V.K.SINGHAL, J. - (1.) THE Tribunal has referred the following questions of law arising out of its order dt. 31st March, 1981 in respect of the asst. year 1976 77 on the directions given by this Court on 1st Nov., 1985 : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to deduction under S. 80P(2)(d) of the IT Act, 1961 of interest and not net receipts ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in granting exemption of Rs. 2,49,948 to the assessee ?"
(2.) THE relevant facts for the purpose of considering the controversy in dispute are that the assessee is a co operative society formed under the Co operative Societies Act and has received the income of Rs. 4,99,895. Deduction under S. 80P(2)(d) of the IT Act, 1961 were claimed. The ITO examined the details of various expenses and sources of income and found that they are not separately identifiable and therefore applied a percentage of these expenses in the same proportion as various heads of income stood in the P&L account 50% of the interest income i.e. Rs. 2,49,948 had been found deductible and the remaining 50% was subjected to tax. The ITO found that the assessee has effected sales of other item on which exemption claimed is not available separately and as such the percentage is required to be worked out for the expenses relating to these items. In the appeal before the CIT(A) it was claimed that the entire income from commission and interest amounting to Rs. 10,99,535 should have been exempted from tax under s. 80P(2)(d). The CIT(A) found that the commission and interest was received by the assessee from various other co operative societies on supply of control clothes and assessee had paid to the bank interest amounting to Rs. 6,56,628 on hypothecation and pledge of controlled cloth and guarantee commission of Rs. 18,358 to the State Government for guaranteeing over drafts to the society. It was contended that the commission and interest was received by the society from its constituents on the supplies of the controlled cloth but besides this, the society itself also made purchases and sales of controlled cloth on its own and that the income from this business was not claimed to be exempt from tax. The CIT(A) came to the conclusion that the supply of the controlled cloth to the assessee's constituents on which it received commission and interest was a business of the society wholly separate and distinct from its other business. It was not connected with the other business carried on by the society. The society could have kept an entirely separate account of its activity pertaining to the commission and interest received by it. The contention of the assessee that no part of expenditure which was incurred by the society could be said to pertain to its income from commission of the business, was not accepted and it was found that supply of controlled cloth to the assessee's constituents on which it received commission was wholly separate from other business. The society could have kept entirely a separate account of its own activities. Therefore the estimate of expenditure pertaining to that activity and deduction of the same from commission and interest income before allowing exemption in regard to that income to the society was found to be justified. The disallowance of total expenditure to the tax exempt income, namely income from commission and interest at 50% was also upheld. In the second appeal before the Tribunal it was contended that ITO was not justified in proportionating expenses between taxable and non taxable income and he should have allowed the entire expenditure and should not have deducted any portion of the expenditure against commission income and income from interest and dividend. It was submitted that under S. 80P(2)(d)(i) the deduction should have been given for the gross amount of the commission and also the gross amount of interest and dividend. The Tribunal came to the conclusion that under the scheme of the Act certain income are deductible from the gross total income as provided under Chapter VI A of the IT Act. The ITO should have computed the gross total income first as provided under S. 80B(5) of the Act which provided that the gross total income means the total income computed in accordance with the provisions of the IT Act before making any deduction under Chapter VIA and S. 280 O of the IT Act. The gross total income in aggregate of income computed under various heads of income as envisaged under S. 14 of the IT Act. The next income computed by the ITO from commission and interest and dividend has to be taken at 50% thereof by treating 50% of the expenditure attributable to such earnings. Income so arrived at will not be exempt from tax upto the stage these enter the gross total income. It is only after the gross total income which is the sum total of income computed under various heads is computed that deductions under S. 80P have to be considered. The deduction under S. 80P(2)(a) has to be made as a whole of the amount of profits and gains of business attributable to such activities. In these circumstances, the Tribunal came to the conclusion that the business profit from these activities were only upto 50% of the gross receipts of the commission, the deduction was admissible only to the extent of 50% of the gross receipts. It was found that the ITO instead of allowing deduction out of gross total income made addition out of the expenses to arrive at the profits. The action of the ITO in allowing deduction for commission at 50% of the receipts of Rs. 5,99,649 was upheld. While taking into consideration the provisions of S. 80M it was observed that the expenditure for earning the dividend income was not to be taken into consideration while allowing deduction under S. 80M. Since the provisions of S. 80M are similar to S. 80P(2)(d) it was contended that the assessee is entitled to deduction of interest and dividend on the gross receipts and not on the net receipts. We have considered over the arguments of the learned counsel for the Revenue. The provisions of S. 80P contemplate the deduction of income of co operative societies. It is provided under sub s. (1) that where in the case of an assessee being a co operative society, the gross total income includes any income referred to in sub s. (2) there shall be deducted in accordance with and subject to the provisions of that section the sums specified in sub s. (2) in computing the total income of the assessee. Sub s. (2)(d) refers to the sum in respect of income by way of interest or dividends derived by the co operative society from its investments with any other co operative society, the whole of such income. So far as the determining the eligibility for exemption is concerned, it is not in dispute that the expenses pertaining to income which is taxable and non taxable (sic) a composite account has been maintained by the assessee and separate account with regard to expenditure and income on both types of income has not been maintained. It was in these circumstances that the ITO has determined the total income after proportionating the expenses to both sources of income. The word 'total income' has been defined under S. 2(45) which means the total amount of income referred to in S. 5, computed in the manner laid down in the IT Act. Sub s. (1) of S. 80P allows the deduction from the gross total income. An assessee may have income from different sources and that income so computed would form the total income. As per S. 80B(5) the gross total income means the total income computed in accordance with the provisions of the IT Act before making any deduction under Chapter VIA. When an assessee has income from different sources, the total income from each of such sources has to be computed in accordance with the provisions of the IT Act and the expenditure incurred for receiving such income has to be taken into consideration. The assessee has maintained a composite account of the expenses incurred for earning the taxable as well as exempt income and therefore bifurcation made in respect of expenditure cannot be considered to be unjustified. This matter was considered in detail in the case of Kota Co operative Marketing Society Ltd. vs. CIT (1994) 207 ITR 608 (Raj) wherein it has been held that if a co operative society is carrying on business and earning income, part of which is exempted and part of which is not exempted, the profits and gains attributable to the exempted activity has to be arrived at on the basis of the books of account maintained by the assessee. If separate books or separate accounts of expenditure have been maintained for the exempted and non exempted activities there is no problem. If separate books of account have not been maintained and expenses have been incurred jointly for earning both the income then such expenses relatable to earn the non exempted activities must be estimated. The income exempted under S. 80P(2) has to be arrived at separately in order to determine the income under S. 80P(2) and it can never envisaged that the total income which has been so received could be allowed without deducting the expenditure incurred in earning the income. The use of the words the whole of the amount of profits and gains of business attributable to any one or more of such activities appearing at the end of sub s. (2) of S. 80P could be only for such income which is attributable to the activities which are exempted. In order to ascertain the real profit, the expenses incurred in earning the said income has to be deducted. In the present case the Tribunal has found that allowing the deduction for commission at 50% of the receipts is justified. The Tribunal has relied upon the decision in the case of Cloth Traders (P) Ltd. vs. Addl. CIT (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC) : TC 24R.531 which was over ruled by the apex Court in the case of Distributors (Baroda) P. Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) : TC 24R.516. Following the decision of this Court in the case of CIT vs. Loonkar Tools (I) Ltd. (DB IT Ref. Application No. 11/37 decided at Jodhpur on 21st July, 1994) [since reported at (1995) 127 CTR (Raj) 77] we are of the view that the Tribunal was not justified in holding that the assessee is entitled to deduction under S. 80P(2)(d) of the IT Act, 1961 of the entire interest and not net receipts. We are also of the opinion that the Tribunal was not justified in granting the exemption of Rs. 2,49,948 to the assessee.
(3.) CONSEQUENTLY , both the questions are answered in negative against the assessee and in favour of the Revenue. No order as to costs. *****;