2002 (12) TMI 24 - HC - Income Tax

Co-operative Societies - purchase bonus - Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the purchase bonus is not allowable deduction out of profits and gains of business to the society? This question is answered in the negative, in favour of the assessee and against the Revenue - Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee-society was not entitled to deduction of Rs. 40,000 under section 80P(2)(c)(i) of the Income-tax Act, 1961? This question is answered in the affirmative, in favour of the Revenue and against the assessee

Summary

Issues Involved:
1. Whether the "purchase bonus" is an allowable deduction out of profits and gains of business to the society.
2. Whether the assessee-society was entitled to deduction of Rs. 40,000 under section 80P(2)(c)(i) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Purchase Bonus as Allowable Deduction

Background:
The assessee, a co-operative society, supplied coal and diesel to its members who are manufacturers of bricks and tiles. The society claimed deductions for "purchase bonus" payable to its members, arguing it is allowable as business expenditure under the Tamil Nadu Co-operative Societies Act. The Assessing Officer disallowed the claim, treating the payment as appropriation of net profit rather than an expenditure for earning business income. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this disallowance.

Arguments by Assessee:
The assessee contended that under Section 72 of the Co-operative Societies Act, the payment of "purchase bonus" is a deferred discount, payable based on the business done by members with the society. They cited Circular No. 117 from the Central Board of Direct Taxes and decisions from Andhra Pradesh High Court and Supreme Court supporting the view that such bonuses are deductible.

Arguments by Revenue:
The Revenue argued that the payment is an appropriation of income, not a deductible expenditure, as it is made out of net profits. They cited the decision in CIT v. South Arcot District Co-operative Supply and Marketing Society Ltd. [1981] 127 ITR 467 to support their stance.

Court's Analysis:
The court examined Section 72 of the Co-operative Societies Act and Rule 96 of the Tamil Nadu Co-operative Societies Rules. It concluded that the arrangement for disbursement of net profits under the Co-operative Societies Act has no relevance for determining taxable profits under the Income-tax Act. The court noted that the purchase bonus, although paid after determining net profits, serves as an incentive to members, effectively acting as a deferred discount. The court found that the real nature of the purchase bonus is a business expenditure and should be allowed as a deduction.

Precedents:
The court referred to CIT v. T.T.D. Co-operative Stores Ltd. [1998] 232 ITR 109 and Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, which supported the view that such payments are deductible as they relate back to the date of sale, reducing the sales figure in the trading account.

Conclusion:
The court concluded that the purchase bonus is a deductible business expenditure and answered the question in the negative, in favor of the assessee and against the Revenue.

Issue 2: Deduction under Section 80P(2)(c)(i)

Background:
The assessee claimed a deduction of Rs. 40,000 under section 80P(2)(c)(i) of the Income-tax Act, 1961. The lower authorities granted only Rs. 20,000, as the assessee was not considered a consumer co-operative society.

Arguments by Assessee:
No specific arguments were advanced by the assessee regarding this issue.

Court's Analysis:
The court examined Section 80P(2)(c) of the Income-tax Act, which provides different deductions for consumer co-operative societies and other societies. The court found that the assessee does not qualify as a consumer co-operative society, as the members used the supplied articles for manufacturing, not consumption.

Conclusion:
The court upheld the deduction of Rs. 20,000 as per the provisions of the Act and answered the question in the affirmative, in favor of the Revenue and against the assessee.

Final Judgment:
1. The common question regarding the "purchase bonus" was answered in the negative, in favor of the assessee and against the Revenue.
2. The question regarding the deduction under section 80P(2)(c)(i) was answered in the affirmative, in favor of the Revenue and against the assessee.

There were no orders as to costs.