2010 (1) TMI 940 - AT - Income Tax

Deduction u/s 80P(2)(d) - whether permissible to the assessee in respect of the gross interest received from the member co-operative societies or net interest computed in accordance with the provisions of the Act? Held that - It would be appropriate to allocate the interest expenses on the basis of the proportion of the eligible interest income in question vis-a-vis total receipts of business as shown in the P/L a/c order of the CIT(A) set aside and AO directed to rework the interest expenses attributable to the earning of interest income from the member cooperative societies appeals of the Revenue are partly allowed.

Summary

Issues Involved:
1. Computation of deduction under Section 80P(2)(d) of the Income Tax Act, 1961.
2. Allocation of interest expenditure attributable to earning interest income from member co-operative societies.
3. Allocation of head office expenses attributable to earning interest income from member co-operative societies.

Detailed Analysis:

1. Computation of Deduction under Section 80P(2)(d):
The primary issue before the Tribunal was whether the deduction under Section 80P(2)(d) of the Income Tax Act, 1961, should be computed on the gross interest received from member co-operative societies or the net interest after deducting expenses attributable to earning such income. The Tribunal had previously held that the deduction should be on the net income after deducting relevant expenses. The Tribunal stated, "deductions permissible to the assessee under s. 80P(2)(d) are in respect of the net income after excluding the expenses attributable to the income referred to in s. 80P(2)(d)."

2. Allocation of Interest Expenditure:
The AO initially computed the deduction by considering the entire interest expenditure incurred by the assessee. However, the assessee contended that only a portion of the interest expenditure should be attributable to earning the interest income from member co-operative societies. The CIT(A) agreed with the assessee, directing that only 48% of the interest expenditure be considered, based on the proportion of working capital loans raised to the total loans advanced to member co-operative societies. The Tribunal found that an element of estimation was necessary and directed the AO to rework the interest expenses based on the proportion of eligible interest income to the total business receipts.

3. Allocation of Head Office Expenses:
The AO had allocated head office expenses based on the percentage of interest receipts to total receipts, which was 13.82%. The CIT(A) adjusted this to 13.69% based on revised calculations. The Tribunal agreed with the need for estimation but directed the AO to reallocate head office expenses similarly to the interest expenditure, based on the proportion of eligible interest income to total business receipts.

Conclusion:
The Tribunal concluded that both interest and head office expenses should be allocated proportionately based on the ratio of eligible interest income to total business receipts. The CIT(A)'s order was set aside, and the AO was directed to recompute the deduction under Section 80P(2)(d) accordingly. The Tribunal's decision for the assessment year 2002-03 was applied to subsequent years 2005-06 and 2006-07, resulting in the Revenue's appeals being partly allowed.