2005 (12) TMI 65 - HC - Income Tax

Deduction under section 80P(2)(a)(iv) - assessee is a registered co-operative society deriving income from dividend, interest and from its trading activities - Whether, Tribunal is right in directing the Income-tax Officer to allow deduction under section 80P(2)(a)(iv) as claimed by the assessee on the gross income and not on the net income as worked out by the Income-tax Officer? The assessment year is 1981-82 and the relevant accounting period is the year that ended on June 30, 1980. - question referred is answered in the affirmative, that is, in favour of the assessee and against the Revenue

Issues Involved:
1. Deduction under section 80P(2)(a)(iv) of the Income-tax Act, 1961.
2. Computation of gross income versus net income for deduction purposes.
3. Allocation of common overhead expenses in a single, indivisible business.
4. Applicability of precedents and legal principles.

Issue-wise Detailed Analysis:

1. Deduction under section 80P(2)(a)(iv) of the Income-tax Act, 1961:
The primary issue was whether the Income-tax Appellate Tribunal was correct in directing the Income-tax Officer to allow deduction under section 80P(2)(a)(iv) on the gross income instead of the net income. The assessee, a registered co-operative society, claimed the entire gross profit from the sale of agricultural articles as deductible. The Income-tax Officer disagreed, arguing that only the net profit should be considered for deduction.

2. Computation of Gross Income versus Net Income for Deduction Purposes:
The Tribunal found that the business of the assessee was one and indivisible, and thus, the entire expenditure incurred for the business should be allowed as a deduction. The Tribunal concluded that the decision in Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447 was not applicable due to changes in the statutory provisions post-1968. The Tribunal relied on the Supreme Court decision in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, which held that when a business is indivisible, the entire expenditure should be deductible.

3. Allocation of Common Overhead Expenses in a Single, Indivisible Business:
The Tribunal and the High Court both held that when the business is indivisible, common overhead expenses cannot be allocated on a notional basis to different activities. The High Court emphasized that the entire expenditure incurred for the business should be deductible under section 37 of the Act. The Tribunal's view was that since the business was indivisible and the expenses were common, there was no need to apportion the expenses between taxable and non-taxable activities.

4. Applicability of Precedents and Legal Principles:
The High Court reviewed several precedents, including the Supreme Court's decisions in CIT v. Indian Bank Ltd. [1965] 56 ITR 77 and Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, which supported the view that in an indivisible business, the entire expenditure is deductible. The High Court also considered the decision in Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450, which reinforced the principle that if the business is one and indivisible, the entire expenditure should be allowed as a deduction.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the assessee was entitled to deduction under section 80P(2)(a)(iv) on the gross income. The court concluded that common overhead expenses in an indivisible business should not be allocated on a notional basis. The question referred was answered in the affirmative, in favor of the assessee, and against the Revenue. The court appreciated the assistance rendered by the amicus curiae.

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