1. These appeals of the assessee relate to the assessment years 1976-77 and 1977-78 and arise out of the order of the Commissioner (Appeals), Nagpur dated 23-9-1981. The aforesaid appeals involve a common issue and are, therefore, heard together and disposed of by common consolidated order for the sake of convenience.
2. The main controversy in the aforesaid appeals relates to the exemption claimed by the assessee under Sections 80P(2)(a)(iii) and 80P(2)(a)(iv) of the Income-tax Act, 1961 ('the Act'). The brief facts of the case are as under.
The assessee is a co-operative society at Hinganghat and is functioning at Hinganghat Tahsil. The assessee-society is functioning as per its constitution and bye-laws as per provisions of the Maharashtra Co-operative Societies Act, 1960, As per the constitution and bye-laws of the society it can have different types of members such as (i) individual members, (ii) associate members, (iii) nominal members and (iv) sympathiser members. During the year in question the assessee-society had 273 individual members, 68 sahakari sanstha members (i.e., primary societies), 275 nominal members, one State Government member and 10,572 cotton cultivator nominal members.
During the years under appeal, the assessee-society, earned income by commission from the Maharashtra State Co-operative Marketing Federation Ltd. on account of marketing the cotton of their cultivator members to the said Federation. The total amount of commission accrued during the year from marketing the cotton of cultivator members amounted to Rs. 2,59,678. The assesse-society has also earned the profit on sale and supply seeds, pump sets, pesticides, etc., to the primary societies.
The profit earned on sale and supply of goods to the primary society members during the year amounted to Rs. 73,273. On these transactions of sale and supply, the assessee also earned Rs. 35,926 by way of commission from the dealers from whom the goods were purchased for supply to the primary society members, nominal members and individual members. The assessee-society has also earned Rs. 9,933 by way of service and transportation charges in respect of sale and supply of above referred goods. Thus, the total amount earned from the business of sales and supply of seeds, pump sets, insecticides to the primary societies, nominal members and individual members amounted to Rs. 1,19,132. The assessee claimed exemption under Section 80P(2)(a)(iii) in respect of cotton commission received from the Federation because the said commission was earned by marketing the agricultural produce of the members of the assessee-society, viz., 10,572 cotton cultivators and other individual and nominal members. The assessee also claimed exemption in respect of profit, commission and service charges amounting to Rs. 1,19,132 earned out of the transaction of supplying agricultural implements, seeds and other articles intended for agriculture to its members under Section 80P(2)(a)(iv). The assessee has also claimed deduction on account of certain expenses and outgoings appropriated out of the gross profits as provided under Section 65 of the Maharashtra Co-operative Societies Act. In view of the exemptions and deductions claimed, the assessee had no taxable income and hence it filed a nil return. The ITO did not allow deduction in respect of profit earned by way of commission from the Federation on account of marketing the agricultural produce, namely, cotton, of 10,572 cultivators. Similarly, the ITO did not allow exemption in respect of supplies of agricultural implements and articles to the primary society members and nominal members. The ITO thus computed total taxable income at Rs. 1,84,964 as against nil income shown by the assessee. Since the proposed variation was more than Rs. 1,00,000, the ITO referred the matter under Section 144B of the Act to the IAC. The IAC gave hearing to the assessee. The assessee reiterated the contentions made before the ITO and also submitted further written and oral arguments. The IAC rejected the submissions of the assessee and directed the ITO to complete the assessment on the lines stated in Section 144B proceedings by his detailed order dated 7-8-1979. The ITO accordingly completed the assessment by his order dated 16-8-1979 on a total income of Rs. 1,84,960.
3. As against this order of the ITO, the assessee went in appeal before the Commissioner (Appeals) before whom the learned counsel for the assessee, apart from reiterating the submissions made during the course of of assessment proceedings, further submitted that the cultivators and the nominal members are members of the society for all practical purposes. It is vehemently argued that the nominal members and the cotton cultivator members figure in the list of members and all such members have contributed capital though in the case of cotton cultivator members, it is by way of deduction of 1 per cent out of sale price payable to them for the cotton procured. This, however, is in no way prejudicial to the claim of the assessee.
Regarding the ground of disallowance of Rs. 1,19,132 under Section 80P(2)(a)(iv), it was contended by the learned counsel for the assessee that in the instant case there was unmistakably a sale of goods to the primary societies. Even if it was felt that this was not a case of sale, there was certainly a supply of goods. The counsel for the assessee submitted that in Section 80P(2)(a)(iv) the expression used is 'supply'. The assessee's counsel further explained the modus operandi of the transactions of sales by the assessee-society to the primary societies, namely, Sahakari Sewa Sanstha and tried to explain to the Commissioner (Appeals) as to how the sales take place between the assessee-society and the primary society.
Regarding the ground relating to the deduction of Rs. 2,26,610 the learned counsel for the assessee contended that the assessee has made the claim as the aforesaid amount is debited to the profit and loss account as per Section 65 of the Maharashtra Co-operative Societies Act. The Commissioner (Appeals), after hearing the contentions made by the learned counsel for the assessee, wrote a detailed order agreeing with the order of the ITO. While arriving at the aforesaid conclusion, the Commissioner (Appeals) took into consideration the following factors, namely: 1. Whether the person described as a 'member' has some proprietary interest and relating to the organisation by virtue of capital contribution or otherwise? 2. Whether the person described as a 'member' has any control in the affairs of the organisation? 3. What are the entitlements of the person in the profits of the organisation in the assets in the event of widening up and what is his liability? While examining the aforesaid aspects, he took note of Sections 24(2) and 24(8) of the Co-operative Societies Act according to which nominal members and sympathiser members shall not be entitled to any share in any firm whatsoever in the profits and assets of the society as such members. Further, according to Section 27(8), the nominal or sympathiser members shall not have the right to vote. Therefore, according to the learned Commissioner (Appeals), nominal or sympathiser members are not regular members who are entitled for exemption under Section 80P(2)(a)(iii).
Regarding the claim made by the assessee under Section 80P(2)(a)(iv), the Commissioner (Appeals) observed that even by the use of the expression 'supply' appearing in Section 80P(2)(a)(iv), the basic question will remain to be answered, namely, to whom the property in the goods is intended to be transferred. According to him, the intention is to provide goods to the cultivators who are members of the primary societies but not the assessee-society. With the aforesaid observation in his order, the Commissioner (Appeals) has agreed with the order of the ITO on this ground, namely, the ground relating to disallowance under Section 80P(2)(a)(iv).
In dealing with the aforesaid grounds, in view of the fact that according to him nominal members could not be equated with regular members and in view of the fact that' he has held that the so-called supplies to the primary societies' members are in reality to the cultivators who are non-members of the assessee-society, he gave direction to the ITO to withdraw reduction of Rs. 2,128, as according to him it was wrongly allowed in the assessment.
4. As against this order of the Commissioner (Appeals) the assessee is in appeal before us. The learned counsel for the assessee besides reiterating the contentions made before the lower authorities further contended that the word 'member' used in Section 80P is not defined in the Act. Section 80P deals with exemption to co-operative societies.
Though the word 'member' is not denned in the Act, it has been defined in Section 2(19) of the Maharashtra Co-operative Societies Act which is inclusive definition and includes nominal, associate and sympathiser members. According to him, therefore, there is no basis for restricting the meaning only to the category of regular members and exclude other categories of members. The word 'member' according to him must be given its natural and liberal meaning and its meaning cannot be artificially reduced. It is, therefore, contended that the commission received from the marketing federation in marketing the produce of the sympathiser and nominal members would be exempt under Section 80P(2)(a)(iii)- The learned departmental representative, on the other hand, relying on the orders of the lower author ties contended before us that the word 'member' as used in the Act should be given restrictive meaning as to mean only regular members.
Regarding the issue relating to the disallowance under Section 80P(2)(a) (iv), the learned counsel for the assessee reiterated the contentions made before the lower authorities and further submitted that in deciding the aforesaid issue it is necessary to find out whether there is a sale of these goods by the assessee-society to the primary societies who are its members or whether it is a sale to the members of the primary societies who are not its members. In case if it is former the assessee would be entitled to exemption under Section 80P(2)(a)(iv) but in case it is latter the assessee will not be entitled to such exemption.
5. Section 80P(2)(a)(iv) exempts the income or profits arising from purchase of agricultural implements, seeds and other articles intended for agriculture for the purpose of supplying them to its members. For the purpose of determining as to who are the buyers of goods intended for agriculture it is necessary to examine the modus operandi of the transaction. The Commissioner (Appeals) has described the modus operandi of the transaction in the latter part of para 10 of his order.
It has been pointed out that the function of the primary societies is to provide the agricultural implements, seeds, insecticides and other agricultural implements to its members. The primary societies are prohibited to advance cash loans to its members. It can provide articles referred to above by arranging credit facility. Since the object of the primary society is to provide these goods to its members it has necessarily to purchase the same and make it over to its members. For the purpose of fulfilling these objects the procedure that is followed by the primary societies is that it issues permits to their members in quadruplicate. These permits direct the assessee to deliver the goods as mentioned in the said permit to the named individual who is the member of the primary society and who is authorised to take delivery of the goods. The permit also mentions the monetary limit within which the goods should be supplied. Out of four copies of the permit, one copy is retained by the primary society and three copies are delivered to its members. The said member of the primary society then approaches the assessee-society. The assessee-society retains one permit, deliver one permit to the cultivator and send one permit to the bankers of the primary society. On the basis of the said permit issued by the primary society, the assessee-society delivers the goods to the same individual. The assessee-society does not recover any price from the individual. The assessee-society recovers price from the bankers of the primary societies. On the basis of the aforesaid procedure, the learned counsel for the assessee contended that there is a contract of sale between the assessee-society and the primary society whereby the assessee transfers the property in goods to the buyers for price. The price is paid to the assessee-society by the primary society. The assessee-society has no right to recover the price from the members of the primary society. As has been seen above, the price is paid by the primary society to the assessee-society through its bankers. The learned counsel for the assessee further submitted that the assessee has also filed before the lower authorities a certificate from the Central Co-operative Bank authorising the price of goods purchased by the primary society to be paid by the bankers of the assessee-society on behalf of the primary societies. It is also certified by them that the price of the goods so paid by the bankers is debited to the primary societies and ultimately recovered from them. On the basis of the certificate it is contended by the learned counsel for the assessee that there is a sale of goods by the assessee-society to the primary societies who are its members. The profit therefrom is, therefore, exempt under Section 80P(2)(a)(iv). The learned departmental representative, on the other hand, contended that there is a sale by the assessee-society to the members of the primary societies. According to him, the property in goods passes from the assessee-society to the members of the primary society and the ultimate destination of goods have found their way to the cultivators who are net the members of the assessee-society and hence the assessee is not entitled to exemption as claimed.
6. We have carefully considered the facts and circumstances of the case and submissions on either side. Regarding exemption claimed by the assessee under Section 8OP(2)(a)(iii), there is some merit in the contention of the assessee. The word 'member' has not been defined under the Act, therefore, the normal rule of interpretation requires that the word in that Section must be given its natural meaning. The rule of interpretation requires that exemption clause in a taxing statute must be, as far as possible, liberally construed in favour of the assessee provided no violence is done in the language used. Section 80P deals with certain exemptions in respect of income of co-operative societies. When the legislation is dealing with the subject of the Co-operative Societies Act and is using the word 'member' in that section, it is presumed that the Legislature wants to deal with the category of members as is used under the Co-operative Societies Act.
The section uses the word 'member' without any clarification or restriction ; therefore, there is no reason to give a restrictive meaning to the word 'member'. Section 80P which deals with deduction in respect of income of co-operative societies uses the word 'member'.
Thus even though the word 'member' has not been defined under the Act, we can usefully refer to the definition of the word 'member' as used in the Maharashtra Co-operative Societies Act, 1960. The word 'member' has been defined in Section 2(19) of the said Act as follows : (a) 'member' means a person joining in an application for the registration of a co-operative society which is subsequently registered, or a person duly admitted to membership of a society after registration and includes a nominal, associate or sympathiser member; (b) 'associate member' means a member who holds jointly a share of a society with others, but whose name does not stand first in the share certificate; (c) 'nominal member' means a person admitted to membership as such after registration in accordance with the bye-laws.
(d) 'sympathiser member' means a person who sympathises with the aims and objects of the society and who is admitted by the society as such member.
From the above definition, it will be seen that the definition of word 'member' is an inclusive one and includes nominal, associate or sympathiser members. It is true that nominal or sympathiser members have no right to vote but for that reason they do not cease to be the members of the society. Even nominal and sympathiser members have some responsibility under the Act though the same may be lesser than the other category of regular members. It is to be seen that 10,572 cotton cultivator members have contributed 1 per cent capital which amounts to Rs. 5,15,700 and the same has been credited under the head 'Share capital account' in the books of the cotton department. The names of all the members appear in the register of members maintained by the society and they are admitted by the society as members. In this view of the matter, the assessee would be entitled to deduction of Rs. 2,59,678 being the commission received from the Federation for marketing the agricultural produce, viz., cotton of its 10,572 members.
For the same reasons, income arising by marketing the cotton of 275 nominal members also would qualify for exemption under Section 80P(2)(a)(iii).
Regarding the issue relating to exemption under Section 8OP(2)(a)(iv), it has been explained in detail by the Commissioner (Appeals) in his order as well as by the counsel for the assessee in his arguments the procedure of the transaction that takes place between the assessee-society and the primary society. On the basis of that procedure we have to determine as to who is the actual buyer of the goods. In this connection, the counsel for the assessee has explained the provisions of Section 4 and Section 33 of the Sale of Goods Act.
Section 4 of the Sale of Goods Act deals with the contract of sale. It says that a contract of sale of goods is a contract whereby a seller transfers or agrees to transfer the property in goods to the buyer for a price. Thus, the contract of sale presupposes that there is a seller and buyer and there is a transfer of property in goods from the seller to the buyer and such transfer is for consideration called price. In the present case, we have to determine as to who is the buyer, whether it is the primary society or individual members of the primary societies. The buyer is a person who acquires the property in goods from the seller for a price. He is a person who takes delivery of the goods, receives proprietary interest in the goods and pays the price.
Section 33 of the Sale of Goods Act deals with delivery of goods. It says: Delivery of goods sold may be made by doing anything which the party agrees shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf.
In the present case, we have seen that on the basis of the permits referred to above it is clear that the order is placed by the primary societies and in the said permits it directs the assessee-society to deliver the goods mentioned therein and it is on the basis of the permit the assessee delivers the goods to the individual named in the permit issued by the primary society. It is in pursuance of these permits the goods are delivered. Therefore, in law, it is a delivery of goods by the assessee-society to the primary society. Further, the payment of price of the goods is by the primary society to the assessee-society as established by the certificate of the District Central Co-operative Bank. The property in goods also passes from the assessee-society to the primary society. The rules regarding passing of goods in the property are stated in Sections 19 to 24 of the Sale of Goods Act. From the foregoing provisions of the Sale of Goods Act, there, should be no hesitation in holding that the sale of goods is by the assessee-society to the primary society and not to the members of the primary society. The mere fact that the goods might have ultimately finds its destination to the members of the primary society is no criteria for holding that they are direct buyers from the assessee-society. Further, there is no contract between the ultimate consumer and the assessee-society. We, therefore, hold that the profit arising to the assessee-society on sale of goods to its members, namely, primary societies, would be entitled to exemption under Section 80P(2)(a)(iv).
7 & 8. [These paras are not reproduced here, as they involve minor issues.]