2005 (2) TMI 495 - AT - Income Tax

Summary

Issues involved:
1. Deduction under section 80P(2)(a)(ii) and (iv) for income derived from specific activities.
2. Disallowance of rebate paid to members.

Analysis:

Issue 1: Deduction under section 80P(2)(a)(ii) and (iv) for income derived from specific activities
The appeals by the Revenue were against the order of the CIT(A) concerning the deduction claimed under section 80P(2)(a)(ii) and (iv) for the assessment years 1993-94 and 1994-95. The assessee, a federal co-operative society engaged in marketing milk and milk products, claimed deductions amounting to Rs. 97,391 and Rs. 1,12,787 for the respective years. The AO rejected the claim, leading to an appeal. The CIT(A) found that the activities of the assessee were in line with the objectives defined under the Gujarat Co-operative Societies Act, 1961, and fell under the purview of section 80P(2)(a)(ii) and (iv). Referring to a decision of the Madras High Court, the Tribunal dismissed the Revenue's appeal, emphasizing a liberal construction of section 80P and the sufficiency of engagement in qualifying activities for claiming the deduction.

Issue 2: Disallowance of rebate paid to members
The second common ground in the appeals related to the disallowance of rebates paid to members. The AO contended that the amount represented a diversion of profit to the capital account, leading to disallowance. However, the CIT(A) reversed this observation, highlighting the co-operative nature of the society and the purpose of the rebates to incentivize members and maintain active cash flow. The Tribunal, guided by a decision of the Andhra Pradesh High Court, held that the rebates were not part of the profit but a business expenditure incurred for the purpose of the business. Consequently, the appeals of the Revenue were dismissed on this issue as well.

In conclusion, the Tribunal upheld the CIT(A)'s decision regarding both issues, emphasizing the alignment of the assessee's activities with the provisions of section 80P and the legitimate nature of the rebates paid to members as a business expenditure.