Commissioner of Income Tax vs Kailash Distt. Co-operative Marketing and Supply Federation Ltd.

V.K. Mehrotra, J.—At the instance of the Commissioner of Income Tax, Patiala-1, the Income Tax Appellate Tribunal, Chandigarh Bench, referred the following question to the Court for its opinion:

Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that income of the assessed from its activities u/s 80P(2)(a)(iii) has to be deducted u/s 80P(1) irrespective of the fact whether the agricultural produce has been raised by its members, by self-cultivation or by engaging labor, or not, so long as it belongs to them?

The assessed is Kailash Distt. Co-op. Marketing and Supply Federation Ltd. Dhalli, Shimla. The statement of the case submitted to this Court by the Tribunal shows that the facts which were found by the Appellate Tribunal in its order of May 13,1975, are that for assessment year 1970-71 (relevant previous year ending on June 30, 1969) the Income Tax Officer framed an order of assessment on February 28, 1973, at a total income of Rs. 2,05,400/-as against the returned loss of Rs. 69, 845/- as per the original return and the loss of Rs. 1,39,285/- as per the revised return. The assessed was claiming a deduction of a sum of Rs. 2,35,897/- u/s 80P(1) read with Section 80P(2)(a(iii) of the Income Tax Act, 1961. The Income Tax Officer disallowed the claim. So also the Appellate Assistant Commissioner of Income Tax through his order of August 29, 1973. The Tribunal held the claim for exemption admissible and gave relief to the assessed. The Commissioner felt aggrieved by it and, thereafter prayed for a reference being made to this Court u/s 256(1).

The assessed is a Co-operative Society and is assessed in the status of an Association of persons. It carries on business of marketing agricultural produce. It also has income from plying of trucks and from house property. The assessed is an Apex society within the meaning of that term under the H.P. Co-operative Societies Act. What has been found by the authorities under the Act is that it purchases seed potatoes from the members of primary societies through, what are known as, depot holders who are its members. It then sells potato and charges Commission thereon.

The exemption was claimed by the assessed, as noticed earlier, u/s 80P of the Act. The claim for exemption was in respect of sums obtained by the assessed in ''the marketing of the agricultural produce of its members''.

The Tribunal accepted the plea made on behalf of the assessed that the amount of income of the assessed representing the marketing by it of agricultural produce of its members is liable to be deducted irrespective of the fact whether the agricultural produce was actually grown by its members or not. In the opinion of the Tribunal, it was sufficient if the agricultural produce marketed by the Assessee was "of its members in the sense that it belonged to them". The correctness of this view is questioned by Shri Indar Singh, appearing on behalf of the Commissioner for Income Tax.

The Income Tax Act, 1922, which provided for exemption of a general nature in Section 14, had a provision in Section 14(3) which, in its relevant part, after its amendment by the Finance Act of 1960 (XIII of 1960) which was effective from April 1, 1960, said:

14 (3) The tax shall not be payable by a Co-operative Society:

(i) in respect of its profits and gains of business carried on by it, if it is:

(a) a society engaged in carrying on the business of banking or providing credit facilities to its members; or

(b) a society engaged in a cottage industry; or

(c) a society engaged in the marketing of the agricultural produce of its members; or

(d) 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; or

(e) a society engaged in the processing without the aid of power of the agricultural produce of its members; or

(f) a primary society engaged in supplying milk raised by its members to a federal milk Cooperative Society:

Provided......

When the Income Tax Act, 1922 was repealed by the Act of the year 1961, similar provision was incorporated in Section 81. It its material part Section 81 said:

Income of Co-operative Societies-income tax shall not be payable by a Co-operative Society:

(i) in respect of the profits and gains of business carried on by it, if it is-

(a) a scoiety engaged in carrying on the business of banking or providing credit facilities to its members; or

(b ) a society engaged in a cottage industry; or

(c) a society engaged in the marketing of the agricultural produce of its members; or 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; or

(e)a society engaged in the processing without the aid of power of the agricultural produce of its members, or

(f) a primary society engaged in supplying milk raised by its members to a federal milk Co-operative Society:

Provided...........

Finance Act (No. 2) of 1967 deleted Section 81 with effect from April 1,1968, along with some other sections. Section 80P was inserted in place of Section 81. The provision thereof, in its material part, was as follows:

80P. Deduction in respect of income of Co-operative Societies.-(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:-

(a) in the case of a Co-operative Society engaged in-

(i) carrying on the business of banking of providing credit facilities to its members, or

(ii) a cottage industry, or

(iii) the marketing of the agricultural produce of its members, or

(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.

To the aforesaid were added Sub-clauses (vi) and (vii) and a proviso by the Finance Act (No. 2) of 1971 with effect from April 1, 1972. They say:

(vi) the collective disposal of the labour 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............

At the time of its insertion by Finance Act No. 2 of 1967 with effect from April 1, 1968, Section 80P(2) had Clause (b) in the following terms:

(b) in the case of a Co-operative Soicety, being a primary society engaged in supplying milk raised by, its member to a federal milk Co-operative Society, the whole of the amount of profits and gains of such business.

By Finance Act of the year 1978, Clause (b) aforesaid was substituted with effect from 1st April, 1979 with the following:

(b) in the case of a Co-operative Society, being a primary society engaged in supplying milk raised by its members to:

(i) a federal milk Co-operative Society; or

(ii) the Government or a local authority; or

(iii) a Government company as defined in Section 617 of the Companies Act or a corporation established by or under a Central 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.

The Finance Act of 1983 substituted Clause (b) with effect from 1st April, 1984. In its present form, in so far as it is material, Clause (b) reads:

(b) in the case of a Co-operative Society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to:

(i) a federal Co-operative Society, being a society engaged in the business of supplying milk, oilseeds, fruits or vegetables...........................

(ii).........

(iii)........

the whole of the amount of profits and gains of such business.

In Commissioner of Income Tax, Madras v. South Arcot District Co-operative Marketing Society Ltd. (1989) 176 ITR 117 the Supreme Court observed (at page 119) that:

... As was observed by the Gujarat High Court in Commissioner of Income Tax, Gujarat-II Vs. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd., while considering the analogous provision of Section 80P(2)(e) of the Income Tax Act, 1961, the provision for exemption was intended to encourage Co-operative Societies to construct warehouses which were likely to be useful in the development of rural economy and exemption was granted from Income Tax in respect of income derived from the letting of such warehouses Having regard to the object with which the provision has been enacted, it is apparent that a liberal construction should be given to the language of the provision and that, therefore, in the circumstances of the present case, it must be regarded that what the Assessee did was to let out its go downs for the purpose of storing the ammonium sulphate handed over to it by the State Government.

The Supreme Court was considering the claim of exemption made by the Assessee for the year 1961-62 u/s 14(3) of the Indian Income Tax Act, 1922.

The Supreme Court spoke again on the subject, the same year, in Commissioner of Income Tax, Lucknow Vs. U.P. Cooperative Federation Ltd., That too was a case u/s 14(3) of the Indian Income Tax Act. What was observed by the Supreme Court (at page 441) was:

....... We would like to point out that u/s 14(3), provision has been made to extend certain advantages to Co-operative Societies in order that the legislative purpose of providing incentives to the Co operative movement may be fulfilled. The High Court was right in holding that the provisions contained in Section 14(3) should be liberally constaied.

In Broach Distt. Co-operative Cotton Sales Ginning and Pressing Society Limited Vs. Commissioner of Income Tax, Ahmedabad, the Supreme Court was dealing with a case u/s 81(i)(c). It observed (at page 422) that:

.... The object of Section 81(i) was to encourage and promote the growth of Co-operative Societies, and consequently a liberal construction must be given to the operation of the provision...

Such being the object of these provisions, what should be the approach of this Court in interpreting them. The principle is no more in doubt. In K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, the Supreme Court said (at page 605/606) that:

.... It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provison produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction: vide Luke v. IRC (1963) AC 557; (1964) 54 ITR 692. The court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption under-lying the statutory provision......

The principle was stated by the Supreme Court a little more emphatically in Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, What was said (in paragraphs 46 and 47) was this:

.... The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning. If the purpose of a particular provision is easily discernible from the whole scheme of the Act then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result i. e. result not intended to be subserved by the object of ''the legislation found out in the manner indicated before, then if other construction is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction......

After referring to its decision in J.H. Gotla, the Supreme Court observed in a recent decision in Keshaviji Ravji and Co. and Ors. v. Commissioner of Income Tax (1990) 2 SCC 231 (in paragraph 28) that:

... In this respect taxing statutes are not different from other statutes. In A.G. v. Carlton Bank (1899) 2 QB 158: Lord Russel of Killowen, C.J. said: (QBD p. 164)

I see no reason why any special canons of construction should be applied to any Act of Parliament, and I know of no authority for saying that a taxing Act is to be construed differently from any other Act. The duty of the Court is, in my opinion, in all cases the same, whether the Act to be construed relates to taxation or to any other subject, namely, to give effect to the intention of the legislature......

The object of Section 80P(1) and 2, like that of its predecessor Section 81 or Section 14(3) of the Income Tax Act, 1922, undoubtedly is to give a fillip to Co-operative movement. There is hardly any scope for doubt about it, particularly in view of what the Supreme Court has said in some of the decisions noted by us earlier. In any interpretation of Section 80P(2)(a)(iii) this cannot be lost sight of.

We have also seen that Clause (b) of Section 80P(2), in its original form or as substituted by Finance Act of 1978 from April 1, 1979, envisaged exemption to the whole amount of profits and gains of supply of milk, raised by its members, by a primary society to a Federal Milk Co-operative Society. A similar exemption was envisaged by Section 14(3)(f) of the Income Tax Act, 1922. It is clear that wherever the Legislature envisaged exemption to the supply or marketing of a commodity by a Co-operative Society, which was raised by its members, it had said so specifically. As a corollary, it must be held that the requirement of the product being raised by a member of the Co-operative Society himself was not envisaged by the Legislature in respect of exemptions contemplated by Section 14(3) of the Income Tax Act, 1922 of Section 81 or Section 80P, when it was not said so specifically by it.

Clause (b) of Section 80P(2) in its present form reinforces this. We have read that clause earlier. Apart from the business of supply of milk, the supply of oilseeds, fruits or vegetables raised or grown by its members have been specifically provided for in Clause (b) now. What was clearly implicit in the scheme of these provisions has been made explicit by the Legislature. That is obvious from the subsequent amendment, which, we feel, is of a clarificatory nature, brought about in Clause (b) of Section 80P(2).

It is permissible for the Court to look into a subsequent amendment of a clarificatory nature to ascertain the intention of the Legislature. The rule is firmly established. We need refer only to a decision of the Supreme Court in Thiru Manickam and Co. Vs. The State of Tamil Nadu, where the learned Judges observed (in paragraph 10) that:

........ The amendment made in Clause (b) can thus be taken to be an exposition by the legislature itself of its intent contained in the earlier provision. We are not impressed by the argument of the learned Additional Solicitor General that the amendment made in Clause (b) was intended to mark a departure from the position in law as it existed before the amendment As already mentioned above, the legislature as a result of the amendment, clarified what was implicit in the provisions as they existed earlier. An amendment which is by way of clarification of an earlier ambiguous provision, can be useful aid in construing the earlier provision, even though such amendment is not given retrospective effect.......

The same principle was reiterated by the Supreme Court in Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, when it observed (in paragraph 48) that:

In view of the aforesaid and in view of the attitude of the law-makers in dealing with this problem as evidenced by the amend- ment and in the circular originally issued prior thereto the right to carry forward the loss in the running business would be available to the wife or minor child if they themselves were assessed but the right would be completely lost if the individual in whose total income the loss is to be included is not permitted to carry forward the loss....

(emphasis supplied).

The relevant clause of Section 80P(2) under which exemption is being sought by the Assessee, namely, CIause (a) (iii), when read in the light of the principles aforesaid, clearly indicates that all that was intended by the Parliament to enable an Assessee to get the exemption contemplated by it was that the agricultural produce should belong to the members of the Co-operative Society which is marketing it though it may not have been produced by such members.

In Commissioner of Income Tax, Gujarat-IV Vs. Karjan Co-op. Cotton Sale, Ginning and Pressing Society Ltd., the Gujarat High Court observed (at page 828) that:

... Now, the words in the section are not " the of brought by be would as so its it in to not and The a or is that grown members? but ?agricultural members?. So commodity Assessee-society long belongs enough say members, member Co-operative Society itself individual member. concept here ownership an produce person who grows agricultural produce....

We are in respectful agreement with the view contained in the aforesaid observations. We may add that in its recent decisions in Commissioner of Income Tax Vs. Haryana State Co-operative Supply and Marketing Federation Ltd., and Commissioner of Income Tax v. Punjab State Co-operative Supply and Marketing Federation Ltd., [(1990) 182 l.T.R. 58], the Punjab and Haryana High Court has noticed the decision in Karjan Co-op. Cotton Sale, Ginning and Pressing Society [(1981) 129 l.T.R. 821 ] with approval.

A contrary line of decisions were brought to our notice by Indar Singh on behalf of the Revenue, being decisions, of the Madhya Pradesh High Court in Commissioner of Income Tax, Madhya Pradesh Nagour and Bhandara v. Mahasamund Kissan Cooperative Rice Mill and Marketing Society Ltd. (1976) 103 l.T.R. 499 and Keshkal Co-operative Marketing Society Ltd., v. Commissioner of Income -Tax, (1987) 165 l.T.R. 437 Gauhati High Court in Assam Co-operative Apex Marketing Society Ltd. v. Addl. Commissioner of Income Tax, Assam (1977) 110 l.T.R. 33 and the Andhra Pradesh High Court in Commissioner of Income Tax v. Mulkanoor Co-operative Rural Bank Ltd. (1988) 173 l.T.R. 629. With utmost respect to the learned Judges, who decided these cases, we are unable to share the view expressed by them in view of what we have said earlier.

Our answer to the question, for the reasons given by us earlier, referred to us is in the affirmative, in favour of the Assessee and against the Revenue.

A copy of our judgment shall be sent to the Appellate Tribunal in terms of Section 260.

Since no one has appeared before us on behalf of the Assessee and it was Shri Sureshwar Thakur who assisted us on its behalf at our request, we leave the parties to bear their own costs of these proceedings.