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PETITIONER: COMMISSIONER OF INCOME TAXTAMIL NADU-V, MADRAS

       Vs.

RESPONDENT: KOTAGIRI INDUSTRIAL CO-OPERATIVETEA FACTORY LTD., KOTAGIRI

DATE OF JUDGMENT:       05/03/1997

BENCH: S.C. AGRAWAL, G.B. PATTANAIK

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      This appeal,  by certificate,  is directed  against the judgment of  the Madras High Court dated January 22, 1982 in Tax  Case   No.  407   of  1977.   The  Kotagiri  Industrial Cooperative  Tea   Factory  Ltd.,   respondent  (hereinafter referred to as ’the assessee’) is a co-operative society. It carries on  business in  manufacture and  sale of  tea  from bought  tea   leaves  and   the  purchase   and  supply   of agricultural manure  to members.  It is also deriving income from  dividend   from  investment  with  other  co-operative societies. In  the previous  year relevant to the assessment year 1972-73  the   assessee earned  a total  income of  Rs. 85,150/-. The  losses of  the earlier  year which  has  been carried  forward  to  the  said  assessment  year  were  Rs. 1,82,744/-. The assessee claimed a deduction of Rs. 53,386/- under Section  80-P(2) from  the income of Rs. 85,150/-. The Income Tax  Officer first  set off  the losses  of  previous years that  had been  carried forward against the income and since the  losses were in excess of the income, he held that no deduction  was permissible  under  Section  80-P  of  the Income Tax Act, 1961 (hereinafter referred to as ’the Act’). The said  view of the Income Tax Officer was not accepted by the Appellate Assistant Commissioner who held that deduction under Section  80-P should  first be  made out of the income and thereafter  the losses  of the  previous year were to be set off.  The  said  decision  of  the  Appellate  Assistant Commissioner  was  affirmed  in  appeal  by  the  Income-Tax Appellate  Tribunal   (hereinafter  referred   to  as   ’the Tribunal’). The Tribunal referred the following question for the opinion of the High Court :-      "Whether, on  the facts  and in the      circumstances  of   the  case,  the      Appellate Tribunal  was  wright  in      law in  holding that  the deduction      under Section  80-P of  the  Income      Tax Act  should be  allowed  before      set off  of  unabsorbed  losses  of      earlier year ?"      The said  question has  been answered by the High Court against the Revenue. IN the impugned judgment the High Court

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has followed  its earlier decision in Commissioner of Income Tax v. Katpadi Co-operative Timber Works Ltd. (1982) 185 ITR 287, wherein  the High  Court had  held that  so long as the gross total income of a co-operative society includes income referable to the activities mentioned in Section 80-P(2) the assessee would  be eligible for the deduction and it is only if there  is any  amount left  thereafter that  could be the subject of  consideration of  set  off  of  carried  forward losses. The  High Court  followed the decision of this Court in Cloth  Traders (P)  Ltd. v.  Additional  Commissioner  of Income tax,  (1979) 118 ITR 243, as well as its won decision in Commissioner  of Income  tax v. Venkatachalam, (1971) 120 ITR 688.      Dr.  V.   Gaurishankar,  the   learned  senior  counsel appearing for the Revenue, has submitted that the High Court was in  error in  proceeding on the basis that the deduction under Section 80-P must be made before the adjustment of the losses of the previous year under Section 72 of the Act. The learned counsel  has placed  reliance on  definition of  the expression "gross total income" contained in Section 80-B(5) and has  contended that  the decision  in Cloth  Traders (P) Ltd. (supra) has since been reversed by a Constitution Bench of this Court in Distributors (Baroda) Pvt. Ltd. v. Union of India &  Ors. 155 ITR 120. Dr. Gaurishankar has also invited our attention  to the recent decision in H.H. Sir Rama Varma v. Commissioner of Income Tax. (1994) 205 ITR 433.      Ms. Janaki  Ramachandran, the learned counsel appearing for the  assessee,  has  also  placed  reliance  on  certain observations in  Distributors (Baroda) Pvt. Ltd. (supra) and has submitted  that  since  the  matter  relates  to  a  co- operative society and it is the policy of the Legislature to encourage  the   co-operative  movement  the  provisions  of Section 80-P, which have been enacted in furtherance of this policy to  encourage and  promote the growth of co-operative societies, must  be liberally  construed in  favour  of  the assessee. The  learned counsel  has placed  reliance on  the Sales Ginning  and Pressing  Society Ltd. v. Commissioner of Income Tax, Ahmedabad, (1989) 177 ITR 418.      Reference may  be  made at this stage to the provisions of Section 80-P which falls in Chapter VI-A of the Act. Sub- Section (1)  of Section  80-P, which  is   relevant for  the purpose of the case, provides as follows:-      "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  the      subject to  the provisions  of this      section, the same specified in sub-      section (2), in computing the total      income of the assessee."      For the  purpose of  Chapter VI-A the expression "gross total income"  is defined  in clause  (5) of Section 80-B in the following terms :-      "Gross  total   income"  means  the      total income computed in accordance      with the  provisions of  this  Act,      before making  any deduction  under      this Chapter."      If Section  80-P(1) is  read  with  definition  of  the expression "gross  total income"  contained in  Section  80- B(5), it  has to  be held  that for  the purpose  of  making deduction under  Section  80-P  it  is  necessary  to  first determine the  gross total  income in  accordance  with  the

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other provisions  of  the  Act.  This  means  that  for  the purposes of  the present case the gross total income must be determined by  setting off  against the  income the business losses of  the earlier years as required under Section 72 of the Act.      In Distributors  (Baroda) Pvt.  Ltd. (supra) this Court has dealt  with the  question whether deduction of income by way of  dividends under Section 80-M has to be made from the income computed  in accordance  with the  provisions of  the Act, i.e.,  after deducting  interest on monies borrowed for earning such  income  or  from  total  income  of  dividends without so  deducting the  interest amount.  In the  earlier decision in  Cloth traders  Pvt. Ltd.  (supra) a three Judge Bench of  this Court had held that the deduction required to be allowed  under  Section  80-M  must  be  calculated  with reference to  the full  amount of  dividends received from a domestic company  and not  with reference  to  the  dividend income as  computed in accordance with the provisions of the Act. In the said decision in Cloth Traders Pvt. Ltd. (supra) the Court did not notice the earlier decision of a two judge Bench of  the Court in Cambay Electric Supply Industrial Co. Ltd. v.  Commissioner of  Income Tax,  (1978)  113  ITR  84, wherein, in  the context  of Section  80-E, it was held that for  the  purpose  of  allowing  deduction  under  the  said provision it was necessary to first compute the total income of the  assessee in  accordance with the other provisions of the Act,  i.e., in accordance with all the provisions except Section 80-E.  The  decision  in  Cloth  Traders  Pvt.  Ltd. (supra) has  been overruled  by the  Constitution  Bench  in Distributors (Baroda)  Pvt. Ltd. (supra) wherein it has been observed :-      "The  opening  words  describe  the      condition which  must be  fulfilled      in    order    to    attract    the      applicability  of   the   provision      contained  in  sub-section  (1)  of      Section 80-M. The condition is that      the  gross   total  income  of  the      assessee must include income by way      of  dividends   from   a   domestic      company. "Gross  total  income"  is      defined  in  Section  80-B,  clause      (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-O’. Income by way      of  dividends   from   a   domestic      company included in the gross total      income would therefore obviously be      income computed  in accordance with      the provisions of the Act, that is,      after deducting  interest on  money      borrowed for  earning such  income.      If income  by way of dividends from      a  domestic   company  computed  in      accordance with  the provisions  of      the Act  is included  in the  gross      total income,  or  in  other  words      form  part   of  the   gross  total      income, the  condition specified in      the opening part of sub-section (1)      Section  80-M   would   sub-section      would be attracted."      [p.135]

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    We are  unable to hold that the observation made in the judgment while  construing the  words "such income by way of dividends"  in   any  way  detract  from  the  above  quoted observation inasmuch as this Court has clearly said :-      "It is obvious as a matter of plain      grammar,  that   the  words   "such      income by  way of  dividends"  must      have reference to the income by way      of dividends  mentioned earlier and      that would  be  income  by  way  of      dividends from  a domestic  company      which  is  included  in  the  gross      total  income.   Consequently,   in      order to  determine which  is "such      income by  way of   dividends",  we      have to  ask the question : what is      the income by way of dividends from      a domestic  company included in the      gross total  income and  that would      obviously be  the income  by way of      dividends  computed  in  accordance      with the provisions of the Act.      [p.136]      It may  also be  pointed out that while considering the provisions of  Section  80-T  of  the  Act  this  Court  has followed the  decision in  Distributors (Baroda)  Pvt.  Ltd. (supra) in H.H. Sir Rama Varma v. Commissioner of Income Tax (supra). In  that case  it has  been held  that a  long term capital loss  brought forward  from earlier assessment years had to  be first set off against the long term capital gains of the current assessment year before deduction contemplated by Section  80-T is  to be given only for the amount of long term capital  gains of the current assessment year after the long term  capital loss of the earlier years brought forward is set off.      It is  no doubt  true that  the decision  of the Madras High   Court    in   Commissioner    of   Income    Tax   v. Venkatachalam,(supra) has  been affirmed  in appeal  by this Court in Commissioner of Income Tax v. venkatachalam. (1993) 201 ITR  737. That  decision was also given n the context of Section 80-T  of the  Act. It  has been taken not of by this court in  H.H. Sir  Ram Varma  v. Commissioner of Income Tax (supra). B.P.  Jeevan Reddy  J. was  a party  in both  these decisions.  In   Venkatachalam  (supra)   this   Court   has emphasised that  the deduction  under Section 80-T had to be made from  out of  capital gains and no question would arise of the  business loss  being set  off against  the amount of capital gains.      Having regard to the law as laid down by  this Court in Distributors (Baroda)  Pvt. Ltd.  (supra) and  H.H. Sir Rama Varma (supra),  it must  be held that before considering the matter of  deduction under  Section 80-P(2)  the Income  Tax Officer had  rightly set  off the  carried forward losses of the earlier  years in  accordance with Section 72 of the Act and on  finding that the said losses exceeded the income, he rightly did  not allow  any deduction  under Section 80-P(2) and the  Appellate Assistant  Commissioner as  well  as  the Tribunal and  the High  Court were  in  error  in  taking  a contrary view.      The principle  of statutory construction invoked by Ms. Ramachandran has no application in construing the expression "gross total  income" in sub-section (1) of Section 80-P. In view of  the express provisions defining the said expression in Section 80-B(5) for the purpose of Chapter VI-A, there is no scope  for construing  the said expression differently in

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Section 80-P.      The  appeal   is,  therefore,   allowed,  the  impugned judgment of  the High  Court is  set aside  and the question referred for  the opinion is answered in the negative, i.e., in favour  of the  Revenue and  against the assessee. In the circumstances, there will be no order as to cost.