Income Tax Appellate Tribunal - Delhi
Karnal Co-Op. Sugar Mills Ltd. vs Deputy Commissioner Of Income-Tax on 23 February, 1998
Equivalent citations: [1998]66ITD521(DELHI)
ORDER
Nathu Ram, A.M.
1. These are counter appeals, preferred by the Revenue for the assessment year 1992-93 and the assessee for the assessment years 1993-94, 1994-95 and 1995-96 against the respective orders of the CIT (Appeals). Since issue involved is common, we have heard these appeals together and accordingly these are disposed of by this consolidated order.
2. The common ground raised in these appeals is whether the assessee is entitled to exemption of income under section 80P(2)(a)(iii) of the Income-tax Act.
2.1 The assessee is a co-operative society incorporated for manufacture of sugar from sugarcane. The assessee in the years under consideration claimed deduction under section 80P(2)(a)(iii). In support decision of the Hon'ble Supreme Court in the case of Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 418/44 Taxman 439 was cited. The Assessing Officer noticed that the assessee society buys sugarcane from its members, manufactures sugar out of such sugarcane purchased on its own account and sells sugar in the market. The end product which is the result of complicated manufacturing process is no more an agricultural produce. Sugar product did not belong to the members. Character of agricultural produce has undergone a complete change and accordingly the activity carried on cannot be termed as "marketing of agricultural produce of its members". He also noticed that in the case of Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd. (supra), raw cotton produced by the members was processed by the society to make it marketable. Processing cost was paid by members and the society sold the produce belonging to its members. Sale made was not to the members. It was on these facts that the Hon'ble Supreme Court held that the activity was covered by section 80P(2)(a)(iii) being a society engaged in marketing of agricultural produce of its members. However, the facts being distinguishable, the ratio of the above decision was not held as applicable to the facts of the present case. The Assessing Officer, therefore, rejected the claim made under section 80P(2)(a)(iii) for the years under consideration for almost the same reasoning given.
2.2 In appeal, for assessment year 1992-93, on behalf of the assessee reliance was placed on the decision of the Hon'ble Karnataka High Court in Addl. CIT v. Ryots Agricultural Produce Co-operative Marketing Society Ltd. [1978] 115 ITR 709 wherein the income derived by the Society by marketing of rice and oil derived from paddy and ground-nut belonging to its members was claimed as not liable to tax under section 81(1)(c). The Assessing Officer rejected the claim on the ground that the processing of paddy and ground-nut had been done with the aid of power and under clause (e) of section 81(1) it could not claim the relief notwithstanding the fact that rice and oil had been actually marketed. The appellate authorities, however, allowed the claim insofar as the income derived from marketing of goods was concerned. But the Revenue's appeal, relating to the income attributable to hulling and expeller charges received by the Society from its members where the marketing of goods was not involved, was allowed. The Hon'ble High Court upheld the view of the appellate authorities with the observation that marketing functions may involve exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market intelligence, etc. The judgment of the Hon'ble Karnataka High Court was approved by the Hon'ble Supreme Court in its judgment in Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd.'s case (supra). Further placing reliance in the case in Chowgule & Co. (Hind) (P.) Ltd. v. CIT [1990] 182 ITR 189/48 Taxman 152 (Punj. & Har.), it was contended that section 80P should be interpreted liberally having regard to the objects of the provisions, i.e., to encourage co-operative societies. The words used in section 80P are not agricultural produce grown by the members and so long as the commodity brought to the society was agricultural produce, the produce belonged to its members. The assessee society is accordingly entitled to the benefit under section 80P(2)(a)(iii). The CIT (Appeals) on the facts and on the strength of decisions cited, came to the conclusion that the entire business income of the society from manufacturing and sale of sugar was exempt under section 80P(2)(a)(iii).
2.3 As regards the appeals for the assessment years 1993-94, 1994-95 and 1995-96, the CIT (Appeals) has taken a contrary view wherein the assessee society was not held eligible to deduction under section 80P(2)(a)(iii). In these appeals the assessee further placed reliance on decision in CIT v. Haryana State Co-operative Supply & Marketing Federation Ltd. [1990] 182 ITR 53 (Punj. & Har.), wherein the marketing was defined as a business activity directed towards flow of goods and services from producer to consumer and in the present case since marketing involved, included purchase of sugarcane, manufacturing of sugar therefrom and sale of sugar in the market, the assessee was entitled to deduction under section 80P(2)(a)(iii). The Revenue at that stage also placed reliance on the Tribunal's decision in the case of Dudhganga Vedganga S. S. K. Ltd. v. Dy. CIT [1995] 54 ITD 97 (Pune), where on identical facts the claim made under section 80P(2)(a)(iii) was not allowed. The CIT (Appeals) discussed elaborately the facts involved and certain decisions in paras 1.3, 1.4, 1.5 and 1.6 of her order for the assessment year 1993-94 and finally upheld the action of the Assessing Officer disallowing the claim under section 80P(2)(a)(iii). Following her decision for the assessment year 1993-94, action of the Assessing Officer disallowing the claim for the assessment years 1994-95 and 1995-96 was also confirmed.
3. Learned counsel for the assessee placing reliance on the order of the CIT (Appeals) for the assessment year 1992-93 and reiterating the submissions made before the lower authorities submitted that in view of the judgment of the Supreme Court in Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd.'s case (supra) the assessee was entitled to exemption of total income under section 80P(2)(a)(iii). He further placing reliance on the decision in Ryots Agricultural Produce Co-operative Marketing Society Ltd.'s case (supra) submitted that marketing functions involve buying, selling, storage, transportation, processing, standardisation, etc., and thus marketing means - performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer. In support of this proposition he also referred to the decision of the Hon'ble Punjab & Haryana High Court reported in Haryana State Co-operative Supply & Marketing Federation Ltd.'s case (supra). He further submitted that the assessee society has its members growers of sugarcane but sugarcane was also purchased by the assessee society from non-members as well. He, however, admitted that exemption is available on marketing of agricultural produce of its members and not for marketing of produce of non-member growers and non-producer members. As such, income attributable to sugarcane purchased from non-member growers and non-producer members would be calculated on proportionate basis and the same could be brought to tax. He has also given certain calculations in this regard for the assessment year 1995-96. According to the learned counsel, income of Rs. 1,00,29,880 would be taxable as attributable to sugarcane purchased from non-grower members and non-member producers. The learned counsel, therefore, pleaded that insofar as the sugarcane purchased from member-growers is concerned, income attributable to such purchases is not taxable within the meaning of section 80P(2)(a)(iii).
4. The learned D.R. on the other hand advanced the arguments in support of the orders of the CIT (Appeals) for assessment years 1993-94 to 1995-96 which are claimed to be fully supported by various courts decisions.
5. We have carefully considered the facts and rival submissions. We have also gone through the orders of the lower authorities and also the various decisions cited for and against. Undisputed facts are that the assessee society was incorporated in October 1972 and as per its bye-laws the main object of the society is to establish a factory for the manufacture of sugar out of the sugarcane supplied to it primarily by its members and to sell the same to the best advantage of the members. The Society was constituted by the following four classes of members :
(i) producer members;
(ii) non-producer members;
(iii) nominated members; and
(iv) State Government.
5.1 During the relevant period there were 35810 members of the Society out of which 4310 members were non-grower of agricultural produce. We also note that the assessee Society also purchased sugarcane from non-members during the year weighing 420202 qtls. for a consideration of Rs. 1,98,24,765. The assessee Society also purchased sugarcane being 6,59,995 qtls. for a consideration of Rs. 3,28,06,526 from Indri Cane Growers Co-operative Society. The assessee Society manufactured sugar out of the sugarcane purchased from grower members as well as non-grower members and also from co-operative society. The assessee Society purchased sugarcane at a minimum price fixed by the Government. The assessee Society paid excess price of Rs. 5 per qtl. to member growers totalling to Rs. 3,13,009 and the same stands allowed at the appellate stage. The amount so paid was in fact adjusted against the shares allotted to the members. The assessee Society also seems to be assisting the cane-growers to improve the quality of the produce. The society has also been paying dividend to its members.
5.2 As stated above the assessee society purchased sugarcane from its members as well as non-members and manufactured therefrom sugar in the factory set up by the Society and earned income on sale of sugar. The question that arises is whether the income earned by the assessee Society from manufacturing of sugar out of cane purchased from its member growers or non-member growers and member non-growers is entitled to exemption under section 80P(2)(a)(iii). For proper appreciation we reproduce hereunder the relevant portion of section 80P :
"80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely :-
(a) in the case of a co-operative society engaged in -
(i) ......
(ii) ......
(iii) the marketing of the agricultural produce of its members.
...................
...................
the whole of the amount of profits and gains of business attributable to any one or more of such activities."
5.3 In the case of Ryots Agricultural Produce Co-operative Marketing Society Ltd. (supra), the expression "marketing" appearing in section 81(i)(c) [now section 80P(2)(a)(iii)] is considered to be of wide import and generally means "the performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer" and in order to make agricultural produce fit for marketing, it may have to be transported or processed, but all the activities involved are understood as amounting to a single activity, namely, marketing and not independent activities such as transporting, processing, selling, etc. The Hon'ble Court further held that marketing functions may involve exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market, intelligence, etc. 5.4 In the above cited case it was claimed that income derived by marketing of rice and oil derived from paddy and ground-nut belonging to its members was exempt from tax. The Court held that the goods were being marketed and the business of the assessee being marketing of agricultural produce of its members, its case fell under section 81(i)(c) and the fact that the goods which were ultimately marketed had been earlier processed with the aid of power would be of no consequence insofar as the exemption granted under section 81(i)(c) was concerned. The aforecited decision of the Hon'ble Karnataka High Court was approved by the Hon'ble Supreme Court in its judgment in the case of Broach Distt. Co-operative Cotton Sales, Ginning & Processing Society Ltd. (supra). In that case the Society was engaged in ginning and pressing of raw-cotton received from members and for rendering such services before selling the goods, the Society charged the members a certain amount by way of ginning and processing charges and also charged commission for the sale of the finished product. The Apex Court observed that the object of the section was to encourage and promote the growth of co-operative societies and consequently a liberal construction had to be given to the operation of that provision. It was held that ginning and pressing were part of the integral process of marketing. It was an activity incidental or ancillary to the marketing of the produce of its members. The members did not take back the cotton after it was ginned and pressed, and its sale was effected by the Society to the outside world and not to its members and they paid only the cost of ginning and pressing to the Society. It was held that the Society was entitled to exemption of the profits and gains derived from the activity of the entire business of ginning and pressing of cotton and marketing it by virtue of section 81(i)(c).
5.5 In the case of CIT v. Karjan Co-operative Cotton Sale, Ginning & Pressing Society Ltd. [1981] 129 ITR 821 (Guj.) the assessee society ginned and pressed cotton received from members and marketed cotton. The Society charged commission from members and interest, insurance and godown charges from purchasers. The Hon'ble Gujarat High Court held the view that concept of 'marketing' includes all activities connected with the process of taking over from the agricultural-producer-member and handing over marketable commodities to the purchaser and all the intermediate processes connected with the marketing of the agricultural produce of the members. The term "marketing" cannot be restricted only to the buying and selling activity. The commission charged from the members and the interest, godown and insurance charges received from the purchasers was attributable to the activity of "marketing" of agricultural produce of the members of the society and the same was held deductible under section 80P(2)(a)(iii).
5.6 In the case of Shree Rajkot Lodhika Purchase & Sales Union Ltd. v. ITO [1991] 38 ITD 562 (Ahd.) agricultural produce, comprising groundnuts of the members, were brought to the assessee Society and in the course of marketing of such produce the Society first converted the groundnut into oil and subsequently, the de-cake was converted into de-oil cake and oil was extracted by solvent extraction plant and these products were ultimately sold for the members. The Tribunal held that such activity was an activity of "marketing" of agricultural produce of its members and as such whole of profit or gain arising of such activity was exempt under section 80P(2)(a)(iii).
5.7 In the present case, the Society purchased sugarcane from its members as well as non-members at a price fixed by the Government. The assessee Society manufactures sugar out of such sugarcane purchased in its factory and sells it in the open market and earns profit therefrom. The facts of the present case are therefore, distinguishable from those of the cases cited supra wherein the Society processed the paddy into rice; groundnut into oil; and raw cotton was ginned and pressed and the end product in the shape of rice, oil and pressed cotton Was sold in the market on behalf of the members at remunerative price and the Society charged the members for the processing done. Whereas, in the present case the assessee Society in like manner has not carried out the manufacturing process of sugar out of the sugarcane belonging to the members and selling the sugar on their behalf in the open market and charging the members only the manufacturing charges thereby passing on the remunerative price of its agricultural produce to its members. What the assessee-society has done is that it purchased sugarcane from its members as well as non-members at the same price fixed by the Government and the profit earned from manufacturing of sugar has been appropriated by itself instead of passing of its benefit to its members as per the objects of its bye-laws which provides that the sugar shall be sold by the society to the best advantage of its members. The ratio of the aforesaid decisions is, therefore, not applicable to the facts of the present case.
5.8 Reference in this regard is made to the decision of the Hon'ble Madhya Pradesh High Court in the case of CIT v. Kisan Co-operative Rice Mills Ltd. [1976] 103 ITR 264, wherein the assessee Society purchased paddy from its members, milled it into rice and sold the same on its own account. It was held that income arising to the Society out of the business of purchase of paddy and sale of rice by it on its own account was not entitled to exemption under section 81(i)(c) [Now section 80P(2)(a)(iii)].
5.9 Further, in the case of Dudhganga Vedganga S. S. K. Ltd. (supra), the assessee Society produced sugar out of sugarcane purchased from its members as well as non-members and marketed sugar. It was held that the activity of marketing of agricultural produce of its members must be confined to direct produce from agriculture and not to anything manufactured or processed out of it. The Society was held as not entitled to deduction under section 80P(2)(a)(iii).
5.10 Further in the case of case of CIT v. Mahasamund Kissan Co-operative Rice Mill & Marketing Society Ltd. [1976] 103 ITR 499 (MP), paddy purchased by the Society from members was converted into rice and sold. The income derived from sale of rice was not held exempt under section 81(i)(c) [Now section 80P(2)(a)(iii)].
5.11 In the case of South Arcot District Co-operative Supply & Marketing Society Ltd. v. CIT [1974] 97 ITR 500 (Mad.), it was held that rice is not an agricultural produce as it does not continue to have the same original character as paddy after hulling and further it cannot be said that agricultural produce of the members was being sold as it is only the paddy that belonged to the members and rice did not belong to them but belonged to the society.
Ratio of the abovecited decisions directly applies to the facts of the present case as in this case also the assessee-society purchased sugarcane from members and non-members growers at rate fixed by Government like any other trader or manufacturer in this field, the sugar manufactured out of it was sold on its own account, the profit derived from sale of sugar is not on account of marketing of sugarcane of its members but it was on account of manufacturing of sugar out of sugarcane purchased on its own account and accordingly the deduction claimed under section 80P(2)(a)(iii) is not available thereon to the assessee Society.
5.12 As mentioned above, the assessee society also purchased sugarcane from non-members producers and Indri Cane Growers Co-operative Society. The income attributable to the sugarcane purchased from this Society was otherwise not entitled to exemption under section 80P(2)(a)(iii) in view of the decision of the Hon'ble Supreme Court in the case of Assam Co-operative Apex Marketing Society Ltd. v. CIT [1993] 201 ITR 338/69 Taxman 449 wherein the Society engaged in marketing of agricultural produce of its members also had other co-operative societies as its members. Since the agricultural produce marketed by the Society was not produced by the primary marketing societies, being its members, the assessee society was not held entitled to exemption under section 81(1)(c).
5.13 Having regard to all the facts and ratio of various decisions discussed we are of the considered view that the income earned by the assessee society from manufacturing of sugar on its own account was not entitled to exemption under section 80P(2)(a)(iii). We, therefore, vacate the order of the CIT (Appeals) for the assessment year 1992-93 and restore that of the Assessing Officer and further uphold the orders of the CIT (Appeals) for the assessment years 1993-94, 1994-95 and 1995-96 on the issue.
6 to 12. [These paras are not reproduced here as they involve minor issues.]