2015 (9) TMI 506 - HC - Income Tax

Benefit of deduction under section 80P(2)(a)(vi) denied - CIT(A) allowed claim - whether the appellant societies cannot be considered as co-operative societies engaged in the collective disposal of labour of its members as contemplated under section 80P (2) (a) (vi) of the Act and therefore, ineligible for deduction under section 80P (1) as held by ITAT? - Held that - The collective disposal of the labour of the members of the society is not resulting in the generation of any income to the society. On the other hand, toddy tapped and delivered by the members of the society and nonmembers are purchased by it and remuneration is paid to them at agreed rates. The toddy thus purchased is sold through the Toddy Shops established by the society. Therefore, the income of the society has nothing to do with the collective disposal of the labour of its members, but is entirely from out of the price realised by it for the sale of toddy through the society s own toddy shops. When that is the activity of the society, it cannot be said that the sum referred to in section 80P(1) entitling the society for deduction is generated out of the collective disposal of the labour of the appellant societies. For the aforesaid reasons, the Tribunal is fully justified in holding that the appellant societies are not eligible for the benefit of section 80P(2)(a)(vi) - Decided in favour of the Revenue

Issues Involved:
1. Eligibility for deduction under section 80P (2) (a) (vi) of the Income Tax Act.
2. Interpretation of "collective disposal of the labour of its members."
3. Factual determination of the activities of the appellant societies.
4. Proportionate deduction for income derived from non-member contributions.

Issue-wise Detailed Analysis:

1. Eligibility for deduction under section 80P (2) (a) (vi) of the Income Tax Act:
The primary issue is whether the appellant societies qualify for deductions under section 80P (2) (a) (vi) of the Income Tax Act. The societies claimed this benefit, which was initially upheld by the Commissioner of Income Tax (Appeals) but later denied by the Income Tax Appellate Tribunal. The Tribunal's decision was based on the finding that the societies could not be considered as entities engaged in the collective disposal of the labour of their members, thus rendering them ineligible for the deduction under section 80P (1).

2. Interpretation of "collective disposal of the labour of its members":
Section 80P (2) (a) (vi) provides deductions for income generated from the collective disposal of the labour of its members. The Court referred to the Orissa High Court's judgment in Nilagiri Engineering Co-operative Society Ltd. v. Commissioner of Income Tax, which clarified that the income must be directly attributable to the utilization of the members' specialized labour. The labour could be manual or otherwise, but it must be directly connected to the members' specialized skills. The Kerala High Court in Commissioner of Income Tax v. M/s. Uralungal Labour Contract Cooperative Society also supported this interpretation, emphasizing that the income must result from the collective labour of the society's members.

3. Factual determination of the activities of the appellant societies:
The Tribunal and the Assessing Officer determined that the societies were primarily engaged in the business of running toddy shops, purchasing toddy from both members and non-members, and selling it. The members were paid based on the quantity of toddy supplied, and the societies also purchased toddy from non-members. The main objective of the societies was not the collective disposal of labour but rather the sale of toddy, which generated their income. The Tribunal concluded that the societies' activities did not align with the statutory requirement of generating income through the collective disposal of the members' labour.

4. Proportionate deduction for income derived from non-member contributions:
The societies argued that they should still be eligible for proportionate deductions for the income derived from the labour of their members, even if some toddy was purchased from non-members. However, the Tribunal and the Court found that the primary activity of the societies was the sale of toddy, not the collective disposal of labour. Therefore, the societies were not entitled to any deduction under section 80P (2) (a) (vi).

Conclusion:
The Court upheld the Tribunal's decision, stating that the societies were not eligible for the deduction under section 80P (2) (a) (vi) as their income was not generated from the collective disposal of the labour of their members. The appeals were dismissed, and the question of law was answered against the assessees and in favour of the Revenue.

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