ITAT allows cooperative society deduction u/s 80P(2)(a)(i), rejects AO's estimated apportionment of mixed profits

The assessee, a cooperative society engaged in providing credit facilities to its members and in sugar manufacturing, claimed deduction u/s 80P(2)(a)(i) on profits from the credit facility business. The AO rejected the claim, alleging absence of separate books and estimating income proportionately across activities, resulting in an addition. The ITAT found that the assessee had produced separate audited profit and loss accounts for the credit facility and sugar manufacturing businesses, showing genuine profit from member credit activities and loss from sugar operations, which remained uncontroverted by the Revenue. Holding the AO's estimations unjustified, the ITAT allowed the assessee's appeal.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessee-cooperative society, engaged in providing credit facilities to its members and also in sugar manufacturing business, is entitled to deduction under section 80P(2)(a)(i) on the net income after setting off loss from sugar business against profit from credit facility business.

1.2 Whether the Assessing Officer was justified in estimating proportionate profit from the sugar mill business and denying deduction under section 80P(2)(a)(i) on such estimated amount on the ground that separate books of account for different lines of business were not maintained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Deduction under section 80P(2)(a)(i) and estimation of proportionate profit from sugar business

Legal framework (as discussed)

2.1 The Court proceeded on the basis of the statutory scheme of section 80P(2)(a)(i) relating to deduction of income attributable to the business of providing credit facilities to members, and on the principle that deduction is allowable on the "gross total income" computed in accordance with the Act.

Interpretation and reasoning

2.2 The Tribunal noted that the assessee is a cooperative society engaged in (i) business of providing credit facilities to its members, and (ii) sugar manufacturing business taken on lease. For the year under consideration, the assessee earned net profit of Rs. 4,17,52,214/- from the credit facility business on gross receipts of Rs. 14,99,38,292/-, and incurred loss of Rs. 3,64,48,176/- from sugar manufacturing on turnover of Rs. 7,92,75,333/-.

2.3 The assessee set off the loss from the sugar business against the profit from the credit facility business and disclosed net profit of Rs. 52,64,040/-, and after making adjustments towards bonus disallowance and depreciation as per the Act, arrived at gross total income of Rs. 65,25,467/-, which was claimed as deduction under section 80P(2)(a)(i).

2.4 The Assessing Officer, alleging absence of separate books of account for each activity, estimated income from each business in proportion to the credits in the profit and loss account and worked out an addition of Rs. 50,10,957/-, effectively disallowing part of the deduction under section 80P(2)(a)(i). The appellate authority affirmed this on the same premise, referring only to a consolidated profit and loss account.

2.5 Before the Tribunal, the assessee produced audited financial statements for both lines of business, including separate audited profit and loss accounts for the credit facility business and the sugar manufacturing business, showing the respective profits and losses with details of direct and indirect expenses. These audited segmental accounts were on record and supported the figures already disclosed.

2.6 The Tribunal observed that the genuineness of the profit from the credit facility business and the loss from the sugar business, as per the separate audited accounts, was not controverted by the Departmental Representative. No defects in the books or in the audited segmental accounts were pointed out, nor were the accounts rejected.

2.7 On these facts, the Tribunal held that the basis adopted by the Assessing Officer-proportionate estimation of profits merely on the assumption of non-maintenance of separate books-was erroneous, particularly when separate audited accounts for each line of business were available and not impeached.

Conclusions

2.8 The Tribunal concluded that the assessee's computation, whereby loss from sugar manufacturing was set off against profit from the credit facility business to arrive at gross total income, and the resultant claim of deduction under section 80P(2)(a)(i), was in order.

2.9 The action of the Assessing Officer in estimating proportionate profit from the sugar business and making an addition of Rs. 50,10,957/- was held to be unjustified and unsustainable in law, and the confirming order of the appellate authority was set aside.

2.10 The impugned addition was deleted, and the grounds of appeal relating to the denial of deduction under section 80P(2)(a)(i) and to the proportionate estimation of profit were allowed.

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