Judgment:
1. On an application under Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question for our opinion :
'Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing claim under Section 80P(2)(a)(iii) of the Income-tax Act, 1961, notwithstanding the fact that the business was not wholly done with the members only ?'
2. The assessee is a co-operative society deriving income from sale of fertilizers, agricultural commodities, pesticides, controlled sugar, etc. It also derives income from tractor, matador, truck, godown rent, interest and receipts.
3. On the basis of computation furnished by the assessee, the assessee had claimed relief under Section 80P(2) at Rs. 4,75,999. The Income-tax Officer, however, required it to furnish the working of the net income from the business done with the members only. The assessee, in compliance with the directions of the Income-tax Officer, has given working of the income earned in dealings with the members at Rs. 76,723. The Income-tax Officer restricted the relief to that extent only. It was contended before the Income-tax Officer that as the assessee was earning income from various activities, the expenditure is indivisible. The Income-tax Officer had not accepted it and restricted the amount for benefit under Section 80P to the tune of Rs. 76,723.
4. The Commissioner of Income-tax (Appeals) following the decision of the Punjab and Haryana High Court given in the case of Punjab State Co-operative Supply and Marketing Federation Ltd. v. CIT allowed the claim of the assessee and directed the Income-tax Officer to allow the entire expenditure incurred on the activities, i.e., transaction with the members of the society and non-members of the society for earning of income under Section 80P of the Income-tax Act, 1961. In appeal before the Tribunal, the Tribunal has also followed the decision of the Punjab and Haryana High Court given in the case of Punjab State Co-operative Supply and Marketing Federation . It has also been pointed out that SLP filed before the apex court against the decision of the Punjab and Haryana High Court has been dismissed by the Supreme Court reported in : [1983]143ITR64(AP) .
5. None appeared on behalf of the assessee. Heard learned counsel for the Revenue, Mr. Singhi.
6. Mr. Singhi, learned counsel for the Revenue, submits that after the insertion of Section 14A by the Finance Act, 2001, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which is exempted under this Act.
7. He also brought to our notice that new Section 14A has been inserted in the Act to clarify the position of law relating to expenditure relating to exempted income. After the insertion of Section 14A, the expenditure can be allowed only in respect of the income which is taxable under the Act and if any expense is incurred in respect of non-taxable income or which is exempt, that expenditure should not be allowed.
8. Before the insertion of Section 14A, there was a dispute on allowability of the expenditure relating to exempted income and various courts have made some observations in this regard.
9. In Rajasthan State Warehousing Corporation v. CIT : [2000]242ITR450(SC) , their Lordships have laid down some guidelines in respect of allowable expenditure in case of exempt income if the business is indivisible, at page 455, their Lordships observed as under :
'(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income ;
(ii) if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible ; and
(iii) in computing 'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under Section 37 of the Act will depend on :
(a) fulfilment of requirements of that provision noted above ; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture, not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee.'
10. In Punjab State Co-operative Supply and Marketing Federation Ltd. v. CIT , at page 209, the Punjab and Haryana High Court observed as under :
'It cannot be disputed that the assessee is entitled to claim expenditure which he incurred wholly or exclusively for the purposes of the business in view of the provisions of Section 37 of the Act. The assessee was pursuing various activities. The income of the assessee in respect of profits and gains of business carried on by the assessee, as specified in Section 81(i), Clauses (a) to (f), is not liable to payment of tax, whereas the income from the other activities pursued by it is liable to tax. Their Lordships of the Supreme Court in the abovementioned authorities laid down the principle that if the business of the assessee is one and in pursuing various activities if the assessee incurs expenditure, wholly or exclusively for the purpose of the business, irrespective of the fact that the income from one or more parts of the activities was not liable to income-tax, the entire expenditure incurred by the assessee in connection with the business, has to be allowed. In this view of the matter, the contention of Shri Awasthy, the learned counsel for the Revenue, that proportionate expenditure should be allowed, is without any merit.'
11. The provisions of the new Section 14A are introduced for disallowance of the expenditure incurred on income which is not taxable. It provides that for the purpose of computing the total income under Chapter IV, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total taxable income under this Act.
12. In the case in hand, the assessee claimed that the business of the assessee is indivisible. The Income-tax Officer asked how much income it earned in dealing with the members of the society, counsel has given the working of the exempted income from the business with the members, which the assessee earned, in the dealings with the members of the assessee-society and restricted that income to Rs. 76,723.
13. When the assessee himself has given the working of the income earned in dealings with the members of the society which is exempt, that means the business of the assessee can be segregated regarding the income earned from a part of the business from dealings with the members of the society and the income which is derived from the dealings with the non-members of the society, therefore, in the case in hand, it cannot be said that the business of the assessee is not segregable or indivisible in respect of the exempted income.
14. When the business of the assessee is segregable for the purpose of exempted income, the Income-tax Officer has rightly restricted the income for the purpose of Section 80P(2) which was earned in dealings with the members of the society.
15. In this case, the assessee itself has given the working of the profit earned and restricted its income to the tune of Rs. 76,723, from the activity, i.e., marketing of agricultural produce grown by its members, there is no need to go into the question what type of expenditure should be allowed and what expenditure is related to the taxable income of the assessee. The question of deduction of expenditure does arise only in cases when the assessee has income from the activities other than referred to in Sub-section (2) of Section 80P. In this case that dispute does not arise as the assessee himself has given the working of the profits earned from the activity referred to in Sub-clause (iii) of Clause (a) of Sub-section (2) of Section 80P. That means the business is divisible and the profits and gains from the activity referred to in Sub-section (2) can be shown separately. The profits and gains can be arrived at on segregation of the business activities of the assessee. Therefore, the assessee is entitled for the benefit of Section 80P(2) only in respect of the income earned from the marketing of agricultural produce of its members. The income earned from the marketing of agricultural produce of non-members is not exempted, no benefit of Section 80P(2) can be given in respect of that income.
16. In the result, we answer the question in the negative, i.e., in favour of the Revenue and against the assessee.
17. Reference so made stands disposed of accordingly.