2011 (3) TMI 615 - HC - Income Tax

Deduction u/s 80P(2(d) - computing the interest income derived from another co-operative societies for the purposes of computing deduction - Applicability of section 14A - As per the bye-laws of the appellant- Federation deductions were admissible to it under section 80P(2)(a)(i) of the Act on the income derived by it from its members by way of interest on its investments as loan and advances for their working capital - assessee is entitled to deduction under section 80P(2)(d) of the Act after excluding the expenditure attributable to the earning of such income - It may be noticed that section 80P was inserted in place of section 81 which was simultaneously deleted by Finance (No. 2) Act 1967 with effect from 1-4-1968 Regarding Section 14A - on consideration of facts involved therein had concluded that there was no expenditure which had been incurred by the assessee for earning the income and the same did not form part of total income - Decided against the assessee

Summary

Issues:
1. Interpretation of section 80P(2)(d) of the Income-tax Act, 1961.
2. Allowability of expenses attributable to interest income for deduction under section 80P(2)(d).
3. Applicability of section 14A to deductions under section 80P(2)(d).

Interpretation of section 80P(2)(d) of the Income-tax Act, 1961:
The case involved an appeal under section 260A of the Income-tax Act, 1961, regarding the interpretation of section 80P(2)(d) of the Act. The appellant, an Apex body of Co-operative Societies, claimed deduction under section 80P(2)(d) for interest income derived from member societies. The Assessing Officer initially disallowed the deduction, stating that working capital advances did not qualify as 'investments.' The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal accepted the appellant's plea and allowed the deduction under section 80P(2)(d) for interest received on advances provided to member co-operative societies. The deduction was permitted after deducting expenses incurred for earning such income.

Allowability of expenses attributable to interest income for deduction under section 80P(2)(d):
The main contention revolved around whether expenses incurred for earning income deductible under section 80P(2)(d) should be reduced from such income. The appellant argued against this reduction, citing previous judgments. On the other hand, the Revenue argued that post the insertion of section 14A in the Act, expenses related to income not part of the total income should be excluded. The court, after considering the submissions, upheld the Revenue's contention. Referring to relevant case laws, the court emphasized that the assessee is entitled to deduction under section 80P(2)(d) after excluding expenses attributable to the earning of such income.

Applicability of section 14A to deductions under section 80P(2)(d):
The insertion of section 14A in the Income-tax Act by Finance Act, 2001, was crucial in determining the applicability of expenses incurred for earning income not forming part of the total income. The court discussed the scope of section 14A, emphasizing that expenses can only be allowed if they are related to the earning of taxable income. The court referred to a Supreme Court judgment to clarify that section 14A aims to prevent the deduction of expenses incurred in relation to exempt income against taxable income. The court concluded that section 14A clarifies the treatment of expenses incurred in relation to exempt income, ensuring that expenses are only allowed concerning the earning of taxable income.

In conclusion, the court dismissed the appeals, ruling against the assessee and in favor of the Revenue. The judgments cited and the interpretations of sections 80P(2)(d) and 14A were pivotal in determining the deductibility of expenses and the applicability of these provisions to the case at hand.