Commissioner of Income Tax vs KESHAV KRAY VIKRAY SAHAKARI SAMITI LTD.

By the Court

This is an application u/s 256(2) of the Income Tax Act, 1961, arising out of the Tribunals order rejecting the application for making reference u/s 256(1) of the Act.

The assessee which is a co-operative society has filed return declaring his income as Rs. 71,630. The assessing officer gave finding that no separate accounts were maintained for members and non-members and the business was indivisible. While considering the claim for deductions u/s 80P(2) of the Income Tax Act, 1961, made by the assessee he disallowed proportionate expenses relatable to such income and the net income in respect of profits and gains of the activities with its members, which was made on estimate basis, the income of the assessee was increased to Rs. 78,635.

The Appellate Assistant Commissioner did not agree with the assessing officer, and allowed deduction of entire expenses without dividing it proportionately.

The Tribunal finally held that as the assessee was carrying on the business which was indivisible, the proportionate expenses incurred for carrying on such business cannot be separated between business activity with members and business activity with non-members. Therefore, its expenses cannot be disallowed, if otherwise allowable u/s 37 of by bifurcating the expenses proportionately between income attributable to the exempted activity and non-exempted activity.

In coming to this conclusion, the Tribunal relied on the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Maharashtra Sugar Mills Ltd., Bombay,

Aggrieved with the aforesaid order of the Tribunal dated 27-3-1989, the Commissioner filed an application u/s 256(1) of the Income Tax Act, 1961, by raising the following question for making reference to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of the Appellate Assistant Commissioner who has relied upon Supreme Courts ruling in the case of Commissioner of Income Tax, Bombay Vs. Maharashtra Sugar Mills Ltd., Bombay, without considering the facts of the two cases ?"

The Tribunal rejected the application holding that since the issue is governed by the decision of the Supreme Court which binds all the courts and Tribunals in India, the question cannot be referred for the opinion of the court. Hence, this application u/s 256(2) of the Income Tax Act, 1961, is at the instance of the revenue.

We have heard learned counsel for the parties.

It has been urged by the learned counsel for the revenue that in view of the provisions of section 80P(2), the ratio of the decision of CIT v. Maharashtra Sugar Mills Ltd. (supra) would not apply to the facts of the present case. However, we are unable to sustain it.

The allowability of expenses while computing the net taxable income does not depend on the question of exemption and taxable in part where the activity is one and indivisible which is well settled by the Apex Court.

The case before the Apex Court was that the assessee was engaged in the cultivation of sugarcane and manufacturing of sugar. While the income derived from cultivation was exempted from Income Tax, as agricultural income, the income from activity of the manufacturing activity is not exempted. The assessee-manufacturer who was carrying it as a single indivisible activity claimed all expenses laid wholly or exclusively for earning the profits. In view of the fact that income attributable to agriculture was not taxable the assessing authority has sought to proportionately disallow the managing agency commission could be attributable to profits and gains arising from the cultivation of sugarcane. The Supreme Court held that two activities being indivisible cannot be bifurcated for the purpose of disallowing the expenses. For the purpose of allowing expenses it is to be considered u/s 37, whether they have been incurred or laid out for the purpose of carrying the business of the assessee. The situation may be otherwise while the assessee is carrying on two distinct activities of which the income is to be separately computed.

Subsequently, another case has arisen before the Supreme Court which arose from this court in Rajasthan State Warehousing Corporation Vs. Commissioner of Income Tax, The income derived by the State Warehousing Corporation from certain activities as specified in section 10(29) of the Act have been exempted from tax. This court has taken a view that the expenses which are referable to the earning income as per section 10(29) of the Act, are to be disallowed in computing the taxable income of the State Warehousing Corporation. This court has upheld the contention of the revenue and has disallowed the income attributable to non-taxable income earned by the Corporation, Reversing the decision of the High Court, the Supreme Court said that in view of the fact that a perusal of the question itself disclosed that income from various ventures was earned in the course of one indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only the proportion of it which was referable to the taxable income, was unsustainable.

The present is also the case alike. The nature of deductions u/s 80P(2) refer to that where whole of the amount of gross profits and gains of business are attributable to any one or more of such activities.

It is true that the scheme of sections 10 and 80P(2) are not identical but, at the same time it is apparent from the facts of the case that to draw any distinction no foundation has been laid in facts found by the assessing authority at any stage. They have decided the assessment proceedings on assumption that the cooperative society was carrying on one indivisible business and it is part of the income derived from same business which is attributable to business as referred to in sub-section (2) is eligible for deductions u/s 80P(2). Moreso, section 80P does not exempt any part of the business but merely allows deductions of a part of income only of the whole gross total income. At no stage it is the case of revenue that the assessee was carrying on two distinct activities, so as to fall in exception as explained in Rajasthan State Warehousing Corporations case (supra).

That being the position, the question which has sought to be raised by the learned counsel for revenue at this stage on the facts found by the Tribunal in our opinion, does not give rise to a question of law other than which is answered by the two Supreme Courts decisions referred to above. No order as to costs.