2006 (4) TMI 188 - AT - Income Tax

Income From Co-Operative Societies - Applicability of u/s 14A - Income by way of interest or dividends derived by the cooperative society from its investments with any other cooperative society is deduction is permissible u/s 80P ? whether the deduction is to be computed with reference to the gross interest received from the member co-operative societies or the net interest as included in the gross total income of the assessee - HELD THAT - It is evident from the decision of the Hon'ble Supreme Court in the case of U.P. Co-operative Federation Ltd. 1989 (2) TMI 3 - SUPREME COURT , the advances made by the assessee to the member co-operative societies for the purpose of procurement of milk etc. in the course of its business falls within the category of 'investments' and interest thereon accordingly qualifies for deduction u/s 80P(2)(d). We may also usefully refer to the decision of Haryana Co-operative Sugar Mills Ltd. 1989 (2) TMI 42 - PUNJAB AND HARYANA HIGH COURT , In this case it was held that the amount deposited by one co-operative society with another, whether for long-term or short-term would be an investment within the meaning of section 80P(2)(d). We are, therefore, of the considered view that the interest earned by the assessee on the advances given to the member co-operative societies for procurement of milk qualifies for deduction u/s 80P(2)(d) of the Income-tax Act, 1961. We hold accordingly. Admittedly, the income referred to in section 80P(2)(d) is included in the gross total income but once the said income is excluded by virtue of section 80P(2)(d) it no longer can be said to be included in the total income. Since deduction u/s 80P(2)(d) is allowed to the assessee out of the gross total income, the income described in section 80P(2)(d) no longer is included in the total income notwithstanding the fact that the said income is included in the gross total income. We accordingly hold that section 14A is applicable even in respect of the incomes which are excluded from the total income by virtue of deductions under Chapter VI-A. This view gets further support from the prescribed form of return of income. Sl. No. 18 provides for the gross total income, Sl. No. 19 provides for deductions under Chapter VI-A and Sl. No. 20 provides for the total income. It is therefore, evident that total income as per the return does not include the income referred to in section 80P(2)(d). Therefore, the provisions of section 14A inserted with effect from 1-4-1962 are clearly attracted in this case. We are, therefore, of the considered view that deductions permissible to the assessee u/s 80P(2)(d) is in respect of the net income after excluding the expenses attributable to the income referred to in section 80P(2)(d). In case some expenditure is indivisible, vis a vis other receipts of business, the same shall have to be apportioned between the various. types of receipts and deductions u/s 80P(2)(d) computed accordingly. We hold that assessee is entitled to deduction u/s 80P(2)(d) in respect of interest received on advances provided to the member co-operative societies. So, however, the deduction permissible to the assessee is in respect of the net income after deduction of expenses attributable to the earning of such income. We hold accordingly. Thus, we would like to clarify that after the insertion of section 14A, any decision to the contrary is inapplicable to the proposition involved in this appeal. In the result, the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Entitlement to deduction under Section 80P(2)(d) for interest on advances to cooperative societies.
2. Quantum of deduction under Section 80P(2)(d).

Detailed Analysis:

Issue 1: Entitlement to Deduction under Section 80P(2)(d)

The primary issue is whether the assessee, a cooperative society, is entitled to a deduction under Section 80P(2)(d) for interest earned on advances provided to other cooperative societies. The assessee claimed that the interest income from cooperative societies qualified for this deduction. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) denied this deduction, arguing that the interest was a business receipt from day-to-day operations, not an investment.

The Tribunal referred to the Supreme Court decision in CIT, Lucknow v. U.P. Co-operative Federation Ltd., which held that advances made to cooperative societies for business activities qualify as investments, and the interest derived is entitled to deduction under Section 14(3)(1)(iii) of the Indian Income-tax Act, 1922. The Tribunal concluded that Section 80P(2)(d) of the 1961 Act is pari materia with Section 14(3)(1)(iii) of the 1922 Act. Therefore, the interest earned by the assessee on advances to member cooperative societies qualifies for deduction under Section 80P(2)(d).

Issue 2: Quantum of Deduction under Section 80P(2)(d)

The second issue concerns whether the deduction under Section 80P(2)(d) should be computed on the gross or net interest income. The AO argued that financial expenses directly attributable to earning the interest income should be deducted before allowing the deduction. The Tribunal examined the legislative framework, including Sections 80A, 80B, and 80P, and the definition of "gross total income."

The Tribunal relied on the Supreme Court's decision in Distributors (Baroda) P. Ltd. v. Union of India, which established that deductions under Chapter VIA should be based on net income computed according to the Act's provisions. The Tribunal also referred to the Supreme Court's decision in Sabarkantha Zilla Kharid Vechan v. CIT, which held that exemptions under Section 81(i)(d) (now Section 80P) apply to net profits and gains, not gross income.

The Tribunal noted that Section 14A, inserted with retrospective effect, disallows deductions for expenses related to income not included in the total income. Since the income referred to in Section 80P(2)(d) is excluded from the total income, Section 14A applies, requiring the deduction to be computed on net income after deducting attributable expenses.

Conclusion:

The Tribunal concluded that the assessee is entitled to a deduction under Section 80P(2)(d) for interest earned on advances to cooperative societies. However, the deduction must be computed on the net interest income after deducting expenses attributable to earning such income. The appeal was partly allowed, affirming the entitlement to the deduction but requiring it to be calculated on a net basis.