2024 (10) TMI 697 - AT - Income Tax

Deduction u/s 80P(2)(d) - Interest and dividend earned from the Ahmedabad Dist. Co. Op. Bank Limited - treatment of a government grant as revenue income - Assessee argued income earned by a cooperative society from its investments with other co-operative societies, including cooperative banks, qualifies for deduction - HELD THAT - We find that both interest and dividend income earned by the assessee from Co-operative Banks and other Co-operative Societies qualify for deduction under Section 80P(2)(d) of the Act. This deduction is granted to promote cooperative financial activity, and there is no legal basis to exclude cooperative banks from this benefit. Allowing the deduction is consistent with the legislative intent to foster the growth and sustainability of cooperative societies by providing tax incentives on income earned from mutual investments. The income from cooperative banks, whether as interest or dividends, remains within the cooperative framework, justifying the tax relief. Jurisdictional precedents from the Gujarat High Court and Co-ordinate bench consistently support the view that income earned from cooperative banks should be deductible under Section 80P(2)(d) of the Act. The assessee, being a cooperative society engaged in collecting and marketing milk, primarily falls under activities that are not directly specified in Section 80P(2)(a) or (b) of the Act. Therefore, the assessee qualifies for the standard deduction of Rs. 50,000/- under Section 80P(2)(c)(ii) of the Act. The CIT(A) denied the deduction of Rs. 50,000/- claimed under Section 80P(2)(c)(ii) without providing any substantive reasoning or analysis of the statutory provisions. The provision clearly mandates a deduction for cooperative societies engaged in activities other than those specified under Section 80P(2)(a) or (b) of the Act. The statutory language does not impose additional conditions or exclusions that would disqualify the assessee from this benefit. The disallowance of this deduction by the AO and CIT(A) is hereby set aside, and the deduction is allowed in full. Characterization of income - government grant receipt under the Rashtriya Krishi Vikas Yojana (RKVY) project, specifically for implementing infrastructure and development activities for agricultural upliftment - grant was credited to a joint account controlled by the assessee and the Department of Horticulture, as per the terms of the MOU - HELD THAT - We conclude that the government grant received by the assessee under the RKVY did not confer an unconditional economic benefit to the assessee and, as such, did not qualify as income under Section 2(24)(xviii) of the Act, at the time of receipt. Judicial precedents consistently support the position that grants restricted by purpose and subject to refund obligations are to be treated as capital receipts until they are actually utilized for the designated purposes. The addition made by the AO and confirmed by the CIT(A), treating the grant as taxable income, is erroneous and lacks legal justification. Therefore, addition is hereby deleted. Assessee appeal allowed.

Issues Involved:
1. Disallowance of deductions under Section 80P(2)(d) of the Income Tax Act.
2. Disallowance of standard deduction under Section 80P(2)(c) of the Act.
3. Treatment of government grant as revenue income.
4. Procedural and natural justice concerns raised by the assessee.

Detailed Analysis:

1. Disallowance of Deductions under Section 80P(2)(d):
The primary issue was whether the income earned by the assessee, a cooperative society, from investments with cooperative banks qualifies for deduction under Section 80P(2)(d) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the deductions, arguing that cooperative banks are distinct from cooperative societies and thus do not qualify for the deduction. They relied on the Karnataka High Court's decision in Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society. However, the Tribunal found that this decision was non-jurisdictional and not binding in Gujarat. The Tribunal favored jurisdictional precedents, including CIT vs. Sabarkantha District Co-Op. Milk Producers Union Ltd., which support the eligibility of income from cooperative banks for deduction under Section 80P(2)(d). The Tribunal concluded that both interest and dividend income from cooperative banks and societies qualify for deduction under Section 80P(2)(d), aligning with the legislative intent to promote cooperative financial activity.

2. Disallowance of Standard Deduction under Section 80P(2)(c):
The assessee also claimed a standard deduction of Rs. 50,000/- under Section 80P(2)(c)(ii) for activities not specified under Section 80P(2)(a) or (b). The CIT(A) denied this deduction without substantive reasoning. The Tribunal found that the statutory provision mandates such a deduction for cooperative societies engaged in activities outside those specified in Section 80P(2)(a) or (b). The Tribunal set aside the disallowance, allowing the deduction in full, as the assessee's activities qualified for this benefit.

3. Treatment of Government Grant as Revenue Income:
The assessee received a government grant of Rs. 50,00,000/- under the Rashtriya Krishi Vikas Yojana (RKVY) project, which was credited to a joint account and subject to specific conditions outlined in a Memorandum of Understanding (MOU). The AO treated this grant as revenue income, but the Tribunal found that the grant was tied to strict conditions and was not available for the assessee's discretionary use. The Tribunal noted that the grant did not confer an unconditional economic benefit at the time of receipt and was not utilized during the year. The Tax Audit Report classified the grant as a capital receipt, not reflected in the Profit & Loss Account. Citing judicial precedents, the Tribunal concluded that such grants are capital receipts until utilized for designated purposes, and the addition of Rs. 50,00,000/- as taxable income was erroneous. The Tribunal allowed the appeal, deleting the addition.

4. Procedural and Natural Justice Concerns:
The assessee raised concerns about procedural fairness and the breach of the Principles of Natural Justice, arguing that the lower authorities failed to consider various submissions and explanations. The Tribunal did not specifically adjudicate on these procedural issues separately but allowed the appeal in full, addressing the substantive issues raised.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, setting aside the orders of the lower authorities and granting the deductions under Sections 80P(2)(d) and 80P(2)(c), as well as deleting the addition of the government grant as revenue income. The decision was pronounced in open court on 3rd October 2024 at Ahmedabad.

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