M/S GRAIN MERCHANT SOCIETY,TUMKUR vs. INCOME TAX OFFICER, WARD.2, TUMKUR

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. No.1183/Bang/2014 (Assessment Year : 2008-09) M/s. Grain Merchant Society, Vs. Income Tax Officer, Chellur, Gubbi Taluk, Tumkur. Ward 2, Tumkur. PAN AAAAG 7129D Appellant Respondent.

Appellant By : Shri S. Ramasubramanian, C.A. Respondent By : Dr.P.K. Srihari, Addl. CIT (D.R.) Date of Hearing : 19.03.2015. Date of Pronouncement : 10.04.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-II, Bangalore dt.14.7.2014 for Assessment Year 2008-09. 2. The facts of the case, briefly, are as under :- 2.1 The assessee, a co-operative society registered under the Karnataka State Co- operative Societies Act which extends credit facilities to its members and earns income therefrom; filed its return of income for Assessment Year 2008-09 on 25.9.2009 declaring total income at NIL after claiming deduction of Rs.11,39,219 under Section 80P(2)(a)(i) of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The return was processed under Section 143(1) of the Act and the case was subsequently

2 ITA No.1183/Bang/2014 taken up for scrutiny. The assessment was completed under Section 143(3) of the Act vide order dt.30.11.2010 accepting the assessee's income at NIL as declared. 2.2 Subsequently, the Assessing Officer, on perusal of the records of assessment, was of the view that the deduction of Rs.11,39,216 claimed by the assessee under Section 80P(2)(a)(i) of the Act was not allowable in view of the amended provisions of Section 80 P(4) of the Act. In view of the matter, the Assessing Officer initiated proceedings under Section 147 of the Act to bring to tax income of the assessee that had escaped assessment in the year under consideration. A notice under Section 148 of the Act was then issued to the assessee on 15.6.2012, and in response thereto, the assessee vide letter dt.4.7.2012 requested that the original return of income for Assessment Year 2008-09 filed on 25.9.2009 be treated as filed in response to the notice under Section 148 of the Act. In the course of these reassessment proceedings, the assessee filed a revised computation of income indicating that it had collected pigmy deposits on which commission of Rs.3,06,647 was paid without deducting tax at source thereon. In this computation, the assessee claimed deduction under Section 80P(2)(a)(i) of the Act amounting to Rs.14,45,866 (i.e. being the aggregate of Rs.11,39,219 + Rs.3,06,647). The reassessment was completed under Section 143(3) rws 147 of the Act vide order dt.10.2.2014, wherein the income of the assessee was determined at Rs.14,45,866 by disallowing the assessee's claim for deduction under Section 80P(2)(a)(i) of the Act. 2.3 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.10.2.2014, the assessee preferred an appeal before the CIT (Appeals) – II, Bangalore. The learned

3 ITA No.1183/Bang/2014 CIT(A) disposed off the assessee's appeal vide the impugned order dt.14.7.2014 allowing the assessee partial relief. The learned CIT(A) in the impugned order held that the assessee was entitled to deduction under Section 80P(2)(a)(i) of the Act to the extent of Rs.11,39,216 earned by the assessee by way of interest on amounts lent to its members in the period under consideration. The learned CIT(A) however held that the assessee was not entitled to deduction under Section 80P(2)(a)(i) of the Act in respect of the amount of Rs.3,06,647 disallowed under Section 40(a)(ia) of the Act by the Assessing Officer. 3.1 Aggrieved by the order of the CIT (Appeals) – II, Bangalore for Assessment Year 2008-09 dt.14.7.2014, the assessee has preferred the present appeal raising the following grounds :- “ 1. That the order of the learned CIT (Appeals), in so far it is prejudicial to the interests of the appellant, is bad and erroneous in law and against the facts and circumstances of the case. 2. That the learned CIT (Appeals) erred in law and on facts in holding that the sum of Rs.3,06,647 is not allowable under Section 80P(2) of the Act. 3. That the learned CIT (Appeals) ought to have appreciated that whatever income which is determined in accordance with the provisions of Income Tax Act is to be allowed as a deduction under Section 80P(2) of the Act. Each of the above grounds is without prejudice to one another and the appellant craves leave of the Hon'ble ITAT, Bangalore to add, delete, amend or otherwise modify one or more of the above grounds either before or at the time of hearing of this appeal.” 3.2 In the grounds raised at S.Nos.1 to 3 (supra), the assessee challenges the finding of the learned CIT(A) in the impugned order in holding that the sum of Rs.3,06,647 disallowed under Section 40(a)(ia) of the Act as not being allowable as a deduction under Section 80P(2) of the Act, even though it formed a part of the assessee's income determined in accordance with the provisions of the Act and therefore ought to have been

4 ITA No.1183/Bang/2014 allowed as a deduction under Section 80P(2) of the Act. The learned Authorised Representative was heard in support of the grounds raised. It was submitted that the above proposition, that even if a certain expenditure which was incurred by the assessee was not allowable by virtue of the provisions of section 40(a)(ia) of the Act since the assessee had not deducted tax at source as required by law, it could not be denied that such disallowance would go to increase the assessee's profit / income from business and would qualify for deduction as provided under the law, was upheld by the Hon'ble High Court of Gujarat in the case of ITO V Keval Construction (2013) 354 ITR 13 (Guj) rendered in the context that the eligible deduction under Section 80IB of the Act and by a co-ordinate bench of this Tribunal in the case of V S Lad & Sons V CIT in ITA No.560 & 561/Bang/2012 dt.12.7.2013 rendered in the context of the extent of deduction to be allowed under Section 80HHC of the Act. The learned Authorised Representative submits that both the cited cases (supra), it was held that the deduction was to be allowed in respect of the income determined / computed under the head ‘Profit and Gains from Business and Profession’. It is contended by the learned Authorised Representative that in view of the above cited cases on which reliance is placed, the assessee in the case on hand ought to also be allowed deduction under Section 80P(2) of the Act on an amount of Rs.14,45,866 (i.e. Rs.11,39,219 plus Rs.3,06,647), as against only Rs.11,39,219 allowed in the impugned order of the learned CIT(A). 3.3 Per contra, the learned Departmental Representative supported the finding in the impugned order of the learned CIT(A).

5 ITA No.1183/Bang/2014 3.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon by the assessee. We find that in both the cited cases of Keval Constructions (supra) and of the co-ordinate bench in the case of V.S. Lad & Sons (supra), it has been held in the context of deduction under Section 80IB and 80HHC of the Act, that the deduction is to be allowed to the extent of the income determined / computed under the head ‘Profits and Gains from Business and Profession.’ 3.4.2 In the case of Keval Constructions (supra), the Hon'ble Court held as under :-

“ Having heard counsel on both the question today in this appeal, we find no error in the Tribunal's ultimate conclusion. Even if a certain expenditure which was incurred by the assessee for the purpose of developing housing project was not allowable by virtue of section 40(a)(ia) of the Act, since the assessee had not deducted the tax at source as required under law, it cannot be denied that such disallowance would ultimately go to increase the assessee's profit from the business of developing housing project. Whatever be the ultimate profit of assessee as computed even after making disallowance under section 40(a)(ia) of the Act, would qualify for deduction as provided under the law.” 3.4.3 In the case of V S Lad & Sons (supra), a co-ordinate bench at paras 27 to 29 thereof has held as under :-

“ 27. Besides the above, we also find substance in the argument of the learned counsel for the Assessee based on the decisions of the Hon’ble Supreme Court in the case of Mysodet (P) Ltd. Vs. CIT 305 ITR 276 (SC) and P.R. Prabhaukar Vs. CIT 284 ITR 548 (SC) that deduction u/s.80HHC of the Act is to be computed only with reference to the formula given in Sec.80HHC(3) of the Act and income computed under the head “Profits & Gains of Business or profession” should be adopted subject to Explanation (baa) to Sec.80HHC of the Act. 28. In the case of Mysodet (P) Ltd. (supra), the assessee was a limited company. It purchased 105 computers for Rs. 90,91,063. It exported them and realized export sales of Rs. 90,91,063. There were no profits during that relevant assessment year on the export sales. The relevant assessment year is asst. yr. 1990-91. The ITO allowed the claim of deduction under s. 80HHC at Rs. 15,81,389. According to the calculations made by the ITO the business income stood at Rs. 55,31,941 to which the ITO applied the formula in terms of Sec. 80HHC(3)(b). Applying that formula the export profits worked out to Rs. 15,81,389. The formula adopted was as follows : Export Profits = 90,91,063x55,31,941 3,18,01,941

6 ITA No.1183/Bang/2014 The CIT in exercise of powers of revision u/s.263 of the Act held that s. 80HHC(1) refers to profits derived from the export business and it is with reference to such profits that deduction under s. 80HHC is to be computed. According to the CIT, s. 80HHC confers the benefit only on those assessees who have not only carried the export business but who have also derived profits from such business. According to the CIT, s. 80HHC(3)(b) is a machinery provision which enables the AO to compute profits from export business particularly when the income of the assessee accrues from composite business of domestic and export sales. The Tribunal however held that profits need not be earned in the export business alone to claim special deduction under s. 80HHC. The Hon’ble High Court agreed with the view of the revenue. On further appeal by the Assessee the Hon’ble Supreme Court held that Sec. 80A governs s. 80HHC which deals with deductions in respect of profits retained for export business. The head note to s. 80HHC refers to deduction in respect of profits retained for export business. It is not profits retained from export business. Moreover, prior to 1st April, 1986, s. 80HHC referred to deduction in respect of export turnover. That phraseology has been changed later on. The eligibility for deduction is contemplated by s. 80HHC(1) whereas quantum of deduction is determined under s. 80HHC(3). In the matter of determining the quantum of deduction, the "principle of proportionality" applies. There are two situations which are covered by s. 80HHC(3), namely, turnover only from export sales and, secondly, turnover from composite sales (domestic and export business). The calculation has been correctly done by the ITO. The ITO took into account the business income at Rs. 55,31,941 to which he correctly applies the ratio of Rs. 90,91,063/Rs. 3,81,01,941. In the case of composite business, the figure of export turnover is quite different from total turnover. The entire object for applying the principle of proportionality is to derive export profits from total business profits. This formula applies both under s. 80HHC(3)(a) as well as s. 80HHC(3)(b). Circular No. 564, dt. 5th July, 1990 indicates vide para 4 that s. 80HHC(3) statutorily fixes the quantum of deduction on the basis of a proportion of business profits under the head "profits and gains of business or profession" irrespective of what could strictly be described as profits derived from export of goods out of India. Even the illustration given in the CBDT circular indicates that the ratio mentioned in sub- s. (3) has to be applied to business profits computed under the provisions of ss. 28 to 43D. 29. From the aforesaid decision of the Hon’ble Supreme Court it is clear that profits of the business contemplated u/s.80HHC(3) for applying the formula prescribed therein is the profits computed under the head “Profits and gains of Business or Profession”. The decisions of the Hon’ble Punjab & Haryana High Court relied upon by the CIT in the order u/s.263 of the Act should be considered as not binding in view of the decisions of the Hon’ble Supreme Court in the case of and Mysodet (P)Ltd. (supra). The view expressed by the CIT in the order u/s.263 of the Act is contrary to the decision of the Hon’ble Supreme Court in the case of Mysodet (P) Ltd., and cannot be sustained.” 3.4.4 Respectfully following the ratio of the decision of the Hon'ble High Court of

Gujarat in the case of Keval Constructions (supra) and of the co-ordinate bench in the case

of V S Lad & Sons (supra), we hold that even though in the case on hand, the expenditure

of Rs.3,06,647 incurred on commission was disallowed under Section 40(a)(ia) of the Act

for non-deduction of tax at source, this amount of Rs.3,06,647 would qualify for deduction

7 ITA No.1183/Bang/2014 under Section 80P(2)(a)(i) of the Act since such disallowance would ultimately go to increase the assessee's income computed under the head from ‘Profit and Gains from business and profession’. The Assessing Officer is accordingly directed to allow the assessee deduction of Rs.3,06,647 under Section 80P(2)(a)(i) of the Act in addition to the deduction of Rs.11,39,219 already allowed by the learned CIT(A) in the impugned order. Consequently, the grounds raised by the assessee at S.Nos.1 to 3 in this appeal are allowed. 4. In the result, the assessee's appeal for Assessment Year 2008-09 is allowed. Order pronounced in the open court on 10th April, 2015.

Sd/- Sd/- (N.V.VASUDEVAN) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, - B Bench. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore