Gandevi Taluka Khedut Sahakari Sangh Ltd. vs Commissioner of Income Tax

R.K. Abichandani, J.—The Income Tax Appellate Tribunal, Ahmedabad Bench ""C"", has referred of the opinion of this court u/s 256(1) of

the Income Tax Act, 1961, the following questions :

Whether the Tribunal was justified in law in confirming the order of the Commissioner to the effect that the assessment order passed by the

Income Tax Officer was erroneous in so far as the same was prejudicial to the interests of the Revenue within the meaning of section 263 of the

Act ?

Whether the Tribunal was justified in law in confirming the order as to bifurcating expenses against different types of incomes and in recomputing

the amount of profits and gains attributable to the activities specified in section 80P(2)(a)(iv) of the Act ?

Whether, on the facts and in the circumstances of the case, the order of the Income Tax Officer can be said to have been erroneous in so far as

the same is said to be prejudicial to the interests of the Revenue ?

The relevant assessment years are 1975-76 to 1977-78. The assessee is a co-operative society rendering various services to its members as

well as non-members, who are agriculturists. It purchases, inter alia, agricultural products, implements and articles which are meant for agricultural

use. The Income Tax Officer had framed the assessment u/s 143(3) of the Act, on January 5, 1978, granting deductions u/s 80P of the Act. On

going through the proceedings of Income Tax found in the case of the assessee, the Commissioner of Income Tax found that the assessments made

by the Income Tax Officer were erroneous and were prejudicial to the interests of the Revenue. According to the commissioner of Income Tax,

the Income Tax Officer had erred in allowing excess deduction u/s 80P(2)(a)(iv) of the Act, as claimed by the assessee for the amount of gross

trading profit attributable to the assessee''s activities of purchase of agricultural implements, goods, livestock and other articles intended for the

purpose of supplying them to its members. According to the Commissioner of Income Tax, u/s 80P(2)(a)(iv), the deductions from the gross total

income were to be allowed to the extent of the net income that had arisen after considering the proportionate expenditure incurred. The

Commissioner of Income Tax held that there had been an excess deduction u/s 80P(2)(a)(iv) due to the failure of the Income Tax Officer to take

into account the relevant expenditure. The assessment orders for the relevant years were, therefore, set aside u/s 263 of the Act to this limited

extent and a direction was given to the Income Tax Officer to recompute the amount of profits and gains attributable to the activities specified in

section 80P(2)(a)(iv) of the Act for the said assessment by taking into account the proportionate expenditure incurred and duly debited in that

behalf to the profit and loss account. The assessee appealed before the Tribunal and the Tribunal, relying upon the decision of this court in

COMMISSIONER OF Income Tax, Vs. SABARKANTHA ZILLA KHARID VECHAN SANGH LTD., upheld the order of the

Commissioner.

The relevant provision of section 80P(1) and (2) (a) (iv) which calls for consideration is as under :

80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income refereed to in sub-section

(2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the

total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely :-

(a) in the case of a co-operative society engaged in -. . . .

(iv) the purchase of agricultural implements, seeds, live-stock or other articles intended for agricultural for the purpose of supplying them to its

members, or . . . .

the whole of the amount of profits and gains of business attributable to any one or more of such activities.

The words ""gross total income"" are defined in section 80B(5) to mean the total income computed in accordance with the provisions of the Act,

before making any deduction under Chapter VI-A or u/s 280. The words ""total income"" are defined in section 2(45) so as to mean the total

amount of income referred to in section 5, computed in the manner laid down in the Act.

It would appear that the co-operative society concerned would be entitled to deduction only on the net amount of its profits and gains, i.e., on

income of its business otherwise computable in accordance with the provisions of the Income Tax Act for the purpose of charging Income Tax

thereon and which is included in its total income and not on the amount of its gross profits and gains of business. The provisions clearly envisage the

legislative scheme of allowing deduction to a co-operative society, carrying on its business contemplated by section 80P(2)(a)(iv) of the Act not

with respect to the amount of gross profits and gains of business, but only with respect to the amount of net profits and gains, i.e., income of its

business otherwise computable according to the provisions of the Income Tax Act. It would thus appear that the Tribunal was right in confirming

the decision of the commissioner of Income Tax holding that there had been an excess deduction u/s 80P(2)(a)(iv) of the Act due to the failure of

the Income Tax Officer to take into account the relevant expenditure. The Tribunal has, in this context, relied upon the decision of this court in

COMMISSIONER OF Income Tax, Vs. SABARKANTHA ZILLA KHARID VECHAN SANGH LTD., in which, while considering the

provisions of section 81(1)(d), this High Court, inter alia, held that the only way of working out the scheme of the provisions of section 81(1)(d)

and the proviso to section 81(1) in the light of sections 66 and 110 is first to calculate the total income, secondly, to decide the Income Tax

payable on that total income, thirdly, to ascertain the income in respect of non-taxable activities, by setting off against the gross profits of non-

taxable activities the proportionate amount of expenditure. This court observed that the scheme requires that profits and gains of non-taxable

activities and taxable activities both of which are components which have entered into the total income as known to Income Tax law, should be

separated and that separation of these two components which have entered into the total income can only be done by finding out the proportionate

net income, that is, after deducting from the amount of gross profits both for taxable activities as well as for non-taxable activities all expenditure

attributable to these two different categories of cases. This decision was upheld by the Supreme court in Sabarkantha Zilla Kharid V. Sangh Ltd.

Vs. Commissioner of Income Tax, . It may be noted that the Supreme Court also considered the provisions of section 80P while considering the

decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Anakapalli Co-operative Marketing Society, which was cited

before it. The Supreme Court had also placed reliance on its earlier decision in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and

Others, which was rendered in the context of section 80M of the Act. It was held therein that the full amount of dividend received by the assessee

would not be included in the gross total income; what would be included would only be the amount of dividend as computed in accordance with

the provisions of the Act. It was held that the deductions required to be made for computing the total income from the gross total income can only

be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income.

In view of the above settled legal position, while granting deduction u/s 80P(2)(a)(iv), only the net income attributable to the activities u/s 80P(2)

(a)(iv) of the Act for the purchase of agricultural implements, livestock, etc., intended for supplying to agriculturists which was included in the gross

total income could be deducted and not the gross total income from such activities. To illustrate the point, if the gross income from such source as

is contemplated u/s 80P(2)(a)(iv) is Rs. 1 lakh in respect of members and Rs. 1 lakh in respect of non-members each and the expenditure incurred

is Rs. 10,000 on each count, then in respect of members Rs. 90,000 would be deductible from the sum of Rs. 1 lakh while in respect of non-

members, an amount of Rs. 20,000 would be deducted as provided u/s 80P(2)(c)(ii).

In view of the above discussion, the questions referred to us are answered in the affirmative, in favour of the Revenue and against the assessee.

The reference stands disposed of accordingly with no order as to costs.