Commissioner of Income Tax - I, Lucknow vs U.P. Cooperative Sugar Factories

Satish Chandra, J.—The present appeal has been filed by the Department u/s 260A of the income tax Act, 1961 against the judgment and order dated 30.05.2005, passed by the Income Tax Appellate Tribunal, Lucknow in Appeal No. I.T.A. No. 290/2/2001, for the assessment year 1993-94. On 11.11.2005, a Coordinate Bench of this Court has admitted the appeal on the following substantial question of law:--

Whether on the fact and circumstances of law, the learned Income Tax Appellate Tribunal was justified in holding that deduction u/s. 80P(2)(d) of the income tax Act, 1961 is allowable in respect of whole of the amount of interest income received by the Cooperative Society and not on Net Income which has been arrived after allowing the permissible deductions in earning such interest income.

The brief facts of the case are that the assessee is a Cooperative Society rendered variety of services to its member against collection of annual subscription from them. The assessee has filed the return of loss. While passing the order u/s 143(3) of the Act, on 29.02.1996, the Assessing Officer (AO) observed that the deduction u/s 80P(2)(d) would be available to the assessee in respect of net income of interest received cooperative societies/cooperative Bank, which will have to be worked out alter determining and deducting the expenses debited to the income and expenditure account relatable to the earning of such income. However, the Tribunal observed that the exemption is allowable on interest income as a whole without any adjustment. Being aggrieved, the Department has filed the present appeal.

With this background, Sri D.D. Chopra, learned counsel for the Department has justified the order passed by the AO. He also submits that the deduction is allowable on the net amount of income from interest. For this purpose, he relied on the ratio laid down in the case of Commissioner of Income Tax Vs. Dugdh Utpadak Sahkari Sangh Ltd., .

On the other hand, learned counsel for the assessee has relied on the order passed by the Tribunal. He also relied on the ratio laid down in the case of Commissioner of Income Tax Vs. Doaba Co-operative Sugar Mills Ltd., .

After hearing both the parties and on perusal of the record, it appears that in the instant case, the AO has observed that the deduction is allowable on the net income. On the other hand, the Tribunal has observed that it is allowable as a whole. The CIT(A) has left the issue undecided by holding it to be an academic one as there was huge losses rendered, the possibility of positive income unlikely.

Section 80P(2)(d) of the income tax Act on reproduction reads as under:--

Where one co-operative society makes investment in another, the income so earned from such investments would be totally exempt u/s 80P(2)(d). Income from dividend and interest from any other co-operative society will be covered by the said exemption.

Hon''ble Supreme Court in the case of Commissioner of Income Tax, Lucknow Vs. U.P. Cooperative Federation Ltd., , observed that interest on cash security deposited in another co-operative society cannot be treated as investment. Such short-term call deposits, however, were treated as investment, Commissioner of Income Tax Vs. Haryana Co-operative Sugar Mills Ltd., , but even so, it was found to be eligible u/s 80P(2)(d).

On the issue as to whether it is only net or gross income would qualify for deduction, it was decided in the case of COMMISSIONER OF Income Tax Vs. RAJASTHAN RAJYA SAHKARI UPBHOKTA SANGH LTD., that u/s 80P(2)(d), as for other reliefs under Chapter VI-A, that only net income-would be so eligible for deduction.

On the other hand, deduction was allowed on the gross amount of interest without interest paid to the same bank in the context of the exemption limit for the income as per the ratio laid down in the case of Doaba Co-operative Sugar Mills Ltd. (supra). This view was taken by accepting the plea, that relief sanctioned by law cannot be abridged and the plain language of law is required to be followed as a cardinal principle in the interpretation of fiscal laws. Further, Hon''ble Punjab & Haryana High Court observed that Section 80P(2)(d) of the Act allows whole deduction of an income by way of interest or dividends derived by a co-operative society from its investment with any other co-operative society and this provision does not make any distinction in regard to the source of the investment, because the 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 section does not speak of any adjustment as sought to be made out. 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 decision was examined by the jurisdictional High Court in the case of Dugdh Utpadak Sahkari Sangh Ltd. (supra), where the decision of Rajasthan High Court (supra) was upheld.

Under the facts and circumstances of the instant appeal and in view of the legal position of various High Courts as well as our High Court in Dugdh Utpadak Sahkari Sangh (supra), we agree with the order passed by the AO that deduction is allowable only on net income u/s 80P(2)(d) of the Act. However, in the instant case, the issue is merely an academic one as there was huge losses rendered, and the possibility of positive income is unlikely. For the assessment year under consideration and subsequent year, the losses were continuing carry forward.

Needless to mention that carry forward of the losses are allowed as per law. For this reason only, no deduction has been claimed by the assessee during the assessment year under consideration as per Section 80P(2)(d) of the Act.

However, it has to be placed on record here that in case the assessee''s total income works out for the year under consideration to a positive figure at any stage, deduction under the aforesaid section would be available to the assessee in respect of net income only from interest received from co-operative societies/co-operative banks, which will have to be worked out after determining and deducting the expenses debited to Income and Expenditure account relatable to the earning of such income as has been done in earlier years.

The answer to the substantial question of law is in favour of the revenue and against the assessee. In the result, the appeal filed by the appellant-Department is hereby allowed, as discussed above.