Income Tax Appellate Tribunal - Nagpur
First Income-Tax Officer vs Pusad Ginning And Pressing ... on 13 August, 1990
Equivalent citations: [1990]35ITD146(NAG)
ORDER
M.A. Ajinkya, Accountant Member
1. This is a departmental appeal in which the following two grounds have been raised :
(1) The learned CIT(A) erred in holding that the assessee is entitled to deduction under Section 35C.
(2) The learned CIT(A) erred in allowing deduction of Rs. 37,007 under Section 80P(2)(e).
2. We will deal with the second ground first. The admissibility of deduction under Section 80P(2)(e) of an amount of Rs. 37,007 was considered by the Tribunal in the assessee's own case in their order dt. 27-11-1980 in ITA No. 62/Nag/80 for the assessment year 1976-77. A copy of this order has been filed before us and for the reasons stated in that order, we hold that the decision of the CIT(Appeals) is correct and does not call for any interference.
3. The first ground raised by the department has given rise to an important and interesting issue of law raised by Shri L.S. Dewani, the learned Counsel for the assessee who attempted to argue by resorting to Rule 27 of the Tribunal Rules that a co-operative society was not an association of persons and attempted to support the order of the CIT(Appeals) on the ground decided against him which was that the assessee is an association of persons. Certain facts in this regard may be stated.
4. The assessee which is a co-operative society derives income from ginning and pressing of cotton on behalf of the Maharashtra State Cotton Marketing Federation. It debited, during the relevant accounting year, an amount of Rs. 3,10,125 being the expenditure by way of facilities and incentives to cultivators by providing fertilizers, seeds, tools and implements for cultivation. It claimed deduction of Rs. 3,72,150 being 120% of the expenditure actually debited under Section 35C of the Income-tax Act, 1961. Such claim was rejected by the ITO after obtaining direction of the IAC(Asstt.) under Section 144A of the Act. In appeal, the CIT (A) allowed the claim of the assessee for weighted deduction under Section 35C. He observed that the expenditure in question does not fall within Section 40A(2) but it falls within the scope of Section 35C because the following requisite conditions were fulfilled:
(a) The assessee was a co-operative society engaged in the processing of raw cotton and agricultural product; and
(b) I had incurred directly an expenditure in the provision of goods, services and facilities specified in Section 35C(1)(b) such as fertilizers, seeds, etc., for use by the cultivator.
The CIT(Appeals), however, restricted the claim for deduction to Rs. 3,46,500 because he found that the assessee had actually expended only Rs. 2,88,750. Further, the CIT (Appeals) rejected the claim of the assessee that the status of the assessee was not an AOP. It was argued before the CIT(Appeals) that a cooperative society was not an AOP for the purpose of applying Section 40A(2). While rejecting this claim, the CIT(Appeals), in para 6 of his order, observed as under:-
The Maharashtra State Co-operatives Act, 1960 (under which the appellant society is registered) defines the various types of societies in Section 2 there of viz.,such as Consumer Society, Crop Protection Society, Farming Society, Housing Society, Processing Society, Procedure Society etc. For each of the societies, the objects are specified in the said Act Thus, Under Section 2(22), processing society means a society, the object of which is the processing of goods. Under Section 2(23), Producer's society means a society, the object of which is the production and a disposal of goods or the collective disposal of the labour of the members thereof. It thus follows that the members who come together to form a co-operative society ipso facto come together for the promotion of a joint enterprise, not constituting a partnership. The status will thus be an Association of Persons.
5. In the present appeal, the department is in appeal against the CIT(Appeals)'s decision granting weighted deduction under Section 35C and the learned Counsel for the assessee, ShriL.S. Dewani, invoking the provisions of Rule 27 of the Tribunal Rules, has contended that the assessee's claim that it is not an AOP should be accepted.
6. So far as the departmental appeal is concerned, we are, on a perusal of the record, satisfied that the order of the CIT (Appeals) granting weighted deduction under Section 35C is correct and does not call for any interference. It was argued before the CIT(Appeals) that it was the practice of the society to provide specific agriculture oriented facilities such as fertilizers, seeds etc. to the cultivators so that they would grow cotton for which each cultivator was sanctioned certain amount which would be disbursed only in kind and never in cash. Complete details of the persons to whom such disbursement were made were available and had been produced before the ITO. It was argued that Section 40A(2) was related only to expenditure by way of payments and in the present case, there was no payment at all but only disbursements of fertilizers, seeds etc., which did not fall within the ambit of that section. This argument was accepted by the CIT(Appeals). The CIT(Appeals) observed that where no expenditure as contemplated in Clause (a) of Section 40A(2) is incurred, the provision of Sub-section 40 A(2) cannot be invoked. He relied on the decision in the case of CIT v. A.K. Subbaraya Chetty & Sons [1980] 123 ITR 592 (Mad.) and the decision in the case of CIT v. Udhoji Srikrishandas. The findings of the CIT(Appeals) in this regard are, in our opinion, not assailable and have to be confirmed.
7. The points raised by Shri Dewani raising an interesting issue may now be discussed.
7.1 The main point of Shri Dewani's argument was that the assessee is a co-operative society and not an AOP. Shri Dewani argued that the a co-operative society was an independent status which came within the inclusive definition of the term 'persons' under Section 2(31) of the Act. In support of this stand, Shri Dewani first referred to the various provisions of the Maharashtra Co-operative Societies Act, 1960. In Clause (27) of Section 2 of this Act, which is a definition section, the expression 'society' is defined as a co-operative society registered or deemed to be registered under this Act. He then referred to Section 4 of this Act which reads as under:-
4. A society which has its objects the promotion of the economic interests or general welfare of its members, or of the public, in accordance with co-operative principles, or a society established with the object of facilitating the operations of any such society, may be registered under this Act: Provided that, o society shall be registered if it is likely to be economically unsound, or the registration of which may have an adverse effect on development of the co-operative movement, or the registration of which may be contrary to the policy, directives which the State Government may, from time to time, issue.
On the basis of the above section, he argued that a co-operative society was formed for promotion of the economic interests and general welfare of its members in accordance with the co-operative principles. The society of this type was not formed with the object of earning income and, therefore, it cannot be considered as an AOP. In this connection, he referred to and relied upon the decision of the Supreme Court in the case of CIT. v. Indira Balkrishna [1960] 39 ITR 546 and another decision in the case of G. Murugesan & Bros. v. CIT [1973] 88 ITR 432, where the Supreme Court has held that in order to treat the assessee as an AOP it must be proved that the members of the AOP have come together with the common intention of earning income. In the present case, there was no such intention or object to produce income and there was no collusion on the part of the members of the society to produce income. In this regard, he referred to the objects of the society (page 30 of the compilation) which indicated that the society was formed for the benefits of its members, for facilitating movement of goods and earning of rent and such other activities which would benefit and propogate the welfare of its member.
7.2 Shri Dewani also referred to Section 29(2) of the Maharashtra Co-operative Societies Act which puts restriction on the members of the society for transfer of shares, interest in the capital or property of the society. In the case of an association of persons, Shri Dewani, argued that there is no such restriction.
7.3 He then referred to Section 36 of the said Act which provides for registration of the society as a body corporate with perpetual succession and a common seal and with power to acquit, hold and dispose of property, to enter into contracts, to institute and defend suits and other legal proceedings and to do all such things as are necessary for the purpose for which it is constituted. Since a co-operative society was required to be registered as a body corporate, it could not be treated as an AOP. He also referred to Section 45 of the said Act which provides that the transactions of the society with persons other than members shall be subject to such restrictions, if any, as may be prescribed. Thus, Shri Dewani, argued that this section puts restriction on the transaction with the persons other than the members which was the pre-requisite of the co-operative movement whereas if the co-operative society was treated to be an AOP and if Section 40A(2) was considered to be applicable here then, that section prohibits any payment of expenditure which invalidated the payment made by an AOP to its members. Thus, Section 40A(2)(b) brought within its purview the expenditure resulting in payment to members in the case of an AOP whereas the Section 45 of the Co-operative Societies Act puts restriction on any dealing with the persons other than members. In that sense, Shri Dewani, argued that the objects of the co-operative society would run counter to the provisions of the Act if the status of the co-operative society taken as an AOP. Shri Dewani also then referred to the registration certificate (page 23 of the compilation) where the same society has been registered as a co-operative society.
7.4 Having referred to the various provisions of the Maharashtra Co-operative Societies Act, which according to Shri Dewani, supported his stand that the assessee was not an AOP Shri Dewani then referred to the various provisions of the Income-tax Act, 1961. According to Shri Dewani, the Act recognises a Cooperative society as a saparate assessable entity. In this context, he referred to the Finance Act, 1982 which provides a separate rate of tax in the case of a cooperative society in paragraph B of Part I of the First Schedule of the Finance Act, 1982. Shri Dewani then argued that the form No. 2 of the return of income provides for separate status of co-operative society which was mentioned in contradistinction to status as an association of persons (AOP), Association of persons (Trust), Body of individuals (BOI), Artificial juridical person etc., all of which were given separate distinctive codes different from the code allotted to co-operative society. Shri Dewani then argued that the members of an AOP can claim dissolution of an AOP but the members of a co-operative society cannot claim dissolution of the society. He pointed out that the assessee was, in fact, assessed in the status of a co-operative society and not in the status of an AOP. He argued that if the assessee was to be treated as an AOP then certain sections of the Act would become inworkable. In particular, he referred to Sections 67A, 86(v), 167A and 40(ba). He then argued that Section 80P applies only to a co-operative society and, therefore, a different identity of a co-operative society as such was recognised by the Income-tax Act. Alternatively and without prejudice to the above, Shri Dewani argued that the status of the assessee could be treated as that of an artificial juridical person or the assessee could be treated as an individual and relied on the decision of the Supreme Court in the case of Jogendra Nath Naskar v. CIT [1969] 74 ITR 33 and on the decision of the Allahabad High Court in the case of Bar Council of Uttar Pradesh v. CIT [1983] 143 ITR 584. If the co-operative society was treated as an AOP then while applying the provisions of. Section 40A(2), the assessee which is a company would be in a better position inasmuch as the only payments made to the directors and share-holders would come within the ambit of that section whereas in the case of a co-operative society, the payments made to its members would hit by application of that section if such co-operative society was to be treated as an AOP. He argued that the provisions in the case of a co-operative society should be liberally construed. For this proposition, he relied on the decision of the Supreme Court in the case of Broach Distt. Co-operative Cotton Sales Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 418. Alternatively and without prejudice to the above, Shri Dewani argued that the claim should be allowed as a business expenditure and for this proposition, he relied on the decision of the Gujarat High Court in the case of CIT v. Cellulose Products of India Ltd. [1985] 151 ITR 499 (FB).
8. We have carefully considered the submissions made in this behalf. We cannot accept Shri Dewani's argument that the object with which the co-operative society is formed is not an object to earn income. A careful perusal of the object clause at page 30 of the compilation would show that there are several objects of the society which have the effect of earning income. For example, the object (c) of the society provides for earning of rent, movement of goods and construction of godowns for storing the goods. The object (j) provides for organising the programmes to promote the financial prosperity of the members. These objects clearly spell out an intention to earn income. Even Section 4 of the Maharashtra Co-operative Societies Act talks of promotion of economic interests of the members of a society. Therefore, we cannot accept the argument that the co-operative society has been formed not with the intention of earning income. Therefore, in our opinion, the decisions of the Supreme Court in Indira Balkrishna's case (supra) and G. Murugesan & Bros.' case (supra) would not necessarily support the case of Shri Dewani.
9. However, the other arguments raised by Shri Dewani would appear to support his claim that the status of the assessee should not be treated as an AOP. We agree that the Section 2(31) is an inclusive definition of term'persons'and can cover a category of the assessee other than the various categories mentioned in that Section Further, a co-operative society is a separate assessable unit has been given statutory recognition by the Finance Act, 1982 which has provided for a separate rate of tax. The operative portion of Part I of the First Schedule reads as under :-
Paragraph B In the case of every co-operative society-
Rates of income-tax.
(1) where the total income ex- 15% of the total income.
does not exceed Rs. 10,000
(2) where the total income Rs. 1,500 plus 25% of the amount by
exceeds Rs. 10,000 but does which the total income exceed
not exceed Rs. 20,000 Rs. 10,000
(3) where the total income Rs. 4,000 plus 40% of the amount by
exceeds Rs. 20,000 which the total income exceeds
Rs. 20,000
Further, in the notes Form No. 2 of the return form prescribed under Rule 12(1)(b)(i) of the Income-tax Rules, the notes particulars thus reads as under :-
26. For indicating the status, please use one of the following codes :
....
(g) Association of persons (AOP) 07
(h) Association of persons (Trust) 08
(i) Body of Individuals (BOI) 09
(J) Artificial juridical person 10
(k) Co-operative Society 11
. . . . . . . . . . . . . ..
Here, a separate code number is provided for a co-operative society to indicate the status as can be seen from above. A co-operative society is indicated as distinct from an association of persons (AOP) and an association of persons (Trust). Therefore, a statutory recognition has been given to the status of a co-operative society as such. We agree that the members of a co-operative society cannot ask for dissolution of the society as the members of an AOP can. So far as the provisions of various sections referred to by Shri Dewani are concerned, we find that Section 67A was introduced with effect from 1-4-1989 and does not advance the case of Shri Dewani in this regard. The purpose of this section was altogether different and does not support Shri Dewani's case in the present context. Similarly, Section 86(v)was also introduced with effect from 1-4-1989 and does not support the case of Shri Dewani. Section 167A has been omitted by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. Before its omission, it read as under:
Where the individual shares of the members of an association of persons (other than a company or co-operative society) in the whole or any part of the income of such association are indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate.
Explanation : For the purposes of this section -
(a) 'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below Sub-section (3) of Section 164;
(b) the individual shares of the members of an association of person in the whole or any part of the income of such association shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) are indeterminate or unknown on the date of formation of such association or at any time thereafter.
Here, the co-operative society has been independently stated along with the company while considering the tax rates to be applied to an AOP where the individual shares of the members are indeterminate or unknown. Section 40(ba) is also introduced with effect from 1-4-1989 and does not advance the case of Shri Dewani any further. However, when we look at Section 40A(2)(b) and Section 40A(2), we find that the argument advanced in this regard by Shri Dewani assumes some relevance and importance. Section 40A(2) and Section 40A(2)(b) read as under:
40 A(2)(a) - Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in Clause (b) of this Sub-section and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction :
(b) The persons referred to in Clause (a) are the following, namely :-
(i) Where the assessee is an individual any relative of the assessee;
(ii) where the assessee is a company, firm any director of the company, parter of the association of persons or Hindu undi firm, or member of the association or vided family. family, or any relative of such director,partner or member;
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;
(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the "case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
(vi) any person who carries on a business or profession, -
(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member, has a substantial interest in the business or profession of that person.
This section talks of the expenditure in respect of which payment has been made or is to be made to any persons referred in Clause (b) of the section and provides that if the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from. Now in the case of a company, the expenditure contemplated in Clause 2(a) in respect of persons referred to in that clause in the context of the director of a company or a partner of a firm or member of the association or family or any relative of such director, partner or member. The essence of this section is to check excessive expenditure by a company on a director or person having substantial interest in the company in the business or profession of the company. In the case of a co-operative society, provisions of seeds etc. (which has resulted in this type of expenditure which has been debited to the Profit and Loss Account) is the very essence of the co-oprative movement. Section 45 of the Maharashtra Co-operative Societies Act puts restriction on a co-operative society in its dealing with the persons other than the members. Therefore, by treating a co-operative society as an AOP and by bringing the expenses which have the effect of providing amenities to its members within the ambit of Clause (b) of Section 40A(2), the very purpose of the co-operative movement and co-operative societies of providing facilities to its members would be defeated. We cannot encourage an interpretation of the section which will have the effect of defeating the various provisions of the Maharashtra Co-operative Societies Act and for that reason cannot accept the finding of the Commissioner (Appeals) that the status of the co-operative society should be taken as an AOP particularly when the co-operative society has been independently identified and has been recognised by the Income-tax Act in the form of provision of separate rates by the Finance Act, 1982 and in the form of separate status other than the status of an AOP in the return of income prescribed for the purpose. We agree that the provisions in regard to a co-operative society have to be liberally construed as held by the Supreme Court in the case of Broach Distt. Co-operative Cotton Sales Ginning & Pressing Society Ltd.' s case (supra). Even if the status of a co-operative society is taken as that of an artificial juridical person or an individual, or a company, the expenditure of the type considered in the present case would not be hit by the application of Section 40A(2). The arguments advanced, at length, by Shri Dewani, with reference to the definition of the term 'persons' which he argued, is an inclusive definition and the other arguments with reference to the provisions of the Maharashtra Co-operative Societies Act, the other sections with which we have dealt with separately would seem to support his stand that the status of the co-operative society should not be treated as an AOP.
10. In the light of the discussion above, we hold that the assessee cannot be assessed in the status of an association of persons and we would, therefore, modify the order of the CIT(Appeals) insofar as it relates to the status of the assessee. The arguments advanced by Shri Dewani in this regard to support the order of the CIT(Appeals) by invoking Rule 27 of the Tribunal's rules are accepted.
11. In the result, the departmental appeal is dismissed.