1992-VIL-154-ITAT-AHM

Equivalent Citation: ITD 042, 442, TTJ 044, 574

Income Tax Appellate Tribunal AHMEDABAD

Date: 07.05.1992

INCOME-TAX OFFICER.

Vs

PETLAD TALUKA PURCHASE AND SALES UNION LIMITED.

JUDGMENT

1. The assessee is a co-operative society. The assessment year is 1982-83. The assessee deals in seeds, cement, sugar, edible oil, pesticides etc. It also work as distributing sub-agent for supply of fertilizers to various village co-operative societies. The assessee had made certain investments in Kheda District Central Co-operative Bank Ltd. On the said investments by way of deposits the assessee received interest of Rs. 2,23,402 in the relevant accounting year. The assessee claimed deduction of this amount under section 80P(2)(d) of the Act. It has been laid down in the said provision that in respect of any income by way of interest or dividend derived by the co-operative society from its investments with any other co-operative society, the whole of such income will be liable to be deducted in computing the total income of the assessee. In the original assessment order, the ITO had allowed deduction of Rs. 2,23,402 on the ground that this amount represented income by way of interest derived by the assessee society from its investments with the other co-operative society named above.

2. The CIT, Baroda, initiated proceedings under section 263 of the Act as he was of the view that interest paid by the assessee society was liable to be deducted from the interest received from the investment with other co-operative society and that it was the net income by way of interest which alone was liable to be deducted under the said provision. In reply to the show-cause notice the assessee had submitted before the CIT that the interest amount which had been debited to P & L A/c represented payment of interest on outstanding balances in the account of District Co-operative Purchase and Sale Union and village co-operative society as per the terms and conditions of the agreement between the assessee and said society between whom there were business dealings. It was submitted that interest payment to the said society was incidental to the business activity of the assessee and was allowable as business expenditure and that such expenditure was not liable to be deducted in computing the income by way of interest derived from investment with Kheda District Central Co-operative Bank Ltd. The learned Commissioner perused the documents filed before him in section 263 proceedings and observed that those details of interest payment had not been furnished before the ITO and as such the matter required verification. He accordingly restored the matter to the ITO for the verification of the nature of interest receipt and interest payment and allow deduction in accordance with the provisions of the Act. To the above extent the assessment order was set aside by him.

3. The ITO proceeded to give effect to the order of the Commissioner passed under section 263 of the Act. The same submissions as were made before the Id. Commissioner were made before the ITO. According to the ITO since interest income was assessable under the head income from other sources, interest expenditure, whatever its nature, will be allowable as deduction from such interest income and that interest expenditure would not be allowable as deduction as business expenditure. He accordingly deducted Rs. 1,43,419 which represented interest paid by the assessee, from Rs. 2,80,529 and allowed deduction of Rs. 1,37,110 under section 80P(2)(d) of the Act.

4. The assessee filed appeal before the Dy. CIT(A) who directed the ITO to allow deduction of Rs. 2,80,529 under the said provision. The department is now in appeal before the Tribunal.

5. The learned D.R. has referred to provisions in section 80AB of the Act and has submitted that in view of the said provisions interest expenditure was liable to be deducted from interest income and it was the balance amount which was allowable as deduction under section 80P(2)(d) of the Act. He also relied on the decision of the Andhra Pradesh High Court in CIT v. Anakapalli Co-operative Marketing Society [1989] 175 ITR 584.

6. The learned counsel for the assessee, on the other hand, submitted that interest expenditure in the present case pertained to business dealings with other co-operative societies and that the liability for interest expenditure had arisen because of delay in making payments in respect of price of articles purchased by the assessee. It was submitted that such expenditure was allowable as deduction in computing the business income and that such expenditure was not liable to be deducted in computing the income by way of interest from investments.

7. I have considered the rival submissions and facts on record. Section 80AB lays down that where any deduction is required to be or allowed under any section included in Chapter VI-A, in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section the amount of income of that nature as computed in accordance with the provisions of the Act (before making any deduction under Chapter VI-A) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.

8. In plain terms, what has been laid down in the said provision is that net income, and not gross income, was allowable as deduction under section 80P(2)(d) of the Act. However, the question still remains as to in what manner the net income is to be computed. As already stated, under section 80P(2)(d) what is allowable as deduction is income by way of interest from investments with any other co-operative society. The question, therefore, would be as to what amount would be liable to be deducted in computing the net interest derived by the assessee from its investments with any other co-operative society. The interest derived by the assessee from its said investments would be assessable as income from other sources. The net income which will be liable to be included would be arrived at after deducting any other expenditure laid out or expended wholly and exclusively for the purpose of earning such income. The interest expenditure would be liable to be deducted in computing the net income by way of interest from investments only if such expenditure had been laid out wholly and exclusively for the purpose of earning such income and not otherwise. If the interest expenditure had no nexus with the earning of interest income from investments, the interest expenditure would not be liable to be deducted in computing the net income by way of interest from investments. Consequently nature of interest expenditure shall have to be scrutinised in order to decide the point in controversy. The ITO was not right in observing that interest expenditure, whatever its nature, was liable to be deducted.

9. As far as the present case is concerned, the interest expenditure represents payments made to a certain co-operative society from whom the assessee had purchased certain goods and the payment of the interest was occasioned due to the fact that there was delay in payment of price of the goods purchased. Thus the interest expenditure in the present case was business expenditure and it was not an expenditure incurred wholly and exclusively for the purpose of earning interest from investments. Consequently that interest expenditure was not liable to be deducted from interest derived from investments. The decision of the Andhra Pradesh High Court also lays down the principle which has been followed in the present case. The ground raised by the department is rejected.

10. The appeal is dismissed

 

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