2019 (4) TMI 1852 - AT - Income Tax

Deduction u/s 80P(2)(iv) - sale of seeds claimed u/s 80P(2)(iv) - assessee engaged in the business of milk processing, production of milk products and cattle feed - HELD THAT - It appear from the records that the assessee has not attributed any direct or indirect expenses to its cotton seeds sale activities. However, the Assessing Officer, estimated the indirect expenses attributable to such activity and disallowed the entire claim of deduction under Section 80(P)(2)(iv) in spite of furnishing trading account on the seed selling unit by the assessee. It further appears that the Assessing Officer estimated such expenses at 40% of the gross profit for A.Y. 2011-12 in assessee s own case which was further upheld by the Learned CIT(A) and following the decision of the predecessor, the Learned CIT(A) directed the Assessing Officer to allocate indirect expenses at 40% of gross profit and to allow deduction u/s 80(P)(2)(iv) of the Act on the balance amount. It is a fact that additional expenditure except transportation allocation along with milk vehicles no expenditure seems to be incurred by the assessee as it appears from the records before us. If that be so then the allocation of indirect expenses at 40% of gross profit does not seem reasonable taking into consideration the entire aspect of the matter. We, therefore, restrict the said allocation of indirect expenses at 20% of the gross profit. The Learned AO is, therefore, directed to allow deduction u/s 80(P)(2)(iv) of the Act on the balance amount. Hence assessee s this ground of appeal is partly allowed. Disallowance of deduction u/s 14A r.w.r. 8D - no expenditure incurred to earned exempt income - HELD THAT - Since section 14A is applicable for the expenditure incurred to earned exempt income and not to the income deductible under chapter VIA of the Act respectfully relying upon the said judgment, we find no justification in disallowing the claim of deduction u/s 14A of the Act r.w.r. 8D of the Rule in the case of the assessee before us. In that view of the matter such disallowance is deleted. Hence assessee s ground of appeal is allowed.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80P(2)(iv) of the Income Tax Act for sale of seeds.
2. Disallowance of deduction under Section 14A read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(iv):

The assessee challenged the disallowance of a deduction amounting to ?6,46,875/- claimed under Section 80P(2)(iv) of the Income Tax Act for the sale of seeds. The assessee, engaged in milk processing and related activities, filed a return for A.Y. 2013-14 declaring a total income of ?4,81,36,780/-. The Assessing Officer (AO) observed that the assessee declared a profit of ?6,46,875/- from the sale of seeds but did not attribute any indirect expenses to this activity. Relying on the precedent set by the Gandevi Taluka Khedut Sahakari Sangh Ltd. vs. CIT, the AO disallowed the entire deduction, asserting that deductions under Section 80P(2)(iv) should be based on net profit, not gross profit.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to allocate indirect expenses at 40% of the gross profit and allow the deduction on the remaining amount. The assessee argued that no separate infrastructure or additional expenditure was required for selling the seeds, as it was a trading activity with minimal costs, primarily transportation. The tribunal found the allocation of 40% of gross profit as indirect expenses unreasonable and reduced it to 20%. The AO was directed to allow the deduction on the balance amount, thus partly allowing the assessee's appeal.

2. Disallowance of Deduction under Section 14A read with Rule 8D:

The assessee also contested the disallowance of ?7,98,033/- under Section 14A read with Rule 8D, related to exempt income under Section 10(34). The AO noted that the assessee had not made any disallowance under Section 14A and computed the disallowance at ?7,98,033/-, which was upheld by the CIT(A). The assessee argued that the investments were made from its own funds, not borrowed funds, and relied on the judgment of CIT vs. Banaskantha Dist. Co-Op Milk Producers Union Ltd., which held that Section 14A does not apply to deductions under Chapter IV.

The tribunal reviewed the materials and found that the assessee had sufficient own funds and that the AO had not demonstrated that investments were made from borrowed funds. The tribunal also referenced the jurisdictional High Court's ruling in the Banaskantha case, which clarified that Section 14A applies to exempt incomes, not to deductions under Chapter VIA. Consequently, the tribunal deleted the disallowance of ?7,98,033/- under Section 14A read with Rule 8D, allowing the assessee's appeal on this ground.

Combined Result:

The tribunal's order resulted in both of the assessee's appeals being partly allowed. The decision was pronounced in open court on 30/04/2019.