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The issue arose when the I-T department rejected the National Dairy Development Board’s (NDDB) claim that it had extended long-term financial aid to various dairies and hence the NDDB was not liable to pay direct tax to the tune of Rs 9.90 crore. The I-T department refused to accept the deductions under provisions of section 36(1)(iii) of the I-T Act while assessing the board’s returns for the year 2003-04.
In 2003-04, the board showed taxable income of Rs 81 crore and a refund of nearly Rs 15.61 crore was granted by the I-T department. However, deductions of Rs 9.90 crore were rejected, also on the ground that NDDB was notified as a public financial institution a year later. The I-T department also said that the activity of dairy business cannot be termed as agricultural activity and finances advanced to dairy cooperatives could not be covered under the category of milk food as classified under the Industrial Act.
The NDDB unsuccessfully appealed before the Income Tax Appellate Tribunal (ITAT) for deductions on the financial aid it had extended to milk cooperatives for their development as a government financial institution. The issue landed in the high court in 2008.
Among different issues that the HC framed, one was “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?”
The board’s counsel submitted that recipients of NDDB finances are in the activity of agricultural development and the assessment officer could not have disallowed the deduction claimed in this category by treating the recipients as carrying out agricultural activity.
He also submitted that the department and ITAT completely misunderstood the activity of ‘agricultural development’ to ‘agricultural activity’, which are separate and distinct.
It was also not proper on part of the department in coming to a conclusion that the end product of those industries manufacturing the ‘milk foods’ are not turning out any new product and hence they cannot be brought under the definition of eligible business for qualifying of their financier to claim deductions.
After hearing the case, the bench of Chief Justice Aravind Kumar and Justice Ashutosh Shastri rejected NDDB’s appeal and opined that providing long term finance for industrial or agricultural development to various dairy cooperatives cannot be covered as long term finance extended for agriculture or industrial development.
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