Proportionate allocation of common expenditure governs section 80P deduction where taxable and exempt co-operative business streams are separate.
Where a co-operative society carries on separate taxable and exempt businesses, deduction under section 80P(2) must be computed on profits after deducting proportionate common expenditure attributable to the exempt activity, not on gross receipts. The text further states that expenditure incurred to earn non-taxable income cannot be allowed in full against taxable income merely because the assessee has an overall composite business. The operative principle is apportionment of common costs according to the activity generating the income, with the exempt income and taxable income each bearing their relatable expenditure.
Issues: (i) Whether, in computing deduction under section 80P(2), the exempt income of a co-operative society carrying on separate taxable and non-taxable businesses had to be reduced by proportionate expenditure. (ii) Whether the entire expenditure claimed by the assessee could be allowed against the taxable income.
Issue (i): Whether, in computing deduction under section 80P(2), the exempt income of a co-operative society carrying on separate taxable and non-taxable businesses had to be reduced by proportionate expenditure.
Analysis: Section 80P grants deduction only in respect of income attributable to the specified activities, and the deduction is to be worked out with reference to profits and gains, not gross receipts. Where the assessee carries on distinct businesses and common expenditure is incurred for both taxable and exempt activities, the exempt profit must be determined after setting off the relatable expenditure. The Tribunal found that the assessee's rice mill, trucks and tractors constituted separate businesses from the exempt co-operative activities, and the exempt income could not be taken at gross level without apportionment of expenditure.
Conclusion: The deduction under section 80P(2) was correctly restricted after allowing proportionate expenditure, and the assessee was not entitled to deduction on the gross amount claimed.
Issue (ii): Whether the entire expenditure claimed by the assessee could be allowed against the taxable income.
Analysis: The allowance of expenditure depends on whether it is laid out wholly and exclusively for earning income chargeable to tax. Expenditure incurred to earn non-taxable income cannot be allowed against taxable income merely because the assessee carries on an overall composite business. Since the assessee had both taxable and exempt streams and the businesses were found to be separate, the expenditure had to be allocated according to the income-earning activity to which it related.
Conclusion: The claim for allowance of the entire expenditure was rightly rejected.
Final Conclusion: The reference was answered against the assessee on all substantive questions, affirming proportionate apportionment of common expenditure and denying deduction of expenditure relating to exempt income.
Ratio Decidendi: In a case where an assessee carries on separate taxable and exempt businesses, deduction for exempt income must be computed after deducting proportionate expenditure attributable to that income, and expenditure relating to exempt income cannot be allowed against taxable income.
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