Citation Codes

Equivalent Citations

citation codes

Case Number

D.B Income-tax Reference No. 63 of 1986

Judges

Mr. Virendra Kumar Singhal
Mr. Yad Ram Meena

Acts

Income-tax Act. Sub-section (1) of section 80P
section 80P(2)(d) of the Income-tax Act, 1961,
section 280-O of the Income-tax Act.
INCOME TAX ACT
SECTION 14 INCOME TAX ACT
Co-operative Societies Act
Sub-section (2)(d)

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Smart Summary

Concise Analytical Summary of the Opinion

Factual and Procedural Background

The Income-tax Appellate Tribunal (ITAT) referred two questions of law arising out of its order dated March 31, 1981 (assessment year 1976-77), on directions given by this Court on November 1, 1985. The dispute concerns a co-operative society (formed under the Co-operative Societies Act) which claimed deduction under section 80P(2)(d) of the Income-tax Act, 1961.

Relevant facts as set out in the opinion:

The society received income of Rs. 4,99,895 and claimed deduction under section 80P(2)(d).
The Income-tax Officer (ITO) found that expenses and income sources were not separately identifiable because the assessee maintained composite accounts; accordingly, the ITO apportioned expenses among heads of income and allowed 50% of the interest income (Rs. 2,49,948) as deductible while taxing the remainder.
On appeal to the Commissioner of Income-tax (Appeals) (CIT(A)), the assessee contended that the entire income from commission and interest (Rs. 10,99,535) should be exempt under section 80P(2)(d). The CIT(A) examined the character of the commission/interest receipts (arising from supplies of controlled cloth to constituents) and the society's concurrent proprietary dealings in controlled cloth, and upheld the ITO's allocation of 50% of expenses to the exempt activity as justified.
Before the ITAT, the assessee argued the ITO was not entitled to apportion expenses and that the gross receipts of commission, interest and dividend should have been exempt without deducting related expenditure; the ITAT upheld a method whereby only 50% of the gross receipts were treated as profits for exemption purposes (and so taxable/exempt accordingly), and considered the interaction of gross-total-income computation (section 80B(5) and section 14) and deductions under Chapter VI-A.
The High Court considered the Revenue's submissions and the precedents cited, and concluded that the ITAT was not justified in holding that the assessee was entitled to deduction under section 80P(2)(d) of the entire interest (i.e., without deduction of expenditure), and that the exemption of Rs. 2,49,948 granted by the ITAT was not justified.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to deduction under section 80P(2)(d) of the Income-tax Act, 1961, of interest and not net receipts?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in granting exemption of Rs. 2,49,948 to the assessee?

Arguments of the Parties

Assessee's Arguments

The assessee contended that the entire income from commission and interest (and dividend) should be exempt under section 80P(2)(d) — i.e., the deduction should be given for the gross amount of commission and gross amount of interest and dividend, without deducting any portion of the expenditure attributable to earning those receipts.
Before the ITAT it was submitted that, because the provisions of section 80M (which were said to be similar to section 80P(2)(d)) did not require deduction of expenditure, the assessee was entitled to deduction of interest and dividend on gross receipts and not only on net receipts.

Revenue's Arguments

The opinion records that the Court considered the arguments of learned counsel for the Revenue, but the detailed substance of those arguments is not set out in the provided text.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Kota Co-operative Marketing Society Ltd. v. CIT [1994] 207 ITR 608 (Raj)	Holds that when a co-operative society carries on both exempt and non-exempt business and does not maintain separate books for each activity, profits attributable to the exempt activity must be determined on the basis of the society's accounts; where separate accounts are not maintained, expenses jointly incurred must be estimated and apportioned.	The Court relied on this decision to support the conclusion that bifurcation or apportionment of expenditure (where composite accounts are maintained) is justified and necessary to arrive at the profits attributable to the exempt activity under section 80P.
Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC)	(The Tribunal had relied on this authority; the opinion notes its prior use by the Tribunal.)	The opinion records that the Tribunal relied upon this decision, but the Court also notes that this decision was subsequently overruled by the apex court in a later case (Distributors (Baroda) Pvt. Ltd. v. Union of India).
Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120	Identified in the opinion as the apex-court decision that overruled Cloth Traders (P.) Ltd.	The Court observed that Cloth Traders was overruled by this decision, and therefore the Tribunal's reliance on Cloth Traders did not support the assessee's broader contention that gross receipts should be allowed without deduction of expenditure.
CIT v. Loonkar Tools Pvt. Ltd. [1995] 213 ITR 721 (DBITR Application No. 1 of 1987, Jodhpur, decided July 21, 1994)	Treated by the Court as a relevant authority supporting the proposition that an assessee is not entitled to deduction under section 80P(2)(d) of entire interest without deducting expenditure; the opinion cites the decision as instructive for the present issue.	The Court followed this decision and, on that basis, concluded that the Tribunal was not justified in holding that the entire interest (gross receipts) was deductible under section 80P(2)(d) without accounting for expenditure; this authority contributed to answering both referred questions against the assessee.

Court's Reasoning and Analysis

The Court's analysis proceeds from statutory interpretation and application of precedent to the factual finding that the assessee maintained composite accounts (i.e., did not maintain separate accounts for exempt and non-exempt activities). The reasoning as stated in the opinion can be summarized in sequential steps drawn from the text:

Statutory framework: The Court examined the scheme of section 80P. Sub-section (1) identifies that where a co-operative society's gross total income includes any income referred to in sub-section (2), the sums specified in sub-section (2) shall be deducted in computing the total income. Section 80P(2)(d) specifically refers to income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society and speaks of "the whole of such income" in that context.
Definition of "total income" and the order of computation: The Court noted the definition of "total income" under section 2(45) and that, under section 80B(5), the phrase "gross total income" means the total income computed in accordance with the Act's provisions before making deductions under Chapter VI-A. Thus, the income from each head must be computed in accordance with the Act, taking into account expenditure incurred in earning that income, before Chapter VI-A deductions (such as section 80P) are considered.
Application to composite accounts: Because the assessee maintained a composite account for taxable and exempt incomes without separate accounts for the exempt activity, the ITO's approach of apportioning expenses between taxable and non-taxable incomes was a permissible method to determine profits attributable to the exempt activity. The Court relied on the reasoning in Kota Co-operative Marketing Society Ltd. v. CIT to support this approach: where separate accounts are not maintained, joint expenses must be estimated and apportioned to determine profits attributable to the exempt activity.
On the Tribunal's reasoning: The ITAT had adopted an approach that treated certain incomes (commission and interest) at 50% of gross receipts by attributing 50% of total expenditure to those earnings; the ITAT further relied upon precedents (including Cloth Traders), but the Court observed that Cloth Traders had been overruled by Distributors (Baroda).
Precedential guidance and final conclusion: Following the decision in CIT v. Loonkar Tools Pvt. Ltd., and applying the statutory scheme, the Court concluded the ITAT was not justified in holding that the assessee was entitled to deduction under section 80P(2)(d) of the entire interest without deducting expenditure. In short, the exemption under section 80P(2)(d) must be applied to profits/gains attributable to the exempt activity, which requires deduction of the expenditure attributable to earning that income; it is not a deduction of gross receipts without regard to related expenses.
Specific findings accepted/rejected: The Court accepted that where the Tribunal found deduction for commission at 50% of receipts to be justified, that allowed method was consistent with the statutory framework and precedents; however, the Tribunal's broader holding that the entire interest was deductible (i.e., gross interest without expense deduction) and the grant of exemption of Rs. 2,49,948 were held not justified.

Holding and Implications

Holding:
Both referred questions are answered in the negative — against the assessee and in favour of the Revenue.

Direct consequences and implications (as stated in the opinion):

The Tribunal was not justified in holding that the assessee was entitled to deduction under section 80P(2)(d) of the entire interest (i.e., without deduction of expenditure).
The Tribunal was not justified in granting the exemption of Rs. 2,49,948 to the assessee.
No order as to costs was made by the Court.

The opinion does not purport to lay down any broader novel principle beyond applying the statutory scheme and the cited precedents (Kota decision and Loonkar Tools), and it expressly notes that a prior authority relied upon by the Tribunal (Cloth Traders) had been overruled by a higher authority (Distributors (Baroda)).

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Commissioner Of Income-Tax v. Rajasthan Rajya Sahkari Upbhokta Sangh Ltd.

- The Income-tax Appellate Tribunal has referred the following questions of law arising out of its order dated March 31, 1981, in respect of the assessment year 1976-77, on the directions given by this court on November 1, 1985 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to deduction under section 80P(2)(d) of the Income-tax Act, 1961, of interest and not net receipts ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in granting exemption of Rs. 2,49,948 to the assessee ?"

The relevant facts for the purpose of considering the controversy in dispute are that the assessee is a co-operative society formed under the Co-operative Societies Act and has received the income of Rs. 4,99,895. Deduction under section 80P(2)(d) of the Income-tax Act, 1961, was claimed. The Income-tax Officer examined the details of various expenses and sources of income and found that they are not separately identifiable and, therefore, applied a percentage of the expenses in the same proportion as the various heads of income stood in the profit and loss account. 50 per cent. of the interest income, i.e., Rs. 2,49,948, had been found deductible and the remaining 50 per cent. was subjected to tax. The Income-tax Officer found that the assessee has effected sales of other items on which exemption claimed is not available separately and as such the percentage is required to be worked out for the expenses relating to these items. In the appeal before the Commissioner of Income-tax (Appeals), it was claimed that the entire income from commission and interest amounting to Rs. 10,99,535, should have been exempted from tax under section 80P(2)(d). The Commissioner of Income-tax (Appeals) found that the commission and interest was received by the assessee from various other co-operative societies on supply of controlled clothes and the assessee had paid to the bank interest amounting to Rs. 6,56,628, on hypothecation and pledge of controlled cloth and guarantee commission of Rs. 18,358, to the State Government for guaranteeing overdrafts to the society. It was contended that the commission and interest was received by the society from its constituents on the supplies of the controlled cloth but besides this, the society itself also made purchases and sales of controlled cloth on its own and that the income from this business was not claimed to be exempt from tax. The Commissioner of Income-tax (Appeals) came to the conclusion that the supply of the controlled cloth to the assessees constituents on which it received commission and interest was a business of the society wholly separate and distinct from its other business. It was not connected with the other business carried on by the society. The society could have kept an entirely a separate account of its activity pertaining to the commission and interest received by it. The contention of the assessee that no part of the expenditure which was incurred by the society could be said to pertain to its income from commission of the business, was not accepted and it was found that the supply of controlled cloth to the assessees constituents on which it received commission was a wholly separate other business. The society could have kept entirely a separate account of its own activities. Therefore, the estimate of expenditure pertaining to that activity and deduction of the same from commission and interest income before allowing exemption in regard to that income to the society was found to be justified. The allocation of total expenditure to the tax exempt income, namely, income from commission and interest at 50 per cent. was also upheld. In the second appeal before the Tribunal, it was contended that the Income-tax Officer was not justified in apportioning expenses between taxable and non-taxable income and he should have allowed the entire expenditure and should not have deducted any portion of the expenditure against commission income and income from interest and dividend. It was submitted that under section 80P(2)(d)(i) the deduction should have been given for the gross amount of the commission and also the gross amount of interest and dividend. The Tribunal came to the conclusion that under the scheme of the Act certain incomes are deductible from the gross total income as provided under Chapter VI-A of the Income-tax Act. The Income-tax Officer should have computed the gross total income first as provided under section 80B(5) of the Act which provided that the gross total income means the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A or section 280-O of the Income-tax Act. The gross total income is aggregate of the income computed under various heads of income as envisaged under section 14 of the Income-tax Act. The next income computed by the Income-tax Officer from commission and interest and dividend has to be taken at 50 per cent. thereof by treating 50 per cent. of the expenditure as attributable to such earnings. Incomes so arrived at will not be exempt from tax up to the stage these enter the gross total income. It is only after the gross total income which is the sum total of income computed under various heads is computed that deductions under section 80P have to be considered. The deduction under section 80P(2)(a) has to be made as a whole of the amount of profits and gains of business attributable to such activities. In these circumstances, the Tribunal came to the conclusion that the business profits from these activities were only up to 50 per cent. of the gross receipts of the commission, the deduction was admissible only to the extent of 50 per cent. of the gross receipts. It was found that the Income-tax Officer instead of allowing deduction out of the gross total income made an addition out of the expenses to arrive at the profits. The action of the Income-tax Officer in allowing deduction for commission at 50 per cent. of the receipts of Rs. 5,99,649 was upheld. While taking into consideration, the provisions of section 80M it was observed that the expenditure for earning the dividend income was not to be taken into consideration while allowing deduction under section 80M. Since the provisions of section 80M are similar to section 80P(2)(d) it was contended that the assessee is entitled to deduction of interest and dividend on the gross receipts and not on the net receipts.

We have considered the arguments of learned counsel for the Revenue. The provisions of section 80P contemplate the deduction of income of co-operative societies. It is provided under sub-section (1) that where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of that section, the sums specified in sub-section (2) in computing the total income of the assessee. Sub-section (2)(d) refers to the sum in respect of income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income. So far as determining the eligibility for exemption is concerned, it is not in dispute that the expenses pertain to income which is taxable and non-taxable. A composite account has been maintained by the assessee and a separate account with regard to expenditure and income on both types of income has not been maintained. It was in these circumstances that the Income-tax Officer has determined the total income after apportioning the expenses to both sources of income. The words "total income" have been defined under section 2(45) which means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. Sub-section (1) of section 80P allows the deduction from the gross total income. An assessee may have income from different sources and that income so computed would form the total income. As per section 80B(5) the gross total income means the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A. When an assessee has income from different sources, the total income from each of such sources has to be computed in accordance with the provisions of the Income-tax Act and the expenditure incurred for receiving such income has to be taken into consideration. The assessee has maintained a composite account of the expenses incurred for earning the taxable as well as exempted income and, therefore, bifurcation made in respect of expenditure cannot be considered to be unjustified. This matter was considered in detail in the case of Kota Co-operative Marketing Society Ltd. v. CIT [1994] 207 ITR 608 (Raj), wherein it has been 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 has to be arrived at on the basis of the books of account maintained by the assessee. If separate books or separate accounts of expenditure have been maintained for the exempted and non-exempted activities there is problem. If separate books of account have not been maintained and expenses have been incurred jointly for earning both the incomes then such expenses relatable to earn the non-exempted activities 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) and it can never be envisaged that the total income which has been so received could be allowed without deducting the expenditure incurred in earning the income. The use of the words "the whole of the amount of profits and gains of business attributable to any one or more of such activities" appearing at the end of sub-section (2) of section 80p could be only for such income which is attributable to the activities which are exempted. In order to acetone the real profit, the expenses incurred in earning the said income has to be deducted. In the present case, the Tribunal has found that allowing the deduction for commission at 50 per cent. of the receipts is justified. The Tribunal has relied upon the decision in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC), which was overruled by the apex court in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120. Following the decision of this court in the case of CIT v. Loonkar Tools Pvt. Ltd. [1995] 213 ITR 721, DBITR Application No. 1 of 1987, decided at Jodhpur on July 21, 1994, we are of the view that the Income-tax Appellate Tribunal was not justified in holding that the assessee is entitled to deduction under section 80P(2)(d) of the entire interest and not the net receipts. We are also of the opinion that the Tribunal was not justified in granting the exemption of Rs. 2,49,948 to the assessee.

Consequently, both the questions are answered in the negative against the assessee and in favour of the Revenue. No order as to costs.

Commissioner Of Income-Tax v. Rajasthan Rajya Sahkari Upbhokta Sangh Ltd.

Concise Analytical Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Rajasthan Rajya Sahkari Upbhokta Sangh Ltd.

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