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Second Income-tax Officer Vs. Nagpur Zilla Krishi Audhogik - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Nagpur
Decided On
Judge
Reported in(1982)2ITD138(Nag.)
AppellantSecond Income-tax Officer
RespondentNagpur Zilla Krishi Audhogik
Excerpt:
.....was as follows:--------------------------------------------------------------------------commodity gross gross percentage of claim of the sale profit sales to mem- assessee bers---------------------------------------------------------------------------1 2 3 4 5--------------------------------------------------------------------------- rs. rs. rs.fertilisers & 59,96,829.40 2,61,049.36 70 2,61,049.36insecticidesagricultural 21,34,067.30 1,16,677.98 53 1,16,677.98machinery likesugar 23,72,071.07 32,056.65 17 -barbed- 13,106.33 1,891.55 69.7 1,891.55wire forgunny bags 13,808.50 846.15 88.6 846.15- for rebaggingcotton seeds 1,96,785.91 3,989.52 4.5 -(losses)seeds - jawar 12,831.28 134.26 - -and wheatcement for 1,79,466.45 8,326.80 57 8,326.80construction ofg.c. sheets 2,62,199.88.....
Judgment:
1. This is an appeal by the revenue against the order of the learned Commissioner (Appeals) for the assessment year 1974-75. This assessment was originally made under Section 144 of the Income-tax Act, 1961 ('the Act'). It was reopened under Section 146 of the Act, on 16-4-1977, and reassessment was made under Section 143(3) read with Section 144B of the Act. In the meantime, the assessment for the subsequent year, namely, 1975-76, had been made by the ITO, restricting relief under Section 80P(2)(a)(iv) of the Act. to the net profits and gains arising to the assessee, insofar as it related to transactions with the members of the co-operative society, and excluding from the relief profits arising in respect of transactions with non-members. The Commissioner (Appeals) held that relief under Section 80P(2)(a)(iv) was available to the assessee in respect of all the transactions and further in determining such profits expenditure could not be bifurcated between activities relating to the members and those relating to non-members.

The matter went up to the Appellate Tribunal and in IT Appeal No. 73 (Nag.) of 1980 the Tribunal concurred with the Commissioner (Appeals).

For the year under consideration the learned Commissioner (Appeals) upheld the view canvassed on behalf of the assessee. The revenue urged that the decision of the Tribunal in IT Appeal No. 73 (Nag.) of 1980 was not correct and required a revision. Accordingly, the matter was referred to the President who constituted a Special Bench for disposing of the appeal for the assessment year 1974-75, for a decision on the following issues : 1. Whether the deduction under Section 80(P)(2)(a)(iv) is available to the assessee in respect of trading with non-members 2. Whether the deduction has to be granted with reference to the net profit and not the gross profit The assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1970. The objects of the society are in Marathi and an authentic English translation has been filed before us. The objects are as under: (a) Arranging for selling of goods belonging to the members at maximum reasonable rates.

(b) As per needs, stocking and supplying to members, agricultural goods, articles necessary for agriculture, goods necessary for consumers, industrial goods, etc. ; similarly advancing of help and management to members as per their needs.

(c) Encouraging them in the field of production of good quality, and unadulterated goods.

(d) Constructing necessary sales depots, godowns for stocking of goods and renting the same. Similarly helping the licensed landlords of the go-downs in their business.

(f) To establish unity in the affiliated members' societies and to establish unity and harmony in their administration and supervising them.

(g) To advance money against goods sent by members for sale. (h) To act as purchase agent on behalf of affiliated societies.

(i) To open branches and selling centres wherever necessary in the course of its activity.

(j) To cultivate the habit of economy, independent judgment, and cooperation amongst its members.

The society has not given the translation for objects 11 to 31 but has merely stated that they are ancillary objects.

Although it was claimed that the society was formed for the purpose of supplying to its members agricultural implements, seeds, livestock or other articles intended for agriculture, there was no express prohibition on selling these commodities and articles to non-members.

The assessee submitted its return on 25-4-1975 showing a loss of Rs. 7,740. It claimed to deduct a sum of Rs. 2,50,999 under Section 80P(2)(a)(iv). As stated before, the assessment made ex pane was cancelled under Section 146 on 16-4-1977. In the meantime the assessee submitted a revised return claiming deduction of Rs. 4,04,547 under Section 80P(2)(a)(iv). The basis of the claim was as follows:--------------------------------------------------------------------------Commodity Gross Gross Percentage of Claim of the Sale profit sales to mem- assessee bers---------------------------------------------------------------------------1 2 3 4 5--------------------------------------------------------------------------- Rs. Rs. Rs.Fertilisers & 59,96,829.40 2,61,049.36 70 2,61,049.36InsecticidesAgricultural 21,34,067.30 1,16,677.98 53 1,16,677.98machinery likeSugar 23,72,071.07 32,056.65 17 -Barbed- 13,106.33 1,891.55 69.7 1,891.55wire forGunny bags 13,808.50 846.15 88.6 846.15- for rebaggingCotton seeds 1,96,785.91 3,989.52 4.5 -(losses)Seeds - Jawar 12,831.28 134.26 - -and WheatCement for 1,79,466.45 8,326.80 57 8,326.80construction ofG.C. Sheets 2,62,199.88 13,256.26 92 13,256.26for sheds------------------------------------------------------------------------- 1,12,80,503.00 4,32,749.35 55 4,04,547.96------------------------------------------------------------------------- It appears that in making the above claim the assessee followed the dictum laid down by an earlier Tribunal decision that where the sales to members exceeded 50 per cent of the total sales, the entire purchase of the particular commodity should be deemed to have been made for the purposes enumerated in Section 80P(2)(a)(iv) and as such entitled to full relief. Similarly where the sales to members fell below 50 per cent, no relief was deemed admissible to the assessee.

3. The ITO submitted a draft assessment order to the [AC under Section 144B, proposing relief of Rs. 1,29,622 under Section 80P(2)(a)(iv) which was approved by the IAC also. The working is given below :QUANTIFICATION OF THE EXEMPTION UNDER SECTION 80P(2)(a)(iv) Gross Profits Expenses3. Cloth 2,076 1,474 Total 4,56,728 237,2513. Cloth 602 29 per cent of the G.P. 2,51449Total gross profits out of commodities for agricultural purposes : Rs. 4,04,541Less : Proportionate expenses @ 51.94 per cent 2,69,707Exemption admissible u/s 80P(2)(a)(iv) 1,40,085Nagpur, Sd/- (H.L. Bhagat)dated 19-9-1980 2nd Income-tax Officer, Trust Circle, Nagpur 4. In appeal, the Commissioner (Appeals) followed his decision for the assessment year 1975-76, which had been passed earlier and, accordingly, held that the assessee was entitled to relief under Section 80P(2)(a)(iv) on the entire amount of Rs. 4,04,547. It is, therefore, necessary for us to examine the order of the Commissioner (Appeals) for the assessment year 1975-76. The Commissioner (Appeals) agreed with the ITO that the decision of the Tribunal in the case of Vidarbha Co-operative Marketing Society for the assessment years 1962-63 and 1964-65, did not lay down a universal proposition that profits would qualify for deduction, if the sales of eligible commodities to members exceeded 50 per cent of the total sales.

However, he held that the guideline indicated by the Tribunal was a rule of convenience and could safely be adopted in evaluating the relief to which the assessee is entitled. Refuting the arguments advanced on behalf of the revenue, he held : 1. The Supreme Court decision in CIT v. S.C. Kothari [1971] 82 ITR 794 was not applicable to the facts of the present case. Their Lordships of the Supreme Court were concerned with the losses incurred in the carrying on of an illegal business.

2. The decision of the Gujarat High Court in CIT v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447, was also not applicable. Their Lordships were interpreting Section 81(1)(d) of the Act which had been deleted with effect from 1-4-1968. The decision was also based on the earlier decision of the same Court in the case of Addl. CIT v. Cloth Traders (P.) Ltd. [1974] 97 ITR 140.

This decision has been overruled by the Supreme Court subsequently.

3. The decision of the Bombay High Court in the case of Chatrapati Shivaji Sahakari Sakhar Karkhana Ltd. v. CIT [1978] 115 ITR 312 was also not applicable.

4. The decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 was applicable to the present case. He noticed that the Supreme Court did not refer to Section 80P(2) in the penultimate paragraph of its judgment at page 260. However, he held that the absence of reference to section SOP could not render the decision inapplicable to the assessee's case, as, many other sub-sections have also not been referred to in that para. The basic question being whether relief should be given on the gross or the net income and the Supreme Court having decided that relief should be given on the gross income, the learned Commissioner (Appeals) held that the assessee was entitled to relief on the gross profit earned by the society in its transactions.

5. We also now refer to the decision of the Tribunal in this very case, for the assessment year 1975-76. The Tribunal held that the decision of the Gujarat High Court in Sabarkantha Zilla Kharid Vechan Sangh Ltd. (supra) was not applicable since that decision was on the interpretation of Section 8l(1)(d) which has subsequently been deleted.

The Tribunal, accordingly, declined to examine in detail the Gujarat High Court's decision. Similarly, the decision in Chatrapati Shivaji Sahakari Sakhar Karkhana Ltd. (supra) was held to be inapplicable as in that case the Judges of the Bombay High Court were interpreting provisions of Sections 10, 14 and 16 of the Indian Income-tax Act, 1922, which were substantially different. The revenue had relied upon the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT[1978] 113 ITR 84. The Tribunal held that this decision did not overrule the earlier decision of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452. It held that the decision in Cambay Electric Supply Industrial Co. Ltd. (supra), was on an entirely different issue. Since the Supreme Court has held in the case of Maharashtra Sugar Mills Ltd. (supra), that the expenses claimed by the assessee cannot be bifurcated into expenditure relatable to taxable income and non-taxable income, it held that the assessee was entitled to relief under Section 80P(2)(a)(iv) on the gross profit.

6. The learned departmental representative, Shri P.B. Charles, submitted that the provisions of Section 80P(2) have not been properly interpreted by the Commissioner (Appeals) and the Division Bench of the Tribunal. The deduction under Section 80P(1) is subject to the provisions of Section 80P(2). Section 80P(2)(a) mentions the activities, the income from which is to be excluded from the total income. The section clearly states that what is excludible is the amount of profits and gains of business, attributable to any one, or more of such activities enumerated in Section 80P(2)(a). The profits and gains means the profits and gains as computed according to the Act.

The Act forbids taxation of gross income. Similarly, where certain incomes are to be excluded from the computation of taxable income, the exclusion can only relate to net income and not to the gross income. It is in this context that the Supreme Court decision in the case of S.C.Kothari (supra) becomes relevant.

7. The learned departmental representative then argued that the wordings used in Section 80P clearly point out to the determination of income, relating to different activities carried on by the co-operative society. Section 80P(2)(6) refers to co-operative societies engaged in supplying of milk. Section 80P(2)(r) refers to co-operative societies engaged in activities other than those specified in Clause (a) or Clause (b). Hence, if all the activities of a society are to be considered under Section 80P(2)(a), there is no scope for giving relief under Section 80P(2)(c). Section 80P(2)(c) is thus rendered redundant.

The principle of harmonious construction required that income relating to activities under Section 80P(2)(a) and activities under Section 80P(2)(c) have to be separately determined. Relief under Section 80P(2)(c) will have to be restricted to Rs. 20,000.

8. The learned departmental representative then referred to the definition of 'total income under Section 80B(3) of the Act. The gross total income meant the total income computed in accordance with the provisions of this Act. There is thus no scope for giving relief on the gross profit as that would mean computation of the total income contrary to the scheme laid down in the Act.

9. The learned departmental representative then submitted that the Tribunal was not right in brushing aside the decision of the Gujarat High Court in Sabarkantha Zilla Kharid Vechan Sangh Ltd. (supra) on the ground that Section 81(1)(d) was no longer on the statute book. The wordings of Section 80P(2)(a) were exactly the same as those of Section 81(1)(6J). When the two sections are part materia, the decision on one cannot be ignored while interpreting the other.

10. He then referred to the decision of the Supreme Court in Cloth Traders (P.) Lid. (supra). He pointed out that the wordings in Section 80M of the Act are quite different from those of Section 80P(2)(a). He concluded his argument by saying that the decision of the Tribunal in its order in IT Appeal No. 73 (Nag.) of 1980 requires to be reversed.

11. The learned counsel for the assessee, Shri Somalwar, relied mainly on the orders of the Commissioner (Appeals) and the Tribunal for the assessment year 1975-76. Factually, it was submitted that the society exists only for the sake of its members. The intention at the time of the purchase of articles and commodities mentioned under Section 80P(2) could not be ignored. If the purchases were entirely for the purposes of supplying the commodities and materials to the members for agricultural purposes, then the sale to the non-members does not disentitle the society to complete relief. In other words, it was submitted that the relief due to the assessee under Section 80P(2)(a)(iv) cannot be attenuated to the extent of sale to the non-members.

12. He then submitted that the decision of the Supreme Court in Cloth Traders (P.) Ltd. (supra), was fully applicable to the assessee's case.

The gross total income could mean only the gross profit. The expenditure incurred by the assessee on overheads could not be bifurcated between exempted and non-exempted categories of income-Maharashtra Sugar Mills Ltd. (supra). It was also submitted that the ITO, assuming but not admitting that he was right in principle, should have allowed relief to the assessee to the extent of Rs. 2,69,707 and not Rs. 1,29,622.

13. We have heard the rival submissions. In our opinion, the revenue is entitled to succeed. The relevant provisions in Section 80P read as follows : 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 :- (i) carrying on the business of banking or providing credit facilities to (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under Sub-clause (vi), or Sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely :- (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities ; (2) the co-operative credit societies which provide financial assistance to the society ; (b) in the case of a co-operative society, being a primary society engaged in supplying milk raised by its members to- (iii) a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk to the public), the whole of the amount of profits and gains of such business ; (c) in the case of a co-operative society, engaged in activities other than those specified in Clause (a) or Clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,- (i) where such co-operative society is a consumers' co-operative society forty thousand rupees ; and Explanation : In this clause, 'consumers' co-operative society' means a society for the benefit of the consumers ; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income ; (c) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income ; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities chargeable under Section 18 or any income from house property chargeable under Section 22.

Explanation : For the purposes of this section, an 'urban consumers co-operative society' means a society, for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.

(3) In a case where the assessee is entitled also to the deduction under Section 80H or Section 80HH or Section 80HHA or Section 80-1 or Section 80JJ or Section 80JJA, the deduction under Sub-section (1) of this section, in relation to the sums specified in Clause (a) or Clause (b) or Clause (c) of Sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under Section 80HH, Section 80HHA, Section 80-I, Section 80J, Section 80JJ and Section 80JJA.We find that a co-operative society can engage itself in various activities. These have been classified under Section 80P(2)(a), (b) and(c). In particular we refer to Section 80P(2)(c) which refers to activities other than those specified in Clause (a) or (b), either independently of, or in addition to, all or any of the activities so specified. Thus, obviously, activities other than those relating to purchase of agricultural implements, seeds, livestock or other articles intended for agriculture, for the purpose of supplying them to its members, like supplying the same articles to non-members, would fall within Section 80P(2)(c). The section requires that the profits and gains attributable to such activities should separately be determined.

Hence, the purpose of the section would be frustrated if it is presumed that the profits and gains of all activities of the society are to be determined under Section 80P(2)(a) alone, ignoring the other sub-sections, nor can we ignore the argument of the learned departmental representative that profits and gains mean profits and gains as computed under the Act. We are also not impressed with the argument on behalf of the assessee that the gross total income for purposes of section SOP will be the gross profit. His reliance on Sections 1(24), 2(45) and Section 5 of the Act, which are the charging sections, does not lend any support to the proposition that relief is admissible on the gross profit. On the contrary, there is a complete answer to the question whether relief is to be given on the net income or the gross income in the definition of 'gross total income' in Section 80B(.5). Section 80B(5) reads as follows : (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O ; It is obvious from this definition of 'gross total income' that the total income has to be computed in accordance with the provisions of the Act. This would require deduction of overhead expenditure from the gross profit before arriving at the total income.

14. We also notice that there is a material difference between the wordings of Section 80M and section SOP. Section 80M reads as follows : 80M. (1) Where the gross total income of an assessee, being a domestic company, includes any income by way of dividends from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to-(a) in respect of such income by way of the dividends the whole of from a company formed and registered under the such income ; Companies Act, 1956 (1 of 1956), after the 28th day of February, 1975, and engaged exclusively or almost exclusively in the manufacture or production of any one or more of the articles or things specified in items 2 and 3, item 4 (excluding alloy, malleable and S.G. iron castings), items 7 to 15 (both inclu- sive), items 17 and 18, item 23 (excluding refrac- tories) and items 24, 26, 27, 29 and 33 in the(b) in respect of such income by way of dividends other sixty percent of than the dividends referred to in Clause (a) such income ; (2) Where a company to which this section applies is entitled also to the deduction under Section 80K, the deduction under Sub-section (1) shall be allowed in respect of income by way of dividends referred to therein as reduced by the amount of the deduction under Section 80K.Here the Supreme Court held that the opening part of the section does not have a limitative effect and they are descriptive of items of income included in the total income and are not indicative of the quantum of amount included under different items in the computation of the total income. The section starts with 'where the gross total income of an assessee includes income by way of dividends', then the deduction is to be given for such income by way of dividends. Hence, the Supreme Court held that the entire income from dividends, which in this case was interpreted as the gross dividends, has to be deducted under Section 80M. But the wordings in Section 80P(2) are entirely different.

They refer to the amounts of profits and gains of the business attributable to any one or more of such activities. Therefore, the wordings of clauses (a) and (c) of Section 80P(2), read with Section 80B(2) do not leave any option for us but to hold that relief to the assessee is available only in respect of the net income that could be attributable to dealings with members only.

15. We also questioned the learned counsel for the assessee, to explain how the society could make large amounts of sale to non-members if its purpose was only for dealing with members. It was stated by the learned counsel that the State Government gives subsidies to societies and in order to utilise these subsidies, the societies purchased large quantities of fertilisers, etc. It is, therefore, clearly established that the purpose is not entirely for supplying goods to the members for agricultural purposes. The motive for purchases is the full utilisation of subsidies. The purchases will naturally be far in excess of the requirements of the members, resulting in substantial sale to non-members. Therefore, the assessee cannot be granted relief on the entire sales. The assessee has also not submitted the figures of sales to members and non-members for the earlier years. Suffice it to say, that the sale to non-members is not so insignificant as to come to the conclusion that the assessee made purchases only with a view to sell the commodities to its members.

16. It remains for us to determine whether the ratio of the decision of the Supreme Court in the case of Maharashtra Sugar Mills Ltd. (supra) is applicable to the facts of this case. In that case the question before the Court was whether a part of the managing agency commission paid by the company, could be disallowed on the ground that that part related to management of sugarcane cultivation, the income from which was exempt from tax as agricultural income. The finding of fact in that case was that the cultivation of sugarcane as well as the manufacture of sugar constituted one business. That finding had not been challenged before the Supreme Court. Hence, the entire managing agency commission was held to be business expenditure. The question of determining separately income attributable to agricultural activities and income attributable to business activities, did not arise. The entire income was held to be business income and while determining the business income, a part of the managing agency commission was sought to be disallowed as relating to agricultural operations. Since there was no finding of fact that the cultivation of sugarcane and the manufacture of sugar constituted different activities, the question of disallowing a part of what was admittedly a business expenditure, as not relating to business, did not arise at all. In the present case, the total income is to be determined in accordance with the provisions of this Act.

Then the portion of income which is attributable to certain specified activities of the co-operative society has to be taken out as a deduction from the total income. The section itself imposes a duty on the ITO to determine the profits and gains attributable to such activities as are mentioned in Section 80P(2). We, therefore, hold that the decision of the Supreme Court in Maharashtra Sugar Mills Ltd. (supra) does not apply to the facts of the case. The decision of the Gujarat High Court in Sabar-kantha Zilla Kharid Vechan Sangh Ltd. (supra) cannot also be ignored for the reasons urged by the learned departmental representative.

17. Before parting with this appeal, we have to make a few observations about the manner in which the assessee has claimed relief. It has claimed relief on the entire sales where sales to members exceeded 50 per cent. It has not claimed relief where such sales fell below 50 per cent. This, it appears, is in accordance with the decision of the Tribunal in the case of Vidarbha Co-operative Marketing Society (supra). We are afraid that the criteria laid down in that case is not quite correct. Strictly speaking, it would mean that the assessee would get relief if sales to members are 51 per cent of the total and would be denied relief completely if the sales are 49 per cent. Thus the assessee's entitlement to relief would depend upon a variation of one per cent on either side of 50 per cent. Such a criterion cannot be said to be scientific. The intention of the Legislature is that the assessee should get relief in respect of its activities relating to its members.

Thus, even if a small percentage of the sales are to members, the assessee should get relief on those sales. On this basis, we would direct the ITO to re-work the relief due to the assessee under Section 80P(2)(a)(iv). In fact, we find from the statement reproduced in the earlier part of our order that the assessee has not claimed any relief on sale of seeds. The ITO will, therefore, look into these points and work out the relief correctly. He will also give the relief due to the assessee under Section 80P(2)(c). The answers, therefore, to the questions framed are as follows: Question No. 2 : Deduction has to be granted with reference to the net profit.


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