Allahabad High Court
Chief Commissioner Of Income-Tax ... vs Kisan Sahkari Chini Mills Ltd. on 19 November, 2004
Equivalent citations: (2005)196CTR(ALL)220, [2005]273ITR42(ALL)
Author: P. Krishna
Bench: P. Krishna
JUDGMENT P. Krishna, J.
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law, at the instance of the Chief Commissioner of Income-tax for the opinion to this court, under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") "Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under Section 80P(2)(c) of the Income-tax Act, 1961 ?"
2. The facts of the case in brief are as follows :
3. The respondent-assessee is a co-operative society. The assessment year involved in the case is 1977-78. During the year under consideration, the sugar factory was under construction. No business was done. The assessee received interest on deposits with banks and post offices. A return of net loss of Rs. 7,643 was filed. The deduction claimed by the assessee towards the expenses was disallowed by the Income-tax Officer. He computed the interest income after rejecting the claim put forward by the assessee with regard to the deduction towards the expenses on the ground that the expenditure incurred was in the nature of capital expenditure. The assessee's claim of deduction under Section 80P(2)(c) was disallowed on the ground that in the relevant previous year it did not carry on any activities. The sugar mill was under construction. No business was done by the assessee during the relevant assessment year. On appeal the Appellate Assistant Commissioner allowed the claim of the assessee with regard to the exemption under Section 80P(2)(c) of the Act. This order has been confirmed by the Income-tax Appellate Tribunal in the appeal filed by the Department.
4. Heard Shri A. N. Mahajan, learned standing counsel for the Department. None appeared on behalf of the assessee. The relevant portion of Section 80P of the Act as it existed during the relevant assessment year reads as follows :
"Section 80P(2),-
(c) in the case of a co-operative society, engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed twenty thousand rupees . . ,"
5. Section 80P prior to its insertion in the Act was in the form of Section 80(i)(c) of the Act. The Supreme Court while interpreting Section 81(i)(c), prior to the amendment in 1968 observed that this provision was enacted for promoting the growth of co-operative societies. In such matters the provision should be construed liberally. Reversing the judgment of the High Court that the activity of a society should be divided in two parts- firstly the exempted activities according to clauses (a) to (f) of Section 81(i) and certain other activities which are not exempt, the profits and gains attributable to such non-exempt activities must necessarily be taxed, the Supreme Court in the case of Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT [1989] 177 ITR 418 has held that the object of Section 81(i) was to encourage and promote the growth of a co-operative society and consequently a liberal construction must be given to the operation of that provision. The Supreme Court has given a broad meaning of the expression "marketing" appearing in clause (c) of section Section 80P of the Act grants deduction to a co-operative society in respect of categories of income specified in sub-section (2). The profits of certain businesses are totally exempt from tax, while the profits of other businesses are exempt up to a maximum of Rs. 20,000. A conjoint reading of clauses (a), (b) and (c) shows that clause (c) will come into operation in the case of a co-operative society engaged in the activities other than those specified in clause (a) or (b) either independently of, or in addition to, or any activities so specified. Therefore, clause (c) of Section 80P(2) is in the nature of a residuary clause so far as it relates to the activities of the cooperative society is concerned. The activities of a co-operative society not falling either in clause (a) or clause (b) of Section 80P will be covered by clause (c). Clause (c) of Section 80P(2) read with sub-section (1) of the section grants deduction of Rs. 20,000 in calculation of the gross total income of a co-operative society. Clause (c) of Section 80P(2) exempts income of co-operative society to the extent mentioned in that section if the profits and gains are attributable to the activities in which the co-operative society is engaged. The question is whether the interest income earned by the assessee-co-operative society on deposits with banks and post offices is "attributable" to the activity of the co-operative society. This court in the case of CIT v. Co-operative Cane Development Union Ltd. [1979] 118 ITR 770 following the judgment of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 has held that the expression "attributable to" is much wider than the expression "derived from". The expression "attributable to" suggests that the Legislature intended to cover receipts from sources other than the actual conduct of the business of the assessee. The relevant paragraph in Cambay Electric Supply [1978] 113 ITR 84 (SC) reads as follows (page 771 of 118 ITR) :
"The expression 'attributable to' suggests that the Legislature intended to cover receipts from sources other than the actual conduct of the business of the assessee. The investment of the statutory percentage of its profits in Government securities was a condition of the carrying on of the business. The profits or gains from such investments were connected with or incidental to the carrying on of the actual business."
7. It has been further held as follows (page 93 of 113 ITR) :
"In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance in Section 80J." (See also page 280 of 262 ITR).
8. The ratio of the aforesaid judgment has been reiterated by this court in the case of CIT v. Krishak Sahkari Ganna Samiti Ltd. [20021 258 ITR 594.
The aforesaid view has been recently relied upon by the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278.
9. Thus, in the case in hand, the income earned by the assessee-respondent on the deposits with the banks and post offices during the relevant assessment year, when the sugar factory itself was under construction is the income earned by it from investment in fixed deposits is attributable to the activities of the society. The interest income was treated by the Incometax Officer as the income earned by the assessee. The assessee, being a cooperative society, in our view is entitled for deduction of Rs. 20,000 in its gross total income under Section 80P(2)(c) of the Act. The said provision is in the nature of basic exemption granted to a co-operative society.
10. We could lay our hands on a recent judgment of the Punjab and Haryana High Court-Karnal Co-operative Sugar Mills Ltd. v. CIT [1998] 233 ITR 531. This case, though not relied upon by learned standing counsel, supports the view of the Department. It has been held therein that a co-operative society is not entitled to claim deduction of Rs. 20,000 under Section 80P(2)(c) of the Act where the society had not yet commenced the production. It has been held that whatever activities had been undertaken by the co-operative society, those were pre-operative activities. In this view of the matter it was found that the application of clause (c) is inappropriate. We respectfully dissent. It is true that the assessee has not yet commenced the business of production of sugar but looking into the meaning assigned by the Supreme Court to the phrase "attributable to", the clause (c) will cover the entire income of a co-operative society, not covered by clauses (a) and (b). The income earned by the assessee on deposits was treated as income of the assessee. The deposits were made by the assessee from the funds raised by it by selling its shares and the loan amount received from the Government.
11. In view of the above discussion, we find that the Tribunal has rightly interpreted Section 80P(2)(c) of the Act and the assessee was entitled to deduction under the aforesaid section. We answer the question in the affirmative, i.e., against the Revenue and in favour of the assessee. However, there shall be no order as to costs.