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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Shri A T Varkey, JM, & Shri M.Balaganesh, AM]
Per M.Balaganesh, AM
This appeal by the assessee arises out of the order of the Learned Principal Commissioner of Income Tax-8, Kolkata [in short the ld CIT] in Memo No.PCIT-8, Kolkata/2016-17/U/s263/905963 dated 03.03.2017 passed u/s 263 of the Income Tax Act, 1961 (in short “the Act”) for the Assessment Year 2012-13.
The only issue involved in this appeal is as to whether the ld. CIT was justified in invoking revisionary jurisdiction u/s 263 of the Act, in the facts and circumstances of the case.
2 ITA No.1872/Kol/2017 M/s Goghat Thana Large Sized Primary Cooperative Agricultural Marketing Society Limited. A.Yr. 2012-13 3. At the outset ground no. 2 raised by the assessee was stated to be not pressed, for which necessary endorsement is made in our file. Accordingly ground no. 2 raised by the assessee is dismissed as not pressed.
Brief facts of this appeal against the order passed u/s 263 of the Act are that the assessee filed its return of income for assessment year 2012-13 on 30.09.2012 declaring total income of Rs. Nil since the assessee being a co-operative society, its income was eligible for deduction u/s 80P of the Act. The assessment was completed u/s 143(3) of the Act on 04.02.2015 determining total income of Rs. 7,76,190/-. In the said assessment, the ld. AO categorically held that though the assessee’s income was eligible for deduction u/s 80P of the Act, the said deduction is not applicable in respect of interest income and rental income for which deduction u/s 80P of the Act was denied. In the said assessment, disallowance of handling and transportation charges for want of production and bill was also made. The assessee preferred an appeal before the Ld. CITA against the said order of the ld. AO, which was disposed off by the Ld. CIT(A)-6, Kolkata in Appeal No. 402/CIT(A)-6/Kol/2014-15 dated 31.01.2017 allowing the appeal of the assessee. After disposal off the appellate order by the Ld. CIT(A) against the original assessment order, the ld. Administrative CIT sought to treat the order of the ld. AO as erroneous and prejudicial to the interests of the revenue vide issuance of show cause notice dated 02.02.2017 u/s 263 of the Act on the ground that the assessee had debited the following sums of Rs. 23,770/- and Rs. 4,26,785/- towards provision for gratuity and provision for bad and doubtful advances respectively, which requires to be disallowed u/s 40A(7)(a) and Section 36(1)(vii) of the Act respectively. In the opinion of Ld. CIT, both these provisions were made in respect of unascertained liability and hence not allowable as deduction from the computation of total income. The assessee replied in response to show cause notice u/s 263 of the Act stating that it is a co- operative society engaged in the business of marketing of agricultural produce grown by its members, purchase of agricultural implements, seeds, live stock or other articles 2
3 ITA No.1872/Kol/2017 M/s Goghat Thana Large Sized Primary Cooperative Agricultural Marketing Society Limited. A.Yr. 2012-13 intended for agriculture for the purpose of supplying them to its members. The assessee stated that it is under West Bengal Co-operative Societies Act and / or governed by the Rules framed thereon. The income derived by the assessee is eligible for deduction u/s 80P of the Act. The provision of section 80P(2)(a)(iii) and (iv) states that the income of the co-operative society for acquiring for purchasing of agricultural implements, seeds, live stock or other articles intended for agriculture for the purpose of supplying them to its members is deducted from income under chapter VIA of the Act. The entire income of co-operative society after debiting expenses if the co-operative society is engaged in the business of marketing for agricultural produce grown by its members, the purchase of agriculture implements, seeds, live stock or other articles intended for agriculture for the purpose of supplying them to its members is deducted under chapter VIA of the Act and accordingly, the end result of debiting of expenses for provision of bad and doubtful debts and the provisions of gratuity fund in the profit and loss account does not cause any prejudice to the interests of the revenue. In effect, the assessee was pleading before the ld. Administrative CIT that since its entire income is eligible for deduction u/s 80P of the Act and that the issue of provision for gratuity and provision for bad and doubtful debts also emanates out of its intended activities, when the said provision is sought to be disallowed, then it would only go to increase the income of the assessee thereby automatically making it eligible for deduction under 80P of the Act. Hence there is no prejudice that could be caused to the interests of the revenue within the meaning of section 263 of the Act. Accordingly, it was pleaded to drop the 263 proceedings initiated by the Ld. CIT.
The Ld. CIT however, did not heed to the contentions of the assessee and held that no proper enquiry was made by the ld. AO with regard to these two items and directed the ld. AO to verify the genuineness of the claim of deduction in respect of these two items and set aside the assessment to this limited extent to the file of ld. AO. Aggrieved, the assessee is in appeal before us. 3
4 ITA No.1872/Kol/2017 M/s Goghat Thana Large Sized Primary Cooperative Agricultural Marketing Society Limited. A.Yr. 2012-13
We have heard the rival submissions. At the outset, we find that even if the provision for bad and doubtful debts and provision for gratuity fund are to be disallowed in computing the total income of the assessee, the same would only go to increase the income of the co-operative society, which in turn, automatically lead to enhanced deduction of section 80P of the Act. There is no dispute that the assessee society is indeed eligible for deduction u/s 80P of the Act. In this regard, we would like to place reliance on the circular issued by the CBDT vide circular no. 37/2016 dated 02.11.2016 in the context of enhanced claim of deduction u/s 80IA of the Act with regard to disallowances made u/s 40a(ia), 40A(3) and 43B etc. The said circular is reproduced herein below:
“80-IA OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - PROFITS AND GAINS FROM INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS - CHAPTER VIA DEDUCTIONS ON ENHANCED PROFITS CIRCULAR NO.37/2016 [F.NO.279/MISC./140/2015/ITJ], DATED 2-11-2016 Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.
The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: 4
5 ITA No.1872/Kol/2017 M/s Goghat Thana Large Sized Primary Cooperative Agricultural Marketing Society Limited. A.Yr. 2012-13 Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case: Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.
In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned.”
Though the aforesaid circular was issued in the context of claim of deduction u/s 80IA of the Act, the analogy could be drawn to the facts of the instant case and ultimate effect of the circular would be made applicable to the facts of the instant case. Accordingly, we hold that any disallowance even if it is to be made towards provision for gratuity fund and provision for bad and doubtful debts would only go to increase the business income of the assessee society and in turn, automatically result in enhanced claim of deduction u/s 80P of the Act. Hence it becomes revenue neutral. Accordingly, it could be safely concluded that there is no prejudice that is caused to the interests of the revenue. Even if the order of the ld. AO in not enquiring about these two issues, becomes erroneous, we hold that twin conditions of section 263 of the Act is not cumulatively satisfied in the instant case. Reliance is made on the decision of Hon’ble Apex Court in the case of Malabar Industries Ltd. reported in 243 ITR 83 (SC). Accordingly, we have no hesitation in quashing the revision proceedings initiated u/s 5
6 ITA No.1872/Kol/2017 M/s Goghat Thana Large Sized Primary Cooperative Agricultural Marketing Society Limited. A.Yr. 2012-13 263 of the Act in the facts of the instant case by the ld. Administrative CIT. Accordingly, grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 30.11.2018
Sd/- Sd/- [A T Varkey] [ M.Balaganesh ] Judicial Member Accountant Member
Dated : 30.11.2018 SB, Sr. PS
Copy of the order forwarded to: 1. Goghat Thana Large Sized Primary Cooperative Agricultural Marketing Society Limited, At Vikdas, P.O. & P.S. Goghat, District-Hooghly, Pin-712614 2. ITO, Ward-24(4), Hooghly, Aayakar Bhawan, G.T. Road, Chinsurah, Hooghly-Pin- 712101. 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.