2024 (8) TMI 1172 - AT - Income Tax

Deduction u/s 80P(2)(vi) - Deduction in respect of income of co-operative societies - income earned by the assessee is not only from collective disposal of labour but also from amount received on account of material - HELD THAT - The words Collective Disposal of labour of its Members assumes significance. In our considered view the dominant purpose of assessee is collective disposal of labour in area of civil works. The assessee admittedly while rendering civil works majorly in the terms of labour collectively works for gain. Since civil works is highly fragmented industry in India at times both the Central Government, the State Government, the Local Bodies like Municipal Corporation, Councils, etc. including PSU, State PSU, Electricity Boards, CPWD, PWD Corporate, firms, NGO etc. Nowadays by way of tenders for small and medium size civil works invite the bids which are consisting of both material and labour as such civil works primarily are highly labour intensive consequently small to medium society have to bid for both in a competitive world even though their domain field is only pure labour. In order to survive in the competitive world they under quote on labour and a bare minimum on cost of material so that being lowest bidder they get the tender finally. The above requisite submissions are on record of the present case which has not been disputed by the Department seriously either before Ld. AO and / or before CIT(A). Consequently we are of the considered view that in the given context the services offered by the assessee society cumulatively comes within the mischief of the words Collective disposal of labour of its members falling under section 80P(2)(a)(vi) and therefore order of Ld. CIT(A) is sustained. The nature of broad activity which dominates the field is collective disposal of labour of its Members . Purchases are thus incidental and ancillary to main object of rendering labour services collectively . Society survives and makes profit income by sacrificing their collective labour in process to earn their livelihood on both counts. The dominating activity and purpose in the instant case is collective use of labour by societie s each member / collective disposal of labour of its members and is not of doing business of procuring and selling toddy and thereby making profit. Hence we hold the facts in CIT Vs. Uralungal 2009 (10) TMI 890 - KERALA HIGH COURT to be more parimateria and almost identical with activity of present assessee and respectively disagree with the submissions made by Ld. DR of Revenue. In respect of the Revenue s contention that its database of the assessee shows Tara Singh as the only member having 100% share we observe that in the proceedings before Ld. AO and so also before CIT(A) this issue does not arises and consequently there is no finding. However before us this issue has been raised for the first time without any material evidence in support of same. There is no application to bring additional evidence on record consequently we reject the contention of the Revenue. Further such contention is not legal question of law. Decided against revenue.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(vi) of the Income Tax Act, 1961.
2. Examination of the assessment order's legality and correctness.
3. Applicability of judgments from different High Courts.

Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(vi) of the Income Tax Act, 1961:
The central issue revolves around whether the assessee, a cooperative society engaged in construction work, qualifies for a deduction under Section 80P(2)(a)(vi). The society claimed a deduction of Rs. 14,70,481/- for income earned through work contracts, including material receipts. The Assessing Officer (AO) initially allowed this deduction, but the Principal Commissioner of Income Tax (Pr. CIT) later invoked Section 263, deeming the assessment order erroneous and prejudicial to the revenue's interest. The Pr. CIT argued that the income was not solely from the collective disposal of labour, as required by Section 80P(2)(a)(vi), but also included material receipts.

2. Examination of the Assessment Order's Legality and Correctness:
The Pr. CIT issued a show-cause notice to the assessee, questioning the eligibility for the deduction under Section 80P. The assessee responded by asserting that the society's earnings were primarily from labour, with material purchases being incidental. The Pr. CIT, however, cancelled the assessment order, directing the AO to reassess the case. The AO, in the reassessment, disallowed the deduction, maintaining that the income was not solely from the collective disposal of labour. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who allowed the appeal and deleted the addition of Rs. 14,70,480/-. The Revenue then appealed to the ITAT.

3. Applicability of Judgments from Different High Courts:
The Revenue contended that the CIT(A)'s reliance on the Kerala High Court's judgment in CIT vs. Uralungal Labour Contract Society was misplaced. They argued that the facts of the present case were distinguishable, as the income included material receipts, unlike in Uralungal, where income was primarily from labour. The Revenue also cited another Kerala High Court judgment in Nileshwar Range Kallu Chethu Vyavasya Thozhilali Sahakarana Sangham vs. CIT Calicut, which denied a similar deduction.

Findings and Conclusions:

Eligibility for Deduction:
The ITAT examined the legality of the CIT(A)'s order and the applicability of Section 80P(2)(a)(vi). The key phrase "collective disposal of labour of its members" was scrutinized. The ITAT noted that the assessee's primary activity was labour-intensive civil works, where material purchases were incidental. The competitive nature of tenders necessitated including material costs to secure contracts, but the dominant activity remained labour.

Assessment Order's Legality:
The ITAT found that the AO and Pr. CIT did not adequately consider the context in which the society operated. The CIT(A) rightly relied on the Uralungal judgment, which held that incidental material trading did not disqualify the society from claiming the deduction. The ITAT agreed with the CIT(A) that the society's activities fell within the scope of "collective disposal of labour."

Applicability of Judgments:
The ITAT distinguished the Nileshwar case, noting that the facts were materially different. In Nileshwar, the society's main activity was trading toddy, not labour. In contrast, the present case involved civil works, primarily labour-driven. The ITAT concluded that the Uralungal judgment was more applicable.

Final Order:
The ITAT dismissed the Revenue's appeal, sustaining the CIT(A)'s order. The assessee's income of Rs. 14,70,480/- was deemed eligible for deduction under Section 80P(2)(a)(vi). The ITAT rejected the Revenue's contention about the society's membership, as it was raised without supporting evidence.

Conclusion:
The appeal of the Revenue was dismissed, and the order of the CIT(A) was sustained. The assessee was entitled to the deduction under Section 80P(2)(a)(vi) for the income earned through collective disposal of labour, with material purchases being incidental to the main activity. The ITAT's decision was pronounced in open court on 21/08/2024.