1999 (5) TMI 46 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction under section 80P(2)(a)(vi) of the Income-tax Act.
2. Formation and membership criteria of the Co-operative Society.
3. Utilization of labour and the nature of work performed.
4. Applicability of the Gujarat High Court decision in a similar case.
5. Levy of interest and penalty for non-deduction of tax at source.
6. Disallowance of provision for expenses.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(vi):
The primary issue was whether the assessee, a registered society formed by ONGC employees, was eligible for deduction under section 80P(2)(a)(vi) of the Income-tax Act. The Assessing Officer disallowed the claim on grounds that the society did not meet the conditions specified in the section, particularly that the society was not formed by persons of small means and that the actual labourers were neither members nor had voting rights.

2. Formation and Membership Criteria of the Co-operative Society:
The society was formed by eleven senior Class-I ONGC employees, who had a lien on their jobs for three years. The Assessing Officer noted that despite employing 40 to 60 daily wage labourers, none of them were made members of the society, nor were they given voting rights, which contravened the proviso to section 80P(2)(a)(vi).

3. Utilization of Labour and the Nature of Work Performed:
The society engaged in borewell drilling, a task requiring significant manual labour. The Assessing Officer argued that the society's operations were heavily reliant on the labourers who were not members, thus failing to meet the requirement that earnings must be through the collective disposal of the members' labour.

4. Applicability of the Gujarat High Court Decision in a Similar Case:
The CIT(A) upheld the Assessing Officer's decision based on the Tribunal's ruling in the case of Orient Borewell Co-op. Society Ltd., which was affirmed by the Gujarat High Court. The High Court held that the income derived by the society was akin to that of an ancillary unit of ONGC, functioning like an industrial undertaking, and not through the collective disposal of its members' labour.

5. Levy of Interest and Penalty for Non-deduction of Tax at Source:
The assessee argued that they should not be penalized with interest and penalties as they were permitted by the Assessing Officer not to deduct tax at source. The Tribunal acknowledged this point, remitting the issue of interest liability back to the Assessing Officer for fresh consideration, while noting that penalty proceedings are separate and the assessee could raise objections during those proceedings.

6. Disallowance of Provision for Expenses:
The Assessing Officer disallowed a provision for expenses amounting to Rs. 12.5 lakhs, stating that it was not an actual liability incurred during the relevant period. The CIT(A) upheld this disallowance, citing that the liability had not crystallized and was not precisely quantified. The Tribunal found no convincing rebuttal from the assessee and upheld the CIT(A)'s decision.

Conclusion:
The Tribunal concluded that the disallowance of the deduction under section 80P(2)(a)(vi) was justified based on the Gujarat High Court's ruling in a similar case. The appeal was partly allowed, remitting the issue of interest liability back to the Assessing Officer for reconsideration, while upholding the disallowance of the provision for expenses.