( 1 ) THE Income Tax Appellate Tribunal, Ahmedabad Bench "c", has referred the following question under Section 256 (2) of the Income Tax Act, 1961 (the Act) :-"whether, the Appellate Tribunal is right in law and on facts in directing the Income-tax Officer to allow deduction under section 80p (2) (a) (iv) as claimed by the assessee on the gross income and not on the net income as worked out by the Income-tax Officer. "the Assessment Year is 1981-82 and the relevant accounting period is the year that ended on 30. 6. 1980.

( 2 ) THE assessee is a registered co-operative society deriving income from dividend, interest and from its trading activities. In the previous year relevant to assessment year 1981-82, the assessee had dealt in a number of commodities, including articles intended for agriculture. The assessee filed its return of income on 26. 6. 1981 declaring total income at Nil. Assessment was finalized on 30. 6. 1982 under Section 143 (3) read with Section 144b on a total income of Rs. 2,55,888/ -. One of the adjustments made by the Assessing Officer was in respect of the quantum of deduction under Section 80p (2) (a) (iv) of the Act. The Assessing Officer noted that the out of the aggregate sales of Rs. 9,55,04,537/- in the year under consideration sales to the tune of Rs. 5,01,18,140/- were of articles intended for agriculture, which included sales both to the members of the society as well as to the non-members. While computing its total income, the assessee deducted expenses to the tune of Rs. 4,72,682/- from the gross profit earned out of its total sales. The assessee earned gross profit of Rs. 4,00,367/- on sales of articles intended for agriculture and claimed the whole of this gross profit as deduction under Section 80p (2) (a) (iv) of the Act.

( 3 ) THE Assessing Officer did not agree with this claim in principle as he was of the view that deduction can be allowed only to the extent of the net profits arising out of the activities specified in the said sub-section and not with reference to the gross profit. The Assessing Officer found that the assessee has dealt it a number of commodities and that the common expenses relating to all the activities have been amalgamated in such a manner that the expenses relating to the activities specified under Section 80p (2) (a) (iv) of the Act cannot easily be ascertained. He, therefore, called upon the assessee to furnish details of expenditure relating to such activities. As the assessee failed to furnish such details, the Assessing Officer vide his order dated 26th June 1987, followed the decision of this Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. (1977) 107 ITR 447 and computed the expenses in relation to the activities specified in the said sub-section by applying the rule of three and bifurcated the overhead expenses of Rs. 4,72,682 pro-rata. He, accordingly, held that the expenses attributable to the sale of articles intended for agriculture would be Rs. 2,48,067/- and the net profit arising from purchase and sale of commodities intended for agriculture would be Rs. 1,52,300/- (4,00,367/- minus 2,48,067/- ). Out of the aforesaid amount, the net profits attributable to sale to non-members computed at Rs. 15,230/- (10% of the net profit earned on sale of articles intended for agriculture as computed in the previous year) were deducted and the profits qualifying for deduction under Section 80p (2) (a) (iv) of the Act were computed at Rs. 1,37,070/ -.

( 4 ) THE assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) (CIT (Appeals ). Before the CIT (Appeals) it was contended that the business of the assessee society was one and indivisible and in pursuing various activities, the expenditure incurred wholly and exclusively for the purpose of the business, irrespective of the fact that the income from one or more parts of the activities was not liable to tax, was allowable in entirety and could not be apporti