JUDGMENT BY THE COURT :
This appeal, by certificate, is directed against the judgment of the Madras High Court dt. 22nd Jan., 1982 in Tax Case No. 407 of 1977. The Kotagiri Industrial Co-operative Tea Factory Ltd., respondent (hereinafter referred to as the assessee) is a co-operative society. It carries on business in manufacture and sale of the tea from bought tea leaves and the purchase and supply of agricultural manure to members. It is also deriving income from dividend from investments with other co-operative societies. In the previous year relevant to the asst. yr. 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 s. 80P(2) from the income of Rs. 85,150. The ITO first set off the losses of 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 s. 80P of the IT Act, 1961 (hereinafter referred to as the Act). The said view of the ITO was not accepted by the AAC who held that deduction under s. 80P 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 AAC was affirmed in appeal by 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 Tribunal was wright in law in holding that the deduction under s. 80P of the IT Act should be allowed before set off of unabsorbed losses of earlier year ?"
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 vs. Katpadi Co-operative Timber Works Ltd. (1982) 135 ITR 287 (Mad), wherein the High Court had held that so long as the gross total income of a co-operative society includes income referable to the activities mentioned in s. 80P(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. vs. Addl. CIT (1979) 118 ITR 243 (Guj) as well as its own decision in CIT vs. Venkatachalam (1979) 120 ITR 688 (Mad).
2. Dr. V. Gaurishankar, 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 s. 80P must be made before the adjustment of the losses of the previous year under s. 72 of the Act. The learned counsel has placed reliance on definition of the expression "gross total income" contained in s. 80B(5) and has contended that the decision in Cloth Traders (P) Ltd. (supra) has since been reversed by a Constitution Bench of this Court in Distributors (Baroda) Pvt. Ltd. vs. Union of India & Ors. (1985) 155 ITR 120 (SC). Dr. Gaurishankar has also invited our attention to the recent decision in H. H. Sir Rama Varma vs. CIT (1994) 205 ITR 433 (SC).
3. Ms. Janaki Ramachandran, the learned counsel appearing for the assessee, has also placed reliance on certain observations in Distributors (Baroda) Pvt. Ltd. (supra) and has submitted that since the matter relates to a co-operative society and it is the policy of the legislature to encourage the co-operative movement the provisions of s. 80P, which have been enacted in furtherance of this policy to encourage and promote the growth of co-operative 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. Co-operative Cotton Sales Ginning & Pressing Society Ltd. vs. CIT (1989) 177 ITR 418 (SC).
4. Reference may be made at this stage to the provisions of s. 80P which falls in Chapter VI-A of the Act. Sub-s. (1) of s. 80P, which is relevant for the purpose of the case, provides as follows :
"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-s. (2) there shall be deducted in accordance with and subject to the provisions of this section the sums specified in sub-s. (2), in computing the total income of the assessee."
For the purpose of Chapter VI-A the expression "gross total income" is defined in cl. (5) of s. 80B 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."
If s. 80P(1) is read with definition of the expression "gross total income" contained in s. 80B(5), it has to be held that for the purpose of making deduction under s. 80P 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 s. 72 of the Act.
5. In Distributors (Baroda) Pvt. Ltd. (supra) this Court has dealt with the question whether deduction of income by way of dividends under s. 80M 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 Pvt. Ltd. (supra) a three Judge Bench of this Court had held that the deduction required to be allowed under s. 80M 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 Pvt. Ltd. (supra) the Court did not notice the earlier decision of a two Judge Bench of the Court in Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC), wherein, in the context of s. 80E, 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 s. 80E. The decision in Cloth Traders Pvt. Ltd. (supra) has been overruled by the Constitution Bench in Distributors (Baroda) Pvt. Ltd. (supra) wherein it has been observed :
"The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-s. (1) of s. 80M. 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 s. 80B, cl. (5), to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under s. 280-O. 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 moneys 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-s. (1) of s. 80M would be fulfilled and the provision enacted in that sub-section would be attracted."
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 :
"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."
6. It may also be pointed out that while considering the provisions of s. 80T of the Act this Court has followed the decision in Distributors (Baroda) Pvt. Ltd. (supra) in H. H. Sir Rama Varma vs. CIT (supra). 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 s. 80T of the Act is allowed and the relief under s. 80T 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.
7. It is no doubt true that the decision of the Madras High Court in CIT vs. Venkatachalam (supra) has been affirmed in appeal by this Court in CIT vs. Venkatachalam (1993) 201 ITR 737 (SC). That decision was also given in the context of s. 80T of the Act. It has been taken note of by this Court in H. H. Sir Rama Varma vs. CIT (supra). B. P. Jeevan Reddy, J, was a party in both these decisions. In Venkatachalam (supra) this Court has emphasised that the deduction under s. 80T 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.
8. Having regard to the law as laid down by this Court in Distributors (Baroda) Pvt. Ltd. (supra) and H. H. Sir Rama Varma (supra), it must be held that before considering the matter of deduction under s. 80P(2) the ITO had rightly set off the carried forward losses of the earlier years in accordance with s. 72 of the Act and on finding that the said losses exceeded the income, he rightly did not allow any deduction under s. 80P(2) and the AAC as well as the Tribunal and the High Court were in error in taking a contrary view.
9. The principle of statutory construction invoked by Ms. Ramachandran has no application in construing the expression "gross total income" in sub-s. (1) of s. 80P. In view of the express provision defining the said expression in s. 80B(5) for the purpose of Chapter VI-A, there is no scope for construing the said expression differently in s. 80P.
10. 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.