The main legal point established in the judgment is the strict interpretation of taxing statutes and the requirement for adherence to the plain language of the law, as well as the need for approval of the gratuity fund for claiming deduction.

ORDER :

ARAVIND KUMAR, J.

1. This Court while admitting the appeal had formulated the following substantial questions of law :

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

(C) 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?

(D) 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 u/s. 36(1)(viii) cannot be allowed?

(E) Whether, on the facts and in the circumstances of the case, the ITAT was right in law in concluding that grant given to various cooperative societies is not deductible expenditure u/s.36(1)(xii) of the Act and holding that the same are not in the nature of expenditure?

(F) 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?”

2. The assessee is a corporate body created by an Act of Parliament called National Dairy Development Act, 1987. Assessee claims the status of a company as per the definition of company under the provisions of the Income Tax Act. The assessee does not have authorized, issued or paid up share capital. It has not been incorporated as a company under the Companies Act, 1956. The assessee has no shareholders either in the Government sector or in the banking/institutional sector.

3. The issue involved in this appeal is relatable to the assessment year 2003-04. The return of income filed by the assessee discloses that it had declared taxable income of Rs.81,03,26,249/-, which came to be processed under Section 143(1) of the Act and refund of Rs.15,26,18,119/- came to be issued to the assessee. Subsequently, further refund of Rs.16,13,021/- was issued. After issuance of notice under Section 143(2) of the Act, the scrutiny assessment proceeding was commenced and assessment order came to be passed on 31.03.2003. The deduction claimed under section 36(1) (viii) of the Act for Rs. 9,90,00,000/- was disallowed on the ground that assessee was notified as a Public Financial Institution (for short ‘PFI’) on 23.02.2004 namely it falls in the subsequent year; the activity of dairy business cannot be termed as agricultural activity; finances advanced to dairy cooperatives could not be covered under the category of ‘milk food’ as classified under Clause 27 of the of the First Schedule of the Industrial (Development and Regulation) Act, 1951 (hereinafter referred to as ‘the Industrial Act’ for short); the mandate of the provision required that the aggregate of the amount carried to special reserve account created for the purpose should not exceed twice the amount of the paid up share capital, it could not create any reserve as there is no paid up share capital and therefore, the limit upto which special reserve can be created was indeterminable vide assessment order dated 15.06.2005 (Annexure ‘A’). The assessee being aggrieved by the said order filed an appeal before CIT (Appeals), who dismissed the same by order dated 18.01.2006 affirming the order of the Assessing Officer. Further appeal before the Tribunal did not yield any result to the appellant – assessee and the claim of the appellant came to be negatived by the ITAT vide order dated 08.08.2007 (Annexure C) by affirming the order of the Assessing Officer and CIT (Appeals). However, the Tribunal held that claim of the assessee as regards status of Public Financial Institution, it had applied on 10.07.2002 i.e. within the year of assessment order under consideration and the notification granting status of PFI was on