A.P. State Ware Housing Corporation vs The Commissioner of Income Tax

Goda Raghuram, J.—The questions referred to us at the instance of the Revenue for the Assessment year 1985-1986 are:

Whether on the facts and in the circumstances of the case, the entire income of the assessee Corporation for assessment year 1985-86 is liable to be excluded from being taxed u/s 11 of the Income Tax Act.

Whether in the facts and in the circumstances of the case, the entireity of the income of the assessee Corporation exempt u/s 10(29) of the Income Tax Act.

Whether on the facts and in the circumstances of the case, the income by way of (i) Supervisory charges; (ii) Miscellaneous Receipts; (iii) interest on Bank Deposits; (iv) Lease Rent; (v) Fumigation charges are exempt u/s 10(29) of the Income Tax Act.

Whether on the facts and in the circumstances of the case, the Tribunal is justified in denying the assessee''s claim to set off all the expenditure against the taxable income as the services rendered are composite and the expenditure cannot be segregated against the various receipts of the assessee.

Whether on the facts and in the circumstances of the case, the Tribunal was correct in upholding the assessment of income taxable in the hands of the assessee Corporation for assessment year 1985-86 at Rs. 13,40,260?

The assessee is a State Warehousing Corporation and for the assessment year in question claimed exemption u/s 10(29) and alternatively u/s 11 of the Income Tax Act 1961 (for short ''the Act'') for its income received towards supervisory charges; miscellaneous receipts; interest on bank deposits; lease and rent; and fumigation charges.

Insofar as question No. 1 is concerned, it is fairly stated by Sri Y. Ratnakar, the leaned counsel for the assessee that this question must be answered against the assessee and in favour of the Revenue as the pre-requisite for a claim for exemption u/s 11 of the Act i.e. compliance with the provisions of Section 12(A) of the Act are not been complied with by the assessee. This question is accordingly answered against the assessee and in favour of the Revenue.

The learned counsel for the assessee submits that question No. 4 need not be answered.

The subsisting questions to be answered are thus question Nos. 2 and 3. Question No. 5 is essentially formal in nature.

The Income Tax Officer by the order of assessment dated 26.02.1988 rejected the claims for exemption; the claim u/s 11 on the ground that the assessee did not comply with the technical formalities for entitlement and on the ground that a similar claim of the assessee for the earlier assessment year was rejected. The claim for exemption u/s 10(29) was also rejected; the proportionate expenditure relatable to the taxable receipts and the resultant tax due along with applicable interest, after giving credit for the advance tax paid, was determined at Rs. 6,48,599/-. The assessee''s appeal to the Commissioner of Income Tax (Appeals) was rejected by the order dated 21.12.1988, as well as the further appeal to the Income Tax Appellate Tribunal (''Tribunal''); which was dismissed by the order dated 31.01.1994, along with connected appeal in respect of the assessment years 1977-78 and 1978-70.

Section 10(29) of the Act was omitted by the Finance Act, 2002, with effect from 01-04-2003, but was in operation during the relevant Assessment Year. This provision sets out incomes which do not form part of the total income.

Reliance for the claim for exemption u/s 10(29) of the Act is placed on the decision of a Division Bench of the Supreme Court in Commissioner of Income Tax, Madras v. South Arcot District Cooperative Marketing society Ltd. : (1989) 176 ITR 117 (SC). The respondent was a cooperative society registered under the Madras Cooperative Societies Act. It entered into an agreement with the State Government during the previous year ending 30.06.1960, relevant to the Assessment Year 1961-62. Under the agreement the assessee agreed to hold all the stock of Ammonium Sulphate belonging to and on behalf of the State and to store it in godowns belonging to the assessee. The agreement also required the assessee to take all necessary steps to enable the stocking and storage of the fertilizer, including taking delivery of the stock at the rail-head and transporting it to the godowns. The assessee received an amount during the Assessment Year described as commission and claimed exemption u/s 14(3)(iv) of the Income Tax Act 1922. The Assessing Authority denied exemption and the appellate Assistant Commissioner confirmed the denial. On the assessee''s further appeal, the Appellate Tribunal held that on a construction of the agreement between the assessee and the State Government, the amount is seen to represent the consideration for letting out the godowns and any servicing done in that connection is an insignificant part of the entire transaction. On this reasoning the Appellate Tribunal allowed the appeal and granted exemption. At the instance of the Revenue the Tribunal referred to the High Court the question whether the amount received by the assessee was exempted u/s 14(3)(iv) of the 1922 Act; and whether on the construction of the agreement, the Appellate Tribunal''s finding that the receipts were mostly for letting out the godowns and that the servicing was an insignificant portion of the whole amount, is reasonable and consistent with the material on record. The High Court endorsed the view taken by the Tribunal and answered the reference against the Revenue. The Revenue appealed to the Supreme Court.

Pathak CJI, delivering the opinion for the Court observed that having regard to the object for which the provision was enacted, it is apparent that a liberal construction should be put upon the language of the provision and therefore in the circumstances of the case it must be regarded that what the assessee did was to let out its godowns for the purpose of storing Ammonium Sulphate handed over to it by the State Government. The remaining services performed by the assessee were merely incidental to the essential responsibility of using the godowns for the storage of such stock. Though a certain sum was paid to the assessee and described as commission for the service performed by it, having regard to the totality of the circumstances and to the true substance of the agreement, the amount was paid merely by way of remuneration for the use of godowns. The Supreme Court concurred with the Appellate Tribunal and the High Court and dismissed the appeal, quoting with approval the observations of the Gujarat High Court in Commissioner of Income Tax, Gujarat-II Vs. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd., .

In Commissioner of Income Tax Vs. Karnataka State Warehousing Corporation Ltd., , the analysis of Section 10(29) of the Act fell for the consideration of a Division Bench of the Karnataka High Court. The reference made at the instance of the Revenue was of the question whether fumigation charges (external) and laboratory analysis fee are exempt u/s 10(29); and another question, not relevant for the purposes of the present lis. The Karnataka High Court held on an analysis of Section 10(29) that for the provision to apply the assessee should be an authority constituted under any law for the marketing of commodities; the income should be derived from the letting of godowns or Warehouses; and the letting must be for the purpose of storage, processing or facilitating marketing of commodities. The court held that the assessee was an authority constituted under the law for the marketing of commodities but fumigation activities indulged in in respect of goods not stored in the assessee''s own godowns and termed as fumigation (external) and laboratory analysis of the goods in storage in the assessee''s own godowns fall outside the purview of Section 10(29) of the Act. The question was therefore answered in favour of the Revenue.

In Union of India and Anr. v. U.P. State Warehousing Corporation (1991) 187 ITR 54 (SC), the issue was whether the rental income derived by the assessee from its godowns and warehouses was exempt u/s 10(29) of the Act. As the claim of the assessee was repeatedly rejected over the years by the authorities under the Act, the assessee challenged the notice issued for the assessment year 1974-75 in the High Court. The High Court quashed the notice and the Revenue appealed to the Supreme Court. The Supreme Court in a per curiam opinion of a Division Bench held: ...that the assessee having fulfilled all the tests urns rightly entitled to the exemption as claimed. We are fully in agreement with the High Court that the assessee was entitled to relief on this premises. The Supreme Court analysed the facts of the case and found that the activities of the assessee as a State Warehousing corporation were as an agent of the Central Warehousing Corporation for the purpose of purchase, sale, storage and distribution of agricultural produce, seeds, manure, fertilizers, agricultural implements and individual commodities and these activities undoubtedly are for facilitating marketing of commodities.

In Commissioner of Income Tax Vs. Eastern Seafoods Exports (P.) Ltd., , the issue was whether an income of Rs. 5,70,704/- derived by the assessee from the sale of import license obtained as an incentive on the export of shrimps could be claimed as a deduction u/s 80-J of the Act. A Division Bench of the Madras High Court, on an analysis of the precedents and lexicons, held that the expression ''derived from the business'' in Section 80J should receive a restricted meaning and if it is an income directly relatable to the business activities of the assessee, it will be deemed to be derived from the business of the assessee. Quoting with approval the judgment of Cochin Company Vs. Commissioner of Income Tax, and relying on the judgments of the Privy Council in Commissioner of Income Tax v. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) and of the Supreme Court in In the matter of the Estate of Saradambal Ammal and Others, , the Madras Division Bench observed that profit or gain can be said to have been ''derived'' from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. Income, profit or gain, cannot be said to have been ''derived'' from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner. Applying this analysis the Madras High Court ruled that the sale of replenishment licenses is an act wholly unconnected with the business in the goods which were either required to be exported or imported for the purpose of the business of the assessee and in the absence of any immediate and direct nexus of the sale of the licenses by the assessee and its business activities, no benefit could be granted to the assessee u/s 80J of the Act. The reference was consequently answered in favour of the Revenue.

In Orissa State Warehousing Corporation Vs. Commissioner of Income Tax, the interpretation and application of Section 10(29) of the Act was involved. The question was whether the income received by the Warehousing Corporation as interest on its Fixed Deposits with banks was exempt u/s 10(29) of the Act. The Supreme Court observed that the word ''any income'' as appearing in the body of the statute is circumscribed in its application by user of the expression ''derived from''. Delivering the opinion for a Division Bench of the Supreme Court, Umesh C. Banerjee, J distinguished the judgment of the Gujarat High Court in Ahmedabad Maskati Cloth Dealer Cooperative Ware Houses Society Ltd. (2 supra) and of the Supreme Court in South Arcot District Cooperative Marketing Society Ltd. (1 supra) and in U.P. State Warehousing Corporation (4 supra). It requires to be noticed that in this case, before the Supreme Court it was urged [as has been urged by Mr. Ratnakar before us in this case], that the whole activity being carried on by the assessee is an integrated one and the activities of the assessee cannot be split up. In the facts of the case before the Supreme Court the assessee Warehousing Corporations had claimed exemption u/s 10(29) of the Act for various items of income such as (a) warehousing charges; (b) administrative over-heads being surplus of recovery over costs of the procurement activity on behalf of the FCI/State Government; (c) fumigation service charges; (d) interest; and (e) miscellaneous income.

The Supreme Court held that having regard to the language of Section 10(29), the question of exemption would arise pertaining to that part of income only which arises or is derived from the letting of godowns or ware houses and for the purposes specified in Section 10(29). The Apex Court quoted and approved the ratio of the Madhya Pradesh High Court in M.P. Warehousing Corporation Vs. Commissioner of Income Tax, . The M.P. High Court had held that to claim exemption, it must be proved that the income derived by an authority constituted for the marketing of commodities is income which is derived from the letting of godoams or ware houses for the purposes specified in Section 10(29), which are storage, processing or facilitating the marketing of commodities. If the letting of godowns or ware houses is for any other purpose or if the income is derived from any other source, then such income is not exempt under that clause. Concurring with this ratio of the M.P. High Court the Supreme Court held that in the event the letting of godowns or ware houses is for any other purposes (other than storage, processing or facilitating marketing of commodities) or if income is derived from any other source, then and in that event such income cannot possibly come within the ambit of Section 10(29) and would not be exempt from tax. The Supreme Court clearly held that interest income on fixed deposits would not be income falling within the exclusionary ambit of Section 10(29).

Another decision relied upon by the Revenue apart from the previous one i.e., Orissa and Rajasthan State Warehousing Corporations (9 supra) is the decision of the Madras High Court in Commissioner of Income Tax Vs. Jameel Leathers and Uppers, . The question referred at the instance of the Revenue was whether cash assistance and duty draw back received from the Government by the assessee are includable in the profit derived from the industrial undertaking and eligible for relief u/s 80HH and 80J of the Act. The assessee is engaged in the business of tannery and export of leather hides and skins. For the assessment years in question the assessee claimed exemption u/s 80HH for Rs. 2.08,100. The Profit and Loss Account of the assessee for the year 1983-84 showed gross receipts which included cash assistance and draw backs of duty, aggregating Rs. 26,98,066/- and import license nomination of Rs. 37,146. On behalf of the assessee it was contended that there is an inextricable link between the business carried on and the receipt of these amounts. The assessee contended that if it had not embarked on the business, there would be no occasion for receiving the cash assistance; that the business includes the activity of exports and therefore these benefits became available; that the amount so made available to the assessee by the Government of India was not by way of bounty but as a part of the scheme intended to encourage the setting up of industries jointly and more particularly in the industrially backward areas and to encourage the export of goods made by Indian industries for sale in foreign markets. The assessee also contended that the refund of a part of the import duty on the raw material imported would only reduce the cost of the product, thereby improving the profitability of the assessee''s business and that the cash assistance was meant to upset the loss which the assessee would suffer by having to sell its products in the foreign markets at a price which was below the cost of production and at prices well below the prices prevailing in the domestic market. Negativing this contention on behalf of the assessee the Madras High Court held that while cash assistance, duty draw back and import entitlement are undoubtedly attributable to the business carried on by the assessee and the assessee would not have been in a position to receive any of these benefits had the assessee not been carrying on this business, it cannot be said that such income is ''derived from the business''. Reiterating the principle that the expression ''derived from'' is narrower than the expression ''attributable to'', it was held that the amounts received by the assessee from the Government consequent to the exports effected by it are not amounts which form part of the profits and gains derived from an industrial undertaking and are therefore outside the spectrum of benefits permissible Under Sections 80J and 80HH of the Act.

In Udaipur Sahkari Upbhokta Thok Bhandar Ltd. Vs. Commissioner of Income Tax, the scope of Section 80P(2)(e) fell for consideration. Clause (e) is a part of the raft of Clauses in Section 80P relating to deductions in respect of income of cooperative societies. Clause (e) provides that the whole of income derived by a cooperative society from the letting of godowns or warehouses for storage, processing or facilitating marketing of commodities should be deducted in computing the total income of such assessee; a provision in pari material with Section 10(29) of the Act. The Supreme Court quoted in extenso and approved the ratio in the judgment of the Gujarat High Court in Surat Venkat Sahakari Sangh Ltd. v. Commissioner of income tax (1971) 76 ITR 722 (Guj), a case analyzing the provisions of Sections 81(iv) and 14 and 14(3)(iv) of the Income Tax Act 1922, the predecessor to Section 80P(2)(e) of the Act. The Gujarat High Court had rejected the construction put forward by the assessee while accepting the construction urged by the Revenue. The Revenue had urged that income which was sought to be exempted was only income derived from the letting of godowns or warehouses if they were let of for any of the three specified purposes viz. storage, processing or facilitating marketing of commodities; that these words were governed by the preposition "for" and they denoted the purposes for which the godowns or warehouses should be let out in order that the income derived from such letting should be exempted from tax. The Gujarat High Court held that on a reading of the relevant Clause it is apparent that there was no break in the continuity of idea after the word ''storage''; the idea flows on into the words "processing or facilitating marketing of commodities"; and if the Clause is read as a whole there is no doubt that the words "storage, processing or facilitating marketing of commodities" constitute one single composite Clause governed by the preposition "for" signifying that the letting out of godowns or warehouses contemplated by the Section is letting for any of the three purposes viz., storage, processing or facilitating marketing of commodities. The Supreme Court categorically observed: If the godown is let out (including user) for any purpose besides storing, processing or facilitating the marketing of commodities, then, the assesses is not entitled to such exemption. The judgment of the Supreme Court in South Arcot District Cooperative Marketing Society Ltd. (1 supra) was distinguished as inapplicable on the facts.

It requires to be noticed that the appellant before the Supreme Court, a cooperative society was claiming deduction u/s 80P(2)(e), the income received by way of commission from the State Government for storage of controlled commodities. The assessing officer disallowed the claim for deduction on the ground that the assessee is a wholesaler of food-grains and not a mere stockist. The assessee''s appeal was accepted by the Commissioner of Income Tax and such appellate decision confirmed by the Tribunal. The Rajasthan High Court however reversed the Tribunal''s decision on the view that the assessee was storing controlled commodities as part of its own trading stock, as a trader in the essential commodities in question and was thus disentitled to deduction u/s 80P(2)(e). The Supreme Court confirmed the view taken by the Rajasthan High Court that the assessee was disentitled to claim deduction for the commission component of its income, u/s 80P(2)(e).

In the case on hand the Income Tax Officer rejected the claim of the assessee for exemption u/s 10(29) of the Act in respect of (a) supervisory charges - Rs. 13,03,810.-; (b) miscellaneous receipts -Rs.59,908/-; (c) interest on bank deposits - Rs. 55,590/-; (d) lease and rent -Rs.20,490/-; and (e) fumigation charges - Rs. 6,029/-. This was confirmed by the Commissioner of Income Tax and the Tribunal. Sri Ratnakar, the learned counsel for the assessee has conceded the legitimacy of the denial of exemption in so far as items (b) and (c) are concerned viz., miscellaneous receipts and interest on bank deposits. Supervisory charges is said to represent income received by the assessee for the coordination and logistics of the assessee''s essential operations viz., for ensuring the proper and efficient transport of the commodities and the storing and facilitating the marketing of the commodities as part of its warehousing operations. In respect of lease and rent and fumigation charges the assessee claims that these relate to activities integrally connected with its operations as a Warehousing Corporation.

Section 10 occurs in Chapter-III of the Act and enumerates incomes which do not form part of the total income. Sub-section (29) provides that the totality of income derived from the letting out of the godowns or warehouses for storage, processing or facilitating the marketing of commodities, shall not form part of the total income. On a true and fair construction of Sub-section (29) of Section 10 and in the light of the precedents referred to supra, in particular the decisions of the Madras High Court in Eastern Sea Foods Exports (P) Ltd., and Jameel Leathers and Uppers (5 and 11 supra); of the Madya Pradesh High Court in M.P. Warehousing Corporation (10 supra); and of the Supreme Court in Orissa State Warehousing Corporation; Rajasthan State Warehousing Corporation, and Udaipur Sahakari Upbhokta Thok Bhandar Ltd. (9 and 12 supra), the income derived by the assessee - Warehousing Corporation towards supervisory charges, lease and rent or fumigation charges would not constitute income derived from the letting of its godowns or warehouses for storage, processing or facilitating the marketing of commodities. No exemption under Sub-section (29) of Section 10 of the Income Tax Act 1961 can thus be claimed and allowed.

The reference is accordingly answered in favour of the Revenue and against the assessee.