1. This appeal by the assessee is directed against the order of the Commissioner (Appeals) and relates to the assessment year 1978-79. The assessee is an apex co-operative society engaged mainly in marketing of agricultural produce of its members and some other activities as well.
The accounting year ended on 30-6-1977.
2. The first ground is that deduction under Section 80P(2)(a)(m) of the Income-tax Act, 1961 ('the Act'), should have been allowed on gross profit and not on processed income under the Act. The IAC, who completed the assessment, had allowed deduction of Rs. 68,97,076 under the above provision. This amount was shown by the assessee as the net income attributable to the activity of marketing the agricultural produce of the society's members. A bifurcation between the activities, vis-a-vis, members and non-members, was made by the assessee and there is no dispute about it. However, the assessee claimed before the Commissioner (Appeals) that the deduction to be allowed under Section 80P(2)(a)(iii) should be on the whole of gross profit attributable to the marketing of agricultural produce of its members. This plea was, however, rejected by the learned Commissioner (Appeals), who relied upon the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84. The assessee is in appeal before us.
3. The learned Counsel for the assessee submitted before us that the provision of Section 80P(2) refers to the deduction of the whole of the amount of profits and gains of business attributable to the marketing of agricultural produce of the members of the co-operative society. He laid emphasis on the words 'the whole of and submitted that it could only mean the gross profit. In this connection, he referred to the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v.Addl. CIT  118 ITR 243. That was a case for deciding the scope of Section 80M of the Act and their Lordships considered the meaning of 'any income by way of dividends'. It was held that if the gross total income included dividends, whatever was the quantum of such income, it would be eligible for deduction. It was contended by the learned Counsel that the reliance placed by the Commissioner (Appeals) on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) is misplaced, as that was a case for deciding the scope of Section 80E of the Act, as it stood prior to 1967, and their Lordships held that when the Legislature uses the words 'attributable to', it has a wider import than the expression 'derived from'. He also pointed out that in that provision, the specific words used were 'as computed in accordance with the other provisions of the Act'. Their Lordships have further held that Section 72(1) of the Act regarding the carry forward of losses has direct impact upon the computation under the head 'Profits and gains of business or profession'. In this connection, the learned Counsel drew our attention to certain decisions of the Calcutta High Court. He first referred to the decision in the case of CIT v. Belliss & Morcom (I.) Ltd.  136 ITR 481, where the Calcutta High Court had considered the scope of the provisions of Section 80-I of the Act. Their Lordships held that the expression 'where the gross total income includes any profits and gains attributable to any priority industry' is descriptive of the types of income or profits which will be entitled to relief and such profits must relate to the profits of the priority industry. In this case, the question which was referred to their Lordships was whether the profits and gains attributable to any priority industry were to be arrived at without deducting therefrom any loss Parising in any other business and their Lordships, after considering various decisions of the High Courts and the Supreme Court, held that such profits and gains had to be taken without deducting therefrom any loss arising in any other business. The other case to which a reference was made was the decision of the Calcutta High Court in the case of CIT v. Orient Paper Mills Ltd.  139 ITR 763 in which it was held that the profit of the priority industry was to be taken before setting off the unabsorbed development rebate of the priority industry itself. In this decision, their Lordships dissented from the decisions of the Madras High Court in the cases of CIT v. English Electric Co. Ltd.  131 ITR 277 and CIT v. Standard Motor Products of India Ltd.  131 ITR 300. In this decision, their Lordships had also considered the decisions in the case of Cloth Traders (P.) Ltd. (supra) and Cambay Electric Supply Industrial Co. Ltd. (supra) and without holding that there was any contradiction between the two, they followed the ratio of the decision in the case of Cloth Traders (P.) Ltd. (supra), which was a decision given by a larger Bench. The learned Counsel has further relied on another decision in the case of CIT v. Oil India Ltd.  143 ITR 848 (Cal.), but we need not go into the details of that decision as it merely follows the earlier decisions already referred to in this order.
The departmental representative on this point has mainly relied on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra), to which a reference has already been made. He submitted that the plea of the assessee that gross profit should be considered as profits and gains of business is not acceptable on any principle and he further submitted that the profits and gains should always be as computed according to the provisions of the Act.
4. In this case, as already stated above, we have to determine the scope of the words 'the whole of the amount of profits and gains of business attributable to any one or more of such activities', which are mentioned in Section 80P(2). Sub-section (1) of Section 80P provides that the income in question, which is entitled to be deducted, should be included in the gross total income of the co-operative society. What is included in the gross total income is a particular nature of income and what is to be deducted is given only in Sub-section (2). Now the question for consideration is as to what has to be deducted in the case of such a co-operative society, which is engaged in the marketing of the agricultural produce of its members. The plea advanced by the assessee is that, it should be the gross profit, i.e., the profit before allowance of any expenses which are normally debited in the profit and loss account as against the trading account. On the other hand, the stand of the department is that whatever is included in the gross total income and is in the nature of income from business in the marketing of agricultural produce of its members, the same should be deducted. The revenue also emphasises the words 'the whole of the amount of profits and gains of business'. In the present case, there is no dispute as to what is attributable to this particular activity. The dispute is on the question of principle. We may now proceed to consider the correctness of the claim of the assessee.
5. As the section speaks of 'the amount of profits and gains of business', we have to see as to v/hat is the meaning of these words.
There is no definition of these terms in the Act and we have, therefore, to consider the import of these terms by looking to the common usage as well as in a commercial sense. When we speak of profits and gains of a business, we always speak of net profit and not of gross profit. The gross profit is arrived at before considering the legitimate business expenses which the person earning the income has to incur in order to carry on that business and to earn the profit. Only what remains after considering such legitimate business expenses, can be considered as profits and gains. Profits and gains are the resultant from the carrying on of a business or exercise of a profession and this expression cannot be used for any other head of income. The other section where this expression finds place is Section 28 of the Act.
This section deals with profits and gains of business or profession and they must be understood in their natural and proper sense as referring to profits and gains ascertained on ordinary principles of commercial trading. The profits or gains of a trade or business are the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning such profits or gains. 'Profit' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. This expression means the net profits of a business after deducting the necessary outgoings without which those proceeds could not be earned.
6. While this is the normal position, the Act has provided for certain deductions and allowances to which reference has been made in Section 29 of the Act. There are also various provisions allowing weighted deductions and allowances like development rebate, investment allowance, etc., in order to encourage one activity or the other. On the other hand, there are provisions disallowing certain expenses or expenses of a particular nature to certain extent. For the purpose of levying income-tax, these provisions have to be taken into consideration and the taxable income or loss has to be determined.
Besides what is provided in the various sections, there can be certain allowances under Section 28 itself which may be in the nature of a business loss or a trading loss.
7. Now we have to determine whether profits and gains of a business for the purposes of Section 80P should be taken as profits and gains in a commercial sense or it should be only gross profit without taking into consideration any expenses or, on the other hand, it can be only the profit arrived at according to the provisions of the Act. In our opinion, it cannot be the gross profit of a trade as that would create anomalous situation and in any sense, gross profit could not be considered as profits and gains of a business. There can be cases where there is a gross profit after taking into consideration the purchase and sale of a commodity and yet there is a loss in the business as the assessee has to incur certain expenses in order to carry on that business. The plea of the learned Counsel for the assessee that profits and gains should be taken as gross profit has, therefore, to be rejected.
8. The Commissioner (Appeals), on the other hand, has held that profits and gains should have the same meaning as the profits and gains as computed according to the provisions of the Act. For this, he has mainly relied on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra). If we consider that decision of the Supreme Court, we find that it was decided on the basis of the language of Section 80E, as it stood at the relevant time. That section spoke of total income as computed in accordance with the other provisions of the Act. Their Lordships had to decide as to whether for determining the profits and gains attributable to the business of generation or distribution of electricity, profit under Section 41(2) of the Act should be considered or not. Their Lordships held that such profit has to be taken into consideration as it was attributable to the business of generation or distribution of electricity. Their Lordships had also held that the profits can also be ascertained after adjusting the carry forward of losses of that business. This decision, in our opinion, cannot be invoked to interpret the expression 'profits and gains of business' as profit computed under the provisions of the Act, as there are certain deductions and disallowances which are specially allowed under the provisions of the Act but are not otherwise taken for determining the profits of a business in a commercial sense. We are, therefore, of the view that for ascertaining the amount of profits and gains of business attributable to the marketing of agricultural produce of the members of the society, we must first consider all the business expenses which have been incurred by the assessee for earning such profit and such deduction would also include normal depreciation which is allowed even under the general principles of accountancy. We do not have the complete details of the break up of the deductions and we, therefore, cannot indicate as to how much deduction should actually be allowed in this case. We would, therefore, direct the ITO to deduct the profits and gains arrived at on the basis of principles laid down above.
9. Before parting with this ground, we may refer to certain arguments advanced before us with reference to the provisions of Section 80AB of the Act. This provision was inserted by the Finance (No. 2) Act, 1980, and came into force on 1-4-1981. As a result of this provision, deductions under Sections 80HH to 80TT of the Act (except Section 80M) should be computed with reference to the net income under the respective sections which had formed part of the gross total income.
This net income has to be computed in accordance with the provisions of the Act. Though this provision is effective from the assessment year 1981-82, the departmental representative submitted that this was merely clarifying the intention and the same position should hold good for the earlier years as well. On the other hand, the learned Counsel for the assessee submitted that the income could be taken in accordance with the provisions of this Act, only from the assessment year 1981-82 and not for earlier years. We are of the view that by giving effect to this provision from 1-4-1981 the Legislature has not extended this provision to the earlier years. Therefore, for the year under consideration, we will have to consider the other provisions and the requirements of law.
That, however, does not mean that gross profit should be considered as profits and gains of business. As already discussed, that expression has to be interpreted in its common commercial sense and only such profits and gains would be entitled to deduction under Section 80P.10 to 19. [These paras are not reproduced here as they involve minor issues.)