Gujarat High Court
Gandevi Taluka Khedut Sahakari Sangh ... vs Commissioner Of Income-Tax on 21 January, 1994
Equivalent citations: [1994]207ITR175(GUJ)
Author: M.B. Shah
Bench: M.B. Shah
JUDGMENT R.K. Abichandani, J.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench "C", has referred of the opinion of this court under section 256(1) of the Income-tax Act, 1961, the following questions :
"1. 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 ?
2. 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 ?
3. 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 ?"
2. 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 under section 143(3) of the Act, on January 5, 1978, granting deductions under section 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 under section 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, under section 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 under section 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 under section 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 CIT v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447, upheld the order of the Commissioner.
3. 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."
4. 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 under section 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.
5. 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 under section 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 CIT v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447, 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 Vechan Sangh Ltd. v. CIT [1993] 203 ITR 1027. 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 CIT v. Anakapalli Co-operative Marketing Society [1989] 175 ITR 584, which was cited before it. The Supreme Court had also placed reliance on its earlier decision in distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, 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.
6. In view of the above settled legal position, while granting deduction under section 80P(2)(a)(iv), only the net income attributable to the activities under section 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 under section 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 under section 80P(2)(c)(ii).
7. 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.
8. The reference stands disposed of accordingly with no order as to costs.