Dairy activity is not ‘Industry or Agriculture’ u/s 36(1)(viii) of Income Tax Act: Gujarat HC denies Claim of National Dairy Development Board [Read Order]

The Gujarat High Court in a recent ruling in favour of the Income Tax Department, held that dairying is not an industry or agricultural development or development of industrial facility for the purpose of direct taxation under Section 36(1)(ii) of the Income Tax Act, 1961.

Hearing an appeal by the National Dairy Development Board, the High Court of Gujarat analysed the nature of ‘dairying’ at length and the decision was held in favour of the revenue.

Five substantial questions of law were framed as issues for decision by the Bench comprising the Chief Justice Aravind Kumar and Justice Ashutosh J Shastri, namely–

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in confirming disallowance of deduction under Section 36(1)(viii) for Rs.9,90,00,000?

2. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that ‘dairying’ is not industry or agricultural development or development of industrial facility for the purpose of Section 36(1)(iii) of the Income Tax Act, 1961?

3. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that in absence of share capital, deduction under Section 36(1)(viii) cannot be allowed?

4. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in concluding that grants given to various cooperative societies are not deductible expenditure under Section 36(1)(xii) of the Act and holding that the same are not in the nature of expenditure?

5. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that in absence of approval to deed of variation the payment of Rs.5,61,56,408/- being contribution made to National Dairy Development Board Employees Group Gratuity Funds cannot be allowed?

The assessee claimed deduction of Rs.9.90 Crores under Section 36(1)(viii) of the Act. The assessee contended before the AO and reiterated before the appellate authority and also before the Tribunal that as a provider of long term finance for agricultural and industrial development it is entitled to claim deduction of Rs.9.90 Crores, which amount was equivalent to the reserve created for the purpose.

The Gujarat HC, in regard to this question, perused the Sections 28 and 36 of the Income Tax Act, 1961; notably in a strict sense in the light of a recent judgement Krishi Upaj Samiti v. Commissioner of Central Excise and Service Tax, Alwar. 

It was observed that “the assessee in computation of the income has claimed deduction of Rs. 9.90 crores contending that it has provided long term financing for agricultural development and therefore eligible for deduction under section 36(1)(viii) of the Act to the extent of profit derived from such activities subject to creation of special reserve.”

The Sections 36(1)(iii) and 36(1)(xii) were also analysed by the court for reaching a judicious decision and it was observed that the contention raised by the assessee, National Dairy Development Board cannot be accepted as providing long term finance for various dairy co-operations cannot be covered as long term finance extended for agricultural or industrial development.

It was thus held, on the observation made by the bench that the activity of dairy business cannot be construed as agricultural activity, that no deduction or relief can be availed by the assessee.

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