SABARKANTHA ZILLA KHARID V. SANGH LTDversusCOMMISSIONER OF INCOME TAX

A               SABARKANTHA ZILLA KHARID V. SANGH LTD
                                          I'.

                      COMMISSIONER OF INCOME TAX

                                 AUGUST 5. 1993

B          [B.P . .JEEVAN REDDY AND N.VENKATACHALA, J.J.]

         Income Tax Act, I96I : Sections 66, SI(i)(d), !10-lncome of Co-
  operative Societies--Total inco111e including inconie on tvhich no tax is
  payable-De1e1111i11atio11 of lax-Co-operative Society engaged in supplying to
C its 1nen1hers and nnn-nien1bers awicultural i1n11len1ents and other articles
  intended for afjliculiure-Exemption claimed from payment of Income tax on
  its profits and gains of its business'-Held, co-operative society becomes
  enticled to deduction or exemption from Income tax payable by it on its net
  anzount of profits and gains, i.e., on inco111e of its business othcnvise con1-
  putable for pwpose of charging Income Tax thereon and which is included
D in its total income and not on the amount of its gross projits and gains of
    business.

          The appellant, a co-operative society, was engaged in purchase of
    agricultural implements, seeds, livestock or other articles intended for
    agriculture, for the purposes of suppl)ing them to its members as well as
E   non-members. It filed income tax returns, for the assessment years 1964-65
    to 1966-67 claiming exemption from pa)ment of income tax on profits and
    gains of its business purportiug to be under Section 81(i) (d) of the Income
    Tax Act 1961.Thc Income-Tax Otlicer held that the exemption allowed to
    an assessee under Section 8l(i)(d) was not on the amount of gross profits
F   and gains of business "ith its members !Jut only on such portion of gross
    profits and gains of business inclutlib1e in computation of total inconte
    under Section 110 since. the income exempted from income-tax under
    Section 81 (i) (d) was includible in total income of the asses see as required
    by Section 66. The assessee's appeals were dismissed hy the Appellant
G   Assistant Comn1issioner. 'fhe assessee filed further appeals before the
    Tribunal which allowed two appeals and dismissed the third. the refer-
    ences made at the instance of the revenue as well as the assessee \\'ere
    decided by the High Court against the assessee. Hence the appeals by
    special leave.

H          Dismissing the appeals, this Court
                                         484
                        ZILLA KHARID v. C.I.T.                            485

      HELD: 1.1. In view of Section 66 of the Income Tax Act, 1961               A
con1putation of the total inccnne of every person is to be done by including
all income on which no income-tax is payable under Chapter VII. There-
fore, the income on which no income-tax is payable by a co-operative
society under Section 81 (i) (d) falling in Chapter VII, has to be necessarily
included in its total inco1ne and it becon1es entitled to a deduction from
                                                                                 B
the amount of income-tax chargeable on its total inco111e as envisaged by
Section 110. Accordingly, the co-operative society concerned becomes en-
titled to deduction or exemption from income-tax payable by it only on its
net amount of 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          C
total income anti not on the amount of its gross profits and gains of
business. [490-F-H]

      1.2. The provisions of the Income Tax Act clearly envisage a legisla-
tive scheme of giving income-tax exemption to a co-operative society car-        D
11ing on its business contemplated in Section 8l(i) (d) of the Income Tax
Act, not with respect to the amount of gross profits and gains of its
business but only with respect to the amount of net profits and gains, i.e.,
inconie of its business otherwise computable according to the provisions
of the Incon1e Tax Act for the purpose of charging income-tax as a part of
the total income of the assessee, as rel)uired under Section 110 of the          E
Income Tax Act. [491-A-R]

      1.3. The rel)uirement of Section 81(i) (d) of the Income Tax Act, on
its plain language read in conjunction "ith Sections 66 and 110 of the
Income Tax Act, makes it manifest that the scheme of 'income-tax
exemption' provided for under the Income Tax Act for a co-operative              F
society in relation to profits and gains of its business, is not in any way
different. [494-F-G)

     Conunissioner of lncon1c Tax v. Sabarkantha Zilla K11a1id Vechan
Sangh Ltd., 107 l.T.R 447; upheld.                                               G
      Disllibut01s (Baroda) P. Ltd. v. Union of India and 01s., 155 l.T.R.
120, relied on.

       Conunissioner of Inconze-tax v. Anakapalli Cooperative Ma'rketing
Society, 175 I.T.R. 584, approved.                                               H
    4S6                   SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R.

A         2. The deduction under Section 110 of the Income Tax Act, 1961, to
    which a co-operative society doing the business under Section 81 (i) (d)
    would be entitled from the amount of income tax with which it is charge-
    able on its total income is an amount equal to the income tax calculated
    at the 'average rate' of income·tax on the amount on which no income tax
B is payable. [495-A-B]
         CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 793-95
    (NT) of 1977.

          On Appeal by Certificate from the Judgment and Order dated
C   11.3.1977 of the Gujarat High Court in Income Tax Reference No. 173 of
    1975.

         Harish N. Salve, J.H. Parekh, N.K. Sahoo and S. UdaySagar for P.H.
    Parekh for the Appellant.

D         P.S. Poti, B. Parlhasarlhy and P. Parmcswaran for the Respondent.

          The Judgment of the Court was delivered by

          VENKATACHALA, J. As the assessec is common to all these appeals
    they could be disposed of by this common judgment.
E
    CIVIL APPEALS NOS. 793-95(NT) OF 1977

          These are assessee's appeals from the common judgment in !TR Nos.
    100 of 1974, 24 of 1974 and 139 of 1974 of lhe Gujarat High Courl reported
    in 107 ITR 447. The assessee, who is the appellant in these. appeals, is
F   Sabarkantha Zilla Kharid Vechan Sangh Ltd., Himat Nagar. It is a co-
    operative society engaged in the purchase of agricultural implements,
    seeds, livestock or other articles intended for agriculture, for the purpose
    of supplying them to its members as well as to its non-members. It filed
    the income-tax returns before the concerned Income Tax officer for the
    assessment years 1964-65, 1965-66 and 1966-67 under the Income Tax Act,
G   1961 - the I.T. Act. In those returns, it sought to claim exemption from .
    payment of income-tax on profits and gains of its business of every assess-
    ment year, purporting to be under section Sl(i) (d) of the I.T. Act, as stood   f"
    then. According to it, arhount of profits and gains of the business carried
    on "(ith its members represented its income and that income in its totality
H   was exempt from payment of income-tax under section Sl(i) (d) of the LT.
                   .                                                       '
            ZILLA KHARID v. C.l.T. [YENKATACHALA. J. J                   487

Act. But, the Income Tax Officer did not accede to the claim so made. He A
took the view that the income-tax exemption allowed to an assessee under
section Sl(i) (d) of the l.T. Act was not on the amount of gross profits and
gains of busines.; with its members but only on such portion of gross profits
and gains of business includible in computation of total income under
section 110 thereat; since the income exempted from income-tax under
s.ection 81 (i) '(d) thereof was includible in tbe total income uf the assessee
                                                                                B
as required by section 66 thereof. The Income Tax. Officer made the
assessment orders, respecting all assessment. years accordingly. The Appel-
late Assistant Commissioner, before whom the assessee preferred the
appeals again,t the said orders of the Income Tax Officer, dismissed the
appeals. The assessee took up the matters in further appeals before the         c
Tribunal. The Tribunal allowed the first !wo appeals acceding to the
assessee's claim that the exemption from payment of income-tax provid~d
for under section Sl(i) (d) of the I.T. Act was respecting its gross profits
and gains. However, it dismissed the third appeal by upholding the order
of the Income Tax Officer and the order of the Appellate Assistant D
Commissioner. Thereafter, two questions which related to the controversy
in the first two cases were, at the instance ~f the Revenue, referred by the
Tribunal to the High Court. One of the questions was reframed, by the
High Court. The questions, after one of them was reframed read:

         ( l) Whether, on the facts and in the circumstances of the case,       E
              the finding of the Tribunal that the case of the assessee is
              covered by section Sl(i) (d) only and the provisions of section
              66 read with section 110 of the Act are not attracted is
              erroneous in law?

        (2) Whether on the facts and in the circumstances of the case,          F
            the Tribunal was correct in law in holding that the assessee
            was entitled to rebate under section Sl(i) (d) of thr, Act on
            the whole of the amount of profit of Rs. without deduction
              of proportionate overhead expenses?
                                                                                G
      The High Court which examined the said questions answered them
against the assessce and in favour of the Revenue. A question covering the
same controversy, which was referred by the Tribunal to the High Court,
at the instance of the asscssee in the third case, read:

            Whether on the facts and in the circumstances of the case, the H
    488                       SUPREME COURT REPORTS [1993] SUPP.1 S.C.R.

A           decision reached by the Tribunal that the assessec was entitled to
            rebate on profit on sales to the members in the manner mdic.ated
            by it was correct in law, having regard to the provisionB11.secnon
            81(i) ( d) of the Act, as it stood before the amendment in the year
            1968?

B         The High Court on consideration of the said question answered it
    against the assessee and in favour of the Revenue.

           The High Court disposed of all the said three cases, by its common
    judgment adverted to at the outset. The assessee having preferred the
C   present appeals against the said common judgment of the High Court, it
    is these appeals which need our consideration.

          The main controversy requiring our decision in these appeals since
    relates to "profits and; gains" of business carried on by a co-operative
    society on which no income-tax is payable under section 81(i) (d) of the
D   LT. Act, it would be advantageous to excerpt the material portion of that
    provision, here itself:

            "81. Income of co-operative societies - Income-tax shall not be
            payable by a co-operative society -

E           (i)   in respect of the profits and gains of-business carried on by
                  its. if it is -

                  (a) ······························
                  (d) a society engaged in the purchase of agricultural imple-
F                     ments, s°'eds, livestock, or other articles intended for
                     agriculture' for the purpose of supplying them to its mem-
                       bers.11

          The said provision, as seen therefrom, undoubtedly exempts an as~
    sessee - co-operative society, \\i'hich carries on the business envisaged
G   th~rcin, from pay1nent ?f incon1c-tax on profits and gains of such business.
  But the controversy, wfiich relates to the said provision is, whether the
  income-tax not payable thereunder, calls to be calculated either with
  reference to the full amount of profits and gains of the co-operative
  society's business as contended on behalf of the assessee or with reference
H to the net amount of profits and gains of the co-operative society's business,
            ZILLAKHARID v. C.l.T. [VENKATACHALA, J.]                     489

as otherwise computable under the provisions of the I.T. Act for the A
purpose of charging income-tax thereon, as contended on behalf of the
Revenue. If the relevant provisions of the I.T. Act providing for charging
a person including a co- operative society with income-tax on 11 profits and
gains 11 of such person's business show that it is the net profits and gains,
i.e., income of such business computed in accordance with the provisions
                                                                                B
of the I.T. Act, which is includible in such person's total income liable to
charge of income-tax, it must flow therefrom, as a necessary corollary
thereof that the "profits and gains" for which exemption of income-tax is
envisaged under section Sl(i) (d) of the l.T. Act, ought to be net profits
and gains, i.e., income of business computed in accordance with the
provisions of the I.T. Act which is includible in such person's total income    c
for charging income-tax thereon. This situation requires us to advert to
such of the relevant provisions of the I.T. Act, which could be of assistance
to us in resolving the controversy.

       Profits and gains of business is an income classified under the head D
'D' in section 14 for the purpose of charge of income-tax and for computa-
tion of total income, save as otherwise provided thereunder. What is the
income which is chargeable for income-tax under the head ''Profits and
gains of business or profession", becomes clear from section 28. Then,
section 29 requires that the income referred to in section 28 shall be
computed in accordance with the provisions contained in sections 30 to E
43C. Section 37 found in the group of sections 30 to 43, is a general
provision which provides for giving allowance of any expenditure (not being
expenditure of the nature described in sections 30 to 36 and not being in
the nature of capital expenditure or personal expenses of the assessee) laid
out or expended wholly and exclusively for the purposes of the business or F
profession, while computing the income chargeable under the head "Profits
and gains" of business. Thus, the said section makes it clear, that the
business expenditure not covered by the preceding sections 30 to 36, could
be deducted in computing profits and gains of business. Sections 38 to 43C
covers specific items of expenditure not deductible in computation of the
income under the head "profits and gains"of business. Section 4(1) which G
assumes importance in the context, rcadS:

         "4(1) - Where any Central Act enacts that income-tax shall be
         charged for any assessment year at any rate or rates, income-tax
         at that rate or those rates shall be charged for that year in H
    490                    SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R.

A            accordance with and subject to the provisions of this Act in respect
             of the total income of the previous year or previous years, as the
             case may be of every person.Tl

          Then section 5 tells that the total income of any previous year of a
    person includes all income from whatever source derived, varying, of
B   course, according to the factor of residence.

           When, we come to section 66, it requires that in computing the total
    income of an. assessee, there shall be included all income on which no
    iocome-tax is payable under Chapter VII thereof. What needs to be noticed
C   here is, that clause (45) of section 2 defines 'total income' as the total
    amount of income referred to in section 5 computed in the manner laid
    down in the LT. Act. Then comes section 110. It provides for the mode of
    computing the tax in cases where the exempted income is included in the
    total income. It reads:

D            ''Where there is included in the total income of an assessec any
             income on which no income-lax is payable under the provisions of
             this Act, the assessee shall be entitled to a deduction from the
             amount of income-tax \vith which he is chargeable on his total
             income, of an amount equal to the income-tax calculated at the
             average rate of income-tax on the amount on \Vhich no income-tax
E            is payable."

           Thus, when section 66 of the I.T. Act. requires the computation of
    the total income of every person to be done by including all income on
    which no income-lax is payable under Chapter VII, the income on which
F   no income-tax is payable by a co-operative society under section 81(i) (d)
    falling in Chapter VII. has to be necessarily include<\ in its total income.
    The above section 110 is then attracted because of the very words of its
    opening clause. Hence, when the assessee-co-opera~ivc society's income is
    included in its total income, it becomes entitled to a deductions from the
    amount of income-tax charg~able on its total inco1ne. That n1eans, the
G   co-operative society concerned becomes entitled lo deduction or exemp_-
    tion from income-tax payable by it only onjts net amount of profits a'ud
    gains, i.e., gn income 9Lits business otherwise computable in accordance
    with the provisions of the l.T. Act for the purpose of charging income-tax
    thex:eon and which is included in its tqtal income, and not on lhe a1nount
H · of its gross profits and gains of business.
           ZILLA KHARID v. C.l.T. [VENKATACHALA, J.]                     491

       Thus, the said provisions of the LT. Act, in our view, clearly envisage A
a legislative scheme of giving income-tax exemption to a co-operative
society carrying on its business contemplated in section 81(i) (d) of the \.T.
Act, not with respect to the amount of gross profits and gains of its 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 LT.
Act for the purpose of charging income-tax as a part of the total income
                                                                               B
of the asscssee, as required under section 110 of the LT. Act.

      Since the above view of ours on the income-tax exemption allowed
under section 81(i) (d) of the LT. Act is based on the applicability of the
express provisions in the LT. Act bearing thereon, it would be enough to        c
refer to two decided cases-one of the Andhra Pradesh High Court in
Commissioner of Income- tax v. Anakapalli Co-operative Marketing Society,
175 I.T.R. 584 and the other of this Court in Distiibutors (Baroda) P. Ltd.
v. Union of India and 010-., 155 I.T.R. 120, which directly bear on the
controversy.
                                                                                D
      lnAnakapalli Co-operative Marketing Society's case (supra), the ques-
tion referred for decision of the Andhra Pradesh High Court under section
256(1) of the l.T. Act was:

        "Whether, on the facts and in the circumstances of the case, the
                                                                                E
        Appellate Tribunal was justified in holding that the entire amount
        of Rs. 3,72,038 relating to marketing of agricultural produce of its
        members and interest on loans given to its members should be
        allowed as deduction under section SOP(2)(a) of the Income-tax
        Act, and not Rs. 73,720 with reference to the proportionate net
        profit referable to those activities only?"                             F

     Section SOP, which provided for exemption to a co-operative society
from payment of income-tax, was incorporated in the LT. Act with _effect
from 1.4.1968 by deletion of section 81, with which we have dealt with. The
material provision of section SOP read thus:
                                                                                G
        "80P(l) 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 he deducted, in accordance with and
        subject to the provisions of this section, sums specified in sub-sec-
        tion (2), in computing the total income of the assessee.                H
    492                       SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R.

A           (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 -

                 (i) .....
B
                 (ii) .....

                 (iii) the marketing of the agricultural produce of its members,
                       or

c                (iv) the purchase of agricultural implements, seeds, livestock
                      or other articles intended for agriculture for the purpose
                      of supplying them to its members, or



D           the whole of the amount of profits and gams of business at-
            tributable to any one or more of such activities. 11

          Jeevan Reddy, J. (one of us) who spoke then for the Division Bench
    of the High Court, answered the aforesaid question in the negative, taking
E   the view that what was deductible under sub-section (1) of section SOP was
    only that portion of the said amount as can be called total income at-
    tributable to activities defined in clause (5) of section SOB. Section SOAB
    introduced into the I.T. Act by the Finance (No. 2) Act, 19SO, \vith effect
    from April l, 19Sl, was adverted to by His Lordship to buttercss the view
    so taken, in that it read:
F
            ''Where any peduction is required to be made or allowed under
            any section (except section SOM) included in this chapter under
            the heading 'C. Deductions in respect of certain incomes'. In respect
            of any incoriie .of the na~ure specified in that section which is
            included in the gross total income of the assessee, then not-
G           withstanding anything contained in that section for the purpose of
            computing the deduction under that section, the amount of income
            of that nature as computed in accordance with the provisions of
            this Act (before making any deduction under this Chapter) shall
             alone be deemed to be the amount of income of that nature which
H           is derived or received by the assessee and which is included in his
            ZILLAKHARID v. C.1.T. [VENKATACHALA,J.]                       493
                               1
        gross total income.'                                                     A

      Hence, the view taken by the Andhra Pradesh High Court on the
scope of section SOP of the I.T. Act which had replaced section 81 of the
I.T. Act, fully supports the view we have already expressed on the'income
exemption' of profits and gains of a business of a co-operative society as       ·B
envisaged under section 81 of the I.T. Act read in conjunction with sections
66 and 110 thereof.

      The case of Dist1ibutors (Baroda) P. Ltd. (supra) is a decision of the
Constitution Bench of this court. There, this court was concerned with the
interpretation to be placed on section SOM of the I.T. Act. That section         c
read thus:

        "SOM. Deduction in respect of ceitain i11terc01porate dividends. - (1)
        Where the gross total income of an assessee being a company
        includes any income by way of dividends received by it from a            D
        domestic company, there shall, in accordance with and subject to
        the provisions of this section, be allowed, in computing the total
        income of the assessee, deduction from such income by way of
        dividends of an amount equal to -
                                                                                 E
        (a) where the assessee is a foreign company -
              (i)   in respect of such income by way of
                    dividends received by it from an
                    Indian company which is not such a
                    company as is referred to in Section                         F
                    108 and which is mainly engaged in a 80% of such
                    priority industry                    income;
              (ii) in respect of such income by way of
                  · dividends other than the dividends 65% of such
                    referred to in sub-clause (i)      income;
              (b)   where the assessee IS domestic
                    company - in respect of any such 60% of such
                    income by ·way of dividends      income. 11
     The requirement of the above sub-section (1) of Section SOM of the
LT. Act, according to the Constitution Bench, was this:                 H
    494                   SUPREME COURT REPORTS [1993] SUPP ..1 S.C.R.

A                "Sub-s. (1) of s.SOM provides that in computing the total income
            of the assessee, there shall be allowed a deduction from 'such
            income by way of dividends' of an amount equal to the whole or
            a specified percentage of such income. Now, when in computing
            the total income of the asscssee, a deduction has to be made form
            'such income by way of dividends', it is elementary that such
B
            income by way of dividends' from which deduction has to be made
            must be part of gross total income. It is difficult to see how the
            language of this part of sub.s. (1) of s.SOM can possibly fit in if
            'such income by way of dividends' were interpreted to mean the
            full amount of dividend received by the assessee. The full amount
c           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 provision
            of the Act. If that be so, it is difficult to appreciate how for the
            purpose of computing the total income from the gross total income,
            any deduction should be required to be made from the full amount
D
            of the dividend. The deduction required to be made for computing
            the total income from the gross total income can only be from the .
            amount of dividend computing in accordance with the provisions
            of the Act which would be forming part of the gross total income.
            It is, therefore, clear that whatever might have been the interpreta-
E           tion placed on clause (iv) of sub.s. (1) of s.99 and s.85A, the
            correctness of which is not in issue before us, so far as sub-s.(1)
            of s.SOA is concerned, the deduction required to be allowed under
            that provision is liable to be calculated with reference to the
            amount ofOividend computed in accordance with the provisions
            of the Act and forming part of the gross total income and not with
F
            reference to the full amount of dividend received by the assessee."

          If, what is stated above is the requirement of section SOM of the LT.
    Act, regarded as a clarificatory provision on its plain language, the require~
    ment of section Sl(i)( d) of the LT. Act, on its plain language read in
G   conjunction with sections 66 and 110 of the LT. Act, makes it manifest that
    the scheme of 'income-tax exemption' provided for under the LT. Act for
    a co-operative society in relation to profits and gains of its business, is not
    in any way different. Thus the view, we have taken as to the income-tax
    exemption envisaged under section Sl(i)(d) of the l.T. Act receives full
H   support from the decision of the Constitution Bench.
             ZILLA KHARID v. C.I.T. [VENKATACHALA, J.]                    495

        Then, comi.ng to the question of actual amount to be deducted as         A
  income-tax to which a co-operative society becomes entitled under section
  Sl(i)(d), section llO makes it clear that the deduction to which such
  co-operative society would be entitled from the amount of income-tax with
  which it is chargeable on its total income, is an amount equal to the
  income-tax calculated al the· average rate of income-tax on the amount on
                                                                                 B
  which no income-tax is payable. Since the 'average rate' of income-tax is
  defined in section 2(10) as meaning the rate arrived at by dividing the
. amount of income-tax calculated on the total income, by such total income,
  the deduction in income-tax to which a co-operative society doing the
  business envisaged under section ·s1(i)(d) would be entitled, can only be
  the average rate of income-tax on the amount on which no income-tax is         c
  payable and nothing more.

      In the view, we have taken on the matters of controversy in the
 appeals, the answers given by the Gujarat High Court in its judgment under
 appeals on all the questions referred to it, require to be upheld, in thei;
 ~~                                                                              D
       In the result, we dismiss these appeals. However in the circumstances
 of these appeals, we do not propose to make any order as to costs.

 CIVIL APPEALS NOS. 1549-51(NT) OF 1977.
                                                                                 E
        As the previous judgment of the Gujarat HiglrCourt relied upon by
 it in the judgment under challenge in these appeals, is upheld by us in Civil
 Appeals Nos. 793-95(NT) of 1977 just now disposed of, we dismiss these
 appeals as well, however, without costs.

 R.P.                                                     Appeab dismissed.