MENON, J. - This is reference by the Income-tax Appellate Tribunal, Madras Bench A, under section 66(1) of the Indian Income-tax Act, 1922, the question referred being : "Whether the aforesaid profits of Rs. 14,497 and Rs. 42,826 of the society from its dealings with non-members are exempt from income-tax for assessment years 1950-51 and 1952-53 respectively under clause (iv) of paragraph 15 of the Part B State (Taxation Concessions) Order, 1950 ?" The assessee is a co-operative society registered under the Cochin Co-operative Societies Act, XXVI of 1113. Under section 72(q) of that Act the Government may make rules prescribing "the prohibitions and restrictions subject to which societies may trade with persons who are not members" and rule 20 of the Rules of 1116 provides : "No distributive society shall sell its goods to persons other than members without the previous sanction of the Registrar." It is agreed that the assessee is a distributive society. There is no specific finding as to whether the requisite sanction for dealing with non-members has been obtained or not; but as the Appellate Tribunal has dealt with the case as if the said sanction had been obtained was shall also do the same.
2. The contentions urged by the assessee and the conclusions reached can be gathered from paragraphs 6, 7 and 8 of the statement of the case.
"6. The Income-tax Officer, Trichur, assessed Rs. 14,497 and Rs. 42,826 for the aforesaid assessment years 1950-51 and 1952-53 as the apportioned profit of the society from its dealings with non-members.
The rest of the profit earned by the society in the aforesaid two previous years was not assessed as the considered them to be exempt under the aforesaid clause referred to in paragraph 4 supra. The assessee contended before the Income-tax Officer and the Appellate Assistant Commissioner in appeal thereafter, that even profit from its dealings with is non-members came within the purview of the same clause and was exempt thereunder, which, however, was not accepted. The quantum was never in dispute.
"7. In the appeals before the Tribunal, it was contended that the entire profits of whatever description, of ever co-operative society registered under a Co-operative Act in force in a Part B State was exempt under the aforesaid clause (iv) in question, by a proper interpretation thereof, as exemption is conferred in the main body of the clause itself and that the exemption. It was not the assessees case that the exemption now sought for could be supported on principles of mutuality; "8. The Tribunal, by its order dated 4th May, 1954, held that trade with non-members could never be part of the functions of any co-operative society qua co-operative society and the profit from such activity was of such a nature as to fall for assessment under section 2; such a situation was clearly recognised and provided for in the aforesaid clause (iv) in question as exceptions to the exemption sought to be granted thereby; the contention that the exception were enumerated in the aforesaid clause after the earlier conferment of the exemption in the same clause and hence were in operative was untenable as the whole clause required to be read together to ascertain the true scope of the exemption conferred thereby; and the bye-laws authorising trading with non-members with a view to effectively carry out the main objects for which the society was formed and the Registrar of Co-operative Societies approval thereof were irrelevant to the issue." 3. The relevant portion of the Part B States (Taxation Concessions) Order, 1950 (issued under section 60A of the Indian Income-tax Act, 1922) reads as follows : "15. Exemptions - Any income falling within the following classes shall be exempt from income-tax and super-tax and shall not be included in the total income or total world income of the person receiving them : (iv) the profits of any co-operative society registered under any Act in force in Part B State, or dividends or other payments received by members of any such society out of such profits.
For this purpose, the profits of a co-operative society shall not be deemed to include any income, profits or gains from (1) investments in (a) securities of the nature referred to in section 8 of the Indian Income-tax Act, or (b) property of the nature referred to in section 9 of that Act, (3) the other sources referred to in section 12 of the Indian Income-tax Act." The clause was added to the Order by S. R. O. 1800 dated 14th November, 1951, and the exemption granted is on the lines of the exemptions available to co-operative societies on that date in Part A States under a notification of 1925, issued under section 60 of the Indian Income-tax Act, 1922.
4. The history of the exemptions in favour of co-operative societies till the amendment effected by the Finance Act of 1955, in pursuance of the recommendations of the Taxation Enquiry Commission is briefly summarised in A. N. Aiyars Indian Income-tax Act, 1922, (1955 Edition, page 12) as follows : "Government had granted some exemptions to co-operative societies from the very inception of the co-operative movement. So far as income-tax was concerned - (i) the profits of a co-operative society, and (ii) all dividends and other payments received by the members of society on account of profits was construed by the courts as meaning profits from business. Income from property and interest on securities were therefore not exempt from tax : (I. L. R. 52 Mad. 140); Madras Provincial Co-operative Bank Ltd. v. Commissioner of Income-tax, Madras ( I I. T. R. 158; I. L. R. 56 Mad. 837) and this interpretation was accepted by the Government and incorporated in the Notification in 1934 by an amendment which expressly excluded from the exemption (i) interest on securities, (ii) income from property, (iii) dividends, and (iv) income-from other sources chargeable under section 12 of the Act.
The Taxation Enquiry Commission laid great emphasis on the extreme importance of planned co-operative development for the future welfare of the Country and expressed the view that such a development on the requisite scale will not be possible without the active assistance of the State especially in the form of exemption from taxation. They accordingly recommended the continuance of the existing concessions and also the enlargement of the concessions in certain respects." 5. The Appellate Tribunal has taken the view that the profits concerned constitute income, profits or gains from the other sources referred to in section 12 of the Indian Income-tax Act and denied the exemption to the assessee on that basis. We can see no warrant for this assumption.
6. The amounts were returned as the profits of the assessees business and assessed as such and the learned counsel for the Department was unable to suggest any argument in support of the assumption made.
Section 12 deals only with such taxable income, profits and gains as fall outside the preceding specific heads like "profits and gains of business, profession and vocation." It is expressly confined to income which is "not included in any; of the preceding heads" and as stated by the Privy Council in Commissioner of Income-tax, U. P. v. Basant Rai Takhat Singh "section 12 does not come into operation untile the preceding heads are excluded." (a) that dealing with non-members had been permitted under rule 20; and (b) that the amount concerned do not come within the three exceptions to the exemption granted by clause (iv) of paragraph 15 of the Part B State (Taxation Concessions) Order, 1950.
Are these by themselves sufficient to make the said amounts the profits of the Co-operative Society and attract the exemption invoked by the assessee Our answer is "no." In order to obtain the exemption the profits must satisfy another test. They must have accrued from one or all of the objects for which the society was formed and registered.
8. The objects of the co-operative society before us as stated in its bye-law are : "the organisation and development of rural production on a commercial basis and marketing." "Marketing" in the context in which it occurs must mean the marketing of goods produced by "the organisation and development of rural production on a commercial basis." 9. It is not contended that the profit of Rs. 14,497 and Rs. 42,826 which were admittedly earned as the sole distributor of the Cochin State of its quota of yarn from mills within and without that State were the profits of any such "Production" or "marketing". The contentions is that the activity that produced the profit is justified by clause (vi) of bye-law No. 3. The said bye-law reads as follows : "The objects of the society are the organisation and development of rural production on a commercial basis and marketing. For the purpose of attaining these objects, it shall be competent for the society : (ii) To purchase either for cash or on credit such raw materials, stores and applicances as may be required for the industries and retail the same either for cash or on credit to the members.
(iv) To purchase and hold in common and let on hire improved applicances connected with the industries.
(v) To purchase and receive for sale the finished products from members, and see the same took the best advantage, by establishing and running depots or otherwise.
(vi) To do such other acts as may help the development of industries or improve the economic condition of members.
(vii) To receive contributions any carry out the objects of such contributions." A bare reading of the bye-law will show that it is impossible to accept the contention. Clauses (i) to (vii) are controlled by the words : "For the purpose of attaining these objects" and "these objects" are "the organisation and development of rural production on a commercial basis and marketing." 10. A question similar to the one before us arose for consideration in Hoshiarpur Central Co-operative Bank Ltd. v. Commissioner of Income-tax, Simla. The assessee in that case was a co-operative bank registered under section 9 of the Indian Co-operative Societies Act, 1912. The profits arose not out of banking transactions but from dealings in sugar, oil and standard cloth. It was assumed that such dealings had the permission of the Provincial Government under section 31 of the said enactment.
"Where income is derived by a co-operative society from the business of the society as a co-operative society the profits are within the exemption given by the Government notification, but where profits arise out of some business even though it may be permitted, but not of the nature which follows out of the objects of the co-operative society, then in that answered the question referred :- "Where a co-operative bank deals in sugar and standard cloth with special permission of the authorities and earns income from such activities, is such income exempt from tax under item 2 of the Government of India Notification F. D. (C.R.) Notification R. Dis. No.291-I. T/25 dated 25th August, 1925, as subsequently amended (Income-tax Manual, 10th Edition, Part II, pages 257-258) ?" in the negative.
12. In the case above mentioned the Court proceeded, as we have done, on the basis that the amounts concerned constituted "profits and gains of business." Learned counsel for the assessee is assessable under section 10 of the Indian Income-tax Act, 1922 his client is entitled to the exemption once it is established that the amounts are the profits and gains of a business and that the said amounts do not come within the three exceptions to the exemption granted by clause(iv) of paragraph 15 of the Part B States (Taxation Concessions) Order, 1950.
13. It is true that the Income-tax Act is not restricted in its application to the profits of lawful business and that elements of illegality will not ensure an avoidance of the tax. As stated by Kanga : "The taint of illegality or wrong doing associated with income, profits or gains is immaterial for the purpose of taxation. Once the character of an enterprise has been ascertained as being of the nature of trade the person who carries it on cannot found upon elements of illegality to avoid tax." (The Law and Practice of Income-tax, Third Edition, Page 236).
It is, however, one thing to say that the taint of illegality will not assist in the avoidance of the tax and quite a different thing to hold that the taint of illegality will none the less attract an exemption granted under the Act. The net may be cast wide. It does not follow that the meshes through which alone escape is possible are either wide or elastic.
14. Sundaram in his "Law of Income-tax in India" (seventh Edition, Page 1132) deals with Hoshiarpur Central Co-operative Bank Ltd. v.Commissioner of Income-tax, Simla, as follows : "It has been held that the exemption covers only profits of a co-operative society (bank) as such and does not extend to profits from other activities which though allowed by Government are not objects of the society, e.g., profits from sugar and standard cloth. Presumably the profits arose from dealings with non-members; for, otherwise, on the principle of mutuality, it would have been irrelevant to discuss what was or what was not the ordinary object of the society. Even if the profits arose from dealings with non-members it is not clear why profits should be interpreted in the qualified sense as done in this case." The reason for the interpretation, as we understand it, is that it will be curious to interpret an exemption granted in order to foster the co-operative movement as extending to the activities of a co-operative society which are not sustained by its own constitution.
15. We are in entire agreement with reasoning adopted in Hoshiarpur Central Co-operative Bank Ltd. v. Commissioner of Income-tax, Simla and hold that the sums of Rs. 14,497 and Rs. 42,826 mentioned in the question referred are not entitled to exemption from assessment under clause (iv) of paragraph 15 of the Part B States (Taxation Concessions) Order, 1950. We answer the reference accordingly.
16. In the circumstances of the case there will be not order as to costs.
17. A copy of this judgment under the seal of the Court and the signature of the Registrar shall be sent to the Appellate Tribunal as provided in sub-section (5) of section 66 of the Indian Income-tax Act, 1922.