1. The Income-tax Appellate Tribunal has referred the following three questions of law arising out of the order dated March 28, 1981, in respect of the assessment year 1976-77 under Section 256(1) of the Income-tax Act, 1961 :
'1. Whether the Tribunal was correct in law in allowing the deduction under Section 80P(2) of the Act at Rs. 1,50,132 only out of deduction claimed for Rs. 4,60,385 ?
2. Whether the Tribunal was correct in law in deducting proportionate expenditure at 67 per cent. out of the income claimed under Section 80P(2) of the Act for the overhead expenditure ?
3. Whether the Tribunal was correct in law in not allowing the entire expenditure under Section 57 of the Act against the taxable income ?'
2. The brief facts of the case are that the assessee has filed the return initially in which the deduction under Section 80P of the Income-tax Act, 1961, was claimed on proportionate basis as the assessee was having income which was partly taxable and partly non-taxable. Subsequently, the said return was revised and the assessee claimed deduction from the gross amount of income, of the amount of income derived from its members without deducting therefrom proportionate administrative and managerial expenses. The assessee derives its income mainly from supply of fertilizers to its members, marketing of agricultural produce, agricultural implements, etc. The assessee is also running a rice mill. In the year in question, the gross profit from supply of fertilizers to its members was in the figure of Rs. 4,60,385. This income was claimed as exempt before the Income-tax Officer, but the Income-tax Officer found that the business of rice mill, trucks and tractors, etc., is separate and divisible businesses and, therefore, relying upon the decision of the Gujarat High Court in the case of CIT v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. : [1977]107ITR447(Guj) it was held that the income of the co-operative society from non-taxable activity has to be computed by setting off against the gross profit proportionate amount of expenditure. The claim of the assessee for allowingthe entire expenditure on account of managerial and administrative expenses was not accepted. On the basis of the said decision of the Gujarat High Court, the proportionate expenses from the gross income of Rs. 4,60,385 were reduced to the extent of Rs. 3,10,253 and exemption was allowed for Rs. 1,50,132 only. In computing the expenses of Rs. 3,10,253 the total income shown on the credit side of the profit and loss account was taken into consideration and the total expenses on the debit side of the profit and loss account were taken into consideration and the proportionate expenses come to 67 per cent. Applying this 67 per cent. to the figure of Rs. 4,60,385, the figure of Rs. 3,10,253 was arrived at which was considered as expenses not liable to deduction under Section 80P(2) of the Income-tax Act. It was not disputed that the income from the trucks and tractors was not exempt and other activity which was the main source of income, i.e., supply of fertilizers and agricultural implements to its members and marketing of agricultural produce was exempted. The staff which was employed by the assessee was looking after both the businesses, namely, the business of supply of fertilizers, agricultural implements, etc., to its members and carrying on the activity of running of the rice mill and deriving income from trucks and tractors. The income which was derived by the assessee from the rice mill or from operating the tractors and trucks was wholly divisible and was neither connected nor having any proximate relationship with the other non-taxable activity of the assessee. The criteria which has to be adopted for the purpose of determining the liability and deducting the expenses is as to whether the business is a single and indivisible one or separate businesses are being carried on by the assessee.
3. Section 80P of the Income-tax Act reads as under :
'80P.(1) Where, in the case of an assessee being a co-operative 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.
(2) The sums referred to in Sub-section (1) shall be the following, namely :--
(a) in the case of a co-operative society engaged in-
(i) carrying on the business of banking or providing credit facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of the agricultural produce of its members, or
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural produce of its members, or
(vi) the collective disposal of the labour of its members, or
(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,
the whole of the amount of profits and gains of business attributable to any one or more of such activities.'
4. From the above provision of law, it would be evident that the exemption which has been allowed under Section 80P is in respect of income derived from various activities mentioned therein and not in respect of the gross receipt from any or all of the activities. The finding which has been recorded by the Income-tax Appellate Tribunal is that the assessee carried on separate businesses and the business of supplying of fertilizers to its members which is an exempted one is divisible from the running of the rice mill and operating the trucks and tractors. The expression 'gross total income' which has been used in Section 80P(1) is defined in Section 80B(5) to mean the total income computed in accordance with the provisions of this Act before making any deduction under this Chapter or under Section 280-O. If a co-operative society is carrying on a 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 sets of 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 incomes, then such expenses have to be estimated by the Income-tax Officer which are relatable to earn the non-exempted activities in order to arrive at the true and correct income. The exemption clause in a taxation statute has to be construed strictly and cannot be extended beyond the clear language used in the section. It cannot be presumed that no expenditure was incurred inearning the exempted income. According to the scheme of the Act and more particularly the provisions of Section 80P read with Section 80B(5) and the provisions of Chapters IV and V of the Act where the assessee is having both taxable as well as non-taxable income, the total income which is exempted and for which the exemption is available under Section 80P has to be arrived at. Similarly, the taxable income has to be determined. After determining the said incomes separately, the deductions which are available under Chapters IV and V have to be given to arrive at the gross total income as defined in Section 80B(5). The income which is exempted under Section 80P(2) has to be arrived at separately in order to determine the income under Section 80P(2) and it can never be envis-aged that the total income which has been so received could be allowed without deducting the expenditure incurred in earning the said 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-section (2) of Section 80P could be only for such income which is attributable to the activities which are exempted. The meaning which has to be given for the word 'attributable' in the clause has to be in accordance with the commercial accounting principles and under accountancy as well as in business, the profit could not be arrived at without deducting the expenses therefrom. In order to ascertain the real profit, the expenses incurred in earning the said income has to be deducted.
5. The submission of Mr. Ranka on behalf of the assessee is that the business of the assessee is one and indivisible and in pursuance of various activities the expenditure which has been incurred wholly and exclusively for the purpose of business and irrespective of the fact that the income from one or more part of the activities is not liable to tax, the entire expenditure incurred by the assessee is to be allowed from the taxable income and the gross receipt of the exempted income has to be considered under Section 80P.
6. Reliance has been placed on the decision of the apex court in the case of CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) wherein it was held by the apex court that, where the business constitutes one single and indivisible business, the entire expenditure is to be allowed.
7. This authority has no application because a finding has been recorded by the Tribunal that the two businesses are not one, single and indivisible business, but are separate businesses. The running of the rice mill and deriving income from trucks and tractors are wholly independent from the other activities which are exempt under Section 80P of the Act.The decision of the Gujarat High Court in the case of Sabarkantha Zilla Kharid Vechan Sangh, referred to above, was challenged by the assessee in the apex court and in C. A. Nos. 793, 795 of 1977 and C. A. Nos. 1549, 1551 of 1977, the judgment given by the Gujarat High Court was upheld and the special leave to appeal petition was dismissed. According to the decision of the Gujarat High Court, in computing the taxable income of the co-operative society carrying on both taxable and non-taxable activities, the income from non-taxable activity could not be deducted from the gross total income, but only that part of the profit from the non-taxable activities can be reduced which has been arrived at after deducting the proportionate expenditure therefrom. The view which the Income-tax Appellate Tribunal has taken is in accordance with law and the assessee is not entitled to the deduction of the entire amount of income received from the sale and supply of fertilizers to its members without deducting the expenses in respect thereof. Accordingly, it is held that the Income-tax Appellate Tribunal was justified in allowing the deduction under Section 80P(2) of the Act at Rs. 1,50,132 out of the total deduction claimed by the assessee at Rs. 4,60,385. The Tribunal was further right in coming to the conclusion that only the proportionate expenses at the rate of 67 per cent. has to be reduced. The expenditure under Section 37 of the Act refers to the expenditure which is laid out wholly and exclusively for the purposes of the business or profession and the business which is referred to under Section 37 of the Act is that whose income is chargeable to tax under the head 'Profits and gains of business or profession' and, therefore, the expenditure which is attributable only to the income which is chargeable to tax has to be determined separately and the expenditure which has been incurred for earning the non-taxable income cannot be allowed under Section 37.
8. Accordingly, the reference is answered in favour of the Revenue and against the assessee, with no order as to costs.