TaxTMI 
TaxTMI 
2005 (12) TMI 65
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....rticles intended for agriculture. The assessee filed its return of income on June 26, 1981, declaring total income at nil. Assessment was finalised on June 30,1982, under section 143(3) read with section 144B on a total income of Rs. 2,55,888. One of the adjustments made by the Assessing Officer was in respect of the quantum of deduction under section 80P(2)(a)(iv) of the Act. The Assessing Officer noted that out of the aggregate sales of Rs. 9,55,04,537 in the year under consideration sales to the rune of Rs. 5,01,18,140 were of articles intended for agriculture, which included sales both to the members of the society as well as to the non-members. While computing its total income, the assessee deducted expenses to the tune of Rs. 4,72,682 from the gross profits earned out of its total sales. The assessee earned gross profit of Rs. 4,00,367 on sales of articles intended for agriculture and claimed the whole of this gross profit as deduction under section 80P(2)(a)(iv) of the Act. The Assessing Officer did not agree with this claim in principle as he was of the view that the deduction can be allowed only to the extent of the net profits arising out of the activities specified in....
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....ght to be reduced entirely on the basis of the decision in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447 (Guj). The Tribunal upon considering the said decision found that in the said decision the controversy was in respect of pre-1968 provisions where the then prevailing section 81 granted an exemption to a co-operative society of profits and gains of business on specified activities, but for the purpose of granting exemption it was not as if the whole amount of profits was required to be ignored like the provisions of section 10 of the Act or the whole amount was required to be deducted like section 80P(2) of the post-1968 provisions. That, at that time relief was granted on the basis of section 110 of the Act which provided for determination of tax where total income included income on which no tax was payable. The Tribunal observed that, under the said Act, the assessee was entitled to deduction from the amount of income-tax calculated with reference to the total income, of an amount equal to income-tax calculated at the average rate of income-tax on the amount on which no income-tax was payable. That, the High Court upon considering the said section ....
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....earing on September 28, 2005. Mr. B.B. Naik, learned standing counsel appearing on behalf of the applicant-Revenue, had made various submissions which are set out in detail hereinafter. However, despite service of notice there is no appearance on behalf of the respondent-assessee. Hence, considering the nature of the controversy involved, this court had by an order of even date appointed Mr. S.N. Soparkar, the learned senior advocate as amicus curiae for assisting the court. Accordingly, Mr. Soparkar has appeared as amicus curiae and addressed the court on the issues involved in the reference. Heard Mr. B.B. Naik, learned standing counsel for the applicant-Revenue, and Mr. S.N. Soparkar, the learned senior advocate appearing as amicus curiae. Mr. Naik submitted that in so far as the controversy involved in the present case is concerned, the business of the assessee can be said to consist of two parts, namely, (i) sale of articles intended for agriculture, and (ii) sale of commodities other than articles intended for agriculture. That, under section 80P(1), in the case of a co-operative society whose gross total income includes income referable to any of the activities mention....
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....essing Officer. Reliance was also placed upon the decisions of the Rajasthan High Court in the cases of Kota Co-operative Marketing Society Ltd. v. CIT [1994] 207 ITR 608 and CIT v. Rajasthan Rajya Sahkari Upbhokta Sangh Ltd. [1995] 215 ITR 448, to contend that the assessee was not entitled to the deduction of the entire amount of income received from the sale of articles intended for agriculture to its members without deducting the proportionate expenses thereof. The learned senior advocate, Mr. Soparkar submitted that as per the legislative scheme only the net income is deductible. Hence, there could not be any quarrel with the proposition that it is only the net income of the exempt activities that are deductible from the gross income while computing the total income. However, the question that would arise is that if expenses qua exempted and non-exempted income are indivisible whether the expenses are required to be allocated notionally to determine the net exempted income? Whether expenditure, qua exempt activities as well as non-exempt activities is deductible at the first stage on actual basis and at the next stage the total income is required to be computed by deducti....
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....wn that the computation has to be in accordance with the scheme of the Act. Learned counsel further submitted that as regards the mode of computation of income the lead decision was the decision of the apex court in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77, which was followed by the apex court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452. It was urged that no theory of pro-ration had been applied at the first level by the Supreme Court. It was submitted that two types of situations arise while computing the income from activities that are exempted, firstly where expenses are directly allocable to the exempted activities and, secondly, where the expenses are not directly allocable to the said activities. It was submitted that what is not directly allocable cannot artificially by pro-ration be allocated to such activities. It was submitted that the decision of this court in the case of Gandevi Taluka Khedut Sahakari Sangh Ltd. [1994] 207 ITR 175 deals with expenditure on direct basis and not pro-rated basis, hence, it is not an authority on the proposition that indirect expenses should also be pro-rated as contended by learned counsel for the....
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....operative society in its general section had to be deducted from the aggregate income under the head "Business income" and the net income alone would be entitled to deduction under section 80P(2)(a)(iv) of the Act; that income from house property and income from other sources which are not eligible for deduction under section 80P, loss could not be deducted after aggregating that income with business income. The principal controversy in the present case pertains to the deductibility of expenditure incurred for the business of a co-operative society in relation to the amount of profits and gains attributable to the activities specified under section 80P(2)(a)(iv) of the Act, when the business of the assessee qua specified activities and activities other than specified activities is one and indivisible and there are common overhead expenses. In other words, whether the income from the specified activities is required to be deducted in toto or whether the common overhead expenses are required to be allocated on a proportionate basis, to arrive at the net income from the specified activities on a notional basis. Various decisions have been cited by both learned counsel. The decis....
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....ture, so much of the managing agency commission which was referable to the growing of sugarcane, was disallowed on the ground that the income from sugarcane cultivation was agricultural income and not exigible to tax. The Appellate Tribunal found that the cultivation of sugarcane and the manufacture of sugar by the assessee constituted one single and indivisible business. It was held by the apex court that the entire managing agency commission was laid out for the purpose of the business carried on by the assessee and was allowable under section 10(2)(xv) of the Act of 1922 and that the fact that the income from growing of sugarcane, a part of that business, was not taxable under the Act, was not a relevant circumstance. The court held as follows: "The finding of the Tribunal that the cultivation of sugarcane as well as the manufacture of sugar constitutes one business is a finding of fact. That finding has not been challenged before us. What was urged on behalf of the Department is that the assessee's business consisted of two parts, namely, (1) cultivation of sugarcane and (2) manufacture of sugar. The former part being agricultural operation, the income therefrom is not exigi....
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....ndeed there was no dispute before any of the authorities uptil now about the method adopted by the Income-tax Officer for arriving at the figure of proportionate net income of taxable activities and proportionate net figure of non-taxable activities, that is, of the advisability of the rule of three in finding out the proportionate net income out of the total net income of the assessee. Since there is no such dispute, all that we are concerned with in the present case is whether the law in India in the form of section 81(1)(d) and the proviso to section 81(1) read in the light of the provisions of sections 66 and 110 permits any such apportionment. In our opinion, the only way the scheme can be worked under the Income-tax Act, 1961, in connection with the incomes forming part of total income on which no income-tax is payable covered by Chapter VII, is by adopting the procedure that the Income-tax Officer had done; otherwise a very curious result is likely to follow if the argument on behalf of the assessee were to be accepted. By adopting his reasoning the profits and gains of business in respect of taxable activities may be arrived at figure X by not taking into consideration the ....
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....on its business on the ground that that part of the expenditure is proportionate to the income which is exempt or excluded from income-tax. Beyond this principle nothing else has been laid down by these decisions which we have so far discussed." The aforesaid decision of this court was affirmed by the Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT [1993] 203 ITR 1027). The apex court held thus: "Thus, when section 66 of the Income-tax Act requires the computation of the total income of every person to be done by including all income on which no income-tax is payable under Chapter VII, the income on which no income-tax is payable by a co-operative society under section 81(i)(d) falling in Chapter VII, has to be necessarily included in total income. The above section 110 is then attracted because of the very words of its opening clause. Hence, when the assessee-co-operative society's income is included in its total income, it becomes entitled to a deduction from the amount of income-tax chargeable on its total income. That means, the co-operative society concerned becomes entitled to deduction or exemption from income-tax payable by it only on it....
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....rrying on business and earning income, part of which is exempted and part of which is not exempted, the profits and gains attributable to the exempted activity have to be arrived at on the basis of the books of account maintained by the assessee. If separate sets of books or separate accounts of expenditure have been maintained for the exempted and non-exempted activities there is no problem. If separate books of account have not been maintained and expenses have been incurred jointly for earning both the income then such expenses relatable to earning the non-exempted income must be estimated. The income exempted under section 80P(2) has to be arrived at separately in order to determine the income under section 80P(2) and it can never be envisaged that the total income which has been so received could be allowed without deducting the expenditure incurred in earning the said income. The use of the words "the whole of the amount of profits and gains of business attributable to any one or more of such activities" appearing at the end of sub-section (2) of section 80P could be only for such income which is attributable to the activities which are exempted. In order to ascertain the rea....
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....ction of only that proportion of it which was referable to the taxable income, was unsustainable. The controversy in question is required to be decided in the light of the legal position stated in the decisions cited above. To properly appreciate the controversy in question it would be necessary to advert to the scheme of the Act. This court in its decision rendered in the case of CIT v. Baroda Peoples Co-operative Bank Ltd. [2006] 280 ITR 282, Tax Appeal No. 208 of 2003 and allied matters, has exhaustively delineated the scheme of the Act, which is reproduced hereunder: "Section 80P of the Act appears in Chapter VI-A of the Act. The said Chapter pertains to deductions to be made in computing the total income. It is divided into four heads or four parts: A: General sections (sections 80A to 80B) B: Deduction in respect of certain payments (sections 80C to 80GGC) C: Deductions in respect of certain incomes (sections 80H to 80TT) D: Other deductions (sections 80U to 80VV) Section 80A(1) of the Act provides that in computing the total income of an assessee, there shall be allowed from the gross total income, the deductions specified in sections 80C to 80U, in a....
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....owed. Once this is the scheme laid down by the statute, all such allowable expenditure, in the form of various allowances and deductions, are already taken care of from the income earned by an assessee under a particular head. In the case of income falling under the head 'Profits and gains of business or profession' section 29 of the Act stipulates that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. Therefore, in the case of an assessee carrying on business of banking in the first instance, income under section 28 is computed in accordance with the provisions of section 29 of the Act and such net figure is taken as a component of the total income or gross total income for the purpose of deduction under Chapter VI-A .... Examining the issue from a slightly different angle, one may take into consideration the provisions of section 4 read with section 5 and section 2(45) of the Act. The charge of income-tax is fastened under section 4 of the Act in respect of the total income of the previous year. Such total income includes all income from whatever source derived which is either received or acc....
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....specified in sub-section (2) shall be deducted in computing the total income of an assessee, namely, a cooperative society. Before analysing sub-clause (i) of clause (a) of subsection (2) of section 80P of the Act it is necessary to take note that under sub-section (3) of section 80P the deduction available under sub-section (1) of section 80P shall be allowed after reducing from the qualifying income, the income, if any, as referred to in the sections specified therein, viz., section 80HH, etc. This is one more indication available in the scheme of the Act to denote that what is deductible under the provisions of Chapter VI-A is in terms of the provisions of the Act with special reference to section 80B(5) read with section 80AB of the Act and is the net figure." Therefore, it is evident that as per the scheme of the Act all permissible statutory deductions are required to be made prior to making deduction under the provisions of Chapter VI-A, and that what is deductible under Chapter VI-A of the Act is the net figure. Section 80P(1) provides that where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-sec....
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..... Baroda Peoples Co-operative Bank Ltd. [2006] 280 ITR 282 to the facts of the present case, in the first instance, income under the particular head, namely, profits and gains of business or profession, comprising of the specific item, namely, profits and gains from activities specified under sub-clause (iv) of clause (a) of sub-section (2) of section 80P is required to be computed in accordance with the provisions of the Act, i.e., all permissible deductions/allowances have to be first taken into consideration (excluding deductions under Chapter VI-A) and the figure of net income arrived at after such computation has to form part of the total income. Therefore, in the first instance the income of the assessee under section 28 is required to be computed in accordance with the provisions of section 29 of the Act. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Sections 30 to 36 provide for specific deductions and section 37 which is relevant for the present purpose provides for general deductions. Under section 37 any expenditure (not being expenditure of the nature described in sec....
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....ed activity and which forms part of the gross total income. In relation to the applicability of section 80AB of the Act, the Tribunal has held that the same does not salvage the case of the Revenue because the said section deals with determination of income on the basis of the provisions of the Act. That the expenditure sought to be apportioned being common expenditure, there is no question of deducting the same from the profits of the tax-free activities because such expenditure has no direct nexus with such activities nor can it be said that such expenditure cannot be related to non-taxable activities. The moot question, therefore, would be as to what is the amount of profits and gains attributable to the activities specified under section 80P(2)(a)(iv) of the Act, in so far as the assessee is concerned, in view of the fact that the business of the assessee is one and indivisible and there being common overhead expenses, it is not possible to bifurcate the expenses qua exempted and non-exempted activities. As can be seen from the order of the Tribunal, it has recorded a finding of fact after appreciating the evidence on record that the business of the assessee is one and in....
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....ore, is whether apportionment is permissible on a notional basis. In the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1993] 203 ITR 1027 the apex court has held that when the assessee-co-operative society's income is included in its total income, it becomes entitled to a deduction from the amount of income-tax chargeable on its total income. That means, the co-operative society concerned becomes entitled to deduction or exemption from income-tax payable but it is only on its net amount of profits and gains, i.e., on income of its business otherwise computable in accordance with the provisions of the Income-tax Act for the purpose of charging income-tax thereon and which is included in its total income, and not on the amount of its gross profits and gains of business. Under the scheme of the Act as it stood at the relevant time what was exempted was the income-tax payable by the assessee in relation to the exempted activities, which was computable in the light of sections 66 and 110 of the Act. Section 81 fell under Chapter VII of the Act under the heading "Incomes forming part of total income on which no income-tax is payable". Under section 110 read with section 66 of th....
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....'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfilment of requirements of that provision noted above; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." In the said case, on behalf of the Revenue it had been conceded that if the exempted income and the taxable income are earned from one indivisible business, then the apportionment of the expenditure cannot be sustained. In the facts of the said case it was held that the income from various ventures having been earned in the course of one indivisible business, the impugned order upholding the ap....