Patna High Court
Bihar Agricultural Produce Marketing ... vs Commissioner Of Income Tax on 23 September, 2011
Author: S K Katriar
Bench: Sudhir Kumar Katriar, Ahsanuddin Amanullah
Miscellaneous Appeal No.630 of 2008
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Against the order dated 13.6.2008 passed by the Income Tax
Appellate Tribunal, Patna Bench, Patna in ITA No.575/Pat/2007.
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Bihar Agricultural Produce Marketing Board, having its office in Pant Bhawan on
Bailey Road, P.O. G.P.O., P.S. S.K. Puri in the town and district of Patna, through Dr.
B. Rajinder, Administrator.
...... ....... Appellant.
Versus
The Commissioner of Income Tax, Patna ..... ..... Respondent.
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For the Appellant : Mr. K.N. Jain, Senior Advocate with
Dr. R. Usha &
Mr. Sribesh Jha, Advocates
For the Respondent: Mr. Harshwardhan Prasad, Sr. Standing Counsel with
Ms. Archana Sinha, Jr. Standing Counsel.
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PRESENT
THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR
THE HON'BLE MR. JUSTICE AHSANUDDIN AMANULLAH
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S.K. Katriar, J. This appeal under section 260A of the Income Tax Act
1961 (hereinafter referred to as „the Act‟), is directed against the order
dated 13.6.20008, passed by the Income Tax Appellate Tribunal, Patna
Bench, Patna in ITA No.575/Pat/2007, whereby the appeal preferred by
the assessee has been dismissed, and the order passed by the learned
Commissioner of Appeals has been upheld. The learned Commissioner
had, in its turn, upheld the order of the learned Assessing Officer. It is
with respect to the Assessment Year 2004-05.
2. A brief statement of facts essential for the disposal of this
appeal may be indicated. The appellant assessee had submitted its returns
for the period in question on 1.11.2004. It was a statutory body created in
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terms of the Bihar Agricultural Produce Markets Act 1960 (hereinafter
referred to as the „local Act‟). It is an institution for charitable purposes
within the meaning of section 2(14) of the Act. The local Act was
repealed by the Bihar Agricultural Produce Market (Repeal) Act 2006
(Bihar Act 23 of 2006), with effect from 12.9.2006. The learned
assessing officer passed order of assessment on 19.12.2006 (Annexure-
1), whereby the assessee was assessed to tax. Its claim for exemption
beyond 15% of its receipts under the provisions of section 12 of the Act
was rejected under the provisions of section 11 of the Act. Aggrieved by
the order, the assessee preferred appeal which was dismissed by order
dated 5.7.2007, passed by the learned Commissioner of Income Tax
(Appeals), Patna, and the order of assessment was upheld. The assessee
challenged the same by preferring appeal before the Tribunal which has
been rejected by the impugned order. Hence this appeal at the instance of
the assessee.
3. While assailing the validity of the proceedings, learned
counsel for the appellant submits that the Act was repealed with effect
from 1.9.2006, and the assessment order was passed on 19.12.2006. The
same will be deemed to have been passed against a dead person because
no steps were taken for substitution in terms of the Repeal Act. He relies
on the provisions of section 159, 171, and 189 of the Act. He submits in
the same vein that the appellant Board is not covered by sub-section (31)
of section 2 of the Act which defines „Person‟. He relies on the judgment
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of the Supreme Court in Commissioner of Income Tax, Bombay City I
vs. Amarchand N. Shroff, (1963) 48 ITR 59 (at page 66 LHC)=AIR
1963 SC 1448, paragraph 7. He next submits that the Board‟s fund
collected under the provisions of section 33-C of the local Act is statutory
contribution for specific purpose, and the assessee was not free to use it
in any manner it liked. It could be used only for the specified purpose. He
submits in the same vein that, supposing for the sake of argument that the
substitution in terms of Repeal Act was complete, yet it was not liable to
taxation. He relies on the judgment dated 1.4.2011, passed by a Division
Bench of this Court to which one of us (S.K. Katriar, J.) was a party in
Misc. Appeal No.425 of 2010 (Bihar State Text Book Publishing
Corporation vs. The Commissioner of Income Tax-I, Patna &
another), since reported in 2011(4) PLJR 398. He next submits that, in
view of the scheme, the aims and objects of the local Act, the Board‟s
fund cannot be treated to be „income‟ within the meaning of sub-section
(24) of section 2 of the Act. He next submits that the assessee is an
organisation for charitable purposes and, therefore, it is entitled to the
benefit of exemption in terms of section 11(2) (a), and the cognate
provisions of the Act. The learned authorities under the Act have erred in
disallowing the claim of exemption in terms of section 11(2) (a) of the
Act to the extent of 85%. He submits that the information in terms of
section 139, read with section 17, read with Form 10, should have been
allowed to be filed. He relies on a Division Bench judgment of the
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Gujarat High Court in Commissioner of Income-Tax vs. Mayur
Foundantion, (2005) 274 ITR 562. The expression „in the manner‟
occurring in section 11(2) (a) of the Act excludes the compulsion element
of time. He relies on the judgment of the Supreme Court in Sales Tax
Officer, Ponkunnam and another vs. K.I. Abraham, AIR 1967 S.C.
1823 (paragraph 6). He further submits that the Revenue should not take
advantage of ignorance of the assessee. He relies on the judgment of a
Division Bench of the Allahabad High Court in Commissioner of
Income-Tax vs. Lucknow Public Educational Society, (2009) 318 ITR
223 (All).
3.1) Learned counsel for the appellant has advanced elaborate
submissions in reply to the contentions of the learned senior Standing
Counsel.
4. The learned Senior Standing Counsel has supported the
impugned order. Relying on the provisions of the Repeal Act, he submits
that the successor body contemplated under the Repeal Act is the State
Government itself whose senior functionary has always remained the
Managing Director of the Board. The assessee has contested the matter at
all stages and, therefore, the quondam Board was throughout effectively
represented by the Board‟s Managing Director, a senior member of the
Indian Administrative service. He further relies on the provisions of
section 170 of the Act. He next submits that the information as to non-
utilisation of 85% of the receipts has to be given in Form 10 within the
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time prescribed by the Explanation -2 to section 139(1) (b) of the Act. He
relies on the judgment of the Supreme Court in Commissioner of
Income-Tax vs. Nagpur Hotel Owners' Association, (2001)247 ITR
201 (at page 204), and further states that the judgment in the case of
Commissioner of Income Tax vs. Mayur Foundation (supra) stood on
a different footing.
5. We have perused the materials on record and considered the
submissions of the learned counsel for the parties. The first contention
advanced on behalf of the appellant is that the order of assessment was
passed after the Board had become extinct. It appears to us that the local
Act remained on the statute book from 1960 to 31.8.2006. The same was
repealed by the Repeal Act, with which the entire duties and functions of
the Board came to an end. However, Section 3 of the Repeal Act took
into account the affairs of the Board conducted while the local Act was in
force, and also the issues arising out of the same in future after repeal of
the Act.
5.1) It is evident on a perusal of the proviso to section 3(i) of the
Act that any pending proceeding shall continue and shall be taken care of
by the Administrator and Special Officer contemplated by section 4(ii) of
the Act, till it reaches its finality. Section 4(i) of the Act provides that all
liability including statutory and non-statutory, secured or unsecured, shall
be the liability of the State Government. It is thus evident that the local
Act was repealed, yet adequate provisions have been made in the Repeal
6
Act to look after the litigations or such other proceedings against, or
initiated by, the Board. The Repeal Act further provides that all rights,
liabilities, and properties under the Act shall vest in the State
Government.
6. It is relevant to reproduce hereinbelow section 33-A of the
local Act:
"33-A. Establishment of Board. - (1) For the purposes of
exercising superintendence and control over Market
Committees, and for exercising such other powers and
performing such functions as are conferred or entrusted
under this Act, the State Government shall, by
notification in the official Gazette, establish a Board
called the Bihar Agricultural marketing Board.
(2) The Chairman of the Board shall be the person
nominated by the State Government. The number of the
members of the Board shall not exceed fifteen. These
members shall be appointed by the State Government.
(3) The members of the board shall be appointed by
the State Government by notification in the official
Gazette, from amongst the following categories of
persons, namely:
(a) an officer of Finance Department of the State
Government ;
(b) two officers of the Agriculture Department of the
State Government;
(c) an officer of the Revenue Department of the
Government;
(d) Chief Engineer of the Rural Engineering
organisation of the State Government, ex-officio;
(e) The Chief Town Planner of the State Government,
ex-officio;
(f) an officer of the Ministry of Agriculture of the
Government of India to be nominated by that
ministry;
(g) Managing Director of the State Bank of India or
his nominee;
(h) five members to be nominated from amongst the
members of the Market Committee;
(i) Director, Marketing;
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(j) The managing director of the board shall function
as the member secretary of the board.
(4) The Managing Director of the Board shall
function as the Chief Executive Officer of the Board
who shall be an officer of the State Government not
below the rank of a Collector.
(5) The membership of persons, other than the
official members shall be at the pleasure of the
Government.
6.1) It is evident from a perusal of Section 33A of the Act that its
Chairman shall be the person nominated by the State Government.
Traditionally the State Government has always nominated a senior
member of the Indian Administrative Service as the Managing Director.
It is evident under section 33-A(4) of the local Act that the Managing
Director of the Board shall function as the Chief Executive Officer of the
Board who shall be an officer of the State Government not below the
rank of a Collector. It is further relevant to state that section 33-A of the
Act provides that the Board comprises of nominees of the Bihar
Government and some other ex-officio nominees.
7. As stated hereinabove that, after repeal of the local Act, the
Administrator and Special Officer shall be officers of the State
Government. In other words, the official control of the affairs of the
Board prior to repeal of the Act and thereafter has in substance been that
of the State Government. To this has to be added the position that the
Board and/or the Administrator vigorously contested the proceedings
before the three learned authorities under the Act and before us also.
Furthermore, it is with respect to a period prior to the date of repeal of the
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local Act. We are, therefore, in no doubt that the quondam Board has
always been effectively represented and, therefore, the proceedings
cannot abate on account of formal non-substitution of the nominee of the
State Government. We, therefore, do not agree with the first submission
advanced on behalf of the learned counsel for the appellant
8. We shall now deal with the second contention advanced by
learned counsel for the appellant. He has submitted that the receipts of
the Board are not taxable. This necessitates a close examination of the
schemes, aims and the objects of the Act. The aims and objects of the Act
are as follows:
"(1) Creation of market area and markets with a view to
ensuring fair trade transactions in agricultural and
allied commodities.
(2) Appointment of Market Committees fully
representative of growers, traders, local authorities
and Government to supervise the working of regulated
markets.
(3) Regulation of market charges and prohibition of
realization of excess charges.
(4) Regulation of Market practices.
(5) Licensing of market functionaries.
(6) Arrangement for conciliation of disputes regarding
quality, weighment, deductions etc.
(7) Sale by open auction.
(8) Arrangement for the display of reliable and up to date
market information in the market yard.
(9) Improving generally the conditions of agricultural
marketing."
The preamble of the Act reads as follows:
"An Act to provide for the better regulation of
buying and selling of Agricultural Produce and the
Establishment of Markets for Agricultural Produce
in the State of Bihar and for matters connected
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therewith".
9. Section 27 of the Act empowers the market committees to
levy and collect market fee from the licensees which can be used for the
purposes mentioned in Section 30 of the Act. The Act contemplated and
constituted a network of market committees at the local level to achieve
the aims and objects of the Act enumerated above under the over all
guidance, supervision, control, and regulation of the Board. Section 2(bb)
of the local Act defines „Board‟ to mean the Bihar Agricultural
Marketing Board established under Section 33A of the Act. Chapter
IV-A of the Act is headed „Marketing Board‟. Section 33-A is headed
„Establishment of Board‟, and provides for its composition and
appointment. In view of the provisions of section 33A of the Act, the
Marketing Board is a body corporate having perpetual succession and
common seal, and can sue and be sued in its own name. Section 33-C of
the Act, which is headed „Board‟s Fund‟, is of utmost importance in the
present context, and is reproduced hereinbelow:
"33.C. Board‟s Fund.- (1) Every Market Committee
shall, out of its fund, pay to the Board as
contribution, such percentage of its income derived
from licence fee and market fees as may be
prescribed to meet expenses of the establishment of
the Board and also those incurred in the interest of
the Market Committee.
(Emphasis added)
9.1). In view of the aims and objects, the preamble and the scheme
of the Act, we are of the view that the Board is a statutory body, having
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legal personality of its own, and has been assigned statutory duty of
regulation of buying and selling of agricultural produce and
establishment of markets for agricultural produce in the State of Bihar. It
appears to us that it is not in the least engaged in any commercial
activity, and no part of its activity is inspired by any profit motive. The
Board‟s duties are entirely statutory verging on sovereign and regal
functions.
10. We must also notice the judgment of a Division of this
Court in Bihar State Text Book Publishing Corporation vs. The
Commissioner of Income Tax (supra), on which learned counsel for the
appellant has placed heavy reliance. That was a case where the appellant
assessee is a public-sector undertaking of the Government of Bihar, and
incorporated under the provisions of Section 617 of the Companies Act.
It is charged with the duty of publication and distribution of text-books in
schools particularly for children of the poor and down-trodden sections of
the society. In view of the policy decision of the State Government, it
was extending cash subsidy to the assessee for printing and sale of text-
books at low rates to children of the deprived sections of the society in an
effort to fulfill the constitutional mandate of spread of education. The
assessee claimed exemption from payment of taxes on the amount of
subsidy received and receivable from the State Government which was
concurrently rejected by the three authorities under the Act. The assessee,
therefore, preferred appeal in this Court under Section 260A of the Act
11
which was allowed. It is relevant to state that the learned Tribunal had, in
that case relied on the judgment of the Supreme Court in Sahney Steel
&Press Works Ltd. v. C.I.T. [(1997) 228 ITR 253]. On a close perusal
of the judgment of the Supreme Court and various other relevant
authorities, this Court concluded that the subsidy received by the
Corporation from the Bihar Government was entitled to the benefit of
exemption from taxation. The relevant portions of the judgment are
reproduced hereinbelow:
10. We must consider the judgment of the Supreme
Court in Sahney Steel & Press Works Ltd. (supra), on
which the learned appellate authority as well as the
learned Tribunal have placed full reliance. We are of
the view that the judgment is inapplicable to the facts
and circumstances of the present case, inasmuch as
it did not deal with `charitable purpose' within the
meaning of section 2(15), nor the `benefits of
exemption available to educational institutions from
the State Government', within the meaning of section
10(23C), of the Act. Sahney Steel & Press Works Ltd.
was really concerned with industrial subsidy from the
Government which is fundamentally different and
distinct from educational institutions to which has to
be added Chapter-IV of the Constitution of India
which lays down the governmental duty to promote
education amongst all, particularly the downtrodden
sections, of this country. In view of the facts and
circumstances of the case, the Supreme Court held
that the amount paid to the assessee in that case was
in the nature of subsidy from public funds. The funds
were made available to the assessee to assist it in
carrying on its trade or business. The Supreme Court
held that, having regard to the scheme of the
notification, there was no doubt that the object of
various assistances under the subsidy scheme was to
enable the assessee to run the business more
profitably.
11. We wish to notice some of the judgments
discussed in Sahney Steel & Press Works Ltd. (supra),
to the extent relevant in the present context. The
basic principle to be applied for determination as to
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whether a subsidy payment is in the nature of capital
or revenue, has been stated by Viscount Simon in
Ostime v Pontypridd and Rhondda Joint Water Board
[(1946) 14 ITR (Suppl) 45, 47; (1946) 28 TC 261 (HL)],
that the nature of subsidy from public funds made to
an undertaker to assist in carrying on the
undertaker's trade or business are trading receipts
and are, therefore, taxable. The identity of the source
is of great importance. In other words, it must come
from public funds. Equally important is that the
subsidy from public funds are meant to carry on the
undertaker's trade and business which are trading
receipts, that is, are to be brought into account in
arriving at the balance of profits orgains.
11.1) The judgment of the House of Lords in
Seaham Harbour Dock Co. v Crook [(1931) 16 TC 333
(HL)], may be noticed. The Harbour Dock Company
had applied for and obtained grants from the
Unemployment Grants Committee from funds
appropriated by Parliament. These grants were paid
as the work progressed and were equivalent to half
the interest on approved expenditure met out of
loans. In other words, the House of Lords observed
that if a subsidy from public funds given for a
particular purpose and objective to take care of the
problem of unemployment, in that case financial
assistance will not be treated to be operational or
trade receipt and, therefore, exempt from taxation.
Such a subsidy does not form part of trade activities
of the company and, therefore, the House of Lords
reached that conclusion. It had nothing to do with the
trade of the company. Another test to determine this
is whether or not such a subsidy is meant to achieve
a certain objective, or the beneficiary is free to spend
it for any item of its trade or business as was the case
in Sahney Steel & Press Works Ltd. In other words, if
the recipient is bound to use the subsidy from public
funds for a particular purpose, as was the case in
Seaham Harbour Dock Company, or Lincolnshire
Sugar Co. Ltd. v. Smart [(1937) 20 TC 643 (HL)], it
would not be operational or trade receipts, and would
therefore not be taxed.
11.2) We would next like to notice the facts and
circumstances of Lincolnshire Sugar Co. Ltd. (supra).
In that case, it was found that the Company carried
on the business of manufacturing sugar from home-
grown beet. The company was paid various sums
under the British Sugar Industry (Assistance) Act
1931, out of monies provided by Parliament. The
question was whether these monies were to be taken
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into account as trade receipts or not. The object of the
grant was that in the year 1931, in view of the heavy
fall in prices of sugar, sugar industries were in
difficulty. The government decided to give financial
assistance to certain industries in respect of sugar
manufactured by them from home-grown beet during
the relevant period. Lord Macmillan held that:
"What to my mind is decisive is that these
payments were made to the company in order
that the money might be used in their
business."
He further observed that:
"I think that they were supplementary
trade receipts bestowed upon the company
by the Government and proper to be taken
into computation in arriving at the balance
of the company's profits and gains for the
year in which they were received."
Applying these principles in the case of Sahney Steel
& Press Works Ltd., the Supreme Court observed that
the payments were made to assist the new industries
at the commencement of business to carry on their
business. The payments were nothing but
supplementary trade receipts. It is true that the
assessee, Sahney Steel, could not use this money for
distribution as dividend to its share-holders. But the
assessee was free to use the money in its business
entirely as it liked and was not obliged to spend the
money for a particular purpose like extension of docks
as in the Seaham Harbour Dock's case (supra).
11.3) The judgment in the Canadian case in St.
John Dry Dock and Ship Building Co. Ltd. v. Minister
of National Revenue, 4 DLR 1, may also be referred. It
was a case where the Canadian Government had
given aid to the company to encourage construction of
dry dock which was "an aid to the construction of dry
dock", and was, therefore, treated to be not an
operational subsidy. It was, therefore, exempt from
taxation because it was meant for a particular
objective of general public utility.
12. The ratio of the judgments discussed above is
that the grant coming from the Government will
qualify for exemption from taxation if the same was
granted for a particular purpose of public utility or
public importance, or to alleviate a situation affecting
the general public, and cannot be used for any other
purpose. The subsidy from the Government would be
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taxable if it can be used for any purpose the assessee
likes including its trade and business, would then be
in the nature of trade receipts and taxable. In other
words, the basic question to be determined is whether
a subsidy from payment from public funds is in the
nature of capital or revenue. In the case of the former,
it is not taxable, and is taxable in case of the latter.
11. Applying the ratio of the judgment to the present situation, it
appears to us that the Board‟s fund was meant for specific purposes,
namely, to meet the expenses for establishment of the Board, and those
incurred in the interest of the Market committee. The aims and objects of
the Market committee, and the purpose for which the committee itself
could use the funds, are laid down in section 30 of the local Act. In such
a situation, it is a statutory, compulsory contribution by the market
committee to the Board‟s fund, meant for specified statutory purposes,
which cannot be used for any purpose that the Board desires, and surely
cannot be used for commercial activities, or trade and business. It does
not permit any profit motive. It is apparent from the aims and objects of
the Act that the functions of the Board are entirely statutory, specified,
and to alleviate the situation affecting plight of agriculturists in the State
of Bihar. In such a situation, it is not a revenue receipt and, therefore,
cannot be taxed.
12. We must also notice the definition of „income‟, occurring in
sub-section (24) of Section 2 of the Act. It is quite clear in our minds that
the Board‟s fund received under section 33-C of the local Act is not an
income for profits and gains, is not dividend , is not voluntary
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contribution, nor is it covered by any one of the remaining clauses of sub-
section (24) of section 2 of the Act. We, therefore, conclude that the
Board‟s fund received and collected under the provisions of section 33C
of the Act is not income within the meaning of sub-section (24) of
section 2 of the Act, and is beyond the purview of the Act.
13. In view of the foregoing discussion, we do not consider it
necessary to discuss the remaining questions advanced by learned
counsel for the parties.
14. In the result, we allow this appeal, and the order dated
13.6.2008, passed by the learned Income Tax Appellate Tribunal, Patna Bench, in ITA No.575/Pat/2007, is hereby set aside. In the circumstances of the case, there shall be no order as to costs.
(S K Katriar, J.) Ahsanuddin Amanullah, J. I agree.
(Ahsanuddin Amanullah, J.) Patna High Court, Patna Dated the 23rd day of September, 2011. S.K.Pathak/ (AFR)