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81. Income of co-operative societies.

Income-tax shall not be payable by a cooperative society-

(i) in respect of the profits and gains of business carried on by it, if it is

(a) xxx xxx xxx xxx

(b) xxx xxx xxx xxx

(c) a society engaged in the marketing of the agricultural produce of its members".

By the Finance Act ( No. II ) 1967, Section 81 was omitted and its provisions re-enacted as Section 80P of the 1961 Act. The relevant extract of Section 80P is :

80-P (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.
This decision was given in December 1998. Immediately thereafter, Section 80P(2)(a)(iii) was sought to be amended by the Income Tax Act (2nd Amendment) Bill No. 169 of 1998. Clause 8 of the Bill which is relevant for our purposes, reads:
"Amendment of section 80P. In section 80P of the Income-tax Act, in sub-section (2), in clause (a), for sub- clause (iii), the following sub-clause shall be substituted, and shall be deemed to have been substituted with effect from the 1st day of April, 1968, namely: -
(iii) the marketing of agricultural produce grown by its members."

The reason for this amendment has been stated in Clause 6 of the Statement of Objects and Reasons as:

" 6 Clause 8 seeks to amend section 80P of the Income-tax Act. Under the existing provision, profits derived by a cooperative society engaged in the marketing of agricultural produce of its members are fully deductible in computing the taxable income under Section 80P(2)(a)(iii) of the Income-tax Act. The deduction was intended for primary cooperative societies marketing the agricultural produce of their farmer members. In the case of Kerala State Cooperative Marketing Federation vs. Commissioner of Income-tax, the Hon'ble Supreme Court held that the use of words "of its members" in the relevant clause would mean the agricultural produce belonging to the members and not necessarily grown by them. The interpretation given to the use of the words in the provision is not in accordance with the legislative intent of the existing provision. In respect of income arising from transactions with non-members, the cooperatives are not different from other assessees, and such cooperatives are required to be taxed in the same manner as companies or other assessees engaged in marketing of agricultural produce. If an amendment in section 80P(2)(a)(iii) is not made, it is likely to have serious impact on revenues. The proposed amendment, therefore, replaces the words "of its members" by the words "grown by its members". The amendment seeks to restrict the deduction to the profits derived by a cooperative society engaged in the marketing of agricultural produce grown by its members".

A validating clause coupled with a substantive statutory change is therefore only one of the methods to leave actions unsustainable under the unamended statute, undisturbed. Consequently, the absence of a validating clause would not by itself affect the retrospective operation of the statutory provision, if such retrospectivity is otherwise apparent. By the impugned amendment, the legislature has substituted the word 'of'' which occurred in Section 80P (2)(a)(iii) and which had been construed by this Court in 1998 as "belonging to" , with the phrase "grown by". The clear effect of the substitution, in keeping with general principles relating to amendments, would be that Section 80P(2)(a)(iii) must be read as if the substituted phrase were included from the date that the section was introduced in the statute viz. 1st April, 1968.