JUDGMENT

This appeal, by certificate, is directed against the judgment of the Madras High Court dated January 22, 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 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 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 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 wright 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 Commissioner of Income Tax v. Katpadi Co-operative Timber Works Ltd1, 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 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. Additional Commissioner of Income Tax2, as well as its own decision in Commissioner of Income Tax v. Venkatachalam3.

3. 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 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 definition of the expression "gross total income" contained in Section 80-B(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. v. Union of India & Ors.4. Dr. Gaurishankar has also invited our attention to the recent decision in H.H. Sir Rama Verma v. Commissioner of Income Tax5.

Ms. Janaki Ramachandran, the learned counsel appearing for the assessee, has also placed reliance on certain observations in Distributors (Barola) 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 Section 80-P, which have been enacted in furtherance of this policy of encourage and promote the growth of co-operative societies, must be liberally construed in favour of the assessee. The learned Counsel has placed reliance to the decision of this Court in