The main legal point established in the judgment is that income derived from conducting chit funds is eligible for deduction under S.80P (2)(a)(i) of the Income-tax Act, 1961, as long as the chit fund schemes provide credit facilities to its members.

1. The assessee is a co-operative society doing banking business. As part of its business activity the assessee was also conducting Kuris-Chit Funds-since about the year 1959 or so. The income derived from the conduct of the chit funds was not being subjected to tax till 1969-70. For the assessment year 1969-70 the Income tax Officer took the view that the assessee's income from the chit fund business did not fall within the scope of S.80P (2)(a)(i) of the Income-tax Act, 1961 (hereinafter referred to as the Act) and subjected the said income to tax rejecting the assessee's claim for deduction under the aforesaid provision. The grounds which weighed with the Income-tax Officer for disallowing the assessee's claim for deduction under S.80P (2) (a) (i) (a) (i) were that the business of conducting the chit fund was not one intended for providing credit facilities but was only in the nature of a saving scheme and that there was no restriction that only members of the society could become subscribers in the chit fund.

2. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Ernakulam contending that the disallowance of his claim for deduction under S.80P (2) (a) (i) was erroneous and illegal. The Appellate Assistant Commissioner agreed with the view expressed by the Income-tax Officer that in conducting the chit fund the assessee could not be said to be engaged in providing credit facilities to it members. In the opinion of the Appellate Assistant Commissioner the exemption under S.80P (2) of the Act would be available only in respect of income derived from the activity of advancing loans to needy, persons just as in the case of ordinary banking business, and on this reasoning he dismissed the assessee's appeal.

3. The assessee thereupon carried the matter in second appeal before the Income-tax Appellate Tribunal, Cochin Bench. The Tribunal scrutinised the rules governing the conduct of the chitty as contained in the chitty 'thala-variyola' and found that Clause.2 thereof specifically provided that only the members of the Bank could become subscribers of the chitty and that the foreman (assessee) was prohibited from taking any outsiders as subscribers in the chit fund. Accordingly, the Tribunal held that the Income-tax Officer and the Appellate Assistant Commissioner were in error in stating that the chit fund schemes of the assessee Bank were open to outsiders also and in disallowing the assessee's claim for deduction under S.80P (2) (a) (i) of the Act on that ground. It was further held by the Tribunal that an intention to provide credit facility is clearly discernible in such chit fund schemes and that a chit fund cannot be regarded as a mere saving scheme. Referring to the observation contained in the order of the Appellate Assistant Commissioner that the exemption provided. for under S.80P (2) (a) (i) would be attracted only in cases where an assessee has been engaged "in the activity of advancing loans to needy persons just as a bank does" the Tribunal held that the words used in the said section do not warrant such a restricted interpretation. In this view the Tribunal allowed the appeal and held that the assessee is entitled to deduction under S.80P (2) (a) (i) of the Act and directed the Income-tax Officer to modify the assessment in the light of the said finding; On the application of the Commissioner of Income-tax, Kerala the Tribunal has referred to this court the following question under S.256 (1) of the Act:

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income derived by the assessee from conducting chit funds was eligible for deduction under S.80P (2) (a) (i) of the Income-tax Act, 1961?"

4. S.80P (2) (a) (i) is in the following terms:

"80P. Deduction in respect of income of co-operative societies. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred