Case: Sabarkantha Zilla Kharid Vechan Sangh Limited Vs. Commissioner of Income Tax

2. These are assessees appeals from the common judgment in ITR Nos. 100 of 1974, 24 of 1974 and 139 of 1974 of the Gujarat High Court reported as CIT v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. The assessee, who is the appellant in these appeals, is Sabarkantha Zilla Kharid Vechan Sangh Ltd., Himat Nagar. It is a cooperative 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 itsIt filed the income tax returns before the Income Tax Officer concerned for the assessment years67 under the Income Tax Act, 1961the 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 assessment year, purporting to be under Section 81(i)(d) of the I.T. Act, as it stood then. According to it, amount of profits and gains of the business carried on with its members represented its income and that income in its totality was exempt from payment of income tax under Section 81(i)(d) of the I.T. Act. But the Income Tax Officer did not accede to the claim so made. He took the view that the income tax exemption allowed to an assessee under Section 81(i)(d) of the I.T. Act was not on the amount of gross profits and gains of business with its members but only on such portion of gross profits and gains of business includible in computation of total income under Section 110 thereof, since the income exempted from income tax under Section 81(i)(d) thereof was includible in the total income of the assessee as required by Section 66 thereof. The Income Tax Officer made the assessment orders, respecting all assessment years accordingly. The Appellate Assistant Commissioner, before whom the assessee preferred the appeals against the said orders of the Income Tax Officer, dismissed the appeals. The assessee took up the matters in further appeals before the Tribunal. The Tribunal allowed the first two appeals acceding to the assessees claim that the exemption from payment of income tax provided for under Section 81(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 Commissioner. Thereafter, two questions which related to the controversy in the first two cases were, at the instance of the Revenue, referred by the Tribunal to the High Court. One of the questions was reframed, by the Highquestions, after one of them was reframedWhether, on the facts and in the circumstances of the case, the finding of the Tribunal that the case of the assessee is covered by section 81(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, the Tribunal was correct in law in holding that the assessee was entitled to rebate under Section 81(i)(d) of the Act on the whole of the amount of profit of Rs... without deduction of proportionate overhead expensesThe High Court which examined the said questions answered them against the assessee 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 assessee in the third case, readWhether on the facts and in the circumstances of the case, the decision reached by the Tribunal that the assessee was entitled to rebate on profit on sales to the members in the manner indicated by it was correct in law, having regard to the provisions in Section 81(i)(d) of the Act, as it stood before the amendment in the year 1968 ?4. The High Court on consideration of the said question answered it against the assessee and in favour of the Revenue5. The High Court disposed of all the said three cases, by its common judgment adverted to at the outset. The assessee having preferred the present appeals against the said common judgment of the High Court, it is these appeals which need our consideration

Court's reasoning:
10. 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 income tax is payable under Chapter VII thereof. What needs to be noticed 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 I.T. Act. Then comes Section 110. It provides for the mode of computing the tax in cases where the exempted income is include in the totalThus, 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 tax is payable under Chapter VII, the income on which no income tax is payable by a cooperative society under Section 81(i)(d) falling in Chapter VII, has to be necessarily included in its total income. The above Section 110 is then attracted because of the very words of its opening clause. Hence, when the assesseecooperative societys income is included in its total income, it becomes entitled to a deduction from the amount of income tax chargeable on its total income. That means, the cooperative society concerned becomes entitled 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 I.T. Act for the purpose of charging income tax thereon and which is included in its total income, and not on the amount of its gross profits and gains of business12. Thus, the said provisions of the I.T. Act, in our view, clearly envisage a legislative scheme of giving income tax exemption to asociety carrying on its business contemplated in Section 81(i)(d) of the I.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 I.T. Act for the purpose of charging income tax as a part of the total income of the assessee, as required under Section 110 of the I.T. Act13. Since the above view of ours on the income tax exemption allowed under Section 81(i)(d) of the I.T. Act is based on the applicability of the express provisions in the I.T. Act bearing thereon, it would be enough to refer to two decided casesone of the Andhra Pradesh High Court in CIT v. Anakapalli Cooperative Marketing Society and the other of this Court in Distributors (Baroda) P. Ltd. v. Union of India which directly bear on theHence, the view taken by the Andhra Pradesh High Court on the scope of Sectionof 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 cooperative society as envisaged under Section 81 of the I.T. Act read in conjunction with Sections 66 and 110If, what is stated above is the requirement of Sectionof the I.T. Act, regarded as a clarificatory provision on its plain language, the requirement of Section 81(i)(d) of the I.T. Act, on its plain language read in conjunction with Sections 66 and 110 of the I.T. Act, makes it manifest that the scheme of income tax exemption provided for under the I.T. Act for a cooperative 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 81(i)(d) of the I.T. Act receives full support from the decision of the Constitution Bench21. Then, coming to the question of actual amount to be deducted as income tax to which a cooperative society becomes entitled under Section 81(i)(d), Section 110 makes it clear that the deduction to which such cooperative 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 at the average rate of income tax on the amount on 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 cooperative society doing the business envisaged under Section 81(i)(d) would be entitled, can only be the average rate of income tax on the amount on which no income tax is payable and nothing more