Income Tax Appellate Tribunal - Amritsar
Assessing Officer vs Ganesh Cooperative (L&C) Society Ltd. ... on 20 February, 1998
Equivalent citations: [1998]67ITD436(ASR)
ORDER
G. L. Garoo, A.M.
1. The Revenue as well as the assessee have filed appeals against the order passed by the CIT(A) vide A. No. CIT(A)/IT/BTI/281/1989-90 dt. 27th February, 1991.
ITA No. 1296/Asr/19912. This is the appeal of the Revenue and the Revenue has taken following grounds in appeal:
"On the facts and in the circumstances of the case, learned CIT(A) has erred in giving relief of Rs. 29,806 by applying profit rate of 6 per cent on the total receipts when the assessment was framed at an income of Rs. 1,97,550 by making specific addition of Rs. 1,90,524 on account of non-disclosure of TDS of Rs. 57,974 and security of Rs. 1,32,406."
3. The AO passed order under s. 143(3) of the IT Act and made observation that keeping in view the method of accounting employed by the assessee proviso to s. 145(1) is attracted and as such made an addition of Rs. 1,90,524 being shortfall of payments worked by him in the assessment order. In the assessment order in para 2, the AO has observed that the assessee received gross payments to the tune of Rs. 28,49,937. Out of gross payments and bills the Executive Engineer of PWD deducted Rs. 56,439 as TDS and Rs. 1,32,406 on account of security. The appellant reflected only net payments amounting to Rs. 26,60,948. The AO took note of other payments regarding TDS and after working out the total payments in accordance with the TDS certificate, he came to the conclusion that the payment to the extent of Rs. 1,90,524 was not shown as receipts of the year under consideration and made an addition to the tune of Rs. 1,90,524. Aggrieved against the order passed by the AO the appellant filed appeal before the CIT(A).
4. The learned CIT(A) accepted the plea of the learned counsel that security deducted is not shown as part of the gross receipts because according to the method of accounting adopted regularly, the security is shown in the year when same is received back. The learned CIT(A) has worked out difference to Rs. 57,974 which is mainly on account of not including the TDS with the payments received during the year under consideration. The CIT(A) has then observed that on the facts and circumstances of the case, it will be judicious to apply 6 per cent net rate and if net rate is applied on the total receipts including the TDS, the profit will come at Rs. 1,67,744 as against profit worked out by the appellant at Rs. 7,025. The profit worked out by the AO is at Rs. 1,97,550. The appellant has also taken this ground in appeal.
5. The learned Departmental Representative was vehemently stressing his point that the AO has made a specific addition and there was no justification in the order of the learned CIT(A) to apply GP rate. The learned counsel of the appellant on the other hand pleaded that the case of the appellant was not properly appreciated by the CIT(A). The learned counsel of the appellant pleaded that method of accounting adopted by the appellant show that the deduction of security is not taken as a receipt of the year when such deduction is made but is taken as receipt in the year when the deduction under the security is received back. Even though method adopted is not that perfect but nevertheless the receipts get taxed in the subsequent years. As was explained by the learned counsel, we are of the opinion that there is no infirmity in the order of the CIT(A). We are of the opinion that the CIT(A) has rightly and correctly invoked s. 145. It is now a settled law that the entire assessment is open before the CIT(A) and the CIT(A) is empowered to deviate from method of estimating income of the appellant and he has adopted more logical and rationale method. The learned CIT(A) has included the deduction on account of TDS with the receipts, shown during the year under consideration. He has also applied a net rate of 6 per cent which is very reasonable and rationale on labour contract. We, therefore, confirm the order of the CIT(A) on this issue.
6. In the result the ground taken by the Revenue as well as the appellant is dismissed.
ITA No. 1338/Asr/19917. The appellant has taken following grounds in the appeal:
"(1) That the learned appellate authority erred in rejecting the claim of the assessee co-operative society for the total exemption under s. 80P(2)(a)(vi) of the Act without mentioning any reason when the assessee fulfils all the conditions mentioned therein. The Department has no locus standi or any right to question the validity of the amendment of the bye-law No. 25 of the appellant society particularly when the abovementioned amendment was found correct and approved by the Asstt. Registrar of the co-operative societies of the co-operative Deptt. who is the competent authority in the matter of working of the co-operative society in the District. Still further the appellant society has passed the necessary resolution again in the general body meeting to remove this lacuna if any, recently."
8. During the assessment proceedings the AO gave finding that the appellant is not fulfilling all the conditions laid under s. 80P(2)(a)(vi) of the IT Act and as such the income is not fully exempt but is entitled to a statutory deduction of Rs. 20,000 provided under s. 80P(2)(c)(ii) of the IT Act. Aggrieved against the finding of the AO the appellant filed appeal before the CIT(A). The CIT(A) has observed that the Asstt. Registrar vide report dt. 11th July, 1991, has stated that as per resolution, the voting rights were restricted to the members who contribute their labour but the Asstt. Registrar did not offer any comment on bye-law No. 53 under which only general body of co-operative society could carry out amendment. The AO pleaded before the CIT(A) that in accordance with the co-operative society Act and the bye-laws of the assessee's society, the power of amendment did not vest with the managing committee as is provided by bye-law No. 27 and as such powers were vested only with the general body. The Department pleaded before the CIT(A) that resolution of managing committee was without jurisdiction because there was no restriction on voting right to the member who contributed their labour. The learned CIT(A) has given finding which is as follows:
"2.3. I have given due consideration to the rival submissions and I have verified the assessment record and reply of the Asstt. Registrar in response to query letter issued by the AO. My findings in the matter are as under :
(i) The managing committee Resolution No. 3, dt. 7th January, 1986, appears to be invalid and without jurisdiction since the amendment of bye-laws is not within the purview of managing committee. Bye-law No. 26 states that the ultimate authority in all the matters relating to the administration of society shall vest in general body. Bye-law No. 27 enumerates the powers and duties of the general body. In sub-cl. (v) & (vi), there is a clear reference to amendment of bye-laws subject to sanction of the Registrar. The powers of managing committee are enumerated in bye-law No. 36 and it clearly mentions that it shall have all the powers and discharge all the duties except those reserved for the general body. As such, it is apparent that amendment of bye-laws falls within the purview of general body and is not within the competence of managing committee.
Bye-law No. 53 further specifically states that no amendment shall be made to the bye-laws except by the resolution passed by majority of the members at the general body Meeting. Bye-law No. 53 is reproduced below for ready reference:
"Amendment of bye-laws '53. Subject to the provisions of the Act and Rules no amendment to those bye-laws shall be carried out save in accordance with a resolution to discuss the amendments has been given :
Provided that no such resolution shall be valid unless it is passed by a majority of members present at the general meeting at which not less than two-third of the members for the time being of the society are present.
Provided further model bye-laws or amendments previously approved by the Registrar may be adopted by a simple majority at a general meeting with an ordinary quorum."
In view of the foregoing discussion, it is apparent that resolution No. 3 dt. 7th January, 1986 passed by the managing committee was beyond its purview since it has introduced a substantive amendment in the bye-law. The voting rights could be restricted only by the general body.
(ii) Since the managing committee resolution is not valid, as such, the voting rights were available to all members whether they contributed labour or not and deduction under s. 80P(2)(a)(vi) cannot be allowed to the assessee in view of the proviso which was introduced w.e.f. 1st April, 1972 (Gora Vibhag Jungle Kamdar Mandali vs. CIT (1986) 161 ITR 658 (Guj). The ground of appeal is rejected."
9. The learned counsel of the appellant made almost similar plea as was taken before the authorities below.
10. Apart from the discussions made above, the appellant has made claim that the case of the appellant is covered under s. 80P(2)(a)(vi) of the IT Act. The sub-clause deals with the collective disposal of labour and its employees. The learned counsel has drawn our attention to the case of Guru Nanak Co-operative (L&C) Society Ltd. (infra); decided by the Tribunal. There is proviso attached to sub-section, sub-cl. (vi) which reads as follows:
"Provided that in the case of a co-operative society falling under sub-cl. (vi), or sub-cl. (viii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely :
(1) the 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.
11. The learned counsel has drawn our attention to the order passed by the Tribunal in case of ITO vs. The Guru Nanak Co-operative (L&C) Society Ltd. in ITA No. 283(ASR)/1993 for the asst. yr. 1991-92. We have gone through the order passed by the Tribunal. Not only facts are different but the observations are different to the extent that in case of the appellant the authorities below have given categorical finding that the conditions laid in the proviso to s. 80P(2)(a)(vi) are not fulfilled. The authorities below have given detailed reasons that the resolution No. 3 is not passed by the competent persons of the society. The resolution No. 3 is definitely in violation of bye-laws No. 53 which is reproduced as follows:
"53. Subject to the provision of the Act and Rules no amendment to those bye-laws shall be carried out save in accordance with a resolution to discuss the amendments has been given :
Provided that no such resolution shall be valid unless it is passed by a majority of members present at the general meeting at which not less than two-third of the members for the time being of the society are present.
Provided further that model bye-laws of amendments previously approved by the Registrar may be adopted by a simple majority at a general meeting with an ordinary quorum".
There is no doubt that bye-laws 5 and 6 (iv) of the society is in contradiction to the proviso to sub-cl. (vi) of the Act. For the sake of clarity bye-laws 5 and 6 are reproduced as follows :
"5. Subject to the provisions of bye-law 6, any individual shall be eligible for admission as member of the society, if he is :
(i) Over 18 years in age and of sound mind;
(ii) Ordinarily resident in the area of operation of the society; and
(iii) of good character;
(iv) a skilled or unskilled worker except sympathising members not exceeding 5 or 1/10th of the total membership of the society whichever is less.
6. No individual shall be eligible for admission as member of the society if: -
(i) he has applied for bankruptcy.
or
(ii) he has been declared as an insolvent.
or
(iii) he has been sentenced for any offence involving dishonesty of moral turpitude within 5 years preceding the date of his admission as a member;
or
(iv) he is an approved contractor."
It is also relevant to reproduce the resolution 3 as follows :
"Resolution No. 3: The meeting of the Ganesh co-operative L&C Society Ltd., Bhatinda held today i.e. on 7th January, 1986, under the presidentship of Boota Singh, president of the society :
1. That Suraj Bhan being secretary is hereby authorised to write the proceedings of today.
2. It is hereby resolved that only those members would be entitled to voting right, who would work personally in the works allotted to the society."
Not only that the said resolution is not passed in accordance with the bye-laws of the society but also same is not passed by the competent authority. It is very much clear that even resolution does not delete the bye-laws 5 and 6 as reproduced above. This clearly shows that the issue of membership is to be read with bye-laws 5 and 6 and unauthorised resolution No. 3. All the three acts are in clear violation to the proviso to the s. 80P(2)(a)(vi) and, therefore, relief to the society cannot be granted.
12. The second important aspect of the case is that it is not only the members who are contributing collective disposal of the labour but large number of persons who are non-members as was explained by the learned counsel of the appellant. The work of the appellant society is such that they will require the job work from various labour contractors and large number of people are contributing their collective labour towards undertaking and execution of the contract during the year under consideration. It is, therefore, clear that major contribution of individual labour to the contract work is from non-members whereas contributions of members is very much minimum. The Hon'ble Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. vs. CIT (1975) 100 ITR 472 (AP) that the business of the appellant society must have a direct or proximate connection with or nexus to the earnings in the areas listed to sub-s. (2) in order that the society may enjoy the required exemption. The Hon'ble Gujarat High Court in the case of Gora Vibhag Jungle Kamdar Mandali vs. CIT (1986) 161 ITR 658 (Guj) has decided the issue that the voting right in a labour society if given to social workers then the society was not entitled to the deduction under s. 80P(2)(a)(vi) of the IT Act. The Hon'ble Gujarat High Court has given following findings :
"It is also important to note that in the Gujarat Co-operative Societies Act, 1961, also different kinds of members of co-operative Societies are contemplated inasmuch as the definition of the word 'member' in s. 2(13) of the said Act means a person joining in an application for the registration of a co-operative society which is subsequently registered or a person duly admitted to the membership of a society after registration and includes a nominal, associate or sympathiser member. Before the Gujarat Amendment Act No. 23 of 1982, the nominal, associate or sympathiser member of the society had the right to vote if such right is conferred on him by the bye-laws of the society, but by the aforesaid Amendment Act, such right of voting is taken away as it is clearly provided in s. 25(7) of the Gujarat Co-operative Societies Act, that no nominal or sympathiser member shall have the right to vote and no such member shall be eligible to be a member of a committee or for appointment as a representative of the society or any other society. It is, therefore, clear that the Gujarat State, after experience, has also, by amending the provisions of the Act, taken away the right to vote by nominal or sympathiser member even if provided by the rules or bye-laws. From the above discussion, it is clear that if the co-operative society as specified in sub-cl. (vi) of s. 80P(2) of the IT Act wants to earn full exemption on the profits made by it, persons other than those three categories specified in the proviso to s. 80P(2) of the IT Act, can members of the society, but they should not be given the right to vote only to members specified in the proviso. The laudable object behind this enactment is to see that the working of such societies is not in anyway interfered with or controlled by such outsiders. We have carefully considered the provisions of s. 80P of the Act along with its object and we are of the view that the language of the proviso has clearly expressed the intention of the legislature to carry out the object of eradicating any evil from any outside member from the root by providing that the right to vote be restricted only to three categories of members mentioned in the proviso in the rules and bye-laws of the co-operative society. It does not have any ambiguity. By interpreting the said proviso in its literal meaning, it is not likely to create any contradiction with the apparent purpose of the enactment or any absurdity or to defeat the object of the statute. In that view of the matter, the observations which are made in the Supreme Court judgment, Tirath Singh vs. Bachittar Singh AIR 1955 SC 830 are not applicable to the present case."
13. The intention of the legislature by introducing facility of exempting income was to provide a social support to the skilled and semi-skilled labourers so as to provide the economic uplift to the economically weaker sections of the society. It was also intention of the legislature to exempt the income of such skilled or semi-skilled labourer, if they will pool their contributions in shape of their skill and labour and make earnings, whereby such earnings will be exempt totally in case all such persons will constitute to co-operative society for the purpose of executing any contract of bigger magnitude. In cases where some individuals constitute a society and engage outside labour or make planning of the affairs in such a way like allotment of floating membership, that will result into passing of benefit to wrong persons. There is no scope whatsoever to bring non-member in this ambit. There is no scope to fiddle with the bye-laws by passing the resolution which has no legal standing. The benefit given under sub-cl. (vi) of s. 80P(2) is an additional benefit given to a co-operative society engaged in collective disposal of labour of its members on the fulfilment of conditions mentioned in the proviso and the language of the proviso is quite clear and there is no ambiguity. The conditions laid down in the section are to be strictly followed by the society who make such claim.
Keeping in view the above discussions, we are of the opinion that the CIT(A) was justified in refusing the exemption under s. 80P(2)(a)(vi) of the IT Act. The appeal of the appellant on this issue is dismissed.
14. In the result both the appeals of the Revenue as well as the assessee's are dismissed.