Income Tax Appellate Tribunal - Hyderabad
Income Tax Officer vs Food Corporation Of India. (Also Ito V. ... on 16 December, 1992
Equivalent citations: (1994)48TTJ(HYD)421
ORDER
T. V. RAJAGOPALA RAO, J.M. :
These are two Departmental appeals relating to asst. yrs. 1987-88 and 1988-89 directed against the orders of the CIT(A)-II, Hyderabad whereby the learned CIT(A) had allowed the appeals filed by the assessee pertaining to those assessment years and directed the ITO to grant exemption to the assessee society under S. 80P(2)(a)(vi) of the IT Act holding that the entire income of the assessee society is exempt from tax.
2. The sole question involved in these appeals is whether or not the assessee society is entitled to the exemption under S. 80P(2)(a)(vi) of the Act. The full name of the assessee is Food Corporation of India & Central & State Warehousing Labour Contract Co-operative Society Ltd., Khammam (which is hereinafter for short, called the assessee society). The assessee filed returns for asst. yr. 1987-88 on 30th March, 1990 and for asst yr. 1988-89 on 5th April, 1990 declaring all incomes by claiming exemption under S. 80P(2)(a)(vi). The ITO, however, completed the assessment for both these assessment years by his independent orders dt. 27th March, 1991. The ITO rejected the claim of the assessee society under S. 80P(2)(a)(vi) of the IT Act, 1961 but conceded deduction of Rs. 20,000 under S. 80P(2)(c)(ii). Consequently, for asst. yr. 1987-88 he computed the total income at Rs. 1,80,324 and for asst yr. 1988-89, he computed the total income at Rs. 1,21,680. While framing the assessments, the claim of the assessee society under S. 80P(2)(a)(vi) was negatived on the following grounds :
(1). As per bye-law 42 of the society, the works obtained by the society shall be executed either by giving sub-contracts to group of persons or by employing them on daily wages or on piece work. When sufficient members are not available, the board of directors may employ, with the permission of the Registrar, persons other than the members to such an extent as may be necessary to complete the work on hand and paying them such remuneration as may be reasonable. As per S. 80P(2)(a)(vi) , in order to qualify for full deduction, the co-operative society should be a society engaged in collective disposal of labour of its members. However, according to bye-law No. 42 of the assessee society, there was a provision for engagement of outside labour for carrying out part of the work as and when circumstances demanded. This would show that the society is not a society which is engaged in carrying out the work by the exclusive collective disposal of labour of its members.
(2) The rules and bye-laws of the society should restrict the voting rights to the following classes of its members as per the proviso to S. 80P(2)(a) :
(i) Individuals who contribute their labour, or, as the case may be, carry on the fishing or allied activities;
(ii) The co-operative credit societies which provide financial assistance to the society;
(iii) The State Government.
In the bye-laws of the assessee society there is no provision restricting the voting rights to the above classes of persons. For the above two reasons full exemption under S. 80P(2)(a)(vi) is held not available to the assessee but deduction of Rs. 20,000 for each of the years was allowed to the assessee under S. 80P(2)(a)(ii) of the IT Act.
3. For asst. yr. 1987-88, the surplus as per P&L a/c was found out by the ITO at Rs. 2,02,324. A sum of Rs. 20,000 was allowed as deduction and the total income was determined at Rs. 1,80,324. Similarly for asst. yr. 1988-89 a surplus of Rs. 1,41,680 was found out as per P&L a/c from which a sum of Rs. 20,000 was deducted and the total income for 1988-89 was determined at Rs. 1,21,680. Appeals were preferred against the assessment orders for these two years on behalf of the assessee. Since common points were involved both these appeals were consolidated and they were disposed of by the CIT(A) by his consolidated order dt. 19th October, 1991. The learned CIT(A) held that he was satisfied from the bye-laws of the society that the members of the society only have got voting rights. He also stated that the surplus shown in the P&L a/c represents nothing but bills receivable which were received and distributed among the members of the society. In para No. 5, the conclusions of the learned CIT(A) are found given which are as follows :
"On going through the evidence taken out by the Assessing Officer I find he has been very harsh in applying a bye-law which was only protecting the interest of the society and cannot be treated as a bye-law detrimental to the interest of the society because of that bye-law say buy-law 42 one cannot say that the society is not meant for collective disposal of labour by its members. The Assessing Officer has not gone through the voting pattern followed by the society and simply rejected that there was no voting rights to the members just because no clause is found in the societys bye-laws. The deed in which bye-laws are mentioned may not be comprehensive, however, under the Societys Act, it is paramount that elections are held regularly and it is also inherent in the formation of the society that the members of the society have the voting rights. Under these circumstances, I hold that this society comes under the purview of S. 80P(2)(a)(vi) and also under the provisions of proviso to that sub-clause. Therefore, the entire income of the appellant is exempt from tax."
Thus, he allowed the appeals for 1987-88 and 1988-89 and against the common impugned order dt. 19th October, 1991, the present appeals are filed by the Revenue and thus the matter stands for our consideration.
4. We have heard Shri K. Vasantha Kumar, learned Departmental Representative and Shri G. P. Tandon, learned counsel for the assessee. On behalf of the assessee, a paper book containing 45 pages apart from a copy of the bye-laws of the society is filed. The learned Departmental Representative filed a paper compilation comprising enquiry report from the ITI dt. 12th October, 1990 and the statement recorded from the president of the assessee society dt. 4th October, 1990. The learned counsel for the assessee also filed a written arguments before the Tribunal. From the papers on record, we may record our finding of fact regarding the assessee society.
5. The assessee society was registered under the provisions of the A.P. Co-operative Societies Act, 1964 on 17th November, 1972. The certificate of registration is provided in the paper compilation filed on behalf of the assessee-society. Alongwith the certificate of registration, the bye-laws of the assessee society also are filed in the paper book. The main object of the society found out from bye-law No. 3 is stated as to promote the economic interest of the labour members of the society and to find suitable and profitable employment for them by obtaining contract works from Government, public bodies, private bodies or individuals and by executing these contracts through or with the help of the members and to encourage thrift, self-help and co-operation among the members. In the accounting years relevant to these two assessment years consideration there were a total number of 224 members in the assessee society. Again in the relevant accounting years the assessee society has been carrying out the activity of loading and unloading bags at Food Corporation of India godowns, under the agreement entered into with it. The contractual obligation would amount to engaging in collective disposal of its labour by the members and through the members of the society. Income of the society comes only through the collective disposal of labour, in other words, income is earned from the hard work of each and every member of the society. From the enquiry of the ITI dt. 12th October, 1990, it is seen that the assessee society is found to be genuine and its genuineness was also confirmed by the Asstt. Manager In-charge of the FCI., Khammam. From the statement given by the president of the assessee society on 4th October, 1990, it is seen that the assessee society had submitted tender in March, 1965 to the FCI authorities. Their tender was accepted and under the labour contract which was finalised by the FCI with the assessee society, the assessee is obliged to supply labour for handling bags of food grains at railway sidings at buffer storage complex of FCI, Khammam like loading and unloading of bags from railway wagons. The FCI had fixed labour charges for loading and unloading of bags of food grains. The president of the assessee society in his statement had stated that for unloading of 100 kgs. of bag the rate agreed was 54 paise per bag and for loading 100 Kgs. of bag the hamali rate agreed was 64 paise per bag. The assessee society has been maintaining written books of account like cash book, abstract register and bill book. The abstract register would disclose as to the total quantity of the bags exported or imported for which the claim for labour charges would be made against the FCI For each day work slip would be issued by the FCI authorities showing the total number of bags handled by the members of the assessee society and those work slips will be duly entered in the abstract register and each month a bill would be raised against the FCI as per the slips entered into the abstract register and the payment would be made by the FCI by D.D. After realising the D.D., the amount would be distributed among the members of the society. Thus, it can be seen that the assessee society is purely a labour society in which members of the society are contributing their labour and the object of the society is to get remunerative hamali charges for the members of the society who are manual labourers earning purely by their sweat and labour. Profit & loss account as well as balance sheet as on 30th June, 1986 was appended to the IT statement which were all filed alongwith the return for asst. yr. 1987-88. A perusal of the P&L a/c would show that in the accounting year relevant to asst. yr. 1987-88, a sum of Rs. 16,62,986 were distributed among the members of the society and the balance was stated to be Rs. 2,02,324. This according to the assessee represents the amount still due from the FCI That is, according to the assessee, the amount of Rs. 2,02,324 remained to be unpaid Hamali charges due from the FCI for which a bill was raised which was not yet paid, whereas according to the Assessing Officer, the said amount represents the income of the assessee for the year under consideration. It was the claim by the assessee that this amount was distributed among the members of the society next year. The ITO, however, found that this distribution was not made by way of wages and this distribution cannot be considered as expenditure for the year to qualify for deduction. Further, he points out that in the balance sheet dt. 30th June, 1986 also, it did not disclose unpaid liability towards wages to the extent of Rs. 2,02,324. Therefore, he had taken that this amount of Rs. 2,02,324 represents the income of the assessee society. We disapprove this treatment of the amount of Rs. 2,02,324 as income of the assessee society. The fact of distribution of this amount was never disputed by the ITO. On the other hand it is explained that this amount of Rs. 2,02,324 is the amount not realised in the year in question but for which a claim is made against the FCI Unless the amount is realised the question of distribution does not arise. The ITO failed to investigate the true nature of the amount of Rs. 2,02,324. When the bill raised against FCI for the whole of the accounting year amounted to Rs. 18,65,310.15 the FCI had honoured the bills and paid through D.D. only to the extent of Rs. 16,62,986, thus leaving the claim of Rs. 2.02,324 undecided in the accounting year relevant to asst. yr. 1987-88. The whole of amount for which the bill was raised against the FCI represent nothing but the labour charges for the number of bags handled by the members of the society and as and when the payment is made then distribution among the members takes place. When the claim is not considered and the amount is not paid then such amount not considered and not paid would be shown only as amount due but not actually paid. In that fashion it was revealed in the P&L a/c. Further the fact that book entries were made under a particular fashion, does not determine the real nature of the amount. The true nature of the amount entered in the books of account should be determined according to law and the fashion in which the book entries were made cannot determine its true character. From the evidence on record, we are unable to subscribe to the view that Rs. 2,02,324 mentioned in the P&L a/c represents the income of the assessee. When once it is shown to be the amount due from the FCI the obligation to pay the said amount among the members towards their hamali charges would arise and should not be lost sight of. Thus for the amount of Rs. 2,02,324 there is a matching liability of an equal amount. Simply because liability is not shown, in the balance sheet, it does not cease to be a liability. The liability would be determined according to law and not in accordance with the nature of the book entry.
6. Now let us deal with the two objections on which the ITO refused to extend the benefits of S. 80P(2)(a)(vi) to the assessee society. The first objection is with regard to bye-law No. 42. According to the said bye-law the assessee can engage outside labour after obtaining the permission of the Registrar. Therefore, it is concluded that the assessee society is not a society engaged in collective disposal of labour of its members only. Bye-law 42 is as under :
"The board of directors shall be competent to enter into contract for the execution of public or private works or to undertake piece or job work on behalf of the society. These works shall be executed either by giving sub-contracts to groups of members or by employing them on daily wages or on piece work, when sufficient members are not available, the Board of directors may employ with the permission of Registrar persons other than members to such extent as may be necessary to do any work which the society has in hand and pay them such remuneration as may be reasonable. The board of directors can enter into agreement with the members for the due performance of work or works entrusted to them or of the work allotted to them from day to day. It may also take steps to enforce the fulfilment of such agreement in accordance with the provision of the Workmens Breach of Contract Act III of 1859."
Firstly we may make it clear that permission to engage outside labour was neither sought for nor granted by the Registrar in this case. It is very clear from the bye-law that such permission can be sought for only when sufficient members are not available. We have already seen that there are 224 members of the society and there is no evidence that any outside labour is engaged to handle the bags either for export or import. No permission was ever sought for or obtained from the Registrar. The IT Inspector also did not obtain any such information. In the letter dt. 26th March, 1991 addressed by the counsel for the assessee to the ITO, the following is what is stated :
"Further, regarding the collective disposal of labour of the members of the Labour Contract Society, I may be permitted to submit that the strength of the society is such that there is no necessity for engaging the services of men other than the members of the society. The strength of the society since its inception has been in hundreds."
Therefore, the society denied of having engaged any outside labour whatsoever till now. Copy of letter dt. 26th March, 1991 was found at page 12 of the paper book filed on behalf of the assessee. Under r. 12 of the A.P. Co-operative Societies Rules 1964 (hereinafter called Societies Rules) a labour contract society is defined to mean a society which has its principal object, the securing and provisions of employment to its members by executing works with the help of its members or through them. So a labour contract society which engages outside labour to execute labour contract work cannot come under the definition of labour contract society at all. But the assessee society is registered as a labour contract society only. Rule No. 5 of the A.P. Co-operative Societies Rules, 1964 gives the power to a society to frame its own bye-laws. However, such bye-laws should not be contrary either to the A.P. Co-operative Societies Act, 1964 or to the A.P. Co-operative Societies Rules, 1964. Sub-r. (5) of the A.P. Co-operative Societies Rules begins with the words, "The bye-laws of a Society shall not be contrary to the provisions of the Act and these Rules ...". Thus if a bye-law framed, to be extent it contravenes the Act and rules, it is invalid. So to the extent the bye-law of the society permits to engage outside labour it becomes invalid and cannot have the force of bye-law. In that way the bye-law 42 is found to be contravening the very definition of labour contract society given in the A.P. Co-operative Societies Rules and, hence, the bye-law is not valid under law and it should be disregarded. Thus this objection of the Assessing Officer does not stand in the way of the assessee society getting full exemption under S. 80P(2)(a)(vi).
7. The second objection of the Assessing Officer that there was no provision in the bye-law restricting voting rights to only persons enumerated in the proviso to 80P(2)(a), namely, (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;
(2) the co-operative credit societies which provide financial assistance to the society;
(3) the State Government.
This objection does not appear to be tenable. It is not the bye-law of a society which prescribes voting rights. If there is no specific provision in the section or the rule framed under A.P. Co-operative Societies Act (hereinafter called the Act) then only the bye-laws can be looked into. There is specific provision in the Act itself in S. 25 enumerating the persons who are entitled to vote and elect the executive body of the society and also entitled to participate in general body meeting. Sec. 25 of the A.P. Co-operative Societies Act with its four sub-sections is as follows :
"Vote and manner of its exercise : - (1) Subject to such rules as may be made in this behalf every member shall have one vote in the affairs of the society and shall exercise his vote in person and not by proxy.
(2) Every person nominated to the committee by the Government or where the financing bank is a member, every person representing such financing bank shall have one vote :
Provided that no nominee of the Government or the representative of the financing bank, as the case may be, shall be entitled to participate in or vote at any election.
(3) In the case of equality of votes, the chairman of the meeting shall have a second or casting vote.
(4) Notwithstanding anything in sub-s. (1), where a society is a member of another society, its president or a person appointed under S. 32 or a special officer appointed under S. 34, as the case may be, shall represent the society as its delegate in the affairs of that other society and vote on its behalf at the meeting of the other society.
Provided that no officer of the Govt. shall be entitled to participate or vote at any election."
From the proviso to S. 25(2), it is very clear that though the Government and the financing banks are given powers to vote they are specifically excluded to vote at the time of elections to elect executive committee, etc. The voting rights contemplated under the proviso to S. 80P(2)(a) of the IT Act at the voting rights contemplated for the sake of election to the executive body, etc., only. As can be seen from sub-s.(4) of S. 25 of the A.P. Co-operative Societies Act, it contemplates only co-operative society becoming a member to another society and in such a case who can represent the member society as its delegate in the affairs of that other society. There are cases where primary societies can become members of an apex society. Sec. 25(4) contemplates such a situation. However, nowhere in the A.P. Co-operative Societies Act or rules there is contemplation that a primary society can become a member of another primary society or a member of one primary society becoming a member of another primary society. The Assessing Officer himself admitted that the bye-laws of the assessee society do not deal with the subject of voting and the absence of any provision in the bye-laws is sought to be interpreted by him that there is no prohibition imposed by the bye-laws against a non-member participating in the affairs of the society. The Assessing Officer state that there is no provision in the bye-law restricting the voting rights to the class of persons enumerated in the proviso to S. 80P(2)(a) only. In our view, this finding of the ITO is not correct. Sec. 25 clearly spells out as to who are all the persons entitled to vote and the proviso to S. 25(2) clearly states that no nominee of the Govt. or the representative of financing bank shall be entitled to participate or vote in any election. Thus, it is very clear that the members of only the labour contract society are entitled to vote and there is sufficient compliance to proviso to S. 80P(2)(a) already extracted above.
8. The learned Departmental Representative cited the following three decisions in support of his contentions :
(i) CIT vs. U.P. Co-operative Cane Union Federation Ltd. (1980) 122 ITR 913 (All)
(ii) Vidarbha Co-op. Marketing Society Ltd. vs. CIT (1985) 156 ITR 422 (Bom)
(iii) Gora Vibhag Jungle Kemdar Mandali vs. CIT (1986) 161 ITR 658 (Guj).
9. The decision in (1986) 161 ITR 658 (Guj) (supra) spells out what are the requisite conditions precedent for claiming benefit by the co-operative labour contract societies. In the said decision it is stated as follows as per headnote :
"If the co-operative society as specified in sub-cl. (vi) of S. 80P(2)(a) of the IT Act wants to earn full exemption on the profit made by it, persons other than those three categories specified in the proviso to S. 80P(2) of the IT Act can be members of the society but they should not be given the right to vote and that fact should be clearly borne out from the rules and bye-laws restricting the right to vote to members specified in the proviso only. If the co-operative society gives the right to vote to any other person, it would not be entitled to the additional benefit conferred by S. 80P(2)(a)(vi). "
We have no quarrel with the proposition laid down by the Honble Gujarat High Court. We have already seen S. 25 of the A.P. Co-operative Societies Act and according to its provisions the voting rights are restricted only to members of the society. Neither the Government nor the financiers banks are entitled to vote in any elections conducted to the society. Thus since the assessee society also is governed by the A.P. Co-operative Societies Act, 1964, provisions of S. 25 of the A.P. Co-operative Societies Act also apply to the assessee society according to which only those persons enumerated in the proviso to S. 80P(2)(a) were given right to vote and to none else. We are satisfied that the proviso to S. 80P(2)(a) are sufficiently complied with and the bye-laws or rules of the A.P. Co-operative Societies Act or Rules do not confer any right to vote to any non-member or an outsider. The learned Departmental Representative is unable to substantiate before us that non-members are entitled to vote in the elections conducted to the society. Thus the ratio of the decision of the Gujarat High Court is fully complied with. It is significant to note from the ratio that even outsiders can become members of the society but the only embargo is not to give them voting rights. Here also under S. 80P(2)(a) proviso, the first category of persons to whom voting right can be given is the "individuals" who contribute their labour. It is also significant to note that it is enough if they are individuals who contribute their labour and it is not necessary that they should all be members of the labour contract society. Though such an interpretation is not warranted in the facts and circumstances of this case, we merely want to spell out the ambit or proviso to S. 80P(2)(a). We went through the decision of the Allahabad High Court reported in (1980) 122 ITR 913 (All) (supra). That decision is quite distinguishable on facts and, hence, it does not apply to the fats of this case. The only portion of the Bombay High Courts decision reported in (1986) 156 ITR 422 (Bom) (supra) which is stressed before us is that a provision conferring exemption from tax must be construed in a strict manner and the person who claims the exemption must fall within the four corners of the exemption provision. We have no quarrel with this proposition at all according to us in this case, the assessee fulfilled all the conditions laid down for exemption under S. 80P(2)(a)(vi) and, therefore, it is entitled to full exemption under that provision and as such we are of the opinion that the learned CIT(A) is correct in his ultimate finding though his order does not spell out discussion on the subject. We fully agree with the conclusion reached by him in his impugned orders.
9. In the result, we find that there are no valid grounds to interfere with the orders of the learned CIT(A). The Departmental Representative appeals are found to be without merit and, hence, dismissed.