Punjab State Co-Operative Milk Producers Federation Ltd. vs Commissioner of Income Tax and Another

Ajay Kumar Mittal, J.—This appeal u/s 260A of the income tax Act, 1961 (for short ""the Act""), has been filed by the Assessee against the

order dated November 26, 2008, passed by the income tax Appellate Tribunal Chandigarh Bench ""B"", Chandigarh (in short ""the Tribunal""), in

Miscellaneous Appeal No. 233/Chandi/2006 arising out of I.T. A. No. 1068/Chandi/2005, relating to the assessment year 2002-03.

The appeal was admitted on July 17, 2009 to consider the following substantial question of law for determination by this Court:

Whether in the facts and circumstances of the case, the income tax Appellate Tribunal has grossly erred in denying the claim to the Appellant on

account of interest received by the Appellant being a cooperative society from its members co-operative societies u/s 80P(2)(a)(i) of the income

tax Act ?

The facts, in brief, necessary for adjudication as narrated in the appeal are that the Appellant-society is an apex body of co-operative societies

and district co-operative milk producers unions are its members. The Appellant is engaged in the marketing and sale of milk products of its

members societies. As per the bye-laws of the Appellant-federation, deductions were admissible to it u/s 80P(2)(a)(i) of the Act on the income

derived by it from its members by way of interest on its investments as loans and advances for its working capital. The Appellant filed its return of

income for the assessment year 2002-03 on October 29, 2002 declaring taxable income as nil. The return was processed u/s 143(1) of the Act on

February 8, 2003. The Assessee claimed that the entire.income derived on account of interest from co-operative societies, amounting to Rs.

7,95,37,490 was eligible for deduction u/s 80P(2)(d) of the Act. The Assessee, however, restricted its claim in this behalf to Rs. 4,98,64,196

only.

The Assessing Officer on a consideration of the entire matter concluded in assessment order dated March 30, 2005 that the working capital

advances do not qualify the test of ""investments"" as enshrined in Section 80P(2)(d) of the Act, and the deduction claimed by the Assessee under

the said provision could not be allowed. The Assessing Officer thus, ordered that the Appellant-federation was assessable at Rs. 4,98,64,196. It

was unambiguously observed that the Assessee would not be entitled to deduction under the provisions of Section 80P(2)(d) of the Act on

account of interest on working capital to the milk unions.

The Assessee carried appeal before the Commissioner of income tax (Appeals) (hereinafter referred to as ""the CIT(A)""). The Assessee

challenged the disallowance of deduction u/s 80P(2)(d) of the Act. It was also claimed that the interest income from the member co-operative

societies was,deductible u/s 80P(2)(a)(i) of the Act. The Commissioner of income tax (Appeals) upholding the assessment order held that

deduction u/s 80P(2)(d) of the Act was not admissible to the Assessee. It was further held that the deduction u/s 80P(2)(a)(i) of the Act was also

not admissible to the Assessee. Consequently, the Assessee''s appeal was dismissed vide order dated October 31, 2005.

The Assessee further took the matter in appeal before the Tribunal and the Tribunal accepted the plea raised on behalf of the Assessee and

while accepting its appeal, vide order dated April 27, 2006 held that the Assessee was entitled to deduction u/s 80P(2)(d) of the Act in respect of

interest received on advances provided to member co-operative societies. The Tribunal, however, recorded that the deduction permissible to the

Assessee was in respect of the net income after deduction of expenses attributable to the earning of such income. The Assessee filed income tax

Appeal No. 530 of 200 Punjab State Co-Operative Milk Producers Federation Ltd. Vs. Commissioner of Income Tax and Another, ) in this

Court challenging the aforesaid observation of the Tribunal to exclude the expenditure incurred for earning the income from the total income while

computing deduction u/s 80P(2)(d) of the Act. The said appeal has been dismissed by a separate order passed by us today. The Assessee also

filed Miscellaneous Application No. 233/Chandi/2006 dated March 21, 2007 before the Tribunal claiming that ground No. 3 relating to deduction

u/s 80P(2)(a)(i) of the Act in the memo of appeal had not been adjudicated upon while passing the order on April 27, 2006. The Tribunal vide

order dated November 26, 2008 adjudicated the said ground of appeal and held that the interest income in question was not eligible for deduction

u/s 80P(2)(a)(i) of the Act.

This is how the Assessee is in appeal before us raising the substantial question of law as noticed earlier.

We have heard learned Counsel for the parties and have perused the record.

The Tribunal while dismissing the appeal of the Assessee recorded the following findings of fact in para. Nos. 7 and 8 of the order:

In this regard, it is an undisputed fact that the Assessee is a cooperative society duly registered under the Punjab Co-operative Societies Act,

1961. It is also a fact that its predominant object is relating to the business of procuring, processing and marketing of milk and milk products of its

member co-operative milk unions. The claim of the Assessee that it falls within the expression carrying on the business of banking or providing

credit facilities is on the strength of bye-law No. 3.2.32 which has been extracted by us elsewhere in this order. According to the Assessee, in

terms of the said bye-laws, it can be said to have been engaged in the business of providing credit facilities to its members and, therefore, it falls

within the purview of section ''80P(2)(a)(i) of the Act. The Assessee has earned interest income of Rs. 8,14,300 on loans advanced to the member

co-operative societies and has also paid interest amounting to Rs. 18,66,810 to its members co-operative societies on the amounts raised and,

thus, it has received a net interest of Rs. 7,95,37,491. The claim of the Assessee is that the loans and advances have been extended to the member

co-operative societies for their business purposes. In this connection, during the assessment proceedings, when the Assessee was required to

explain as to why the interest income has been shown under the head ''Income from other sources'' in its computation of income, the Assessee

submitted that the main business of the Assessee included providing working capital finance to the member milk unions and, therefore, the said

activity would constitute an activity of providing credit facilities within the meaning of Section 80P(2)(a)(i) of the Act.

We have considered the above position and are of the opinion that there is no dispute that the Assessee-society is a co-operative society

engaged in the procuring, processing and marketing of milk and milk products of its co-operative member society. It has been providing credit

facility to its members. Primarily the credit facility being provided relates to the outstanding dues to the Assessee of the milk unions. In this

connection, a reference made by the Assessee to the circular issued by the managing director of milkfed which has been reproduced, on page 15

of the assessment order is note-worthy. It shows the interest to be charged on the balances of the milk unions outstanding on a particular date in

the books of account of the Assessee. The Assessee has itself declared the interest on such amounts as income from other sources in its

computation of income, as specifically noticed by the Assessing Officer at page 17 of his order. In our considered view, the activity of permitting

member milk unions, an extended credit facilities to pay the outstanding dues, by itself would not make the Assessee fall within the expression

''carrying on the business of banking or providing credit faciEties to its members''. The extension of such credit facility is subservient to its main

object of procuring, processing and marketing of milk and milk products of the member societies. The said activity, having regard to the fact

position on record in our opinion is not an independent activity and is intended only to enable fulfilment of its main object. The said activity is not

distinct and separate activity of the Assessee-society engaged, amongst others in carrying on the business of banking or providing credit facilities to

its members so as to attract Section 80P(2)(a)(i) of the Act.

The Tribunal while confirming the order of the Commissioner of income tax (Appeals) had held that the Assessee was a co-operative society

engaged in procuring processing and marketing of milk and milk products of its members societies. The credit facility which was provided to its

members was relating to the outstanding dues to the Assessee of the milk unions. It also recorded that the credit facility which was extended by the

Assessee to its members was ancillary to its main object and it was not carrying on the business of banking or providing credit facilities to its

members and, therefore, was not entitled to the benefits of Section 80P(2)(a)(i) of the Act. Learned Counsel for the Assessee was unable to point

out any illegality or perversity in the said findings recorded by the Tribunal which may warrant interference by this Court. Accordingly, the finding

on the merits in the appeal the same is dismissed.