Co-operative Society – Special Deduction – Matter remanded to the Commissioner to decide as to whether the society is entitled to deduction u/s. 80P(2)(a)(iii) and whether benefit earned under Sampath Incentive Scheme, 1997 was a capital receipt

For the assessment year 1993-94, the appellant , a co-operative sugar mill engaged in the business of manufacturing sugar and allied products from the sugarcane supplied to it by its member farmers (sugarcane growers), claimed deduction of Rs.16,75,462 under the provisions of section 80P(2)(d) of the Act. During the pendency of the appeal before the Tribunal, the following two additional grounds were sought to be taken under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963:

“1. That the appellant was entitled to claim of deduction u/s. 80P(2)(a)(iii) of the Act being co-operative society engaged in marketing of agriculture produce of its members. Hence, its total income was not liable to be taxed.

2. That in the alternative, the appellant was entitled to be allowed claim for deduction amounting to Rs.1,74,64,478 representing benefit earned under the Sampath Incentive Scheme, 1997, being the capital receipt in contradistinction to revenue receipt as wrongly returned while computing the total income.”

The Hon’ble Tribunal, vide judgment dated 24th September, 2002, declined the request of the appellant to raise the abovementioned two additional grounds on the ground that the entire material was not before the subordinate authorities and detailed investigation of facts for want of facts would not be possible.

The High Court held that the appellant sugar-mill was engaged in the manufacturing of sugar products from the sugarcane supplied by members, who were admittedly sugarcane growers. Since the appellant sugar-mill was engaged in the marketing of agricultural produce of its members, therefore, it was entitled for the exemption as provided u/s. 80P(2)(a)(iii) of the Act.

The High Court drew support from its Full Bench judgment in the case of the Budhewal Co-operative Sugar Mills Ltd. vs. CIT [2009] 315 ITR 351 (P&H) [FB], wherein it was held that co-operative society engaged in the manufacturing and sale of sugar out of the sugarcane grown by its members is entitled for deduction u/s. 80P(2) (a)(iii) of the Act.

The High Court noted that the Hon’ble Apex Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) has held that keeping in mind the object behind the payment of the incentive subsidy, that the payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. According to the High Court in the present case also, the grant was not for the purpose of bringing into existence new assets but was for the purpose of making payment to the sugarcane growers, therefore, same should be treated as capital receipt.

On appeal by the Revenue, the Supreme Court remanded the matter to the file of the Commissioner of Income-tax (Appeals), in view of the order passed by it in Morinda Cooperative Sugar Mills Ltd. vs. CIT [2013] 354 ITR 230 (SC).

The Supreme Court however clarified that it had not expressed any opinion on the merits of the case and that the assessee was entitled to raise the contention before the Commissioner that in so far as the second issue was concerned, it was covered in its favour by the decision of the Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC)].