TMI Blog2006 (4) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... ryana Co-operative Sugar Mills Ltd.[ 1989 (2) TMI 42 - PUNJAB AND HARYANA HIGH COURT] , In this case it was held that the amount deposited by one co-operative society with another, whether for long-term or short-term would be an investment within the meaning of section 80P(2)(d). We are, therefore, of the considered view that the interest earned by the assessee on the advances given to the member co-operative societies for procurement of milk qualifies for deduction u/s 80P(2)(d) of the Income-tax Act, 1961. We hold accordingly. Admittedly, the income referred to in section 80P(2)(d) is included in the gross total income but once the said income is excluded by virtue of section 80P(2)(d) it no longer can be said to be included in the total income. Since deduction u/s 80P(2)(d) is allowed to the assessee out of the gross total income, the income described in section 80P(2)(d) no longer is included in the total income notwithstanding the fact that the said income is included in the gross total income. We accordingly hold that section 14A is applicable even in respect of the incomes which are excluded from the total income by virtue of deductions under Chapter VI-A. This view gets fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 161 Capital grant written off 84,58,496 9,46,31,613 Gross total income 4,98,64,196 Less deduction under section 80P(2)(d) 4,98,64,196 Balance taxable income Nil As per the note given on the computation of income chart, it was claimed by the assessee that the interest income earned from cooperative societies amounting to Rs. 7,95,37,490 was eligible for deduction Under Section 80P(2)(d) but the claim was restricted to the net income determined above at Rs. 4,98,64,196. On scrutiny of accounts, the AO was of the view that interest earned by the assessee from the cooperative societies was not on account of investment by way of debentures/securities or shares in another cooperative society but was business receipt arising out of business transactions of advancing funds for day-to-day running of the business activities of the District Milk Unions. The Assessing Officer accordingly held that assessee was not entitled to deduction Under Section 80P(2)(d). 3. The Assessing Officer further proceeded to hold that even if the assessee is presumed to be entitled to deduction Under Section 80P(2)(d), the same is permissible on the income to be determined after deduction of expenses as provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 450(SC), in which their Lordships have held that where a part of income is exempt and if the business of the assessee is one and indivisible expenditure cannot be apportioned and the part relating to income which is exempt cannot be disallowed. It was accordingly pleaded that deduction may be allowed Under Section 80P(2)(d) to the assessee in respect of the gross receipts of interest. 7. The ld. D.R., on the other hand, contended that assessee is not entitled to deduction Under Section 80P(2)(d) insofar as deduction is permissible under the said section in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other cooperative society. According to the Id. D.R., the assessee had provided advances to the cooperative societies in the normal course of business and no investment was made in such societies the income wherefrom would qualify for deduction Under Section 80P(2)(d). The ld. D.R. further contended that Section 14A having been inserted with retrospective effect, the decision of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation. v. CIT (supra) stands superseded. The ld. D.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting the deduction permissible under Chapter VIA- i) ITA No. 17/Chandi/03, A.Y. 92-93 ITO Wd. 4(1), Chandigarh v. Punjab State Federation of Coop. Sugar Mills Chandigarh ITA No. 307Chandi/03, A.Y. 92-93 Punjab State Federation of Coop. Sugar Mills, Chandigarh v. ITO Wd.4(1), Chandigarh. ii) ITA No. 79/Chandi/04, A.Y. 2000-01, Punjab State Co-operative Supply Marketing Federation Ltd., chandigarh. v. ACIT Cir.4(1), Chandigarh. It was accordingly pleaded that appeal of the assessee may be dismissed. 9. We have given our careful consideration to the rival contentions. There are two issues involved in this appeal - first issue is as to whether the assessee is entitled to deduction Under Section 80P(2)(d) in respect of interest on advances to the cooperative societies in the course of its business and the second issue is in regard to quantum of such deduction. So far as first issue is concerned, the same is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT, Lucknow v. U.P. Co-operative Federation Ltd. (supra). In the said case, their Lordships of the Supreme Court held that the amounts advanced to the members of a cooperative societi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e money but is not restricted to that mode of 'investment' or loans made on commercial paper. The word 'invest' has been judicially defined a follows: To place property in business; to place so that it will be Safe and yield a profit. It is also commonly understood as giving money for some other property (as) investing funds on lands and houses. Investment means, in common parlance, putting out money on interest, either by way of loan, or by purchase of income producing property.... It is thus evident that on the basis of the decision of the Hon'ble Supreme Court, the advances made by the assessee to the member cooperative societies for the purpose of procurement of milk etc. in the course of its business falls within the category of 'investments' and interest thereon accordingly qualifies for deduction Under Section 80P(2)(d). We may also usefully refer to the decision of the Punjab Haryana High Court in the case of CIT v. Haryana Co-operative Sugar Milk Ltd. (supra). In this case it was held by the Hon'ble High Court that the amount deposited by one co-operative society with another, whether for long term or short term would be an investment within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80P(2)(d) of the Income-tax Act, 1961 is permissible to the assessee in respect of the gross interest received from member cooperative societies or net interest computed in accordance with the provisions of the Act This issue was neither raised nor decided by the Hon'ble High Court. We will therefore consider this issue in the light of the provisions of the Act. 14. It will be pertinent to mention that the deduction claimed by the assessee Under Section 80P(2)(d) falls under Chapter VIA of the Income-tax Act, 1961 dealing with deductions to be made in computing the total income. Section 80P(2)(d) reads as under: 80P.(1) Where, in the case of an assessee being a cooperative 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 this section, the sums specified in Sub-section (2), in computing the total income of the assessee. (2) The sums referred to in Sub-section (1) shall be the following, namely: (d) in respect of any 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducing interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of Sub-section (1) of Section 80M would be fulfilled and the provision enacted in that sub-section would be attracted. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words such income by way of dividends must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words such income by way of dividends must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. That would obvio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be included in its total income as required by Section 66. For the first two years, the Appellate Tribunal accepted the claim of the assessee but for the third year the Tribunal rejected the claim and upheld the ITO' order. On reference, the High Court held, rejecting the claim of the assessee, that the only way of working out the scheme of provisions of Section 81(i)(d) in the light of Sections 66 and 110 was first to calculate the total income and the income tax thereon and secondly to ascertain the net profits in respect of activities on which income tax was not payable by setting off against the gross profits the proportionate amount of expenditure and then to determine the profits and gains from the taxable activities and thereafter from the income tax on the total income grant a rebate at the average rate of income tax on the amount on which no tax was payable. On appeal to the Supreme Court, the Hon'ble Supreme Court held as under: (i) Affirming the decision of the High Court, that since Section 66 required the computation of the total income by including all income on which no income-tax was payable under Chapter VII, the income on which no income-tax was paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an 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. This situation requires us to advert to such of the relevant provisions of the Income-tax Act, which could be of assistance to us in resolving the controversy. The Hon'ble Supreme Court has referred to various provisions of the Act relevant to computation of income from profits and gains of business. At page 1033, their Lordships further held as under: Thus, the said provisions of the Income-tax Act, in our view, clearly envisage a legislative scheme of giving income-tax exemption to a cooperative society carrying on its business contemplated in Section 81(i)(d) of the Income-tax Act, not with respect to the amount of gross profits and gains of its business but only with respect to the amount of net profits and gains, i.e., income of its business otherwise computable according to the provisions of the Income-tax Act for the purpose of charging income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tfully applying the above principle of law hold that deduction Under Section 80P(2)(d) is permissible to the assessee on the net component of interest computed in accordance with the provisions of the Act. 16. It is also pertinent to mention that Section 14A has been incorporated in the Income-tax Act, 1961 by the Finance Act, 2001 with retrospective effect from 1.4.72. The said section reads as under: 14A.For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April, 2001. The question that assumes importance in the light of the contentions advanced on behalf of the parties is as to whether Section 14A is applicable only in respect of income which is not included in the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omes which are excluded from the total income by virtue of deductions under Chapter VIA. This view gets further support from the prescribed form of return of income. Sl. No. 18 provides for the gross total income, Sl. No. 19 provides for deductions under Chapter VIA and Sl. No. 20 provides for the total income. It is therefore, evident that total income as per the return does not include the income referred to in Section 80P(2)(d). Therefore, the provisions of Section 14A inserted w.e.f. 1.4.1962 are clearly attracted in this case. We are, therefore, of the considered view that deductions permissible to the assessee Under Section 80P(2)(d) is in respect of the net income after excluding the expenses attributable to the income referred to in Section 80P(2)(d). In case some expenditure is indivisible, visa other receipts of business, the same shall have to be apportioned between the various types of receipts and deductions Under Section 80P(2)(d) computed accordingly. 17. In the final analysis, we hold that assessee is entitled to deduction Under Section 80P(2)(d) in respect of interest received on advances provided to the member co-operative societies. So, however, the deduction per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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