B.V. Venkataramaiah, Accountant Member -
(1.) THIS is an appeal by the revenue against the order of the learned Commissioner (Appeals) for the assessment year 1974-75. THIS assessment was originally made under Section 144 of the Income-tax Act, 1961 ('the Act'). It was reopened under Section 146 of the Act, on 16-4-1977, and reassessment was made under Section 143(3) read with Section 144B of the Act. In the meantime, the assessment for the subsequent year, namely, 1975-76, had been made by the ITO, restricting relief under Section 80P(2)(a)(iv) of the Act. to the net profits and gains arising to the assessee, insofar as it related to transactions with the members of the co-operative society, and excluding from the relief profits arising in respect of transactions with non-members. The Commissioner (Appeals) held that relief under Section 80P(2)(a)(iv) was available to the assessee in respect of all the transactions and further in determining such profits expenditure could not be bifurcated between activities relating to the members and those relating to non-members. The matter went up to the Appellate Tribunal and in IT Appeal No. 73 (Nag.) of 1980 the Tribunal concurred with the Commissioner (Appeals). For the year under consideration the learned Commissioner (Appeals) upheld the view canvassed on behalf of the assessee. The revenue urged that the decision of the Tribunal in IT Appeal No. 73 (Nag.) of 1980 was not correct and required a revision. Accordingly, the matter was referred to the President who constituted a Special Bench for disposing of the appeal for the assessment year 1974-75, for a decision on the following issues :
1. Whether the deduction under Section 80(P)(2)(a)(iv) is available to the assessee in respect of trading with non-members ?
(2.) Whether the deduction has to be granted with reference to the net profit and not the gross profit ?
2. The facts of the case are as follows :
The assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1970. The objects of the society are in Marathi and an authentic English translation has been filed before us. The objects are as under:
(a) Arranging for selling of goods belonging to the members at maximum reasonable rates.
(b) As per needs, stocking and supplying to members, agricultural goods, articles necessary for agriculture, goods necessary for consumers, industrial goods, etc. ; similarly advancing of help and management to members as per their needs.
(c) Encouraging them in the field of production of good quality, and unadulterated goods.
(d) Constructing necessary sales depots, godowns for stocking of goods and renting the same. Similarly helping the licensed landlords of the go-downs in their business.
(e) To act as salesman in order to effect reasonable sale of goods.
(f) To establish unity in the affiliated members' societies and to establish unity and harmony in their administration and supervising them.
(g) To advance money against goods sent by members for sale. (h) To act as purchase agent on behalf of affiliated societies.
(i) To open branches and selling centres wherever necessary in the course of its activity.
(j) To cultivate the habit of economy, independent judgment, and cooperation amongst its members.
The society has not given the translation for objects 11 to 31 but has merely stated that they are ancillary objects.
Although it was claimed that the society was formed for the purpose of supplying to its members agricultural implements, seeds, livestock or other articles intended for agriculture, there was no express prohibition on selling these commodities and articles to non-members. The assessee submitted its return on 25-4-1975 showing a loss of Rs. 7,740. It claimed to deduct a sum of Rs. 2,50,999 under Section 80P(2)(a)(iv). As stated before, the assessment made ex pane was cancelled under Section 146 on 16-4-1977. In the meantime the assessee submitted a revised return claiming deduction of Rs. 4,04,547 under Section 80P(2)(a)(iv). The basis of the claim was as follows:
It appears that in making the above claim the assessee followed the dictum laid down by an earlier Tribunal decision that where the sales to members exceeded 50 per cent of the total sales, the entire purchase of the particular commodity should be deemed to have been made for the purposes enumerated in Section 80P(2)(a)(iv) and as such entitled to full relief. Similarly where the sales to members fell below 50 per cent, no relief was deemed admissible to the assessee.
The ITO submitted a draft assessment order to the [AC under Section 144B, proposing relief of Rs. 1,29,622 under Section 80P(2)(a)(iv) which was approved by the IAC also. The working is given below :
(3.) IN appeal, the Commissioner (Appeals) followed his decision for the assessment year 1975-76, which had been passed earlier and, accordingly, held that the assessee was entitled to relief under Section 80P(2)(a)(iv) on the entire amount of Rs. 4,04,547. It is, therefore, necessary for us to examine the order of the Commissioner (Appeals) for the assessment year 1975-76. The Commissioner (Appeals) agreed with the ITO that the decision of the Tribunal in the case of Vidarbha Co-operative Marketing Society for the assessment years 1962-63 and 1964-65, did not lay down a universal proposition that profits would qualify for deduction, if the sales of eligible commodities to members exceeded 50 per cent of the total sales. However, he held that the guideline indicated by the Tribunal was a rule of convenience and could safely be adopted in evaluating the relief to which the assessee is entitled. Refuting the arguments advanced on behalf of the revenue, he held :
1. The Supreme Court decision in CIT v. S.C. Kothari  82 ITR 794 was not applicable to the facts of the present case. Their Lordships of the Supreme Court were concerned with the losses incurred in the carrying on of an illegal business.
2. The decision of the Gujarat High Court in CIT v. Sabarkantha Zilla Kharid Vechan Sangh Ltd.  107 ITR 447, was also not applicable. Their Lordships were interpreting Section 81(1)(d) of the Act which had been deleted with effect from 1-4-1968. The decision was also based on the earlier decision of the same Court in the case of Addl. CIT v. Cloth Traders (P.) Ltd.  97 ITR 140. This decision has been overruled by the Supreme Court subsequently.
3. The decision of the Bombay High Court in the case of Chatrapati Shivaji Sahakari Sakhar Karkhana Ltd. v. CIT  115 ITR 312 was also not applicable.
4. The decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT  118 ITR 243 was applicable to the present case. He noticed that the Supreme Court did not refer to Section 80P(2) in the penultimate paragraph of its judgment at page 260. However, he held that the absence of reference to section SOP could not render the decision inapplicable to the assessee's case, as, many other sub-sections have also not been referred to in that para. The basic question being whether relief should be given on the gross or the net income and the Supreme Court having decided that relief should be given on the gross income, the learned Commissioner (Appeals) held that the assessee was entitled to relief on the gross profit earned by the society in its transactions.;