1. The assessee at whose instance this reference has been made is a co-operative society which derives income from various activities such as business in grains, sugar, articles intended for agricultural use, letting of godowns, commission, property, interest and dividend. The assessee society had entered into an agreement with the Government of Maharashtra dated October 30, 1961. This agreement is annexure 'B' to the statement of the case.
2. The preamble to the agreement recites that 'the Government had decided to appoint a sole distributor to store and distribute Ammonium Sulphate, Ammonium Sulphate Nitrate,......by obtaining supplies from the Central Fertiliser Pool or from the manufacturers in India, as the case may be, in the eight districts of Buldana, Akola, Amravati, Yeotmal, Wardha, Nagpur, Chanda and Bhandara (hereinafter referred to as the 'Agency Area').' The assessee-society is described in the agreement as 'Distributor'. It is not necessary to refer in detail to the several clauses of the agreement. The material clauses thereof provided that the distributor shall place indents with the Government for the required quantities of fertilisers or each quarter, one month in advance of the quarter and the Government shall thereupon arrange to supply the fertilisers to the railway stations specified in the indents subject to availability of stocks of fertilisers. The distributor is to take delivery of the supplies and to store them safely in its godowns. The delivery of the fertilisers is, under the agreement, deemed to have been given to the distributor once they are put on rail at Bombay/Sindri or any other railway station in India after the actual weighment on a railway or public weigh-bridge. Clause 4 provides, inter alia, that, 'all risks including shortages in transit pertaining to the fertilisers, after being put on rail, shall be borne by the distributor and the distributor shall be liable to account for the full quantity and bear itself loss on any account after the fertilisers are delivered. That clause also expressly makes it clear that Government shall not be liable for any loss or shortage in transit, etc. Under clause 7, it is expressly provided that the distributor shall be liable to make good any damage or loss which may be caused to the Government by any reason whatsoever. Clause 8 is important. It provides that 'the property in the fertilisers received by the distributor as also in the existing carry over stocks shall vest and always remain vested in the Government while in the custody of the distributor, its agents or any other agency working on its behalf in the discharge of its responsibilities under this agreement. The distributor shall not mortgage or pledge the fertilisers, but shall dispose of the same only in the manner provided in this agreement and at the price fixed by the Government from time to time'. Clause 14 deals with remuneration to be paid to the distributor and remuneration is described as remuneration for the distribution work executed by the distributor under the agreement. Rate is specified. Clause 15 provides that the distributor shall be given an advance of Rs. 25 per ton on stocks of the fertilisers to meet the expenditure on unloading wagons and transferring stocks to distribution or storing centres and such sums advanced have to be deducted from the amounts payable to the distributor by way of commission.
3. The relevant assessment year is 1962-63, during which the assessee received Rs. 1,07,509 as commission from the Government of Maharashtra on sale of fertilisers and the assessee claimed exemption also had sold certain articles to non-members and had derived substantial income therefrom.
4. The Income-tax Officer took the view that the assessee was dealing on a very large scale in various articles, like sugar and grain, which did not belong to the categories specified in section 81(i)(d) and rejected the claim of the assessee.
5. An appeal filed by the assessee came to be dismissed. The assessee, therefore, filed second appeal before the Tribunal.
6. The contention raised by the assessee before the Tribunal was that once the business of the assessee of the assessee-society fell under section 81(i)(d), the entire business profits were exempt from tax and exemption could not be restricted only to a portion of the profits attributable to the sales to the members. On a construction of the agreement, the Tribunal took the view that the assessee was not a society engaged in the business of purchase of fertilisers within the meaning of clause (d) of section 81(i) and, therefore, the assessee's claim for exemption from tax in respect of its profits from the fertiliser business was not well founded. The receipts from the Government by the society were found to be in the nature of commission. Dealing with the sales to non-members, the Tribunal considered certain articles, like iron and steel, superphosphates, oil engines and insecticides and having regard to the quantum of sales of the articles except insecticides, it was found that sales to members varied between 80% to 99% but that in respect of insecticides, the sales to members were hardly 5%. Consequently, the Tribunal held that the assessee was not entitled to exemption from tax in respect of its profits from the sale of insecticides to non-members.
7. The correctness of the rejection of the claim for exemption by the Tribunal is now put in issue by the assessee in this reference in the two following questions :
'1. Whether the assessee is entitled to exemption from tax under section 81(i)(d), Income-tax Act, 1961, in respect of its profits from fertiliser business ?
2. Whether the assessee is entitled to exemption from tax under section 81(i)(d), Income-tax Act, 1961, in respect of its profits from the sale of insecticides to non-members ?'
8. Mr. Thakar, the learned counsel appearing for the assessee, has contended that when section 81(i)(d) refers to 'a society engaged in the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members', the emphasis of the provision is on the supply of the articles specified above to the members and notwithstanding the fact that under the agreement, the assessee is described as a distributor, the assessee was to be regarded as a purchaser of fertilisers and, if necessary, a very wide meaning must be given to the word 'purchase'. According to Mr. Thakar, learned counsel for the assessee, the word 'purchase' should be construed in the sense of procuring and since the assessee was procuring fertilisers under the agreement for the purchase or sale to its members, its entitled to the benefit of exemption under section 81(i)(d).
9. It is necessary at the outset to ascertain the legal effect of the agreement entered into by the assessee with the Government of Maharashtra. The agreement expressly states that, even though the fertilisers are despatched according to the indents made by the assessee, the property in the fertilisers continued to vest in the Government during all the time when the fertilisers were in the custody of the distributor. The effect of clause 8, therefore, is that at no stage the indented fertilisers became the property of the assessee-society. There is no transfer of the property by the Government in favour of the distributor or the assessee-society because the agreement expressly prevents this from happening. Now, it is no doubt true, that the agreement provides that the society is bound to reimburse the Government for any loss that may be occasioned after the fertilisers are despatched by the Government and the argument of Mr. Thakar is that since the assessee-society is required to reimburse the Government for the loss and generally it is the agent who is really reimbursed by the principal, the assessee must be treated as the owner of the fertilisers indented by him. There is nothing in law to prevent a principal and an agent from specifically stipulating that while the good of the principal are in the custody of the agent, the agent shall be responsible for any reason whatsoever and that the agent shall reimburse the principal to the extent of the loss caused. Such a provision does not necessarily imply that the person who is to bear the loss is the owner of the property and such an arrangement is not in any way inconsistent with the relationship of a principal and agent. The relationship between the assessee-society and the Government is really put beyond doubt by the clause regarding the remuneration to be paid to the assessee. Clause 14, to which we have made a reference above, expressly provides that the Government shall pay remuneration for the distribution work executed by the assessee. When an owner deals with his own property or sells his own property, what he gets is price. It is only when he renders services for another, whether as an agent or otherwise, that he gets remuneration. When the agreement expressly refers to the payment to be made to the society as remuneration and the remuneration is expressly described as commission at the prescribed rate, it is difficult to see how the assessee can, by any stretch of imagination, claim that it was the owner of the fertilisers or that it had purchased the fertilisers from the State Government. The agreement, in our view, leaves no room for the argument that the assessee was purchasing the fertilisers from the Government. It unmistakably spells out that the assessee was clearly, it was to be paid remuneration styled as commission.
10. We fail to appreciate the argument of the learned counsel that the word 'purchase' used in section 81(i)(d) must be construed in the sense of procuring and that even if some violence is required to be done to the language of the section, it should be so done if a literal construction of the provisions of section 81(i)(d) is likely to defeat the object of the Act. Now, it is hardly difficult to dispute as a matter of principle or proposition that if a literal meaning given to the word in a provision of a statute leads to absurd results or such a construction defeats the intention of the legislature, it would be permissible to stretch the language of the section or in a given case do a little violence to the words used in the section. That principle is hardly attracted in the present case. We must remember that the whole object of section 81(i)(d). It is also well-known that one who claims the exemption must fall strictly within the four corners of the exemption provisions and an exemption must be strictly construed. There are two requirements of clause (d) so far as the present case is concerned. The first requirement, before exemption from tax in respect of profits and gains of business of a society is claimed, is that the society must be engaged in the purchase of the articles specified under clause (d). Secondly, those articles must be intended for agriculture and thirdly, the purchase must be 'for the purpose of supplying them to its members'. Now, There is no doubt that fertiliser is an article intended for agriculture and has to be supplied to the members of the society but we do not understand how emphasis has to be placed only on the concept of supplying articles to the members as contended by Mr. Thakar. Section 81(i)(d) briefly reads :... 'A society engaged in the purchase of......articles...for the purpose of supplying them to its members.' The provision clearly implies that there must be purchase and the purchase of the articles must be for the purpose of supplying them to the members. It is only when the articles are purchased at a lesser cost and sold at a higher cost that a question of profit arises. It is this profit which is sought to be exempted from taxation under section 81(i). When section 81(i)(d) refers to purchase of articles, it is difficult for us to see how it can be given any other meaning than the normal meaning of the word 'purchase'. Normal meaning of purchase will be acquisition for money or for a consideration. That is the primary meaning. In Concise Oxford Dictionary, apart from the two meanings 'buy, acquire', one more meaning given to the word 'purchase' is 'procure' and it is in this sense that the learned counsel for the assessee wants the word 'purchase' to be construed. Now, it is obvious that the word 'procure' is a word of much wider import and the word 'purchase'. In the same Dictionary, the word 'procure' has been given the meaning as 'obtained by care or effort, acquire'. Purchase is thus a word of restricted meaning than the word 'procure'. While dealing with a taxing statute which deals with income from business, the word 'purchase' will, therefore, have to be construed in the commercial sense. In the commercial sense, a transaction of purchase is a part of a transaction of sale. A transaction of sale can never be complete unless there is a transfer of property from the seller to the buyer and who is the purchaser, must, therefore, acquire the property before he can claim to have purchased the property. On a plain construction of section 81(i)(d), therefore, we do not see how any different meaning can be given go the word 'purchase' in that provision. It is, therefore, necessary for the purpose of exemption under section 81(i)(d) that the assessee must prove that he has purchased certain articles, which means that he has acquired property in certain articles and those articles have been even sold to the members of the society. As we have pointed out earlier, there is no transfer of property under the agreement. The assessee was merely an agent and the Tribunal was, therefore, right in taking the view that the assessee was not entitled to the exemption under section 81(i)(d) of the Act. The first question referred must, therefore, be answered in the negative and against the assessee.
11. So far as the second question is concerned, the argument of the learned counsel for the assessee was that the activity of the assessee-society is an integrated activity. Its dealings in different articles cannot be separately considered and once it is found that it satisfies he requirements of section 81(i)(d), then notwithstanding the fact that same of the sales are made to non-members, the assessee will still be entitled to exemption under section 81(i)(d). The exemption is expressly in respect of articles which are purchased for the purpose of supplying them to its members. If there are certain articles which are not meant for supplying them to their members and the criterion for deciding it will be with reference to the identity of the buyers, it is again difficult for us to see how any exemption under the provisions can be claimed by the assessee in respect of sales to non-members. We are not called upon in this case to go into the question as to whether because of a large percentage of sales being to members, the entire income from the sale of iron and steel, superphosphate and oil engines was rightly exempted but so far as the sale of insecticides is concerned, it is obvious that the only extent of the income that could have been exempted would be that arising from 5 per cent. of the sales to the members and no exemption could be claimed in respect of sales to non-members. Question No. 2 being specifically in respect of profits from the sale of insecticides to non-members would, therefore, have to be answered in the negative and against the assessee.
12. The questions referred are answered as follows :
13. Question No. 1 in the negative and against the assessee.
14. Question No. 2 in the negative and against the assessee.
15. The assessee to pay the costs of this reference.