2019 (11) TMI 1185 - AT - Income Tax

Business promotion expenses disallowances - HELD THAT - It emerges that neither the assessee has proved any nexus between the impugned expenses in the nature of loading and unloading charges and printing and stationery sales promotion by placing all supportive details in entirety nor the lower authorities have found any specific defect in the expenses in issue. Faced with this position, we deem it appropriate in larger interest of justice that a lumpsum disallowance of ₹ 1,00,000/- out of ₹ 4,19,204/- would be just and proper with the rider that the same shall not be treated as precedent in other assessment year. The assessee s instant first substantive ground is partly accepted in above terms Disallowance u/s 80P(2)(a)(i) deduction claim in the nature of interest income - HELD THAT - Issue of section 80P(2)(a)(i) deduction on interest income derived from parking of surplus funds in term deposits schemes of nationalized banks. The fact also remains that impugned disallowance has to be computed on netting basis and both the lower authorities have not taken into consideration the same in their respective orders. We therefore direct the AO to compute the impugned disallowance on netting basis as per law within three effective opportunities of hearing.

Summary

Issues Involved:
1. Disallowance of business promotion expenses.
2. Disallowance of section 80P(2)(a)(i) deduction.

Detailed Analysis:

1. Disallowance of Business Promotion Expenses:
The assessee challenged the correctness of the disallowance of business promotion expenses amounting to ?4,19,204/- at 20% by both the lower authorities. The assessee contended that the expenses were incurred wholly and exclusively for business purposes, and the books were audited by the state government’s Registrar of Cooperative Societies. The CIT(A) upheld the disallowance, noting that most expenditures were made in cash and lacked sufficient bills and vouchers.

The tribunal considered both parties' arguments and concluded that neither the assessee proved the nexus between the expenses and business activities nor did the lower authorities find specific defects. In the interest of justice, the tribunal deemed a lumpsum disallowance of ?1,00,000/- out of ?4,19,204/- to be appropriate, specifying that this should not be treated as a precedent for other assessment years.

2. Disallowance of Section 80P(2)(a)(i) Deduction:
The assessee's claim for a deduction under section 80P(2)(a)(i) amounting to ?3,23,80,202/- was disallowed by the lower authorities. The CIT(A) held that the assessee, not being a Primary Agricultural Credit Society (PACS) or a Primary Cooperative Agricultural and Rural Development Bank (PCARDB), was covered under the definition of a Cooperative Bank as per section 80P(4) and thus not eligible for the deduction.

The tribunal referred to the assessee's past appeals and the Supreme Court judgment in Totgar’s Cooperative Sale Society Ltd. vs. ITO, which held that interest income from surplus funds invested in short-term deposits and securities should be taxed as "income from other sources" and not eligible for deduction under section 80P(2)(a)(i). The tribunal noted that the assessee’s interest income was derived from surplus funds invested in term deposits in different banks, including the State Bank of India.

The tribunal concluded that the interest income derived from investments is not eligible for deduction under section 80P(2)(a)(i). It directed the Assessing Officer to re-compute the disallowance on a netting basis, considering any interest income earned from investments made under sections 63 and 64 of the Multi-State Cooperative Societies Act, 2002, to be attributable to the business of providing credit facilities to members. This computation should be done within three effective opportunities of hearing.

Conclusion:
The appeal was partly allowed. The tribunal reduced the disallowance of business promotion expenses to ?1,00,000/- and directed the Assessing Officer to re-compute the section 80P(2)(a)(i) deduction disallowance on a netting basis.