Business income classification for cooperative undertaking receipts, with carry-forward depreciation allowed and partnership arrangement treated as genuine.

Receipts from the sugar and distillery units were treated as business income because the arrangement was found to be a genuine statutory partnership of societies, not a mere lease or passive letting, and the assessee retained commercial participation and business risk. On that basis, carried forward depreciation under section 32(2) was available for set-off. The partnership deed produced before the appellate authority was admitted and acted upon for complete adjudication, and the colourable-device objection was rejected. The section 43B disallowance was restored to the Assessing Officer for factual verification in light of the income being assessed under the business head.

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Issues: (i) whether the receipts described as lease rent or compensation from the sugar unit and distillery unit were taxable as business income or as income from other sources; (ii) whether the assessee was entitled to set off unabsorbed depreciation of earlier years; (iii) whether the partnership deed produced before the appellate authority could be admitted and acted upon and whether the arrangement was a genuine partnership; and (iv) whether the disallowance under section 43B required verification after the receipts were held to be business income.

Issue (i): whether the receipts described as lease rent or compensation from the sugar unit and distillery unit were taxable as business income or as income from other sources

Analysis: The arrangement was held to be a partnership of societies under section 20 of the Maharashtra Co-operative Societies Act, 1960, and not a mere lease of assets. The assessee contributed the sugar plant, licences, workforce and business infrastructure, while the other society provided finance, expertise and day-to-day management. The assessee retained participatory rights through its nominee director, continued to shoulder business-related risks, and the receipts were linked to commercial exploitation of the undertaking rather than passive letting. The nomenclature used in the TDS certificate did not control the true character of the receipt.

Conclusion: The receipts were held to be taxable as business income and not as income from other sources, in favour of the assessee.

Issue (ii): whether the assessee was entitled to set off unabsorbed depreciation of earlier years

Analysis: Once the receipts were assessed as business income, the carried forward depreciation had to be treated as part of current depreciation under section 32(2) of the Income-tax Act, 1961. It was therefore available for set-off against the income of the relevant year and, to the extent remaining unabsorbed, for carry forward in accordance with law.

Conclusion: The claim for set-off of unabsorbed depreciation was allowed in favour of the assessee.

Issue (iii): whether the partnership deed produced before the appellate authority could be admitted and acted upon and whether the arrangement was a genuine partnership

Analysis: The appellate authority had considered the deed on merits while deciding the character of the receipt. The Tribunal held that the deed could be looked into for complete adjudication and that the surrounding circumstances, the statutory framework for partnership of societies, and the agreed commercial structure showed a real business arrangement and not a sham device. The finding that the deed was colourable was rejected.

Conclusion: The additional evidence issue was allowed and the partnership arrangement was treated as genuine, in favour of the assessee.

Issue (iv): whether the disallowance under section 43B required verification after the receipts were held to be business income

Analysis: Since the receipts were held taxable under the business head, the applicability of section 43B could not be negatived on the footing adopted by the assessee. The matter required factual verification by the Assessing Officer in the light of the revised head of income.

Conclusion: The issue was restored for verification, resulting in no final relief on merits at this stage.

Final Conclusion: The Tribunal treated the impugned receipts as business receipts, permitted the assessee to get the benefit of brought forward depreciation, accepted the partnership deed for adjudication and upheld the genuineness of the arrangement, while directing verification of the section 43B claim.

Ratio Decidendi: Where a cooperative society exploits its industrial undertaking through a statutory partnership of societies and retains commercial participation and business risk, the resulting receipts assume the character of business income, and the carried forward depreciation is available under section 32(2).

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