Commissioner of Income Tax vs Kerala State Co-operative Marketing Federation Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal, Cochin Bench, has referred the following question of law for the decision of this court :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction u/s 80P(2)(a)(iii) in respect of purchases made from member societies ?"

The respondent is the Kerala State Co-operative Marketing Federation Limited, a co-operative society registered under the Co-operative Societies Act. It is an assessee to Income Tax. In this reference, we are concerned with the assessment year 1980-81. During the assessment proceedings, the assessee claimed exemption u/s 80P(2)(a)(iii) of the Income Tax Act, 1961, in respect of the profit earned by the assessee-society out of the purchases it made from member-societies. The total purchases were to the extent of Rs. 33,23,71,339, out of which the purchase from member-societies amounted to Rs. 95,02,851. The assessee claimed exemption on the entire income for having marketed the agricultural products of its members. The Income Tax Officer denied exemption on the ground that what was marketed by the assessee was not the agricultural produce of the members of the assessee. The assessee is an apex society. It purchased cashew from the primary co-operative societies, who are its members. The growers are not the members of the assessee-society. Therefore, the Income Tax Officer held that the assessee is not entitled to the exemption u/s 80P(2)(a)(iii) of the Act. In appeal, the Commissioner of Income Tax (Appeals) held that the assessee is entitled to the exemption under the above section in respect of the income arising from procurement of cashew nuts from its member-societies. It will not be entitled to the said exemption for purchases or supplies made by primary societies or service societies which were not members of the assessee-society. In further appeal, the Appellate Tribunal, following its earlier order for the assessment year 1978-79 in I. T. A. No. 668/(Coch.) of 1983 dated November 28, 1986, held that the assessee will be entitled to exemption u/s 80P(2)(a)(iii)of the Act in respect of the purchases made from member-societies. The plea to the contrary by the Revenue was rejected. In the appeal filed by the assessee, the claim was that the whole of the profits and gains of the business is entitled to deduction u/s 80P(2)(a)(iii) of the Act and it should not be confined to the profits arising from the marketing of the agricultural produce of its members. The Tribunal passed a consolidated order in the appeals filed by the assessee as well as the Revenue dated October 3, 1988. The Appellate Tribunal followed its earlier order rendered for the assessment year 1978-79 in I.T.A. No. 668/(Coch.) of 1983 dated November 28, 1986, and confined the relief to the assessee u/s 80P(2)(a)(iii) of the Act only in respect of the purchases made from member-societies. The assessee has not taken up the matter by way of reference. On the other hand, the Revenue has questioned even the relief granted to the assessee. According to the Revenue, the assessee will not be entitled to the relief u/s 80P(2)(a)(iii) of the Act in respect of purchases made from its member-societies. The reference is confined to the said question.

We heard counsel.

The order passed by the Appellate Tribunal for the year 1978-79 in I. T. A. No. 668/(Coch.) of 1983 and Cross-Objection No. 117/(Coch.) of 1983 was the subject-matter of reference to this court in Income Tax References Nos. 5 and 6 of 1988. The matter was disposed of by this Bench by judgment dated February 15, 1991. The said judgment is reported in COMMISSIONER OF Income Tax Vs. KERALA STATE CO-OPERATIVE MARKETING FEDERATION LTD.., . Question No. 1 in the said case is to the following effect (at page 628):

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and on facts in finding that the assessee is entitled to exemption u/s 80P(2)(a)(iii) ?"

At page 639, we answered the said question thus : "Answered in the affirmative, i.e., in favour of the assessee and against the Revenue". At pages 631 and 632, we observed thus :

"In order to earn the exemption u/s 80P(2)(a)(iii) it is sufficient if the agricultural produce belonged to the members of the society, as observed by the Gujarat High Court in Commissioner of Income Tax, Gujarat-IV Vs. Karjan Co-op. Cotton Sale, Ginning and Pressing Society Ltd., . The words used are not ''agricultural produce grown by its members'' but ''agricultural produce of its members''. The cashew nuts brought to the assessee-society were agricultural produce and that produce belonged to the primary societies who supplied the same to the assessee. The produce belonged to the primary societies who were members of the apex society. It is immaterial whether a member of the society is an individual member or a co-operative society by itself. The produce supplied by the primary societies who are members of the apex society is marketed by the apex society which is engaged in such marketing. The whole of the amount of profits and gains of the business attributable to such an activity is, therefore, liable to be exempted u/s 80P(2)(a)(iii).

The operation of Section 80P(2)(a)(iii) is not limited to the marketing of the agricultural produce of the individual members of a co-operative society, but also the agricultural produce belonging to the primary societies who are members of an apex society. There is a clear indication in Section 80P itself to suggest that the Legislature did not intend to draw a distinction between the agricultural produce of individual members of a co-operative society and that belonging to the primary societies who are members of an apex society. If the Legislature wanted to restrict the operation of Section 80P(2)(a)(iii) to marketing of agricultural produce of individual members of a co-operative society, that would have been made clear in that provision itself. When the Legislature wanted to restrict the operation of a provision to a primary society, a specific provision has been made in that behalf in Clause (b) of Section 80P(2). That says that, in the case of a co-operative society being a primary society engaged in supplying milk, oil seeds, fruits or vegetables raised or grown by its members to a federal co-operative society or the Government or a local authority or a Government company, the whole of the amount of profits and gains of such business shall be deducted in computing the total income of the assessee. That sub-section specifically makes mention of milk, oil seeds, fruits or vegetables raised or grown by the members of a primary society. Only the profits and gains of such business are exempted u/s 80P(2)(b). In the case of a co-operative society engaged in activities other than those specified in Clause (a) or Clause (b), deductions are allowed as provided in Clause (c). In the case of a consumers'' co-operative society, the maximum deduction allowable is Rs. 40,000 and in any other case Rs. 20,000. What a consumers'' co-operative society is, has been clarified in the Explanation to Clause (c). Specific provisions are, therefore, seen made in Section 80P itself wherever the Legislature wanted to restrict the operation of a provision to a primary society or to a consumers'' co-operative society. It, necessarily, follows that no such restriction is imposed on Section 80P(2)(a)(iii). The result is that the society can claim deduction in respect of the business of marketing of agricultural produce of its members including that of member-societies of an apex society."

Our conclusion is stated at pages 633 and 634, which reads :

"In the light of the decisions referred to above and the reasons enumerated by us, we are of the view that the assessee-co-operative society is eligible for the deduction of the whole of the amount of profits and gains of the business attributable to the marketing of agricultural produce of the members of that society. It is made clear that such benefit can be claimed only in respect of the produce of the members of the apex society which are 86 in number. The Commissioner of Income Tax found that deductions have to be made in respect of the supplies made by the members of the society. It was for that reason that the Income Tax Officer was directed to redetermine the income derived from the marketing of the produce of the members of the society. That finding has been concurred with by the Appellate Tribunal. We see no error of law in the conclusion reached by the Tribunal. The first question has, therefore, to be answered in favour of the assessee."

It is common ground that, if the above decision is applied, the assessee is entitled to succeed and the question will have to be answered in the affirmative, in favour of the assessee and against the Revenue. Counsel for the Revenue submitted that, in view of the recent later decision of the Supreme Court in The Assam Co-operative Apex Marketing Society Ltd., Assam Vs. Additional Commissioner of Income Tax, Assam, , at page 342, the earlier decision of this court in COMMISSIONER OF Income Tax Vs. KERALA STATE CO-OPERATIVE MARKETING FEDERATION LTD.., , does not represent the correct law on the subject. We have to examine the said position with care.

In the recent Supreme Court decision brought to our notice, M/s. Nagarmal Baijnath Vs. Commissioner of Income Tax, , the court was concerned with Section 81(i)(c) of the Income Tax Act, as it stood then, which is to the following effect :

"81. 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-- ....

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

Section 81 was deleted by the Finance (No. 2) Act of 1967, with effect from April 1, 1968. Section 80P was incorporated by the same Act with effect from the same date. Section 80P(2)(a)(iii) of the Act is as follows :

"80P. (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-- ....

(iii) the marketing of the agricultural produce of its members; or . ..."

The Explanatory Note on the Finance (No. 2) Act of 1967, as could be gleaned from Circular No. 5(P) of the Central Board of Direct Taxes dated October 9, 1967, is to the effect that Section 81(i)(c) of the Act and Section 80P(2)(a)(iii) of the Act are of similar import. In Taxman''s Direct Taxes Circulars, Volume 2, (fourth edition) 1977, at page 277, it is stated thus :

"The provisions in Section 81 of the Income Tax Act for grant of rebate of tax on the abovementioned incomes of co-operative societies are to be replaced by the provisions in Section 80P in the new Chapter VI-A of the Act with effect from April 1, 1968, i.e., for and from the assessment year 1968-69. Under the new Section 80P of the Act, co-operative societies will be entitled to a deduction, in the computation of their total income, of the whole of their income on which they are at present eligible for rebate of tax. The conditions, qualifications and limits as to the incomes of co-operative societies eligible for deduction under the new Section 80P are the same as laid down in the existing Section 81 of the Income Tax Act for the purpose of rebate of tax on such incomes."

In the recent decision of the Supreme Court in The Assam Co-operative Apex Marketing Society Ltd., Assam Vs. Additional Commissioner of Income Tax, Assam, , at page 342, construing Section 81(i)(c) of the Income Tax Act, which is similar to Section 80P(2)(a)(iii) of the Act, the court observed thus :

". . . . A reading of Clause (i) of Section 81 shows that the idea and intention behind the said clause was to encourage basic level societies engaged in cottage industries, marketing agricultural produce of its members and those engaged in purchasing and supplying agricultural implements, seeds, etc., to their members and so on. The words ''agricultural produce of its members'' must be understood consistent with this object and if so understood, the words mean the agricultural produce produced by the members. If it is not so understood, even a co-operative society comprising traders dealing in agricultural produce would also become entitled to exemption which could never have been the intention of Parliament. The agricultural produce produced by the agriculturist can legitimately be called agricultural produce in his hands but in the hands of traders, it would be appropriate to call it agricultural commodities : it would not be his agricultural produce. Accordingly, it must be held in this case that since the agricultural produce marketed by the assessee was not the agricultural produce produced by its members, namely, the primary co-operative society, the assessee cannot claim the benefit of the said exemption. ..."

The Supreme Court has categorically held that the agricultural produce marketed by the assessee should be the agricultural produce produced by its members, viz., the primary co-operative society, in order to avail of the exemption. The benefit should not be available if the agricultural produce marketed by the assessee was not the agricultural produce produced by its members, viz., the primary co-operative societies.

In this case, in the light of the earlier decision of the Appellate Tribunal in I. T. A. No. 668/(Coch.) of 1983, which was the subject-matter of the decision in COMMISSIONER OF Income Tax Vs. KERALA STATE CO-OPERATIVE MARKETING FEDERATION LTD.., , it has been held that the assessee will be entitled to the necessary relief even if it marketed the agricultural produce of its members and did not market the agricultural produce grown by its members. It was held that it will be sufficient if the assessee-apex society marketed the agricultural produce belonging to its members. It is this view which was accepted as correct by this court in the earlier decision in COMMISSIONER OF Income Tax Vs. KERALA STATE CO-OPERATIVE MARKETING FEDERATION LTD.., . That view has been given effect to for this year (1980-81) also by the Tribunal in paragraph 8 of its order dated October 3, 1988. We are of the opinion that, in view of the later decision of the Supreme Court in The Assam Co-operative Apex Marketing Society Ltd., Assam Vs. Additional Commissioner of Income Tax, Assam, the earlier decision of this Bench in COMMISSIONER OF Income Tax Vs. KERALA STATE CO-OPERATIVE MARKETING FEDERATION LTD.., , does not represent the correct law on the point. In the light of the recent decision of the Supreme Court, the assessee will not be entitled to deduction u/s 80P(2)(a)(iii) of the Act in respect of purchases made from its member-societies. There is no material or proof to show that the agricultural produce was produced by the members of the assessee-society which is a prerequisite for claiming relief u/s 80P(2)(a)(iii) of the Act. Therefore, we answer the question referred to this court in the negative, against the assessee and in favour of the Revenue.

A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.