Full Judgment Text
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PETITIONER:
BROACH DISTT. CO-OPERATIVE COTTON SALESGINNING & PRESSING SO
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, AHMEDABAD.
DATE OF JUDGMENT26/04/1989
BENCH:
PATHAK, R.S. (CJ)
BENCH:
PATHAK, R.S. (CJ)
KANIA, M.H.
CITATION:
1989 AIR 1493 1989 SCR (2) 720
1989 SCC (2) 679 JT 1989 (2) 267
1989 SCALE (1)1138
CITATOR INFO :
RF 1992 SC1622 (4)
ACT:
Income Tax Act, 1961: Section
81(i)(c)--Assessee--Co-operatire Society--Income from gin-
ning and pressing--Whether exempt from tax.
HEADNOTE:
The assessee, a co-operative society, was rendering the
service of ginning and pressing raw cotton received from its
members and marketing the finished product on their behalf.
The assessee charged the members a certain amount by way of
ginning and pressing charges and further charged commission
for the sale of the finished product. For the assessment
years 1961-62 to 1963-64, the assessee claimed that the
receipts from the ginning and pressing activities were
exempt under section 81(i)(c) of the Income Tax Act, 1961
(as it stood then) which provided that income-tax shall not
be payable by a co-operative society in respect of the
profits and gains of business carried on by it, if it was a
society engaged in the marketing of the agricultural produce
of its members.
The Income Tax Officer declined to accept the claim on
the ground that the assessee had been carrying out the
process of ginning and pressing with the aid of power. The
Appellate Assistant Commissioner confirmed the orders of the
Income Tax Officer. The Appellate Tribunal allowed the
second appeal of the assessee holding that the ginning and
pressing activities were to be regarded as an integral part
of the marketing activity. The High Court, while deciding
the reference in favour of the Revenue, observed that the
assessee carried on ginning and pressing of cotton with the
aid of power, and even if those activities were regarded as
ancillary or incidental to its marketing .activity, they
would not come within the category of exempted activities in
view of the proviso to the section.
Allowing the appeals, this Court,
HELD: (1) Ginning and pressing was part of the integral
process of marketing. It was an activity incidental or
ancillary to marketing,
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which included the ginning and pressing of raw cotton and
was not confined to selling activity alone. The members did
not take back the cotton after it was ginned and pressed.
All the raw cotton so treated was marketed by the assessee
on behalf of its members to the outside world and not to its
members. [723G-H; 724A]
Addl. Commissioner of Income-Tax, Karnataka v. Ryots
Agricultural Produce Co-operative Society Ltd., [1978] 115
ITR 709; Commissioner of Income-Tax, Gujarat IV v. Karjan
Co-op. Cotton Sale, Ginning & Pressing Society Ltd., [1981]
129 ITR 821, referred to.
(2) The object of s. 81(i) of the Income Tax Act, 1961
was to encourage and promote the growth of co-operative
societies, and consequently a liberal construction must be
given to the operation of that provision. [724A-B]
(3) The proviso to s. 81(i) operates to exclude from the
exemption those activities which can be regarded as separate
and distinct from the activities enumerated in clauses (a)
to (f) of s. 81(i). If the activity in question is inciden-
tal or ancillary to one of the activities mentioned in those
clauses, the proviso will not apply. [724B]
(4) The assessee is entitled to the 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 cl. (c) of s. 81(i) of the Incometax Act, and
the High Court erred in holding to the contrary. [724F-G]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5 135 15
(NT) of 1975.
From the Judgment and Order dated 24.9.1973 of the
Gujarat High Court in Income Tax Reference No. 31 of 1971.
T.A. Ramachandran, Mrs. A.K. Verma and D.N. Mishra for
the Appellant.
C.M. Lodha, K.C. Dua and Ms. A. Subhashini for the
Respondent.
The Judgment of the Court was delivered by
PATHAK, CJ. These appeals by certificate granted by the
High Court of Gujarat are directed against the judgment of
the High Court
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answering the following question in favour of the Revenue
and against the assessee:
"Whether, on the facts and in the circum-
stances of the case, the income of the Society
from ginning and pressing was exempt under
section 81(i)(c) of the Income-Tax Act, 1961,
as it stood prior to its amendment on 1st
April, 1968?"
The assessee is a. co-operative society constituted
under the Cooperative Societies ACt. The objects of the
society intend that it should press cotton and pack the
bundles for its individual members as well as other custom-
ers, to Use its machinery for any useful work of its mem-
bers, and to sell raw cotton seeds and other agricultural
products. The assessee possesses a ginning and pressing
factory to cater to the needs of its members. It gets raw
cotton from the members, and ginns and presses the cotton
for marketing on behalf of its members. For rendering the
services of ginning and pressing before selling the goods,
the assessee charges the members a certain amount by way of
ginning and pressing charges. It also charges commission for
the sale of the finished product.
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In the course of assessment for the assessment years
1961-62 to 1963-64, the assessee claimed that the receipts
from the ginning and pressing activities were exempt under
s. 81(i)(c) of the Income Tax (as it stood then). The In-
come-Tax Officer, however, declined to accept the claim on
the ground that the assessee had been carrying out the
process of ginning and pressing with the aid of power. The
Appellate Assistant Commissioner confirmed orders of the
Income Tax Officer. In second appeal the Income Tax Appel-
late Tribunal held that having regard to the circumstance
that the receipts were from members only, that there was a
general market for ginning and pressing cotton only and no
evidence appeared of any dealing in raw cotton, the ginning
and pressing activities were to be regarded as an integral
part of the marketing activity, and therefore the receipts
from those activities were not liable to tax by virtue of s.
81(i)(c). At the instance of the Revenue the Appellate
Tribunal referred the-question of law set out earlier to the
High Court of Gujarat for its opinion.
For the purpose of contention raised before the High
Court, and again before us the following provisions of s. 81
seem relevant:
"81. Income of Co-operative societies Income-
tax shall
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not be payable by a co-operative society--
(i) in respect of the profits and
gains of business carried on by it, if it is--
(c) a society engaged in the marketing
of the agricultural produce of its members; or
(e) a society engaged in the process-
ing without the aid of power of the agricul-
tural produce of its members; or
Provided that, in the case of a co-operative
society which is also engaged in activities
other than those mentioned in this clause,
nothing contained herein shall apply to that
part of its profits and gains as is attributa-
ble to such activities and as exceeds fifteen
thousands rupees."
The High Court proceeded on the view that if a Society
carries on certain activities which are exempted activities
according to cls. (a) to (f) of s. 81(i) and certain other
activities which are not exempted, the profits and gains
attributable to such non-exempted activities must necessari-
ly be taxed. The High Court observed that the assessee
carried on ginning and pressing of cotton with the aid of
power, and even if those activities are regarded as ancil-
lary or incidental to its marketing activity they would not
come within the category of exempted activities in view of
the proviso, and therefore they would have to be taxed. We
find ourselves unable to accept the view taken by the High
Court. It is apparent that the ginning, and pressing was
part of the integral process of marketing. It was an activi-
ty incidental or ancillary to the marketing of the produce
of its members. The ginning and pressing of the raw cotton
was never regarded as a distinct process. When they deliv-
ered the raw cotton to the assessee for marketing, ginning
and pressing was regarded as part of that process. The
members did not take back the cotton after it was ginned and
pressed. They paid only the costs of ginning and pressing.
All the raw cotton s6
724
treated by the assessee was received from its members, and
it was only such’ cotton of its members which was marketed
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by the assessee. The sale of the cotton was effected by the
assessee to the outside world and not to its members. The
object of s. 81(i) was to encourage and promote the growth
of cooperative societies, and consequently a liberal con-
struction must be given to the operation of that provision.
The proviso to s. 81(i) operates to exclude from the exemp-
tion those activities which can be regarded as separate and
distinct from the activities enumerated in clauses (a) to
(f) of s. 81(i). If the activity in question is incidental
or ancillary to one of the activities mentioned in those
clauses, the proviso, in our opinion, will not apply. We may
refer in this connection to the observations of the Karnata-
ka High Court in Addl. Commissioner of Income-Tax, Karnataka
v. Ryots Agricultural Produce Co-operative Marketing Society
Ltd., [1978] 115 ITR 709 where reference has been made to
the broad meaning of the expression ’marketing’ appearing in
cl. (c) of s. 81(i), and it has been explained that in order
to make agricultural produce fit for marketing the activi-
ties involved in enabling that to be done must be regarded
as involved in the activity of marketing itself. Reference
may also be made to Commissioner of Income-tax, Gujarat IV
v. Karjan Co-op. Cotton Sale, Ginning & Pressing Society
Ltd., [1982] 129 ITR 821 where the concept of ’marketing’
was given a meaning which included the ginning and pressing
of raw cotton and was not confined to the selling activity
alone.
An attempt was made by learned counsel for the Revenue
to raise the point that ginning and pressing into cotton
bales changed the character of the cotton and therefore,
what was marketed was not the agricultural produce of the
members of the assessee. This point was not raised at any
earlier stage by the Revenue and cannot be permitted to be
taken now.
We are of opinion that the assessee is entitled to the
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 cl. (c) of s. 81(i) of the
Income-tax Act, and that the High Court erred in holding to
the contrary.
In the result the appeals are allowed and the question
referred by the Income-tax Appellate Tribunal to the High
Court must be answered in the affirmative, in favour of the
assessee and against the Revenue. The assessee is entitled
to its costs.
L S.S. Appeals allowed.
725