( 1 ) BY this writ petition under Article 226 of the Constitution of India petitioners have challenged the constitutional validity of the Income Tax (2nd Amendment) Act, 1998, act No. 11 of 1999. By amendment of Section 80p (2) (a) (iii) the legislature has introduced the words "agricultural produce grown by its members" in place of the words "agricultural produce of its members". The effect of the amendment is that the exemption is now confined to societies marketing agricultural produce grown by their members.

( 2 ) UNDER the provision as it stood before the amendment benefit of exemption was being enjoyed by the cooperative societies irrespective of the fact whether members were actual growers of the agricultural produce or they were trading in agricultural produce. This wide meaning was being given to the provision in view of interpretation by courts. In fact in its latest judgment in the Kerala State Cooperative Marketing federation Ltd. Vs. CIT, 231 ITR 814, the Supreme Court confirmed the view that the benefit of the exemption should be available to societies which were engaged in marketing of agricultural produce whether grown by members or marketed by members.

( 3 ) IN order to appreciate the controversy raised by the petitioners in this writ petition it is necessary to give a brief background. Petitioner No. 1 is a co-operative society registered under the Multi State Cooperative Societies Act, 1984. As per averments contained in the petition, petitioner No. 1 is engaged in marketing of agricultural produce of its member Societies. The hierarchy of the cooperative network is as under:-

( 4 ) AT the lowest rung of the ladder are the village cooperative societies having farmers, artisans, craftsmen, weavers etc. as their members. These societies which are generally the village level societies become members of district level cooperative societies, which is the second step in the ladder. The district level cooperative societies become members of the State Cooperative Societies which are the apex societies so far as the states are concerned. These apex societies are in turn members of the Multi State Cooperative Societies like the petitioner No. 1

( 5 ) THE cooperative societies have enjoyed exemption from payment of income tax since long. In the Indian Income Tax Act, 1922 the exemption was enjoyed by the cooperative societies by virtue of a notification issued by the Governor General in council as per power conferred on him under the Act itself. The Finance Act, 1955 amended the 1922 Act by way of insertion of sub-section (3) into section 14. The provision read as under:-

" (3 ). The tax shall not be payable by a cooperative society (i) in respect of profits and gains of business carried on by it. "

( 6 ) THUS the exemption was incorporated in the statute itself. The exemption was enjoyed by the cooperative societies in respect of all profits and gains of business. The exemption provision was very wide. The Finance Bill 1960 made further amendments to section 14 (3) which read as under:-

"14 (3 ). The tax shall not be payable by a cooperative society. (i) in respect of the entire amount of profits and gains of business carried on by it. (a ). . . . . . (b ). . . . . . . (c) a society engaged in the marketing of the agricultural produce o its members. "

( 7 ) THIS amendment curtailed the general exemption enjoyed by cooperative societies so far. The exemption was now confined to societies engaged in marketing of agricultural produce of their members. The need for the amendment was expressed by the then Finance Minister in following words at the time of introduction of the finance Bill:-

"my next proposal is with regard to the taxation of cooperative societies. At present, the business income of such societies is exempt from tax. This exemption is justified having in view the objective of the Cooperative Societies act of 1912, namely, to facilitate the formation of cooperative societies for the promotion of thrift and