2012 (7) TMI 579 - AT - Income Tax

Denial of exemption u/s.80P(2)(a)(vi) - A.O. found that some of the members of the society had no actual link with the actual business affairs of the society and there by the collective disposal of labour specialized/skilled or manual for all the 61 members of the society for this year never happened Held that - AO has also not even made out any material on record either by examining the President/Members of the assessee-society regarding the way in which the assessee has executed the contracts - issue in favour of the assessee basing on the remand report given by the predecessor of the Assessing Officer, the Assessing Officer in order to deviate from that finding has to necessarily examine this aspect by examining the aspect as to how the assessee was carrying out the contract with reference to the contractees or the President of the Society or the Members of the Society - only on assumption and presumptions of his choice, the Assessing Officer has inclined to disallow the claim of the assessee u/s.80P(2)(a)(vi) of the I.T.Act - finding of the AO without bringing any material on record is not sustainable for legal scrutiny - rejection of the claim of the assessee u/s.80P(2)(a)(vi) of the I.T.Act is not correct Disallowance u/s.40A(3) of the I.T.Act Held that - Assessing Officer has not made out on record as to whom the payments were made, whether they are members of the assessee society who are executing the contract works or not - He has not even examined the aspect as to who are the persons executing the contracts on behalf of the assessee, whether its members or else - The genuine and bonafide transactions are not to be disallowed under this Section - addition made u/s.40A(3) is not sustainable for legal scrutiny Addition on account of provision for Roller - assessee s books of account are audited by competent authority as authorized by the Government of Orissa and it was not the case of the AO that the auditors who audited the accounts of the assessee has raised any objection for the financial activities of the assessee Held that - Assessee has not claimed any deduction of this provision though shown as provision for Roller - When the assessee has not claimed any deduction, addition of such amount to the total income of the assessee is not tenable under law In favor of assessee

Summary

Issues Involved:
1. Denial of exemption under Section 80P(2)(a)(vi).
2. Disallowance under Section 40A(3).
3. Addition of Rs. 19,00,000 as provision for Roller.
4. Rectification under Section 154 regarding disallowance under Section 40A(3).

Detailed Analysis:

1. Denial of Exemption under Section 80P(2)(a)(vi)
The primary issue was whether the assessee, a Co-Operative Society, was entitled to exemption under Section 80P(2)(a)(vi) of the Income Tax Act, 1961. The Assessing Officer (AO) denied the exemption on the grounds that the society did not fulfill the terms and conditions laid down under Section 80P, alleging that:
- The society ceased to be a co-operative society.
- Contracts were executed by individuals not authorized by the society's by-laws.
- Significant contracts were executed by non-members.
- The society operated outside its designated area.
- Most members were not involved in the collective disposal of labor.

The Tribunal examined the historical context, noting that the assessee had consistently been granted exemption under Section 80P(2)(a)(vi) in previous years, either by the AO, CIT(A), or the Tribunal itself. The Tribunal emphasized that the AO did not adequately examine the crucial aspect of whether the society's income was derived from the self-employment of its members. The Tribunal found that the AO's findings were based on assumptions and lacked concrete evidence. Consequently, the Tribunal directed the AO to allow the exemption under Section 80P(2)(a)(vi).

2. Disallowance under Section 40A(3)
The AO disallowed Rs. 2,61,81,548 (20% of Rs. 13,09,07,740) under Section 40A(3) for payments made in cash exceeding Rs. 20,000. Subsequently, in a rectification order under Section 154, the AO disallowed the entire amount of Rs. 13,09,07,740. The Tribunal found that the AO did not provide concrete evidence regarding the recipients of these payments or whether they were members of the society. The Tribunal held that genuine and bona fide transactions should not be disallowed under Section 40A(3) and directed the deletion of the disallowance.

3. Addition of Rs. 19,00,000 as Provision for Roller
The AO added Rs. 19,00,000, considering it a capital expenditure and not permissible as a provision. The Tribunal noted that the assessee's books were audited by a competent authority and that the assessee did not claim any deduction for this provision. Hence, the Tribunal directed the deletion of this addition.

4. Rectification under Section 154
The AO rectified the original assessment order under Section 154, disallowing 100% of the cash payments exceeding Rs. 20,000 instead of the initially disallowed 20%. The Tribunal, having already adjudicated the disallowance under Section 40A(3) in favor of the assessee, directed the deletion of the entire addition made in the rectification order.

Conclusion
The Tribunal allowed both appeals filed by the assessee, granting exemption under Section 80P(2)(a)(vi), deleting the disallowance under Section 40A(3), and removing the addition of Rs. 19,00,000. The stay petition filed by the assessee was dismissed as infructuous.