Cooperative society wins deduction under section 80P(2)(d) on gross basis, section 80P(2)(iv) on seed sales, section 14A disallowance deleted

ITAT Ahmedabad allowed the assessee's appeal on three key issues. For deduction under section 80P(2)(d), the tribunal held that deduction on dividend and interest from cooperative society investments should be calculated on gross basis, not net basis, distinguishing SC precedent which applied to business profits. For deduction under section 80P(2)(iv) on seed sale profits, ITAT followed its own precedent allowing deduction with 20% indirect expense attribution. Regarding section 14A disallowance, ITAT deleted the entire disallowance, ruling that section 14A applies only to expenses for earning exempt income, not income claimed as deductible under Chapter VIA.

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Issues presented and considered in these appeals primarily revolve around the following core legal questions:

1. Whether the assessee, a cooperative society, is entitled to claim deduction under section 80P(2)(d) of the Income Tax Act, 1961, on the gross amount of interest and dividend income earned from investments made in other cooperative societies, or only on the net income after adjusting interest expenses.

2. Whether the assessee is entitled to claim deduction under section 80P(2)(a)(iv) of the Act for profits earned from the sale of seeds, and if so, whether such deduction should be allowed on gross profits or net profits after attributing indirect expenses.

3. Whether the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962, are applicable for disallowing expenses incurred by the assessee in relation to earning exempt income, particularly when the investments earning exempt income are made out of the assessee's own funds and not borrowed funds.

4. Ancillary issues such as the initiation of penalty proceedings under section 270A of the Act on additions made relating to disallowance of deductions under section 80P.

Issue-wise detailed analysis:

1. Deduction under Section 80P(2)(d) - Interest and Dividend Income from Other Cooperative Societies

Relevant legal framework and precedents: Section 80P(2)(d) of the Income Tax Act provides for deduction in respect of any income by way of interest or dividends derived by a cooperative society from its investments with any other cooperative society. The language of the statute uses the phrase "the whole of such income." The jurisdictional High Court in Surat Vankar Sahakari Sang Ltd. vs. CIT held that the deduction under section 80P(2)(d) is to be allowed on the gross income of interest or dividends without any adjustment for interest paid by the assessee to other cooperative societies. The Punjab & Haryana High Court in Doaba Co-op. Sugar Mills Ltd. also supported this interpretation, emphasizing that no adjustment is mandated by the statute.

Court's interpretation and reasoning: The Assessing Officer (AO) disallowed the deduction claimed by the assessee on the gross interest and dividend income, allowing deduction only on net income after adjusting interest expenses. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance. However, the Tribunal in the assessee's own preceding years had held that the deduction under section 80P(2)(d) must be allowed on the gross income, relying on the jurisdictional High Court's decision. The Tribunal also rectified an earlier order that had allowed deduction only on net income, acknowledging the apparent error in light of the High Court ruling.

The Revenue relied on the Supreme Court decision in Sabarkanta Zilla Kharid Veehan Sangh Ltd. vs. CIT, which held that deduction under section 80P on profits from business is allowable only on net profits and not on gross profits. The CIT(A) followed this precedent to deny the gross deduction claim. However, the Court distinguished this decision as it pertained to profits from business carried out by the cooperative society, not to income by way of interest or dividends from investments under section 80P(2)(d).

Key evidence and findings: The Tribunal's previous orders in the assessee's own case for earlier assessment years and the binding jurisdictional High Court decisions were key to the Court's reasoning. The Court noted that the AO and CIT(A) failed to follow these binding precedents.

Application of law to facts: The Court applied the plain language of section 80P(2)(d), which allows deduction of "the whole of such income," and the binding precedents to conclude that the assessee is entitled to claim deduction on the gross amount of interest and dividend income earned from investments in other cooperative societies.

Treatment of competing arguments: The Court carefully distinguished the Supreme Court precedent relied upon by the Revenue, clarifying that it applies to profits from business and not to income from investments under section 80P(2)(d). The Court also emphasized the binding nature of the jurisdictional High Court and Tribunal decisions in the assessee's own case.

Conclusion: The Court allowed the ground of appeal relating to deduction under section 80P(2)(d) on the gross income basis and directed the AO to grant the deduction accordingly.

2. Deduction under Section 80P(2)(a)(iv) - Profit on Sale of Seeds

Relevant legal framework and precedents: Section 80P(2)(a)(iv) allows deduction in respect of profits and gains of business carried on by the cooperative society. The Tribunal in the assessee's own preceding years had considered this issue and held that indirect expenses should be attributed to the seed sale activity and deduction allowed on net profits after such allocation. The Tribunal had fixed the indirect expenses attribution at 40% of the gross profit initially but later, on reconsideration and facts, reduced it to 20%, considering the nature of the activity and minimal expenses incurred.

Court's interpretation and reasoning: The AO disallowed the entire deduction claimed by the assessee as the assessee had not claimed any expenses against the gross profits from seed sales nor furnished details of agricultural activities. The CIT(A) upheld the AO's disallowance. The assessee contended that the seed sale was a trading activity with minimal expenses, mainly transportation, and that the authorities below failed to appreciate the facts and unreasonably disallowed the deduction.

Key evidence and findings: The Tribunal's prior orders in the assessee's own case for earlier years, which allowed deduction after attributing indirect expenses at 20% of gross profit, were pivotal. The Court noted that the AO's estimate of 40% indirect expenses was excessive and that the assessee incurred only minimal expenses.

Application of law to facts: The Court applied the Tribunal's earlier findings and directed the AO to allow deduction under section 80P(2)(a)(iv) after attributing indirect expenses at 20% of the gross profit from seed sales.

Treatment of competing arguments: The Court rejected the Revenue's support for the AO and CIT(A) orders, noting that the Revenue failed to dislodge the binding precedent and the factual matrix showing minimal expenses.

Conclusion: The Court partly allowed the ground of appeal relating to deduction under section 80P(2)(a)(iv), directing the AO to allow deduction after deducting 20% of gross profit as indirect expenses.

3. Disallowance under Section 14A read with Rule 8D - Expenses in Relation to Exempt Income

Relevant legal framework and precedents: Section 14A of the Income Tax Act deals with disallowance of expenditure incurred in relation to income which does not form part of total income (exempt income). Rule 8D prescribes the manner of computing such disallowance. The jurisdictional High Court in Banaskantha Dist. Co-op. Milk Producers' Union Ltd. and the Delhi High Court in CIT vs. Kribhco held that section 14A is applicable only for expenses incurred to earn exempt income and not for income deductible under Chapter VIA of the Act.

Court's interpretation and reasoning: The AO disallowed expenses under section 14A read with Rule 8D, finding that the assessee made large investments but did not incur any expenses related to earning exempt income. The CIT(A) upheld this disallowance. The assessee relied on the Tribunal's earlier order in its own case, which deleted such disallowance, holding that section 14A is not applicable where the income is deductible under Chapter VIA.

Key evidence and findings: The Tribunal's earlier order in the assessee's own case for previous years, supported by relevant High Court decisions, was the key evidence.

Application of law to facts: The Court applied the principle that section 14A disallowance is only for expenses incurred to earn exempt income, and since the income in question was deductible under Chapter VIA, the disallowance was unwarranted.

Treatment of competing arguments: The Court found the Revenue unable to counter the binding precedent and the assessee's submissions.

Conclusion: The Court allowed the ground of appeal relating to deletion of disallowance under section 14A read with Rule 8D.

4. Penalty under Section 270A

The assessee raised grounds challenging the initiation of penalty proceedings under section 270A in relation to additions made on account of disallowance of deductions under section 80P. The Court did not elaborate on this issue in detail but allowed the appeal relating to assessment years where penalty was challenged, implying relief to the assessee.

Significant holdings:

On the issue of deduction under section 80P(2)(d), the Court held:
"Section 80P(2)(d) of the Act allows whole deduction of an income by way of interest or dividends derived by the co-operative society from its investment with any other co-operative society. This provision does not make any distinction in regard to source of the investment because this Section envisages deduction in respect of any income derived by the cooperative society from any investment with a co-operative society. It is immaterial whether any interest paid to the co-operative society exceeds the interest received from the bank on investments. The Revenue is not required to look to the nature of the investment whether it was from its surplus funds or otherwise. The Act does not speak of any adjustment as sought to be made out by learned counsel for the Revenue. The provision does not indicate any such adjustment in regard to interest derived from the co-operative society from its investment in any other co-operative society."

The Court further emphasized the principle of strict interpretation of taxing statutes, quoting Rowlatt J. in Cape Brandy Syndicate v. IRC:
"...In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

On the issue of deduction under section 80P(2)(a)(iv), the Court held that deduction should be allowed on net profits after attributing reasonable indirect expenses (fixed at 20% of gross profit) related to the sale of seeds.

Regarding section 14A disallowance, the Court held:
"Since section 14A is applicable for the expenditure incurred to earn exempt income and not to the income deductible under chapter VIA of the Act, respectfully relying upon the said judgment, we find no justification in disallowing the claim of deduction of Rs. 7,98,033/- u/s 14A of the Act r.w.r. 8D of the Rule in the case of the assessee before us. In that view of the matter such disallowance is deleted."

Final determinations were:

• The deduction under section 80P(2)(d) is to be allowed on gross income of interest and dividend from investments in other cooperative societies.
• The deduction under section 80P(2)(a)(iv) for profits from sale of seeds is to be allowed after attributing indirect expenses at 20% of gross profits.
• The disallowance under section 14A read with Rule 8D is not justified where the income is deductible under Chapter VIA, and such disallowance is to be deleted.
• The appeals for assessment years 2017-18 and 2018-19 were partly allowed on these grounds, while the appeal for assessment year 2022-23 was allowed.

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