Punjab & Haryana H.C : disallowance u/s 14A also applies to cooperative socities claiming deduction under section 80P

High Court Of Punjab & Haryana

Punjab State Co-operative Milk Producer’s Federation Ltd. vs. CIT-II

Assessment Year : 2002-03

Section : 80P, 14A

Adarsh Kumar Goel And Ajay Kumar Mittal, JJ.

It Appeal No. 530 Of 2006

March  28, 2011

JUDGMENT
 
Ajay Kumar Mittal, J. – This order will dispose of two appeals, Income-tax Appeal Nos. 530 of 2006 and 516 of 2008 as the counsel for the parties submit that common questions are involved in these appeals. The facts have been taken from Income-tax Appeal No. 530 of 2006.

2. This appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”) has been filed by the assessee against the order dated 27-4-2006, passed by the Income-tax Appellate Tribunal Chandigarh Bench, Chandigarh (in short “the Tribunal”) in ITA No. 1068/Chandi/2005, relating to the assessment year 2002-03.

3. The appeal was admitted on 13-11-2007 for determination of the following substantial questions of law by this Court :

“(1) Whether the Tribunal is correct in law in holding that while computing the interest income derived from another co-operative societies for the purposes of computing deduction under section 80P(2)(d), the expenses can be attributed and deducted more so when these are not identifiable?

(2) Whether in the facts and in the circumstances of the case the ITAT order directing the deduction of expenses attributable to the earning of interest income for the purpose of determining deduction under section 80P(2)(d) is legally sustainable, the same being based on mere presumption and surmises?

(3) Whether in the facts and in the circumstances of the case the order of the ITAT holding that the provision of section 14A are applicable to the deductions under section 80P(2)(d) is legally sustainable in law?”

4. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the appellant-society is an Apex body of Co-operative Societies and District Co-operative Milk Producers Unions are its members. The appellant is engaged in the marketing and sale of milk products of its member societies. As per the bye-laws of the appellant- Federation, deductions were admissible to it under section 80P(2)(a)( i) of the Act on the income derived by it from its members by way of interest on its investments as loan and advances for their working capital. The appellant filed its return of income for the assessment year 2002-03, on 29-10-2002 declaring taxable income as Nil. The return was processed under section 143(1) of the Act on 8-2-2003. The assessee claimed that the entire income derived on account of interest from co-operative societies, amounting to Rs. 7,95,37,490 was eligible for deduction under section 80P(2)(d) of the Act. The assessee, however, restricted its claim in that behalf to Rs. 4,98,64,196 only.

5. The Assessing Officer on a consideration of the entire matter concluded in the assessment order dated 30-3-2005 that the working capital advances did not qualify the test of ‘investments’ as enshrined in section 80P(2)(d) of the Act, and the deduction claimed by the assessee under the said provision could not be allowed. The Assessing Officer, thus, ordered that the income of the appellant-federation was assessable at Rs. 4,98,64,196. It was unambiguously observed that the assessee would not be entitled to deduction under the provisions of section 80P(2)(d) of the Act on account of interest on working capital to milk unions.

6. The assessee carried appeal before the Commissioner of Income-tax (Appeals), [hereinafter referred to as “CIT(A)”]. The CIT(A) also held that deduction under section 80P(2)(d) of the Act was not allowable to the assessee, and consequently dismissed assessee’s appeal vide order dated 31-10-2005.

7. The assessee further took the matter in appeal before the Tribunal and the Tribunal accepted the plea raised on behalf of the assessee and while accepting its appeal, vide order dated 27-4-2006 held that the assessee was entitled to deduction under section 80P(2)(d) of the Act in respect of interest received on advances provided to member co-operative societies. The said deduction was, however, held allowable to the assessee in respect of net income after deducting the expenses incurred for earning such income.

8. The assessee still dissatisfied has preferred the present appeal.

9. We have heard learned counsel for the parties and have perused the record.

10. Learned counsel for the assessee submitted that the authorities below have erred in directing that the expenses incurred for earning income which was deductible under section 80P(2)(d) of the Act was to be reduced from such income. The counsel placed reliance on CIT v. King Export[2009] 318 ITR 100 (Punj. & Har.) and CIT v. Doaba Co-operative Sugar Mills Ltd.[1998] 230 ITR 774 / 96 Taxman 509 (Punj. & Har.). On the other hand, learned counsel for the Revenue submitted that after insertion of section 14A in the Act, the authorities below were justified in disallowing the expenses incurred in relation to income not includible in the total income and directing the same to be excluded from the income earned by the assessee while computing deduction under section 80P(2)(d) of the Act. Learned counsel for the Revenue placed reliance on judgments of the Supreme Court in Sabarkantha Zilla Kharid V. Sangh Ltd. v. CIT[1993] 203 ITR 1027/ 69 Taxman 619 and CIT v. Walfort Share & Stock Brokers (P.) Ltd.[2010] 192 Taxman 211 (SC).

11. We have given our thoughtful consideration to the submissions made by the counsel for the parties and find force in the contention raised on behalf of the Revenue.

12. The assessee is entitled to deduction under section 80P(2)(d) of the Act after excluding the expenditure attributable to the earning of such income. The Apex Court in Sabarkantha Zilla Kharid V. Sangh Ltd.’s case (supra), where the High Court while rejecting the claim of the assessee had held that the assessee who was engaged in the purchase of agricultural implements, seeds, live-stocks etc. was entitled to deduction under section 81 of the Act from tax only in relation to net profit and not gross profits. It was held as under:-

“The said provision, as seen therefrom, undoubtedly exempts an assessee-co-operative society, which carries on the business envisaged therein, from payment of income-tax on profits and gains of such business. But the controversy which relates to the said provision is, whether the income-tax not payable thereunder, falls to be calculated either with reference to the full amount of profits and gains of the co-operative society’s business, as contended on behalf of the assessee or with reference to the net amount of profits and gains of the co-operative society’s business, as otherwise computable under the provisions of the Income-tax Act for the purpose of charging income-tax thereon, as contended on behalf of the Revenue. If the relevant provisions of the income-tax Act providing for charging a person including a co-operative society with income-tax on “profit and gains” of such person’s business show that it is the net profits and gains, i.e., income of such business computed in accordance with the provisions of the Income-tax Act, which is includible in such person’s total income liable to charge of income-tax, it must flow therefrom, as a necessary corollary thereof, that the “profits and gains” for which exemption from income-tax is envisaged under section 81(i)(d ) of the income-tax Act, ought to be net profits and gains, i.e., income of business computed in accordance with the provisions of the Income-tax Act which is includible in such person’s total income for charging income-tax thereon.”

13. It may be noticed that section 80P was inserted in place of section 81 which was simultaneously deleted by Finance (No. 2) Act, 1967, with effect from 1-4-1968.

14. Further, section 14A was inserted in the Act by Finance Act, 2001 with effect from 1-4-1962. The said section provides that any expenses incurred by the assessee for earning income which does not form part of total income under the Act, shall not be an allowable expenditure. The Apex Court in Walfort Share and Stock Brokers’ case (supra), defining the scope of section 14A of the Act, incorporated retrospectively from 1-4-1962, had laid down as under :

“The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is “for the purposes of computing the total income under this Chapter” which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, “in relation to income which does not form part of total income under the Act”. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words “expenditure incurred” in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (see sections 30 to 37).”

15. Adverting to the judgments relied upon by the learned counsel for the assessee, the same do not advance its case. Suffice it to notice that the Doaba Co-operative Sugar Mills Ltd.’s case (supra) was a case prior to insertion of section 14A by Finance Act, 2001 retrospectively from 1-4-1962 and would, thus, be of no assistance to the assessee. Further, this Court in King Export’s case (supra), on consideration of facts involved therein had concluded that there was no expenditure which had been incurred by the assessee for earning the income and the same did not form part of total income. That is not the situation in the present case.

16. In view of the above, the substantial questions of law are answered against the assessee and in favour of the Revenue.

The appeals are accordingly dismissed.

[Citation : 336 ITR 495]

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