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TMI Blog2005 (12) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The assessee is a registered co-operative society deriving income from dividend, interest and from its trading activities. In the previous year relevant to the assessment year 1981-82, the assessee had dealt in a number of commodities, including articles intended for agriculture. The assessee filed its return of income on June 26, 1981, declaring total income at nil. Assessment was finalised on June 30,1982, under section 143(3) read with section 144B on a total income of Rs. 2,55,888. One of the adjustments made by the Assessing Officer was in respect of the quantum of deduction under section 80P(2)(a)(iv) of the Act. The Assessing Officer noted that out of the aggregate sales of Rs. 9,55,04,537 in the year under consideration sales to the rune of Rs. 5,01,18,140 were of articles intended for agriculture, which included sales both to the members of the society as well as to the non-members. While computing its total income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from one or more parts of the activities was not liable to tax, was allowable in entirety and could not be apportioned and attributed towards the claim under section 80P(2)(a)(iv) of the Act. The Commissioner of Income-tax (Appeals) vide his order dated January 24, 1985, concurred with the findings of the Assessing Officer and dismissed the appeal. The assessee carried the matter in second appeal before the Income-tax Appellate Tribunal. The Tribunal found that the claim of the assessee was sought to be reduced entirely on the basis of the decision in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447 (Guj). The Tribunal upon considering the said decision found that in the said decision the controversy was in respect of pre-1968 provisions where the then prevailing section 81 granted an exemption to a co-operative society of profits and gains of business on specified activities, but for the purpose of granting exemption it was not as if the whole amount of profits was required to be ignored like the provisions of section 10 of the Act or the whole amount was required to be deducted like section 80P(2) of the post-1968 provisions. That, at that time rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed being common expenditure there is no question of deducting the same from the profits from the tax-free activities because such expenditure has no direct nexus with such activities nor can it be said that such expenditure cannot be related to non-taxable activities. Therefore, this ground is decided in favour of the assessee." Accordingly, the Tribunal vide its order dated July 7,1989, held in favour of the assessee, in so far as the said ground was concerned. This reference was taken up for hearing on September 28, 2005. Mr. B.B. Naik, learned standing counsel appearing on behalf of the applicant-Revenue, had made various submissions which are set out in detail hereinafter. However, despite service of notice there is no appearance on behalf of the respondent-assessee. Hence, considering the nature of the controversy involved, this court had by an order of even date appointed Mr. S.N. Soparkar, the learned senior advocate as amicus curiae for assisting the court. Accordingly, Mr. Soparkar has appeared as amicus curiae and addressed the court on the issues involved in the reference. Heard Mr. B.B. Naik, learned standing counsel for the applicant-Revenue, and Mr. S.N. Soparka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase of agricultural implements, livestock, etc. intended for supplying to agriculturists which is included in the gross total income can be deducted and not the gross total income from such activities. It was submitted that applying the principles laid down in the aforesaid decision, in case the expenses from the business were indivisible the net income from exempt activities was required to be computed by deducting the expenses on proportionate basis as had rightly been done by the Assessing Officer. Reliance was also placed upon the decisions of the Rajasthan High Court in the cases of Kota Co-operative Marketing Society Ltd. v. CIT [1994] 207 ITR 608 and CIT v. Rajasthan Rajya Sahkari Upbhokta Sangh Ltd. [1995] 215 ITR 448, to contend that the assessee was not entitled to the deduction of the entire amount of income received from the sale of articles intended for agriculture to its members without deducting the proportionate expenses thereof. The learned senior advocate, Mr. Soparkar submitted that as per the legislative scheme only the net income is deductible. Hence, there could not be any quarrel with the proposition that it is only the net income of the exempt a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apex court in the case of Rajasthan State Warehousing Corporation [2000] 242 ITR 450; that if the aforesaid decisions are not reconciled there is a conflict. Mr. Soparkar also pointed out that there are two findings of fact in the case at hand, namely, (i) the business is one composite indivisible business, and (ii) there are common overhead expenses. It was further submitted that in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1993] 203 ITR 1027 the Supreme Court merely laid down that the computation has to be in accordance with the scheme of the Act. Learned counsel further submitted that as regards the mode of computation of income the lead decision was the decision of the apex court in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77, which was followed by the apex court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452. It was urged that no theory of pro-ration had been applied at the first level by the Supreme Court. It was submitted that two types of situations arise while computing the income from activities that are exempted, firstly where expenses are directly allocable to the exempted activities and, secondly, where the expenses are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80P. In support of his contentions reliance was placed upon the decision of the Karnataka High Court in the case of Karnataka State Co-operative Marketing Federation Ltd. v. CIT [2001] 251 ITR 736, wherein it has been held that as per section 80AB, for the purpose of computing the deductions, the amount of income of a particular nature as computed in accordance with the provisions of the Act alone is deemed to be the income of that nature; that losses incurred by the assessee-co-operative society in its general section had to be deducted from the aggregate income under the head "Business income" and the net income alone would be entitled to deduction under section 80P(2)(a)(iv) of the Act; that income from house property and income from other sources which are not eligible for deduction under section 80P, loss could not be deducted after aggregating that income with business income. The principal controversy in the present case pertains to the deductibility of expenditure incurred for the business of a co-operative society in relation to the amount of profits and gains attributable to the activities specified under section 80P(2)(a)(iv) of the Act, when the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome taxable income. Therefore, it seems to us that there is nothing in the language of section 10 from which it can be fairly implied that an expenditure or allowance falling within the section must fulfil some other condition before it can be allowed." In the case of Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC), the assessee-company was manufacturing sugar in its factory and was also growing sugarcane for purposes of its factory. On the question of deduction of expenditure, so much of the managing agency commission which was referable to the growing of sugarcane, was disallowed on the ground that the income from sugarcane cultivation was agricultural income and not exigible to tax. The Appellate Tribunal found that the cultivation of sugarcane and the manufacture of sugar by the assessee constituted one single and indivisible business. It was held by the apex court that the entire managing agency commission was laid out for the purpose of the business carried on by the assessee and was allowable under section 10(2)(xv) of the Act of 1922 and that the fact that the income from growing of sugarcane, a part of that business, was not taxable under the Act, was not a relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are components which have entered into the total income as known to income-tax law, should be separated and that separation of these two components which have entered into the total income can only be done by finding out the proportionate net income, that is, after deducting from the amount of gross profits both for taxable activities as well as for non-taxable activities all expenditure attributable to these two different categories of cases. There is no dispute before us as indeed there was no dispute before any of the authorities uptil now about the method adopted by the Income-tax Officer for arriving at the figure of proportionate net income of taxable activities and proportionate net figure of non-taxable activities, that is, of the advisability of the rule of three in finding out the proportionate net income out of the total net income of the assessee. Since there is no such dispute, all that we are concerned with in the present case is whether the law in India in the form of section 81(1)(d) and the proviso to section 81(1) read in the light of the provisions of sections 66 and 110 permits any such apportionment. In our opinion, the only way the scheme can be worked under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or section 10(2)(xv) of the Act of 1922, now replaced by section 37, or similar other provision of the Income-tax Act, 1961, and the ratio decidendi which flows from this line of authorities is only to the effect that if an assessee has a business which is single and indivisible, and part of the income of that business is exempted or excluded from income-tax, it is not permissible to the Income-tax authorities to disallow any part of the total expenditure incurred in carrying on its business on the ground that that part of the expenditure is proportionate to the income which is exempt or excluded from income-tax. Beyond this principle nothing else has been laid down by these decisions which we have so far discussed." The aforesaid decision of this court was affirmed by the Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT [1993] 203 ITR 1027). The apex court held thus: "Thus, when section 66 of the Income-tax Act requires the computation of the total income of every person to be done by including all income on which no income-tax is payable under Chapter VII, the income on which no income-tax is payable by a co-operative society under section 81(i)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80P of the Income-tax Act which had replaced section 81 of the Income-tax Act, fully supports the view we have already expressed on the 'income exemption' of profits and gains of a business of a co-operative society as envisaged under section 81 of the Income-tax Act read in conjunction with sections 66 and 110 thereof." In the case of Kota Co-operative Marketing Society Ltd. [1994] 207 ITR 608, the Rajasthan High Court has held that if a co-operative society is carrying on business and earning income, part of which is exempted and part of which is not exempted, the profits and gains attributable to the exempted activity have to be arrived at on the basis of the books of account maintained by the assessee. If separate sets of books or separate accounts of expenditure have been maintained for the exempted and non-exempted activities there is no problem. If separate books of account have not been maintained and expenses have been incurred jointly for earning both the income then such expenses relatable to earning the non-exempted income must be estimated. The income exempted under section 80P(2) has to be arrived at separately in order to determine the income under section 80P(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee carried the matter in appeal before the Supreme Court. The Supreme Court in its decision reported in Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450, reversed the decision of the High Court and held that in view of the fact that a perusal of the question itself disclosed that income from various ventures was earned in the course of one indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which was referable to the taxable income, was unsustainable. The controversy in question is required to be decided in the light of the legal position stated in the decisions cited above. To properly appreciate the controversy in question it would be necessary to advert to the scheme of the Act. This court in its decision rendered in the case of CIT v. Baroda Peoples Co-operative Bank Ltd. [2006] 280 ITR 282, Tax Appeal No. 208 of 2003 and allied matters, has exhaustively delineated the scheme of the Act, which is reproduced hereunder: "Section 80P of the Act appears in Chapter VI-A of the Act. The said Chapter pertains to deductions to be made in computing the total income. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted in accordance with the provisions of the Act, that is, all the permissible deductions/allowances have to be first taken into consideration (excluding deductions under Chapter VI-A) and the figure of net income arrived at after such computation has to form part of the total income. In other words, the net income relatable to a particular head or item has to go in as a component of the gross total income before any deduction under Chapter VI-A is to be allowed. Once this is the scheme laid down by the statute, all such allowable expenditure, in the form of various allowances and deductions, are already taken care of from the income earned by an assessee under a particular head. In the case of income falling under the head 'Profits and gains of business or profession' section 29 of the Act stipulates that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. Therefore, in the case of an assessee carrying on business of banking in the first instance, income under section 28 is computed in accordance with the provisions of section 29 of the Act and such net figure is taken as a component of the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the assessee, the sum has to be the amount of profits and gains of business. It is necessary to take note of the fact that in sub-section (2) of section 80P of the Act the word 'income' is not used but the word used is 'sum' which is the 'whole of the amount of profits and gains of business'. Therefore, under sub-section (1) the gross total income has to include income from any of the specified activities and for the purpose of deduction the sums specified in sub-section (2) shall be deducted in computing the total income of an assessee, namely, a cooperative society. Before analysing sub-clause (i) of clause (a) of subsection (2) of section 80P of the Act it is necessary to take note that under sub-section (3) of section 80P the deduction available under sub-section (1) of section 80P shall be allowed after reducing from the qualifying income, the income, if any, as referred to in the sections specified therein, viz., section 80HH, etc. This is one more indication available in the scheme of the Act to denote that what is deductible under the provisions of Chapter VI-A is in terms of the provisions of the Act with special reference to section 80B(5) read with section 80AB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Deductions in respect of certain incomes" of Chapter VI-A the amount of income of the nature specified in that section as computed in accordance with the provisions of the Act (before making deduction under Chapter VI-A) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Applying the principles laid down by this court in the case of CIT v. Baroda Peoples Co-operative Bank Ltd. [2006] 280 ITR 282 to the facts of the present case, in the first instance, income under the particular head, namely, profits and gains of business or profession, comprising of the specific item, namely, profits and gains from activities specified under sub-clause (iv) of clause (a) of sub-section (2) of section 80P is required to be computed in accordance with the provisions of the Act, i.e., all permissible deductions/allowances have to be first taken into consideration (excluding deductions under Chapter VI-A) and the figure of net income arrived at after such computation has to form part of the total income. Therefore, in the first instance the income of the assessee under section 28 is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable to the specified activity, namely, sale of articles intended for agriculture to members of the assessee-society is to be deducted to compute the total income of the assessee. In view of the provisions of section 80AB of the Act, the amount of income from the specified activity computed in accordance with the provisions of the Act (before making deduction under Chapter VI-A) shall be the income derived by the assessee from the specified activity and which forms part of the gross total income. In relation to the applicability of section 80AB of the Act, the Tribunal has held that the same does not salvage the case of the Revenue because the said section deals with determination of income on the basis of the provisions of the Act. That the expenditure sought to be apportioned being common expenditure, there is no question of deducting the same from the profits of the tax-free activities because such expenditure has no direct nexus with such activities nor can it be said that such expenditure cannot be related to non-taxable activities. The moot question, therefore, would be as to what is the amount of profits and gains attributable to the activities specified under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree in finding the proportionate net income is not only disputed but forms part of the main controversy. There is no quarrel with the proposition as regards apportionment of expenditure to arrive at the net income in respect to taxable activities and exempt activities. The crux of the matter lies in the fact that the activities being one and indivisible it is not possible to apportion the expenditure on an actual basis. The question therefore, is whether apportionment is permissible on a notional basis. In the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1993] 203 ITR 1027 the apex court has held that when the assessee-co-operative society's income is included in its total income, it becomes entitled to a deduction from the amount of income-tax chargeable on its total income. That means, the co-operative society concerned becomes entitled to deduction or exemption from income-tax payable but it is only on its net amount of profits and gains, i.e., on income of its business otherwise computable in accordance with the provisions of the Income-tax Act for the purpose of charging income-tax thereon and which is included in its total income, and not on the amount of its gross p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing 'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfilment of requirements of that provision noted above; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute as regards the applicability of the rule of three in finding out the proportionate net income out of the total net income of the assessee, whereas that is the central dispute in the present case. The view taken by the Tribunal that common expenditure cannot be apportioned for deducting the same from the tax-free activities because such expenditure has no direct nexus with the tax-free activities nor could it be said that the said expenditure was not relatable to the taxable activities is in consonance with the principles laid down by the apex court in the case of Rajasthan State Warehousing Corporation [2000] 242 ITR 450. In the circumstances, the Tribunal was justified 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 worked out by the Income-tax Officer. The question referred is accordingly answered in the affirmative, that is, in favour of the assessee and against the Revenue. The reference is disposed of accordingly, with no order as to costs. Before parting, the court records its appreciation for the assistance rendered by Shri Soparkar as amicus curiae. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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