The Punjab State Cooperative Milk Producer’s Federation Ltd v. Commissioner Of Income Tax-Iiand Another

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 530 of 2006Date of decision: 28.3.2011 The Punjab State Cooperative Milk Producer’s Federation Ltd. --- Appellant Versus Commissioner of Income Tax-IIand another --- Respondents CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Mr. M.R. Sharma, Advocatefor the appellant. Ms. Urvashi Dhugga, Senior Standing Counselfor the respondent-Revenue. --- AJAY KUMAR MITTAL, J. This order will dispose of two appeals, Income Tax Appeal No.530 of 2006 and 516 of 2008 as the counsel for the parties submit thatcommon questions are involved in these appeals. The facts have beentaken 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 TribunalChandigarh 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 whilecomputing the interest income derived from anothercooperative societies for the purposes of computing deductionunder Section 80P(2)(d), the expenses can be attributed anddeducted more so when these are not identifiable?computing the interest income derived from anothercooperative societies for the purposes of computing deductionunder Section 80P(2)(d), the expenses can be attributed anddeducted more so when these are not identifiable? (2) Whether in the facts and in the circumstances of the case theITAT order directing the deduction of expenses attributable tothe earning of interest income for the purpose of determiningdeduction under Section 80P(2)(d) is legally sustainable, thesame being based on mere presumption and surmises?ITAT order directing the deduction of expenses attributable tothe earning of interest income for the purpose of determiningdeduction under Section 80P(2)(d) is legally sustainable, thesame being based on mere presumption and surmises? (3) Whether in the facts and in the circumstances of the case theorder of the ITAT holding that the provision of Section 14A areapplicable to the deductions under Section 80P(2)(d) is legallysustainable in law?”order of the ITAT holding that the provision of Section 14A areapplicable to the deductions under Section 80P(2)(d) is legallysustainable in law?” 4. The facts, in brief, necessary for adjudication as narrated in theappeal, are that the appellant-society is an Apex body of CooperativeSocieties and District Cooperative Milk Producers Unions are itsmembers. The appellant is engaged in the marketing and sale of milkproducts of its member societies. As per the bye-laws of the appellant-Federation, deductions were admissible to it under Section 80P(2)(a)(i) ofthe Act on the income derived by it from its members by way of interest onits investments as loan and advances for their working capital. The appellant filed its return of income for the assessment year 2002-03, on29.10.2002 declaring taxable income as Nil. The return was processedunder Section 143(1) of the Act on 8.2.2003.. The assessee claimed thatthe entire income derived on account of interest from cooperativesocieties, amounting to Rs. 7,95,37,490/- was eligible for deduction underSection 80P(2)(d) of the Act. The assessee, however, restricted its claimin that behalf to Rs. 4,98,64,196/- only. appellant filed its return of income for the assessment year 2002-03, on29.10.2002 declaring taxable income as Nil. The return was processedunder Section 143(1) of the Act on 8.2.2003.. The assessee claimed thatthe entire income derived on account of interest from cooperativesocieties, amounting to Rs. 7,95,37,490/- was eligible for deduction underSection 80P(2)(d) of the Act. The assessee, however, restricted its claimin that behalf to Rs. 4,98,64,196/- only. 5.The assessing officer on a consideration of the entire matterconcluded in the assessment order dated 30.3.2005 that the workingcapital advances did not qualify the test of ‘investments’ as enshrined inSection 80P(2)(d) of the Act, and the deduction claimed by the assesseeunder 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 wouldnot be entitled to deduction under the provisions of Section 80P(2)(d) ofthe Act on account of interest on working capital to milk unions. 6.The assessee carried appeal before the Commissioner ofIncome Tax (Appeals), [hereinafter referred to as “CIT(A)”]. The CIT(A)also held that deduction under Section 80P(2)(d) of the Act was notallowable to the assessee, and consequently dismissed assessee’sappeal vide order dated 31.10.2005. 7.The assessee further took the matter in appeal before theTribunal and the Tribunal accepted the plea raised on behalf of theassessee and while accepting its appeal, vide order dated 27.4.2006 heldthat the assessee was entitled to deduction under Section 80P(2)(d) ofthe Act in respect of interest received on advances provided to memberco-operative societies. The said deduction was, however, held allowable to the assessee in respect of net income after deducting the expensesincurred 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 theauthorities below have erred in directing that the expenses incurred forearning income which was deductible under Section 80P(2)(d) of the Actwas to be reduced from such income. The counsel placed reliance onCommissioner of Income Tax v. King Export (2009) 318 ITR 100 andCommissioner of Income Tax Vs. Doaba Cooperative Sugar Mills(Ltd.) (1998) 230 ITR 774. On the other hand, learned counsel for theRevenue submitted that after insertion of Section 14A in the Act, theauthorities below were justified in disallowing the expenses incurred inrelation to income not includible in the total income and directing thesame to be excluded from the income earned by the assessee whilecomputing deduction under Section 80P(2)(d) of the Act. Learnedcounsel for the Revenue placed reliance on judgments of the SupremeCourt inSabarkantha Zilla Kharid Vechan Sangh Ltd. vs.Commissioner of Income Tax, (1993) 203 ITR 1027 andCommissioner of Income Tax vs. Walfort Share & Stock Brokers (P)Ltd. (2010) 41 DTR Judgments 233. 11.We have given our thoughtful consideration to thesubmissions made by the counsel for the parties and find force in thecontention 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 ofsuch income. The apex Court in Sabarkantha Zilla Kharid VechanSangh Ltd’s case (supra), where the High Court while rejecting the claimof the assessee had held that the assessee who was engaged in thepurchase of agricultural implements, seeds, live-stocks etc. was entitledto deduction under Section 81 of the Act from tax only in relation to netprofit and not gross profits. It was held as under:- 11.We have given our thoughtful consideration to thesubmissions made by the counsel for the parties and find force in thecontention 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 ofsuch income. The apex Court in Sabarkantha Zilla Kharid VechanSangh Ltd’s case (supra), where the High Court while rejecting the claimof the assessee had held that the assessee who was engaged in thepurchase of agricultural implements, seeds, live-stocks etc. was entitledto deduction under Section 81 of the Act from tax only in relation to netprofit and not gross profits. It was held as under:- “The said provision, as seen therefrom, undoubtedly exemptsan assessee-co-operative society, which carries on thebusiness envisaged therein, from payment of income tax onprofits and gains of such business. But the controversy whichrelates to the said provision is, whether the income tax notpayable there-under, falls to be calculated either withreference to the full amount of profits and gains of the co-operative society’s business, as contended on behalf of theassessee or with reference to the net amount of profits andgains of the co-operative society’s business, as otherwisecomputable under the provisions of the Income-tax Act for thepurpose of charging income-tax thereon, as contended onbehalf of the Revenue. If the relevant provisions of theIncome-tax Act providing for charging a person including a co-operative society with income tax on “profit and gains” of suchperson’s business show that it is the net profits and gains, i.e.,income of such business computed in accordance with theprovisions of the Income-tax Act, which is includible in suchperson’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 isenvisaged under Section 81(i)(d) of the Income-tax Act, oughtto be net profits and gains, i.e. income of business computedin accordance with the provisions of the Income-tax Act whichis includible in such person’s total income for chargingincome-tax thereon.” 13. It may be noticed that Section 80P was inserted in place ofSection 81 which was simultaneously deleted by Finance (No.2) Act,1967, with effect from Ist April, 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 anyexpenses incurred by the assessee for earning income which does notform part of total income under the Act, shall not be an allowableexpenditure. The apex Court in Walfort Share and Stock Brokers’scase (supra), defining the scope of Section 14A of the Act, incorporatedretrospectively from 1.4.1962, had laid down as under: “The insertion of Section 14A with retrospective effect is theserious attempt on the part of the Parliament not to allowdeduction in respect of any expenditure incurred by theassessee in relation to income, which does not form part of thetotal income under the Act against the taxable income (seeCircular No.14 of 2001 dated 22.11.2001). In other words,Section 14A clarifies that expenses incurred can be allowedonly to the extent they are relatable to the earning of taxableincome. In many cases the nature of expenses incurred bythe assessee may be relatable partly to the exempt income “The insertion of Section 14A with retrospective effect is theserious attempt on the part of the Parliament not to allowdeduction in respect of any expenditure incurred by theassessee in relation to income, which does not form part of thetotal income under the Act against the taxable income (seeCircular No.14 of 2001 dated 22.11.2001). In other words,Section 14A clarifies that expenses incurred can be allowedonly to the extent they are relatable to the earning of taxableincome. In many cases the nature of expenses incurred bythe assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section14A, the expenditure incurred in respect of exempt incomewas being claimed against taxable income. The mandate ofSection 14A is clear. It desires to curb the practice to claimdeduction of expenses incurred in relation to exempt incomeagainst taxable income and at the same time avail the taxincentive by way of exemption of exempt income withoutmaking any apportionment of expenses incurred in relation toexempt income. The basic reason for insertion of Section 14Ais that certain incomes are not includible while computing totalincome as these are exempt under certain provisions of theAct. In the past, there have been cases in which deduction hasbeen sought in respect of such incomes which in effect wouldmean that tax incentives to certain incomes was being used toreduce the tax payable on the non-exempt income by debitingthe expenses, incurred to earn the exempt income, againsttaxable income. The basic principle of taxation is to tax the netincome, i.e., gross income minus the expenditure. On thesame analogy the exemption is also in respect of net income.Expenses allowed can only be in respect of earning of taxableincome. This is the purport of Section 14A. In Section 14A, thefirst phrase is "for the purposes of computing the total incomeunder this Chapter" which makes it clear that various heads ofincome as prescribed under Chapter IV would fall withinSection 14A. The next phrase is, "in relation to income whichdoes not form part of total income under the Act". It meansthat if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability ofSection 14A. Further, Section 14 specifies five heads ofincome 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 forthe 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 59are now to be allowed only with reference to income which isbrought under one of the above heads and is chargeable totax. If an income like dividend income is not a part of the totalincome, the expenditure/deduction though of the naturespecified in Sections 15 to 59 but related to the income notforming part of total income could not be allowed against otherincome includible in the total income for the purpose ofchargeability to tax. The theory of apportionment ofexpenditures between taxable and non-taxable has, inprinciple, been now widened under Section 14A. ReadingSection 14 in juxtaposition with Sections 15 to 59, it is clearthat the words "expenditure incurred" in Section 14A refersto expenditure on rent, taxes, salaries, interest, etc. in respectof which allowances are provided for (see Sections 30 to 37). 15.Adverting to the judgments relied upon by the learned counselfor the assessee, the same do not advance its case. Suffice it to noticethat the Doaba Co-operative Sugar Mills’s case (supra) was a caseprior to insertion of Section 14A by Finance Act, 2001 retrospectively from1.4.1962 and would, thus, be of no assistance to the assessee. Further, this Court in King Export’s case (supra), on consideration of factsinvolved therein had concluded that there was no expenditure which hadbeen incurred by the assessee for earning the income and the same didnot 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 areanswered against the assessee and in favour of the Revenue. The appeals are accordingly dismissed. (AJAY KUMAR MITTAL) JUDGE March 28, 2011*rkmalik* (ADARSH KUMAR GOEL) JUDGE