Purchase bonus as deferred discount and consumers' co-operative status under income tax deduction rules.

Purchase bonus paid by a co-operative society to members, when linked to purchases and operating in substance as a deferred discount, is treated as business expenditure wholly and exclusively incurred for the society's business, even though it is distributed after ascertainment of net profits under co-operative law. The statutory allocation of profits under the Tamil Nadu Co-operative Societies Act is relevant to distribution, but not conclusive for computing taxable income under the Income-tax Act. On the deduction issue, a society whose members used the supplied goods for brick and tile manufacture, rather than for their own consumption, was not a consumers' co-operative society and was confined to the lower deduction limit under section 80P(2)(c).

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Issues: (i) Whether purchase bonus paid by the co-operative society to its members, quantified with reference to business done with the society, is allowable as a business deduction under the Income-tax Act. (ii) Whether the assessee-society was entitled to deduction of Rs. 40,000 under section 80P(2)(c)(i) of the Income-tax Act, 1961.

Issue (i): Whether purchase bonus paid by the co-operative society to its members, quantified with reference to business done with the society, is allowable as a business deduction under the Income-tax Act.

Analysis: The arrangement under the Tamil Nadu Co-operative Societies Act for disposal of net profits was held to be relevant to statutory distribution and not conclusive for computation of taxable income. The payment of purchase bonus, though made after ascertainment of net profits, was found to be in substance an incentive or deferred discount linked to purchases made by members and to the business of the society. The Court treated the payment as an expenditure incurred wholly and exclusively for business, and applied the principle that real commercial profits, not statutory profit allocations, govern deduction under the Income-tax Act.

Conclusion: The purchase bonus is allowable as a business deduction and the issue is decided in favour of the assessee.

Issue (ii): Whether the assessee-society was entitled to deduction of Rs. 40,000 under section 80P(2)(c)(i) of the Income-tax Act, 1961.

Analysis: The assessee was not treated as a consumers' co-operative society because its members used the goods supplied by the society for manufacture of bricks and tiles, rather than for their own consumption. The society was held to fall within the other category of co-operative societies for the purpose of section 80P(2)(c), for which the permissible deduction was limited to Rs. 20,000.

Conclusion: The assessee was not entitled to deduction of Rs. 40,000 under section 80P(2)(c)(i), and the issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered partly for the assessee on the deductibility of purchase bonus and partly for the Revenue on the quantum of deduction under section 80P(2)(c).

Ratio Decidendi: A payment made to members as purchase bonus, which operates in substance as a deferred discount linked to business transactions, is deductible as business expenditure even if it is distributed after ascertainment of net profits under the co-operative law; but a society whose members do not consume the supplied goods for their own consumption is not a consumers' co-operative society for the higher deduction under section 80P(2)(c)(i).

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