Bombay High Court
Commissioner Of Income-Tax vs Nagpur Zilla Krishi Audyogik Sahakari ... on 11 September, 1992
JUDGMENT
V.A. Mohta J.
1. At the behest of the Commissioner of Income-tax, the following four questions have been referred to this court under section 256(1) of the Income-tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the assessee was entitled to deduction under section 80P(2)(a)(iv) in respect of the sales of commodities to non-members also ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in rejecting the contention of the Revenue that the intention of the assessee under the provisions of section 80P(2)(a)(iv) at the time of purchase of eligible commodities should be, in the absence of any other evidence, inferred with reference to their ultimate sales either to members or to non-members ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in granting deduction of the entire gross profit arising from the business attributable to the activities specified in section 80P(2)(a)(iv) instead of confining such relief to the net profit arrived at by deducting proportionate expenditure from such gross profit ?
(4) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction under section 80P(2)(a)(iv) and the entire gross profit without deducting any expenditure was admissible for relief under section 80P(2)(a)(iv) of the Act ?"
2. By consent of parties, the questions are reduced to two and are reframed as follows :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the assessee was entitled to deduction under section 80P(2)(a)(iv) in respect of the sales of commodities to non-members also ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in granting deduction of the entire gross profit arising from the business attributable to the activities specified in section 80P(2)(a)(iv) ?"
3. The assessee, Nagpur Zilla Krishi Audhogik Sahakari Sangh Ltd., Nagpur, is a co-operative society duly registered under the Maharashtra Co-operative Societies Act. It was engaged in various activities including purchasing of agricultural implements, seeds, livestock and other articles intended for agriculture, for the purposes of supplying them to its members. It also supplied such articles to non-members also. For the assessment year 1977-78, it claimed deduction under section 80P(2)(a)(iv) of the Income-tax Act of the gross profit in respect of the entire dealings in commodities intended for agriculture. The Income-tax Officer proceeded on the basis that for attracting section 80P(2)(a)(iv), the deciding factor was the original intention at the time of purchase of such commodities and the intention could be ascertained only from their subsequent utilisation. The gross profit attributable to the transactions of sales to members was estimated at Rs. 2,42,041. The same was reduced to Rs. 80,451 by disallowing proportionate expenditure debited to the profit and loss account.
4. In appeal by the assessee, the Commissioner of Income-tax (Appeals) upheld the claim of the assessee in respect of gross uncomputed income arising out of sales of the commodities the bulk of which were sold to the members. The commissioner of Income-tax (Appeals) further held that there was no legal justification to reduce the exempt income by proportionate expenditure attributable to the said income. The Revenue appealed to the Tribunal on both these issues but unsuccessfully. The Tribunal observed that the law granted exemption in respect of commodities purchased for the purpose of supplying them to its members and hence what was material was the intention of the assessee at the time of purchase and not how the commodities were ultimately disposed of. Upon that view, it held that the Commissioner of Income-tax (Appeals) was justified in basing his decision upon ascertainment of the intention by reference to the volume of dealings with the members vis-a-vis no-members. In justifying non-deduction of proportionate expenses out of the exempt income, reliance was placed by the Tribunal upon the Supreme Court decision in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452.
5. In our view, the approach of the Tribunal towards both the issues is erroneous. We begin with the reproduction of the material portion of section 80P.
"80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred 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, livestock or other articles intended for agriculture 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. . . .
(c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed, -
(i) where such co-operative society is a consumers' co-operative society, forty thousand rupees : and
(ii) in any other case, twenty thousand rupees, Explanation. - In this clause, 'consumers' co-operative society' means a society for the benefit of the consumers."
6. A close examination of the above provisions would reveal that treating the original intention at the time of purchase of commodities as the deciding factor is basically erroneous. Section 80P allows, in the computation of the total gross income of the society, a straight deduction in respect of certain types of income to the extent specified. Exempt incomes include (A) the whole of the amount of profits and gains attributable to the activities referred to in clauses (a) (i) to (vii) of sub-section (2), (B) limited amount of profits and gains derived from the business other than those specified at clauses (a) (i) to (b), which would include sales even to non-members. All this implies that the society is not disentitled from claiming exemption only because it carries on activities the income from which is not exempt. In that case, by the very nature of things, the purchase of the bulk of the commodities would be made for tapping the entire market inclusive of both members as well as non-members without separately earmarking the purchases for sale to members. The exercise of judging the original intention is thus futile. It is not at all necessary.
7. The scheme is clear. All sales of specified commodities to members -irespective of their proportion and quantum - would belong to the exempted category and all such sales to non-members - irrespective of their proportion and quantum - would belong to the non-exempted category. The Tribunal was thus in error in holding that the original intention at the time of purchase of items was the deciding factor and not their ultimate disposal. The correct approach would be to grant exemption to the whole amount of profits and gains attributable only to actual sales of specified commodities to members, irrespective of the original intention at the time of purchase.
8. In the context of the second question, the material expression to be noted is "profits and gains of business". The concept, though not defined under the Act, is well recognised under the Income-tax Act. Section 28 lists the incomes chargeable to income-tax under the head "Profits and gains of business or profession". Section 29 specifies that such income is to be computed in accordance with the provisions contained in sections 30 to 43D. Chapter VI-A deals with the subject of deductions to be made in computing total income. Section 80A which is the first section in that Chapter mentions that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80U. section 80B(5) gives the definition of the term "gross total income" as meaning the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under section 280-O. Sub-section (1) of section 80P provides that where the gross total income of an assessee includes any income mentioned in sub-section (2), the amount of profits and gains of business attributable to certain activities will have to be deducted in computing its total income. Quite obviously, the words "gross total income" referred to in section 80P(1) must be given the defined meaning which means total income computed in accordance with the provisions of the Act, but before making any deduction under Chapter VI-A or section 280-O. Computation in accordance with the provisions of the Act must mean computation in accordance with section 29. It would be consistent and reasonable to hold that the expression "the amount of profits and gains" used in sub-section (2) of section 80P cannot be understood in a different sense. The expression must mean income as computed under section 29.
9. In this context the provisions of section 80AB which is inserted by the Finance (No. 20 Act, 1980, with effect from April 1, 1981, may also be noticed. It is not in dispute that in case section 80AB applies, the profits and gains of business cannot mean the gross uncomputed income as held by the Tribunal. There was some debate before us as to whether section 80AB would apply to assessment for the assessment year 1977-78. As rightly held by the Andhra Pradesh High Court in the case of CIT v. Anakapalli Co-operative Marketing Society [1989] 175 ITR 584, the said provision appears to be only clarificatory in nature explaining the pre-existing legal position since the very beginning.
10. Our attention was invited by Shri Thakar, learned counsel for the assessee, to the following decisions in support of the view of the Tribunal :
(i) CIT v. Maharashtra Sugar mills Ltd. .
11. This decision of the Supreme Court pertains to deduction under section 10(2) (xv) of the Indian Income-tax Act, 1922. The assessee-company owned large areas of lands upon which it grew sugarcane which was used for making sugar in its manufacturing unit. The finding of act was that cultivation of sugarcane and manufacture of sugar constituted one single and indivisible business of the assessee. The point was whether a part of the managing agency commission paid by the assessee which related to management of sugarcane cultivation, the income from which was not exempt from tax as agricultural income, could be disallowed. it was held that entire managing agency commission was laid out or expended for the purpose of business as a whole and, therefore, no part of it could be disallowed.
(ii) Punjab State Co-operative Supply and Marketing Federation Ltd. v. CIT [1981] 128 ITR 189 (P & H).
12. This decision of the Punjab and Haryana High Court pertains to section 81(i)(d) of the Income-tax Act. Applying the ratio of the above Supreme Court decision, the High Court has held that the entire business expenditure incurred in respect of business of distribution of fertilizers under the agency agreement with the Government was deductible because of the indivisible nature of the business.
(iii) Baghapurana Co-operative Marketing Society Ltd. v. CIT [1989] 178 ITR 653 (P & H).
13. In this case, the answer to the question is recorded by that High Court by just following the above decision. The nature and details of the expenditure are not discernible from the judgment and hence we presume that the factual background of the case must be identical.
14. In our view, the ratio of none of these decisions can apply to the matter at hand. The provisions as well as the factual backdrop are quite distinct.
15. Our attention was also invited by Shri Thakar also to a Supreme Court decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 wherein it is held that the expression "attributable to" has a wider import than the expression "derived from". The expression "derived from" is used in section 81 and the expression "attributable to" is used in section 80P. In this matter, nothing turns on that expression.
16. Under the circumstances, we record the answers as follows :
Question No. 1 - In the negative and in favour of the Revenue.
Question No. 2 - In the negative and in favour of the Revenue.
17. No order as to costs.