), Tribal Development Fund (TDF), Watershed Development Fund (WDF) and Producers Organization Development Fund (PODF). The assessing officer was of the view that interest payment claimed in the P & L A/c was not actually paid which was credited to the aforesaid funds, therefore, same was not allowed as business expenditure. The assessee explained that the interest transferred to these funds were not the income of the assessee since NABARD was only a nodal agency for implementing the schemes of Govt. of India, therefore, the amount in FIF/TDF/WDF/PODF did not belong to the assessee and NABARD had acted merely as a trustee to Govt. of India/RBI in respect of these funds and the amount credited to these funds by the NABARD as per the direction of RBI was not the income of NABARD. The assessee also explained that Govt. of India carries out various welfare schemes for which Govt. of India and RBI direct the NABARD to act as its agent. RIDF one of the such scheme under which commercial banks are required to extend credit to priority sector upto the specified percentage of their loan advances portfolio. In case, the commercial banks failed to achieve the set target, the commercial banks are required to deposit an equivalent amount with the NABARD since it is Apex Development Bank. The various State Government and National Rural Road Development Agency (NRRDA) to whom NABARD extend credit out of RIDF are also charged interest at the rates specified by the RBI. Out of the difference in interest received/receivable and interest payable only 0.5% is allowed by the RBI to NABARD as fees for acting as banker. The excess/balance funds instead of being returned to RBI is retained by NABARD on behalf of RBI and credited to FIF, TDF, WDF and PODF as per the direction of RBI as NABARD merely act as trustee to Govt. of India/RBI. The aforesaid facts and submission demonstrate that the assessee has acted on behalf of the Govt. of India/RBI to implement the various schemes as implementing agency, therefore, the amounts transferred to FIF/WDF/TDF/PODF are not belonging to the assessee. In this regard, we have perused the decision of Co-ordinate of ITAT as referred by the ld. Counsel vide ITA No. 3650/M/2016 dated 24.08.2022 wherein the similar issue has been adjudicated in favour of the assessee. The relevant extract of the decision is reproduced as under:

 

“11. We have heard rival contentions and perused the record. We notice that the Finance Minister, in pursuance of policy of the Government of India to promote investment in agricultural sector/rural infrastructure has announced the scheme in his Speech. The relevant portion of announcement is extracted below:-

 

“12. Inadequacy of public investment in agriculture is today a matter of general concern. This is an area which is the responsibility of the States, but many States have neglected investment in infrastructure for agriculture. There are many rural infrastructure projects, which have started but are lying incomplete for want of resources. They represent a major loss of potential income and employment to rural population. To encourage quicker completion of projects in rural infrastructure, I propose to establish a new Rural Infrastructural Development Fund within the National Bank for Agriculture and Rural Development (NABARD) from April, 1995. The fund will provide loans to State Governments and State owned Corporations for completing ongoing projects relating to medium and minor irrigation, soil conservation, watershed management and other forms of rural infrastructure. The loans will be on a project specific basis with repayment interest guaranteed by concerned State Government. Priority will be assigned to projects which can be completed within the least time period. Resources for the Fund will come from commercial banks which will be required by Reserve Bank of India (RBI) to contribute an amount equivalent to a bank’s shortfall in achieving the priority sector target for agricultural lending, subject to a maximum of 1.5 per cent of the bank’s net credit. This is expected to create a corpus of about Rs.2,000 crore for completion of rural infrastructure projects.”

 

We notice that the Government of India has devised a scheme for increasing investment in Agricultural and rural infrastructure projects and accordingly, proposed to establish a new “Rural Infrastructural Development Fund” within NABARD, the assessee herein. It is also stated that the commercial banks shall contribute funds as per the directions given by RBI.

 

12. The Ld A.R submitted that the RBI has issued circulars in this regard from time to time. In this regard, he invited our attention to Circular No. RPCD. CO. Plan 3113/04.09.49/2009-10 dated September 18, 2009. This circular lists out the rate of interest payable to banks on the deposits contributed by them and also prescribes the rate of interest payable by the State Governments/NRRDA on the loans taken by them out of this fund. Following portions of the circular are relevant here:-

 

“7. Further, the relative margin available to NABARD in excess of 0.5 per cent in respect of deposits placed by banks in RIDF XV and the separate window under RIDF XV for rural roads component under Bharat Nirman will be credited to the Tribal Development Fund.”

 

As per circular dated 30th April, 2021, following instructions was given by RBI:-

 

“2. As per the announcement made by the Finance Minister in the Budget, the State Governments will be charged interest at 10.50 percent on loans from RIDF – VII. Keeping in view the above interest rate structure, the margin available to NABARD will be in excess of the usual margin of 0.5 percent. It is suggested that the margin in excess of 0.5 percent in this case may be credited to the Watershed Development Fund.”

 

In Circular dated August 6, 2003, it was instructed as under:-

 

“6. As in the case of RIDF VIII, the relative margin available to NABARD in excess of 0.5 per cent in respect of RIDF IX deposits will be credited to the Watershed Development Fund.”

 

13. We also notice that the assessee has issued guidelines in respect of Watershed Development Fund. In our view, following discussions made in the guidelines are relevant here:-

 

“II PROGRAM PERSPECTIVES AND APPROACH

 

1. Genesis

 

1.1 The Union Finance Minister, in his budget speech for 1999-2000 had announced the creation of a Watershed Development Fund (WDF) with the National Bank for Agriculture and Rural Development (NABARD) with broad objectives of utilization of multiplicity of watershed development programmes into a single national initiative through involvement of village level institutions and PFAs.

 

1.2 In pursuance thereof WDF has been created in NABARD with a contribution of Rs.100 crore each by MoA, Government of India (GOI) and NABARD.”

 

The Guidelines further lists out the manner of utilization of WDF. The Ld A.R submitted that similar guidelines should be available for TDF also.

 

14. We notice that the Government of India has devised schemes for promotion of investments in agriculture and rural development. As per the scheme the banks were directed to deposit “shortfall amounts in giving priority sector lending by banks” with the assessee herein, which in turn, would lend the said money to State Governments to carry out various schemes of agriculture and rural development. The net surplus between the interest income and interest expenditure under this scheme was directed to be appropriated as under:-

 

(a) The assessee herein should take 0.50% as its income.

 

(b) The excess amount of surplus over and above 0.50% referred above shall be transferred to TDF/WDF.

 

(c) The funds credited to TDF/WDF should also be used for specified purposes only.

 

We noticed earlier that WDF was established with the assessee and the initial corpus has been contributed by the MOA, GOI and the assessee. The objective of the schemes is promotion of investment in agriculture and rural development.

 

15. The AO has taken the view that, since the assessee did not keep the funds pertaining to TDF/WDF in separate bank accounts and used it for its own business purposes, the amount so transferred to these funds would constitute income of the assessee. We notice that the manner of keeping funds is not the criteria for determining whether there is diversion of funds by overriding title. The criteria stated by Hon’ble Supreme Court in the case of CIT vs. Sitaldas Tirathdas (supra) is extracted below:- “…….

 

In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable……………”

 

16. Before us, the Ld A.R placed his reliance on certain case laws in support of his submissions that the assessee cannot be considered to be owner of the income transferred to TDF/WDF. The first case law relied upon the Ld A.R is the decision rendered by Hon’ble Madras High Court in the case of New Horizon Sugar Mills (P) Ltd. In this case, the assessee was carrying on the business of manufacture and sale of sugar. The assessee set apart certain amount for the construction of molasses storage tank. As required by Molasses Control Order, the assessee had no power to spend the amount as per its wishes, but was to be spent as per the directions of Government. Accordingly, the assessee claimed that the amount so set apart should not be treated as income. The Hon’ble Madras High Court noticed that an identical issue was adjudicated by it earlier in the case of CIT vs. Salem Co-operative Sugar Mills Ltd (1998) (229 ITR 285). The relevant discussions made by Hon’ble Madras High court are extracted below:-

 

“11. The Tribunal allowed the appeal. On a reference, a Division bench of this Court held that even before collection of the amount as directed by Central Government under the Molasses Control (Amendment) Order, the assessee was directed to keep this amount under a separate account under the head “Molasses storage fund”. Though the assessee collected this amount under the statutory obligation, it did not belong to the assessee, but to the molasses storage fund. The assessee could not utilize the amount in the said fund for any other purpose. The fund had to be utilized for the purpose of constructing a storage tank in accordance with the specifications given by the Central Government. If the assessee failed to collect such amount as directed by the Molasses Control (Amendment) Order, the Central Government would construct a molasses storage tank and recoup the construction charges from the assessee. Therefore, there was diversion of title at the source of the income collected under the directions given under the Molasses Control (Amendment) Order. The sum in question was not includible in the assessee’s total income.

 

12. In the face of the decision in the case of Salem Cooperative Sugar Mills Ltd (supra), it goes without saying that the Tribunal was right in holding that the amount set apart towards molasses storage reserve fund should be excluded from its total income as revenue expenditure. This question is, therefore, answered against the Revenue and in favour of the assessee.”

 

It was brought to our notice that the revenue challenged above said decision rendered by Hon’ble Madras High Court by filing appeal before Hon’ble Supreme Court. However, the appeal of the revenue has been dismissed by the Hon’ble Apex Court following the decision rendered by it in the case of CIT vs. Ambur Co-op Sugar Mills Ltd (2004)(269 ITR 398)(SC). The decision of Hon’ble Supreme Court rendered in the case of New Horizon Sugar Mills (P) Ltd has been reported in (2004)(141 taxman 254)(SC).

 

17. The Mumbai bench of Tribunal has examined an identical issue in the case of M/s National Commodity Derivatives Exchange Ltd (supra). The assessee herein has collected penalty amounts from its members as per the direction given by Forward Market Commission. The amount so collected as transferred to “Investors Protection Fund”. It was held by the Tribunal that the amount so collected and transferred to investor protection fund got diverted at source and consequently it cannot be assessed as the common of the above said assessee.

 

18. In our view, the above said cases support the claim of the assessee that the amounts transferred to these funds do not belong to it. The assessee has also submitted that the amounts available in TDF/WDF are excluded while computing Net worth/Net owned fund of the assessee. Hence, the assessee is conscious of the fact that the amounts credited to TDF/WDF do not belong to it.

 

20. From the facts and circumstances of the case, we notice that

 

(i) the Government of India has framed the scheme for promotion of investment in Agricultural and Rural sector.

 

(ii) The scheme has been set up within the assessee herein.

 

(iii) Initial corpus fund for WDF has been contributed by the assessee, MoA and GOI. The details of contribution made for TDF is not available. Contribution by MoA and GoI by way of corpus to the WDF should mean that the WDF is considered as a separate fund by the GOI within the assessee.

 

(iv) The GOI/RBI has devised schemes for getting funds for the WDF/TDF. The RBI has given guidelines on receipt of deposit amount from banks, interest to be given thereon, manner of advancing loans to State Governments, the interest to be collected thereon, the manner of utilization of gains arising on such activities.

 

(v) Most pertinent point to be noted is that the assessee is not allowed to take entire surplus as its income, i.e., the assessee was allowed to take only 0.50% as its income. The excess amount has been directed to be credited to TDF/WDF.

 

 

(vi) Guidelines have been issued on the manner of utilization of the funds so credited.

 

From the foregoing discussions, we are of the view that the assessee has acted as nodal or implementing agency for the schemes framed by GOI. Hence the amounts transferred to TDF/WDF are diverted at source itself and hence, the same does not belong to the assessee. Accordingly, the amounts so diverted to TDF/WDF cannot be brought to tax in the hands of the assessee. Accordingly, we affirm the order passed by Ld CIT(A) in respect of amount of Rs.628.55 crores transferred to TDF/WDF. For identical reasons, we uphold the order passed by Ld CIT(A) in respect of amount of Rs.4.88 crores transferred to WDF/STCRC fund.”

 

8. The issue in appeal is squarely covered by the decision of ITAT as referred supra in this order, therefore, we do not find any merit in the grounds of appeal filed by the Revenue. Therefore, all the grounds of appeal filed by the Revenue are dismissed.

 

ITA No. 2522/M/2024 (Assessee Appeal)

 

“1. Disallowance of expenditure incurred on promotional activities vis-àvis Producers Organisation Development Fund (PODF) amounting to Rs. 2,60,59,516/- claimed u/s 36(1)(xii) of the Act.

 

2. Additional disallowance u/s 14A of the Income Tax Act, 1961.”

 

9. Ground No. 1: During the course of assessment, the AO noticed that assessee has claimed Rs. 69,43,81,041/- as expenditure for promotional activities. This amount comprising an amount of Rs. 17,89,63,296/- was spent from Co-operative Development Fund, Rs. 2,60,59,516/- spent from Producers Organization Development Fund (PODF), Rs. 1,19,65,825/- was spent from Rural Infrastructure Promotion Fund (RIDF), Rs. 17,95,50,738/- was spent out of Farm Sector Promotion Fund, Rs. 1,22,23,984/- was spent from climate change programme and Rs. 28,56,07,682/- was spent from Gramya Vikas Nidhi. The assessing officer has disallowed these expenditures on the ground that these promotional activities were not related to the business portion of the assessee.

 

10. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the claim of the assessee to the extent of Rs. 66,83,21,525/- and restricted the disallowance to the extent of Rs. 2,60,59,516/- in respect of the amount which was claimed as transferred from Producers Organization Development Fund (PODF) holding that assessee cannot claim such expenditure incurred out of PODF as the same did not belong to the assessee.

 

11. During the course of appellate proceedings before us, the ld. Counsel submitted that the ITAT vide ITA No. 4009/M/2018 A.Y. 2014-15 dated 02.04.2024 has restored the similar issue to the file of the assessing officer for fresh examination.

 

12. On the other hand, ld. DR supported the order of assessing officer.

 

13. Heard both the sides and perused the material on record. We have perused the decision of ITAT on the similar issue for A.Y. 2014- 15, 2015-16 and 2019-20 wherein on the proposition that deduction u/s 36(1)(xii) would be available if the funds has been credited out of funds appropriated from P & L Ac/ of the assessee and same are used for the purpose of assessee, therefore, the issue was restored to the file of assessing officer for fresh examination. The relevant extract of the decision of ITAT vide ITA No. 4009/M/2018 for A.Y. 2014-15 as referred above is reproduced as under:

 

“5.4 We heard the parties on this issue. We notice earlier that the assessee was notified as an eligible entity u/s 36(1)(xii) of the Act from AY 2013-14 onwards. Hence, we are of the view that this issue has to be addressed differently for pre-notification years (i.e., assessment years 2011-12 and 2012-13) and “Post-notification” years (i.e., from AY 2013- 14 onwards).

 

5.5 We notice that an identical issue of claim for deduction of expenditure incurred on Promotional activities was examined by the co-ordinate bench of Tribunal in AY 2010-11, i.e, “Pre-notification” period. The claim of the assessee was rejected on the reasoning that the assessee became notified entity with effect from AY 2013-14 only. However, the alternative contention of the assessee that the relevant expenses should be allowed u/s 37(1) of the Act was accepted by the Tribunal and the matter was restored to the file of the AO for examining the alternative contention. The initial order was passed by the Tribunal for AY 2010-11 on 24.8.2022 in ITA No.3344/Mum/2016 and in that order, identical issue was adjudicated. Subsequently, the assessee filed a miscellaneous application pointing out that there are mistakes apparent from record in the order passed on the issue of disallowance of expenses incurred on promotional activities u/s 36(1)(xii) of the Act. It was also pointed out that the Tribunal did not adjudicate the alternative ground raised by the assessee for allowing the claim u/s 37(1) of the Act. The above said miscellaneous application was numbered as M A No.292/Mum/2022 and the same was disposed of by the Tribunal on 15.6.2023. Hence the decision taken by the Tribunal in AY 2010-11 on this issue, as modified by the M A order, referred above, are extracted below:-

 

“27. We heard rival contentions and perused the record. We have also gone through the decision rendered in the above said two cases, which have been in the context of sec.35(2AB) of the Act. Under the provisions of sec.35(2AB), the expenditure incurred in an “in house research and development facility” as approved by the prescribed authority is granted weighted deduction. Under sec.36(1)(xii), the corporation itself should be notified for the purposes of sec.36(1)(xii) of the Act. Hence, while interpreting the provisions of sec.35(2AB) of the Act, the Honourable High Courts have held that the date of approval of scientific research facility is not relevant. On the contrary, for availing deduction u/s 36(1)(xii) of the Act, the assessee itself should have been notified by the Central Government. Hence it is a question as to whether the assessee is a notified entity or not. In our view, there is vast difference between approval of a facility and notification of the assessee itself.

 

28. The assessee has been notified only subsequently in April, 2014, the copy of which is placed at page 204 of the paper book. Paragraph 2 of the said notification is relevant here:-

 

“2. This notification shall be applicable with effect from Assessment year 2013-14 onwards, relevant to F Y 2012-13 in which the application seeking notification u/s 36(1)(xii) of the Income tax Act, 1961 was filed.”

 

It can be noticed that the Central Government has notified the assessee from AY 2013-14 onwards, meaning thereby, the assessee was not notified for the year under consideration. It is the contention of the assessee that the above said not notification should be read as applicable to the years prior to AY 2013-14 also. However, the CBDT, being the authority issuing notification, has itself stated that the assessee is recognized u/s 36(1)(xii) of the Act from AY 2013-14 onwards.

 

29. In the decisions relied on by the assessee, it was the assessing officer, who had disallowed the claim for non-approval of scientific research facility. Hence it was a question of interpretation of the provisions of sec.35(2AB) of the Act. That is the not the case here. When the notifying authority itself has mentioned that the assessee is being notified from AY 2013-14 onwards, we are of the view that the assessee cannot be deemed to have been notified in the year under consideration, being AY 2010-11. Accordingly, we confirm the disallowance made by the AO.

 

The order passed in the miscellaneous application is extracted below:-

 

“8. We heard rival submissions and perused the record. With regard to various submissions made by the assessee, we hold as under:-

 

(a) With regard to the paragraph 30 of the order passed by the Tribunal, we notice that the Tribunal has made the observation out of context without correctly appreciating the facts, as submitted by the Ld A.R. As contended by him, it is nobody’s case that the promotional expenditure claimed by the assessee u/s 36(1)(xii) is attributable to Government’s contribution. Accordingly, the observations made in paragraph 30 constitutes mistake apparent from record. Accordingly, we omit paragraph 30 of the order.

 

(c) With regard to the contention of the Ld A.R that the notification issued u/s 36(1)(xii) shall have retrospective application, we notice that the Tribunal has passed a detailed order and has expressed a view on this issue. Hence the plea of the assessee would result in review of the order so passed by the Tribunal, which is not permitted u/s 254(2) of the Act. Accordingly, we reject this contention of the assessee.

 

(d) With regard to the alternative contention raised that the said expenditure is allowable u/s 37(1) of the Act, we notice that the Tribunal has not adjudicated the same. Accordingly, following paragraph shall be inserted as paragraph no.30 in the impugned order:-

 

“30. The assessee has raised an alternative contention that the expenditure claimed u/s 36(1)(xii) of the Act is allowable u/s 37(1) of the Act. Since the AO has not examined this issue under the provisions of sec. 37(1) of the Act, we restore this issue to the file of AO for examining the same.”

 

5.6 Since the facts are identical, following the decision rendered by the Tribunal in AY 2010-11, we reject the contentions of the assessee to allow deduction u/s 36(1)(xii) of the Act in AY 2011-12 and 2012-13, since it was held by the Tribunal in AY 2010-11 that the notification issued by the CBDT recognizing the assessee from AY 2013-14 cannot be applied retrospectively. However, we admit the alternative contentions of the assessee for these two years that the expenditure incurred on promotional activities may be allowed as deduction u/s 37(1) of the Act and restore the same to the file of AO for examining the alternative claim in AY 2011-12 and 2012-13.

 

5.7 In respect of AY 2014-15 is concerned, we noticed earlier that the AO had disallowed the claim on multiple reasons. The first reasoning is that the assessee is not a notified entity, which was factually incorrect, since the assessee has been notified from AY 2013-14 onwards. This has been addressed by Ld CIT(A) accordingly. However, other reasoning given by the AO were not addressed by Ld CIT(A). The AO has stated that the expenses incurred are developmental in nature and hence they cannot be considered as having been incurred wholly and exclusively for the purposes of business. We notice that the AO has not given any reason or basis for arriving at such a conclusion. We notice that the assessee exists for so many years and the very object of establishing the assessee is for promotion of rural and agricultural development. Further, the provisions of sec.36(1)(xii) specifically allow the promotional expenses. Hence, we are of the view that the promotional expenses should be considered to have been incurred wholly and exclusive for the purposes of its business only. Hence this reasoning also fails.

 

5.8 The last reasoning given in AY 2014-15 is also given in AY 2015-16 and 2019-20. It is that the promotional expenses are related to various funds created by the assessee and the said funds were created by appropriating profits from the Profit and Loss account of earlier years and hence the promotional expenses should have been debited to the relevant funds and not to the Profit and Loss account. We noticed earlier that, in AY 2019-20, the Ld CIT(A) has confirmed part of disallowance, i.e., the expenditure relatable to “Producers Organisation Development Fund” (PODF) on the reasoning that the assessee is not the owner of PODF and hence the expenditure relating to the same cannot be claimed as deduction by the assessee.

 

5.9 We heard the parties on this issue. Earlier, we have held that the income attributable to the funds held by the assessee in fiduciary capacity would get diverted at source. Hence, we are of the view that the said principle should be applied in respect of expenditure also. However, it is possible that various funds might have been set up by combining contributions from assessee and Government. Hence, this issue needs to be examined by following certain principles. In our view, following principles may be followed in examining the claim for deduction of promotional expenses u/s 36(1)(xii) of the Act:-

 

(a) if a fund has been created entirely out of the funds given by/belonging to the Government and it is held in fiduciary capacity by the assessee, then if the promotional expenditure has been incurred by the assessee out of the said fund as per the requirement of/direction given by the Government, then the same cannot be considered as business expenditure of the assessee and accordingly, the same cannot be claimed as deduction by the assessee. This is for the reason that the expenditure has been incurred by the assessee on behalf of the real owner of funds, i.e., GOI. On the contrary, if there is no such requirement/direction, then, in our view, the promotional expenses and the fund cannot be linked together and hence the entire expenses is allowable as deduction u/s 36(1)(xii) of the Act.

 

(b) if the fund has been created exclusively out of the funds appropriated from the Profit and Loss account of the assessee, then the entire promotional expenses claimed by the assessee is allowable as deduction u/s 36(1)(xii) of the Act. This is for the reason that the entire funds belong to the assessee, even though different names might have been given to various funds, since those funds might have been created for the convenience of the assessee or as per statutory requirements. The question of diversion of funds at source will not arise to these types of funds created by appropriating part of profits of the assessee. In any case, the fact would remain that those funds are used for the purposes of business of the assessee only. Hence, under these set of facts, entire promotional expenses is allowable as deduction u/s 36(1)(xii) of the Act.

 

(c) if the fund has been created both out of the contributions made by the Government and assessee (either by way of contribution or appropriation of profits), then the promotional expenses attributable to the assessee’s contribution is allowable as deduction u/s 36(1)(xii) of the Act. In respect of contribution by Government, the discussion made in clause (a) would apply.

 

We notice that the facts relating to the relevant funds have not been brought on record. Hence, in our view, this issue requires fresh examination at the end of the AO in the light of principles discussed above. The AO may also examine the claim for deduction u/s 37(1) of the Act, if required. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in AY 2014-15, 2015-16 and 2019-20 and restore the same to the file of AO for examining it afresh in the light of principles discussed above.”

 

14. Following the decision of ITAT as elaborated above, the issue of claim of deduction of promotional expenses relating to Producers Organization Department Fund (PODF) is restored to the file of assessing officer for deciding afresh after examination of the claim of deduction as directed in the decision of ITAT referred above. Therefore, this ground of appeal of assessee is allowed for statistical purposes.

 

15. Ground No. 2: Additional disallowance u/s 14A and additional ground of appeal filed by the assessee that no disallowance can be sustained u/s 14A of the Act as no satisfaction has been recorded by the assessing officer.

 

16. During the course of assessment, the assessing officer noticed that assessee has made suo moto disallowance u/s 14A of the Act to the amount of Rs. 12,97,30,254/-. However, the AO has not agreed with the disallowance made by the assessee and made an additional disallowance of Rs. 3,33,00,000/- u/s 14A r.w.r. 8D of the I.T. Rules.

 

17. The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee stating that the AO has given a specific finding that the assessee has made substantial investment from which it will derive exempt income for future and also referred Circular No. 5/2014 dated 11.02.2014 of the CBDT on the point that section 14A r.w.r. 8D provides for disallowance for expenditure even when tax payer in particular year has not earned any exempt income.

 

18. Before us, the ld. Counsel has also filed the additional ground of appeal vide letter dated 24.09.2024that assessing officer has not recorded any satisfaction as mandated by the Income Tax Act, 1961 r.w.r. 8D of the Income Tax Rules, 1962.

 

19. The ld. Counsel also referred the decision of Hon’ble Delhi High Court in the case of PCIT (Central) vs Era Infrastructure (India) Ltd. that amendment made by Finance Act, 2022 to Section 14A will take effect from 01.04.2022 and cannot be applied retrospectively.

 

20. On the other hand, ld. DR supported the order of lower authorities.

 

21. Heard both the sides and perused the material on record. The assessing officer has made additional disallowance of Rs. 3,33,00,000/- on the ground that assessee has made substantial investment which will derive exempt income in future after referring the Circular No. 5/2024 dated 11.02.2014. We find that Hon’ble Delhi High Court in the case of Ira Infrastructure (India) Ltd. as referred above held that amendment made by the Finance Act, 2022 to Section 14A will take effect from 01.04.2022 and the same cannot be applied retrospectively, therefore, we find that decision of ld. CIT(A) in sustaining the additional disallowance made by the assessing officer on the proposition that substantial investment will derive exempt income in future is not justified. During the course of appellate proceedings before us, the ld. Counsel has also referred the decision of PCIT-2 vs Bombay Stock Exchange Ltd. wherein it is held that prior to working out disallowance u/s 14A by applying Rule 8D the assessing officer must record a conclusion that he is not satisfied with suo moto disallowance offered by the assessee. In this regard, we have perused the assessment order para 3.1.5 of the assessment order wherein the AO has made additional disallowance merely on the proposition that venture capital fund was also capable of generating exempt income and also pointing out that on some of the investment in equity share assessee has not received dividend during the year etc. without demonstrating the existence of any dividend income earned by the assessee during the year under consideration. Therefore, both the ground of appeal filed by the assessee are allowed.

 

22. In the result, the appeal of the Revenue is dismissed and appeal of the assessee is partly allowed.

 

Order pronounced in the open court on 06.12.2024.

 

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