1986 (4) TMI 13 - HC - Income Tax

Court rules on exemption for co-op society income under Income-tax Act. Reserve credited under Societies Act allowed as business expenditure.

The court held that income from purchase of paddy and sale of rice by a co-operative marketing society was not exempt under section 80P(2)(iii) of the ... Business Expenditure, Co-operative Society, Diversion By Overriding Title, Exemptions Issues Involved:The judgment involves the interpretation of provisions under section 80P(2)(iii) of the Income-tax Act, 1961 and section 43(2) of the Madhya Pradesh Co-operative Societies Act, 1960.Interpretation of Section 80P(2)(iii) of the Income-tax Act, 1961:The assessee, a co-operative marketing society, claimed relief under section 80P(2)(iii) for income derived from marketing agricultural produce of its members. However, based on precedents, the court held that income from purchase of paddy and sale of rice was not exempt under this section. The court referred to previous decisions to support this conclusion.Deduction under Section 43(2) of the Societies Act:The assessee claimed deduction of Rs. 1,66,763 as a reserve credited under section 43(2) of the Societies Act. The Tribunal initially disallowed this deduction, but the court disagreed. It emphasized that the reserve fund created under section 43(2) is statutory and controlled by the Registrar, not the assessee. The court applied principles from previous cases to support the deduction claim, stating that if the amount is diverted under statutory provisions, it does not constitute income and can be deducted as business expenditure.Legal Principles and Precedents:The court relied on legal principles established in cases like Poona Electric Supply Co. Ltd. v. CIT and CIT v. Travancore Sugars and Chemicals Ltd. to support the deduction claim. It emphasized that statutory deposits, like the reserve fund in this case, which the assessee does not control, can be considered deductible under relevant sections of the Income-tax Act, 1961.Decision and Conclusion:The court answered the questions of law as follows:- Question (i) was answered in favor of the Revenue, stating that the activity of purchasing paddy, milling it, and selling it did not amount to marketing agricultural produce under section 80P(2)(iii) of the Income-tax Act, 1961.- Question (ii) was answered in favor of the assessee, allowing the deduction of Rs. 1,66,763 required to be transferred to the reserve fund under section 43(2) of the Societies Act as a business expenditure or having been diverted by an overriding title. No costs were awarded in this reference.