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Facts
The Revenue filed appeals against the CIT(A)'s orders allowing deductions under sections 80P(2)(e) and 80P(2)(d) claimed by the assessee, a co-operative society. The primary issues involved rental income from godowns and dividend/interest income from investments.
Held
The Tribunal held that the matter requires verification of the factual matrix regarding the rental income from godowns, distinguishing between letting for third-party storage and use for the assessee's own trading. Regarding dividend income, the Tribunal found that the AO's disallowance under section 14A led to duplication and was unsustainable.
Key Issues
1. Whether rental income from godowns is eligible for deduction under Section 80P(2)(e) when used for third-party storage versus the assessee's own trading. 2. Whether the disallowance under Section 14A for dividend income was correctly computed without duplication.
Sections Cited
80P(2)(e), 80P(2)(d), 14A, 1941, 251(1)(a), 10(34)
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: All the above appeals filed by the Revenue are against the separate orders of the Ld. CIT(A)/NFAC, Delhi each dt. 30/03/2024 pertaining to Assessment Years 2018-19, 2020-21 and 2021-22 respectively.
Since the issues involved in all the above appeals are common and were heard together therefore they are being disposed off by this consolidated order.
We shall take appeal of the Revenue in for the A.Y. 2018-19 as a lead case for discussion wherein the assessee has raised following grounds: 1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) has not erred in deleting the disallowance made by AO of the deduction claimed u/s 80P(2)(e) of the Act, ignoring that the issue stands covered in favour of Revenue by the Hon'ble P&H High Court in its Order in ITA No. 157 of 2005 dated 08.09.2010 in the case of the assessee titled CIT vs. Haryana State Co-operative Supply and Marketing Federation Ltd. reported as [2012] 344 ITR 631 (P&H), wherein it was held by Hon`ble Court that the assessee is not eligible to claim deduction 80P(2)(e) of the Act?
2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in deleting the disallowance made by AO of deduction u/s 80P(2)(e) of the Act on the ground that Tax had been deducted under section- 1941 of the Act on some of the transactions, ignoring that the section under which tax is deducted at source by the deductor or a party making payment to an assessee does not determine the nature of receipts in the hands of the assessee or the head under which such income will be assessed in the hands of the assessee? 3. Whether Ld. CIT(A) was justified in directing the AO to quantify the Rental income of the assessee on the basis of its 26AS and allow deduction u/s 80P(2)(e) of the Act on Rental income after calling for fresh submissions from the assessee, ignoring that as per Section-251(1)(a), the power of CIT(A) to set aside the case to the file of AO has been taken away by Finance Act, 2001 w.e.f. 01.06.2001 and the directions of CIT(A) to the AO in para 5.5 of the Order virtually amount to setting aside the issue? 4. Whether on the facts and circumstances of the case, Ld. CIT(A) has not erred in deleting the disallowance made by AO of the deduction claimed by the assessee u/s 80P(2)(e) of the Act, without appreciating the fact that the assessee was purchasing wheat and then selling the same to the FCI and hence the storage of food grains was part of its own business activity and the assessee was not deriving income from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, to other parties, and hence was not eligible for deduction u/s 80P(2)(e) of the Act which has been held by Hon'ble Punjab & Haryana High Court in para 14 of its order in of 2005 in the case of the assessee ? 5. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was right in law in allowing deduction claimed u/s 80P(2)(d) of the Income Tax Act? 6. It is prayed that the order of the Ld. CIT(A) be set-aside and that of the A.O. be restored. 7. The appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off.
4. Briefly the facts of the case are that the assessee is a co-operative apex society engaged in the procurement, storage, and marketing of agricultural produce. The assessee declared income after claiming deduction of Rs.31,67,04,079 under section 80P(2)(e) on account of rental income from godowns/warehouses and Rs.7,11,15,902 under section 80P(2)(d) in respect of dividend received from investments in co-operative institutions. The AO disallowed both claims holding that (i) the godowns were used in connection with trading activity with FCI, KRIBHCO, and CWC and not purely let out, and (ii) the dividend income was exempt under section 10(34) and thus disallowable under section 14A.
5. Against the order of the AO the ASSESSEE went in appeal before the CIT(A).
5.1 Before the CIT(A), it was submitted that the assessee has let out part of its godowns and warehouses to third parties such as FCI, Central 3 Warehousing Corporation (CWC), KRIBHCO and other agencies purely on rental basis, supported by lease agreements and TDS reflected in Form 26AS. It was submitted that such income is eligible for deduction under section 80P(2)(e). For the dividend income, it was submitted that it is not exempt under section 10(34) but taxable and deductible u/s 80P(2)(d), and the assessee had already disallowed proportionate expenses suo motu.
5.2 The CIT(A), after examining records, accepted the contention that rental income from letting of godowns to third parties qualifies under section 80P(2)(e). However, acknowledging that the godowns were used partly for trading and partly for letting, he remitted the matter to the AO for proper bifurcation and recomputation. On the dividend issue, he held that disallowance under section 14A was unwarranted as Rule 8D had not been applied and a suo motu disallowance had already been made.
Against the order of the CIT(A) the Revenue preferred an appeal before the Tribunal.
During the hearing before us, the Ld. CIT-DR supported the order of the AO and submitted that as per the binding judgment of the Hon’ble Punjab & Haryana High Court in the assessee’s own case reported in [2012] 344 ITR 631 (P&H), deduction under section 80P(2)(e) is not allowable where the godowns are used for storage of goods owned by the assessee itself or used in the course of its trading operations. He submitted that the assessee has used godowns for its trading business with FCI, KRIBHCO, and others and thus failed to establish that godowns were let out “as such” for storage, as required under the statute. He also submitted that no separate books were maintained for such bifurcation.
Per contra, the Ld. AR reiterated that the godowns were indeed let out to third parties for storage of their goods and not used in assessee’s own business. He placed reliance on earlier ITAT orders in assessee’s own cases for AYs 2009-10 to 2015-16 where similar facts prevailed and the deduction u/s 80P(2)(e) was allowed. He distinguished the High Court judgment stating that 4 the disallowance in that case was because the goods stored belonged to the assessee, while in the present case, third-party storage was involved.
8.1 The next issue arising for consideration pertains to the allowability of deduction under section 80P(2)(d) of the Income Tax Act, 1961 in respect of dividend and interest income earned by the assessee from co-operative institutions. In this regard the Ld. AR had submitted that assessee, a co- operative society registered under the Co-operative Societies Act, received a total dividend of Rs.7,42,35,840/- during the year under consideration from the following co-operative institutions:
Indian Farmers Fertilizer Cooperative Limited (IFFCO): Rs.4,15,61,400/- Krishak Bharati Cooperative Limited (KRIBHCO): Rs.3,26,64,000/- Central Warehousing Corporation: Rs.10,440/- 8.2 Further, interest income of Rs.11,36,792/- was received from The Haryana State Co-operative Bank, which is also a co-operative society. Thus, the total exempt income aggregating to Rs.7,53,72,632/- was claimed as eligible for deduction under section 80P(2)(d). However, the assessee, on its own computation, restricted the deduction claim to Rs.7,11,15,902/- after voluntarily disallowing Rs.42,56,730/- under section 14A read with Rule 8D of the Income Tax Rules, 1962. 8.3 The Assessing Officer, while framing the assessment, disallowed the entire deduction claimed under section 80P(2)(d). The AO was of the view that the assessee had claimed a full deduction without offering any proportionate disallowance towards expenditure relatable to such income. Further, the AO invoked section 14A and computed a notional disallowance of Rs.25,97,31,163/- by proportionately allocating total indivisible expenditure across all heads of income, and thereby concluded that the net income attributable to the exempt dividend and interest became negative, effectively nullifying the claim under section 80P(2)(d).
5 8.4 The assessee contended before the lower authorities that its investments in co-operative institutions were made out of accumulated surplus and reserve funds over the years and not out of borrowed funds. It was submitted that no expenditure, direct or indirect, was incurred for earning such income. Nonetheless, in order to avoid litigation and in line with past directions of the Hon’ble ITAT in earlier years, the assessee voluntarily disallowed a portion of the expenditure under Rule 8D and claimed deduction for the balance. The assessee also emphasised that no fresh investments were made during the year.
8.5 Before the CIT(A), the assessee argued that the AO had failed to record satisfaction as mandated under section 14A(2) regarding the correctness of the assessee's computation of disallowance before invoking Rule 8D. It was also pointed out that the method adopted by the AO was not in accordance with Rule 8D, but a mechanical allocation of overall expenditure based on profit ratios, which was impermissible. The assessee placed reliance on judicial precedents including orders of the Hon’ble ITAT in its own cases for earlier years, where similar claims were accepted subject to proportionate disallowance.
8.6 The Ld. CIT(A), after due consideration of the submissions and the factual matrix, agreed with the contentions of the assessee and deleted the disallowance. The CIT(A) recorded that the assessee had, in fact, made a suo motu disallowance under section 14A r.w. Rule 8D, and that there was no proper invocation of Rule 8D by the AO in accordance with the procedure laid down. It was held that the AO’s basis for disallowance — being a proportionate allocation of common expenditure — lacked statutory support and led to duplication of disallowance, which was unsustainable in law.
We have heard the rival submissions and perused the records. The short controversy before us is whether the rental income earned by the assessee from letting of godowns is eligible for deduction under section 80P(2)(e), and 6 whether dividend income qualifies for deduction under section 80P(2)(d) or is hit by section 14A.
9.1 It is not in dispute that part of the godowns were indeed let out to agencies like FCI, KRIBHCO, and Central Warehousing Corporation for pure storage purposes, and separate lease deeds and rental invoices have been produced. At the same time, it is also noted that portions of godown space were used by the assessee for its own trading activities with FCI, KRIBHCO, and Central Warehousing Corporations etc . Therefore, there exists a mixed factual scenario which needs to be clearly bifurcated for computing eligible deduction.
9.2 We find merit in the submission of the Ld. CIT-DR that the Hon’ble Punjab & Haryana High Court in the case of the assessee itself ([2012] 344 ITR 631) has categorically held that storage income is not per se eligible for deduction under section 80P(2)(e) unless the storage space is “let out” and the goods stored belong to third parties. In that case, the High Court held that where the goods stored belonged to the assessee itself (prior to sale to FCI), such use does not constitute “letting” and hence deduction is not allowable. The High Court further emphasized that the burden is on the assessee to prove the nature and extent of “letting out”.
9.3 However, we also find that in subsequent years, the Coordinate Bench of this Tribunal has held in favour of the assessee on similar facts by examining documentary evidence of third-party leasing. In particular, in to 1613/Chd/2018 and others, the Tribunal has noted that where godowns were given on rent to third parties, deduction under section 80P(2)(e) was allowable. The key distinction made was whether the rental income arises from the storage of goods belonging to third parties or the assessee’s own goods stored by the assessee for third party .
9.4. We have carefully considered the rival contentions and perused the material available on record. In view of the binding precedent laid down by 7 the Hon’ble Jurisdictional High Court and the consistent view taken by the Coordinate Bench of the Tribunal in the assessee’s own case for earlier assessment years, we are of the considered opinion that the matter requires verification of the factual matrix and, accordingly, deserves to be restored to the file of the Learned Assessing Officer.
9.5 The Assessing Officer shall examine and bifurcate the income derived by the assessee under two distinct heads:
(i) income from letting of godowns to third parties exclusively for storage purposes; and (ii) income attributable to the use of godowns in the course of the assessee’s own trading operations, wherein goods were stored and subsequently sold to agencies such as the Food Corporation of India (FCI), Krishak Bharati Cooperative Ltd. (KRIBHCO), and the Central Warehousing Corporation (CWC).
9.6 It is a settled position in law that deduction under section 80P(2)(e) of the Income Tax Act, 1961 is available only in respect of income derived from letting of godowns or warehouses for storage, processing, or facilitating the marketing of commodities belonging to others. If the assessee is found to have used its own warehouses for storing goods procured in the course of its business, which were subsequently sold to FCI, KRIBHCO, CWC, or any other agency, such activity shall be construed as part of its trading operations and shall not qualify for exemption under section 80P(2)(e) of the Act.
9.7 The Learned Assessing Officer is, therefore, directed to conduct a factual verification exercise based on the books of accounts and other documentary evidence that the assessee may furnish in support of its claim. The assessee is equally directed to produce cogent material to establish that the godowns let out to FCI, KRIBHCO, and CWC were on a rental basis alone, and that such letting was wholly unconnected with the assessee’s trading or business activity involving procurement and resale of goods to these entities.
It is clarified that only such rental income which arises from passive letting of godowns, without any link to the assessee’s trading operations, shall be eligible for deduction under section 80P(2)(e). However, in cases where the rental activity is intertwined or incidental to the business of trading in goods, the same shall not be eligible for such deduction. The Assessing Officer shall carry out the aforesaid verification after affording due opportunity of hearing to the assessee and in accordance with law.
9.8 As regards the issue of dividend income, it is an admitted position that the assessee has earned dividend and interest income from investments in co-operative institutions which are prima facie eligible for deduction under section 80P(2)(d). It is further not in dispute that the assessee has made a voluntary disallowance of Rs.42,56,730/- under section 14A r.w. Rule 8D and restricted the deduction to Rs.7,11,15,902/-.
9.9 In our considered view, the invocation of the provisions of Section 14A read with Rule 8D of the Income Tax Rules, 1962, by the Assessing Officer, in principle, cannot be faulted. The Assessing Officer was justified in disallowing expenditure attributable to the earning of exempt income. However, once the provisions of Section 14A r.w. Rule 8D(2) are invoked, it is imperative that the disallowance be computed strictly in accordance with the formula prescribed under the Rule. At the same time, it is equally necessary to acknowledge that the assessee had suo motu disallowed a sum of Rs.42,56,730/- in its computation of income, towards expenditure relatable to exempt income. This voluntary disallowance ought to have been duly considered and adjusted by the Assessing Officer while computing the final disallowance under Rule 8D.
9.10 As regards the assessee’s claim for deduction under section 80P(2)(d) of the Income Tax Act, 1961, we observe that the dividend income received by the assessee from other co-operative institutions is, in principle, eligible for deduction under the said provision. The assessee has contended, and it is borne out from the record, that a proportionate disallowance was already 9 offered voluntarily in respect of such exempt income, following the mandate of section 14A.
9.11 However, the Assessing Officer proceeded to make an additional disallowance by invoking Rule 8D, without factoring in the suo motu disallowance already made by the assessee. Upon perusal of the assessment records and the computations furnished, it is evident that the disallowance made by the Assessing Officer has led to a duplication—once by the assessee and again by the AO—which, in our considered opinion, is contrary to law. Such double disallowance in respect of the same exempt dividend income is unsustainable and, therefore, cannot be upheld.
In view of the above, we set aside the order of the CIT(A) and restore the matter to the file of the AO with the following directions:
(i) The AO shall verify, based on lease deeds, TDS certificates, rental agreements, and other supporting documents, the portion of income that arises from letting of godowns for third-party storage. Deduction under section 80P(2)(e) shall be allowed only on such income, in accordance with the binding decision of the Hon’ble Punjab & Haryana High Court.
(ii) Income attributable to use of godowns for own trading business shall not qualify under section 80P(2)(e).
(iii) The AO shall verify the amount of dividend received and the expenditure disallowed by the assessee suo motu. If the AO proposes to make any further disallowance under Rule 8D, he must do so after reducing the amount already disallowed by the assessee to avoid duplication.
(iv) The AO shall grant adequate opportunity of being heard to the assessee before finalizing the order.
In the result, the present appeal of the Revenue is allowed for statistical purposes.
Both the parties fairly submitted that the facts and circumstances of other two appeals i.e and 666/ Chd/2024 are exactly identical to the Appeal in ITA No. 664/Chd/2024 and similar contentions raised therein may be considered, therefore, our findings and directions given in ITA No. 664/Chd/2024 shall apply mutatis mutandis to these two appeals which are accordingly allowed for statistical purposes.
In the result, all the above appeals filed by the Revenue are allowed for statistical purposes.