Commissioner Of Inco... v. Kotagiri Industrial ..., Supreme Court Of India, Judgment, Law, casemine.com

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Equivalent Citations

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Case Number

Civil Appeal No. 5912 of 1983, decided on March 5, 1997

Disposition

allowed

Advocates

Dr V. Gauri Shankar, Senior Advocate (S. Rajappa and C. Radha Krishan, Advocates, with him) for the Appellant;
Ms Janaki Ramachandran, Advocate, for the Respondent.

Judges

Justice S.C. Agrawal

Acts

the provisions of the Act
Section 5, Subsection 2 of the 1983 Income Tax Act
Section 80-B(5) of the Act
Section 80-E of the Act
Section 72 of the Act
Section 80-M of the Act
Section 80-T of the Act
Section 80-P of the Act, Chapter VI-A of the Act, Section 80-B(5)
Section 80-P of the Income Tax Act
Section 80-P(2) of the Income Tax Act, 1961

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Smart Summary

Factual and Procedural Background

The respondent–assessee, Kotagiri Industrial Cooperative Tea Factory Ltd., is a cooperative society engaged in manufacturing and selling tea, purchasing and supplying manure to its members, and earning dividend income from investments in other cooperative societies. For Assessment Year 1972-73 it reported an income of Rs 85,150 while carrying forward earlier-year business losses amounting to Rs 1,82,744. The assessee claimed a deduction of Rs 53,386 under Section 80-P(2) of the Income-tax Act, 1961.

The Income-tax Officer (ITO) first adjusted the brought-forward losses under Section 72, found the losses exceeded current income, and consequently denied any deduction under Section 80-P. On appeal, the Appellate Assistant Commissioner reversed this approach, allowing the Section 80-P deduction before the set-off. The Income-tax Appellate Tribunal affirmed that view.

At the Revenue’s instance, the Tribunal referred the following question to the Madras High Court: whether the Section 80-P deduction should precede the set-off of unabsorbed losses. The High Court answered in favour of the assessee. The Revenue obtained a certificate, leading to the present appeal before the Supreme Court.

Legal Issues Presented

Whether, in computing the total income of a cooperative society, the deduction under Section 80-P(2) must be allowed before or after setting off unabsorbed business losses of earlier years under Section 72.

Arguments of the Parties

Revenue’s Arguments

Section 80-B(5) defines “gross total income” (GTI) as income computed in accordance with the Act before Chapter VI-A deductions; therefore GTI must first reflect the Section 72 set-off.
The High Court’s reliance on Cloth Traders (P) Ltd. is misplaced because that decision has been overruled by the Constitution Bench in Distributors (Baroda) (P) Ltd.
Recent authority in H.H. Sir Rama Varma v. CIT endorses the principle that prior-year losses must be adjusted before granting Chapter VI-A relief.

Assessee’s Arguments

Invoked observations in Distributors (Baroda) (P) Ltd. to urge a liberal construction of Section 80-P owing to the legislature’s policy of encouraging cooperatives.
Relied on Broach District Coop. Cotton Sales Ginning & Pressing Society Ltd. v. CIT to support a purposive, cooperative-friendly interpretation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Katpadi Coop. Timber Works Ltd. (1982) 135 ITR 287 (Mad)	Deduction under Section 80-P precedes set-off of carried-forward losses.	The High Court had followed this view; the Supreme Court declined to follow it.
Cloth Traders (P) Ltd. v. Addl. CIT (1979) 3 SCC 538	Earlier view that deduction under Section 80-M is on gross dividend without prior adjustments.	Noted as overruled; High Court’s reliance on it held erroneous.
Distributors (Baroda) (P) Ltd. v. Union of India (1986) 1 SCC 43	Constitution Bench: deductions under Chapter VI-A are on income computed after applying provisions of the Act, including loss set-offs.	Treated as controlling authority; applied to Section 80-P context.
H.H. Sir Rama Varma v. CIT 1994 Supp (1) SCC 473	Long-term capital loss must be set off before Section 80-T deduction.	Relied upon to reinforce that losses are adjusted prior to Chapter VI-A relief.
Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644	For Section 80-E, total income is first computed under other provisions before deduction.	Cited to show consistency with the post-Distributors approach.
CIT v. V. Venkatachalam (Mad) (1979) 120 ITR 688 & SC affirmance 1993 Supp (3) SCC 413	Deduction under Section 80-T must come out of capital gains; business loss cannot be set off against capital gains for that purpose.	Distinguished; relied upon in later case law but found not to affect present issue.
Broach Distt. Coop. Cotton Sales Ginning & Pressing Society Ltd. v. CIT (1989) 2 SCC 679	Principle of liberal construction in favour of cooperatives.	Cited by assessee; Court held the statutory definition in Section 80-B(5) leaves no room for such interpretive extension.

Court's Reasoning and Analysis

The Court read Section 80-P(1) in conjunction with the statutory definition of “gross total income” in Section 80-B(5). Because GTI is defined as income computed in accordance with the Act before Chapter VI-A deductions, the computation must first reflect mandatory adjustments such as the set-off of carried-forward business losses under Section 72. The Court considered its Constitution Bench ruling in Distributors (Baroda), which expressly overruled Cloth Traders and established that Chapter VI-A deductions are allowable only on income already adjusted in accordance with the Act. The same principle was reaffirmed in H.H. Sir Rama Varma for Section 80-T.

The Court rejected the assessee’s plea for a “liberal” cooperative-friendly construction, stating that Section 80-B(5) provides an explicit definition, leaving no interpretive latitude. Consequently, the ITO rightly first set off earlier-year losses; because those losses exceeded current income, no deduction under Section 80-P(2) was permissible. The appellate authorities and the High Court therefore erred.

Holding and Implications

Appeal Allowed; High Court judgment set aside. The referral question is answered in the negative—i.e., the Section 80-P deduction cannot be allowed until after unabsorbed losses are adjusted.

Immediate consequence: the assessee is not entitled to any Section 80-P deduction for A.Y. 1972-73 because its carried-forward losses exceed current income. Broader implication: the decision affirms that, for all Chapter VI-A provisions, “gross total income” must first reflect statutorily mandated loss adjustments, thereby aligning Section 80-P with the post-Distributors (Baroda) jurisprudence. No new doctrine is created; existing principles are reinforced.

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Commissioner Of Income Tax, T.N-V, Madras v. Kotagiri Industrial Cooperative Tea Factory Ltd., Kotagiri .

Judgment

1. This appeal, by certificate, is directed against the judgment of the Madras High Court dated 22-1-1982 in Tax Case No. 407 of 1977. The Kotagiri Industrial Cooperative Tea Factory Ltd., the respondent (hereinafter referred to as “the assessee”) is a cooperative society. It carries on business in the manufacture and sale of tea from bought tea leaves and the purchase and supply of agricultural manure to the members. It is also deriving income from dividends from investments with other cooperative 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 had 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 the 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 right 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?”

2. The said question has been answered by the High Court against the Revenue. In the impugned judgment the High Court has followed its earlier decision in CIT v. Katpadi Coop. Timber Works Ltd. (1982) 135 ITR 287, 1982 Tax LR 398 (Mad) wherein the High Court had held that so long as the gross total income of a cooperative 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. CIT (1979) 3 SCC 538, (1979) 118 ITR 243 as well as its own decision in CIT v. V. Venkatachalam (1979) 120 ITR 688, (1979) 12 CTR 362 (Mad).

3. Dr V. Gauri Shankar, 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 the definition of the expression “gross total income” contained in Section 80-B(5) and has contended that the decision in Cloth Traders (P) Ltd. (1979) 3 SCC 538, (1979) 118 ITR 243 has since been reversed by a Constitution Bench of this Court in Distributors (Baroda) (P) Ltd. v. Union of India (1986) 1 SCC 43, (1985) 155 ITR 120. Dr Gauri Shankar has also invited our attention to the recent decision in H.H Sir Rama Varma v. CIT 1994 Supp (1) SCC 473, (1994) 205 ITR 433.

4. Ms Janaki Ramachandran, the learned counsel appearing for the assessee, has also placed reliance on certain observations in Distributors (Baroda) (P) Ltd. (1986) 1 SCC 43, (1985) 155 ITR 120 and has submitted that since the matter relates to a cooperative society and it is the policy of the legislature to encourage the cooperative movement the provisions of Section 80-P, which have been enacted in furtherance of this policy to encourage and promote the growth of cooperative societies, must be liberally construed in favour of the assessee. The learned counsel has placed reliance on the decision of this Court in Broach Distt. Coop. Cotton Sales Ginning and Pressing Society Ltd. v. CIT (1989) 2 SCC 679, (1989) 177 ITR 418.

5. 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 cooperative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.”

6. 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.”

7. If Section 80-P(1) is read with the 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 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.

8. In Distributors (Baroda) (P) Ltd. (1986) 1 SCC 43, (1985) 155 ITR 120 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 (P) Ltd. (1979) 3 SCC 538, (1979) 118 ITR 243 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, i.e, after making deduction as provided under the Act. In the said decision in Cloth Traders (P) Ltd. (1979) 3 SCC 538, (1979) 118 ITR 243 the Court did not notice the earlier decision of a two-Judge Bench of the Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644, (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 (P) Ltd. (1979) 3 SCC 538, (1979) 118 ITR 243 has been overruled by the Constitution Bench in Distributors (Baroda) (P) Ltd. (1986) 1 SCC 43, (1985) 155 ITR 120 wherein it has been observed: (ITR p. 135 :

“… 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 ‘total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under Section 280-D’. 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 monies 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 forms part of the gross total income, the condition specified in the opening part of sub-section (1) of Section 80-M would be fulfilled and the provision enacted in that sub-section would be attracted.”

9. We are unable to hold that the observations made in the judgment while construing the words “such income by way of dividends” in any way detract from the above-quoted observations inasmuch as this Court has clearly said: (ITR p. 136 :

“… 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.”

10. 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) (P) Ltd. (1986) 1 SCC 43, (1985) 155 ITR 120 in H.H Sir Rama Varma v. CIT 1994 Supp (1) SCC 473, (1994) 205 ITR 433. 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 of the Act is allowed and the relief under 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.

11. It is no doubt true that the decision of the Madras High Court in CIT v. Venkatachalam (1979) 120 ITR 688, (1979) 12 CTR 362 (Mad) has been affirmed in appeal by this Court in CIT v. V. Venkatachalam 1993 Supp (3) SCC 413, (1993) 201 ITR 737. That decision was also given in the context of Section 80-T of the Act. It has been taken note of by this Court in H.H Sir Rama Varma v. CIT 1994 Supp (1) SCC 473, (1994) 205 ITR 433. B.P Jeevan Reddy, J. was a party in both these decisions. In Venkatachalam 1993 Supp (3) SCC 413, (1993) 201 ITR 737 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.

12. Having regard to the law as laid down by this Court in Distributors (Baroda) (P) Ltd. (1986) 1 SCC 43, (1985) 155 ITR 120 and H.H Sir Rama Varma 1994 Supp (1) SCC 473, (1994) 205 ITR 433, 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.

13. 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 provision 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 Section 80-P.

14. 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.

Commissioner Of Inco... v. Kotagiri Industrial ...