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Commissioner Of Income-Tax v. Broach District Co-Operative Cotton Sales
Factual and Procedural Background
The assessee is a co-operative society constituted under the Co-operative Societies Act. The relevant assessment years were 1961-62 to 1963-64. The society's objects included pressing cotton, packing bundles for members and other customers, using its machines for the members' useful work, and selling raw cotton, cotton and cotton seeds and other agricultural produce. It operated a ginning and pressing factory to serve members prior to marketing their produce and charged ginning and pressing fees and commission for sale of the finished product.
During assessment, a dispute arose over receipts from the society's ginning and pressing activities. The society claimed exemption for those receipts under section 81(i)(c) of the Income-tax Act (as it then existed). The Income-tax Officer held that ginning and pressing with the aid of power were not covered by the exemption clauses of section 81(i)(c) and were therefore taxable; the Appellate Assistant Commissioner confirmed this view. The society appealed to the Tribunal, which held that, based on (i) receipts from members only, (ii) the general market for ginning and pressing cotton only, and (iii) no evidence of dealing in raw cotton, the ginning and pressing activities were integral to marketing and that receipts from those activities were not liable to tax under section 81(i)(c).
At the instance of the Commissioner, the Tribunal referred the following question to the High Court for opinion: whether, on the facts and circumstances, the society's income from ginning and pressing was exempt under section 81(i)(c) of the Income-tax Act as it stood prior to its amendment.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the income of the society from ginning and pressing was exempt under section 81(i)(c) of the Income-tax Act, 1961, as it stood prior to its amendment?
- Whether ginning and pressing activities carried on with the aid of power by the assessee-society fall within any of the clauses (a) to (f) of section 81(i), or whether — by reason of the proviso to section 81(i) — profits attributable to such activities (to the extent they exceed Rs. 15,000) are taxable?
- Whether the Tribunal's factual finding that ginning and pressing were integral to marketing prevents the proviso to section 81(i) from applying to those activities?
Arguments of the Parties
Revenue's Arguments (as represented by Mr. K. H. Kaji)
- The Tribunal failed to give proper effect to the proviso to section 81(i). Even if ginning and pressing are integral to marketing, because they were carried out with the aid of power they are activities not mentioned in clauses (a) to (f) of section 81(i).
- Consequently, nothing in subsection (i) applies to that part of the profits and gains attributable to such activities which exceed Rs. 15,000, and those amounts must be taxed.
Assessee's Arguments (as represented by Mr. K. C. Patel)
- The society is effectively a marketing society; ginning and pressing are ancillary or integral parts of the marketing process carried out to make members' produce marketable.
- Because the society's main activity is marketing of members' agricultural produce, receipts from ginning and pressing should be regarded as falling within the exempt activities and thus not subject to tax under section 81(i).
- If the case falls within any one of clauses (a) to (f) of section 81(i), that should suffice to claim exemption for the business's entire profits and gains.
- Relied on precedent: U. P. Co-operative Bank Ltd. v. Commissioner of Income-tax (Allahabad High Court) to support the proposition that income exempt under any one clause is exempt notwithstanding non-applicability of another clause; and relied on Surat Vankar Sahakari Sangh Ltd. (this High Court) to emphasize the legislative purpose of encouraging co-operative societies.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| U. P. Co-operative Bank Ltd. v. Commissioner of Income-tax (Allahabad High Court) | Principle that clauses enumerating exempt sources are distinct and independent; if income falls within any clause it is exempt notwithstanding non-applicability of another clause (i.e., being non-exempt under one clause does not preclude exemption under another). | The court held this precedent did not assist the assessee because it did not address the effect of a proviso that specifically disallows exemption for profits attributable to activities outside the enumerated clauses (a)-(f). The High Court's earlier ruling did not consider the proviso's effect where some activities are exempt and others are not; therefore the precedent was inapplicable to the mixed-activities proviso context here. |
| Surat Vankar Sahakari Sangh Ltd. v. Commissioner of Income-tax (this High Court) | Observation that section 81 contains several distinct and independent heads of exemption and that each must be examined to see whether particular income falls within any head; also stressed the legislative purpose to encourage co-operatives. | The court found the case unhelpful to the assessee's position on the proviso point: while it confirms that clauses are distinct, it does not override the clear operation of the proviso which taxes profits attributable to activities not falling within clauses (a)-(f). |
Court's Reasoning and Analysis
The court began by expounding the language of section 81(i) and its proviso. Section 81(i) grants exemption from income-tax for profits and gains of business carried on by a co-operative society where the society falls within specified categories (clauses (a) to (f)). The proviso qualifies this exemption: where a society is also engaged in activities other than those specified, the part of its profits attributable to such other activities that exceeds Rs. 15,000 shall not be exempt.
The court examined whether ginning and pressing with the aid of power could be taken to fall within any of clauses (a) to (f). It observed that clause (e) specifically exempts "processing without the aid of power" of members' agricultural produce. The presence of clause (e), which limits exemption to processing without power, indicated that processing with the aid of power (i.e., ginning and pressing with power) was intentionally left outside the ambit of the exempted activities.
The court rejected the assessee's argument that because the society's primary character was marketing, ancillary ginning and pressing performed to make produce marketable should be treated as part of the marketing activity and therefore wholly exempt. The court reasoned that accepting the assessee's interpretation would neutralize the express effect of the proviso; the proviso would be rendered otiose if ancillary activities carried out with power were automatically treated as exempt marketing activities.
The court considered the precedents relied on by the assessee. It explained that the Allahabad High Court decision (U. P. Co-operative Bank Ltd.) established that exemption under any one clause would suffice for exemption, but that decision did not address a proviso that specifically taxes profits attributable to activities not enumerated among the exempt clauses. Similarly, the court found the Surat Vankar decision—while confirming the independence of exemption heads—did not assist in overcoming the clear statutory effect of the proviso in a mixed-activities situation.
On those bases the court concluded that ginning and pressing with the aid of power are activities outside the scope of the exempted clauses (a) to (f) and therefore fall within the proviso's purview; profits attributable to those activities are not entitled to claim exemption to the extent the proviso applies.
Holding and Implications
Holding: The court answered the referred question in favour of the revenue and against the assessee-society. Specifically, the court held that, on the facts and in the circumstances of the case, the income of the assessee from ginning and pressing with the aid of power was not exempt under section 81(i)(c) of the Income-tax Act as it stood prior to its amendment on 1st April, 1965 (as stated in the opinion).
Implications:
- Direct effect: Receipts from the society's ginning and pressing activities carried on with the aid of power are taxable and not covered by the exemption in section 81(i)(c) for marketing activities.
- The Tribunal's factual finding that those activities were integral to marketing does not, as a matter of statutory interpretation, prevent application of the proviso; ancillary or integral nature of the activity does not expand the statutory list of exempt activities.
- No broader new precedent was created beyond the statutory interpretation reached; the court simply applied the language of section 81(i) and its proviso to the facts, and the court ordered that there should be no order as to costs of the reference given the co-operative character of the society.
1. The following question has been referred to us by the Tribunal for our opinion :
"Whether, on the facts and in the circumstances of the case, the income of the society from ginning and pressing was exempt under section 81(i)(c) of the Income-tax Act, 1961, as it stood prior to its amendment on 1st April, 1968 ?"
2. The assessee is a co-operative society constituted under the Co-operative Societies Act. The relevant assessment years were 1961-62 to 1963-64. The objects of the society, inter alia, are to press cotton and to pack the bundles for the individual members of the society as well as other customers and to use the machine for any useful work of the members, and to sell raw cotton, cotton and cotton seeds and other agricultural produce. It has also got a ginning and pressing factory to cater to the needs of the members of the society before the goods as ginned and pressed cotton are marketed on behalf of its members. For rendering these services of ginning and pressing to the members before selling the goods, the society used to charge the members a certain amount of ginning and pressing charges as well as commission for the sale of the finished product. In the course of assessment a dispute arose before the Income-tax Officer in respect of receipts from the ginning and pressing activities. It was claimed on behalf of the assessee that they were all exempt as the claim would come within section 81(i)(c) of the Income-tax Act (as it existed then). The Income-tax Officer, however, was of the opinion that the activity of ginning and pressing would not come within any of the exemption clauses of section 81(i)(c) and since the society had been carrying out the process of ginning and pressing with the aid of power, the receipts therefrom were liable to be taxed. The Appellate Assistant Commissioner also confirmed the orders of the Income-tax Officer. The society took the matter in further appeal to the Tribunal and claimed exemption for the said receipts under section 81(i)(c) of the aforesaid Act. The Tribunal held, having regard to three facts, namely, (i) receipts from members only, (ii) general market for ginning and pressing cotton only, and (iii) no evidence whatsoever as to any dealing in raw cotton, that ginning and pressing activities were an integral part of marketing and receipts from those activities were, therefore, not liable to tax under section 81(i)(c). At the instance of the Commissioner the question set out hereinabove has been referred to us.
3. At the time of hearing of this reference, Mr. K. H. Kaji, learned advocate, appearing on behalf of the revenue urged that the Tribunal has not properly considered the proviso to section 81(i). activities of ginning and pressing with the aid of power, though an integral part of the activities of marketing done by the assessee-society on behalf of its members, would none the less be the activities not mentioned in any of the clauses (a) to (f) of section 81(i) and, therefore, nothing contained in sub-section (i) shall apply to profits and gains exceeding Rs. 15,000, as was attributable to such activities. It was, therefore, contended that the Tribunal has not given full effect to the proviso to section 81(i)(c). On behalf of the assessee, it was urged that if the case of the assessee-society falls within any of the clauses (a) to (f) of section 81(i), the taxing authorities are not entitled to levy tax on profits and gains of the business carried on by the assessee. In any case, it was urged on behalf of the assessee that having regard to the finding of fact that ginning and pressing activities were part and parcel of the marketing activities of the society, this court must not on the facts and in the circumstances of the case accept the contention of the revenue and hold that such receipts are within the purview of the taxing authorities.
4. The question, therefore, which arises for our consideration is whether the receipts from ginning and pressing activities of the assessee-society would be liable to tax in view of the proviso to section 81(i)(c). The relevant part of section 81(i) (c) and (e) so far it is pertinent for the purposes of the question involved in this reference reads as under :
"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.....
(e) a society engaged in the processing without the aid of power of the agricultural produce of its members; or....
Provided that, in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees..."
5. On a plain reading of clause (i) of section 81 it appears to us that if a co-operative society is engaged in the marketing of agricultural produce of its members, its profits and gains of business consisting of marketing activities would not be liable to tax subject to the exception contained in the proviso to section 81(i). The proviso in fact enjoins that if a co-operative society engages itself in activities other than those mentioned in clauses (a) to (f) of section 81(i), it will not be entitled to claim exemption for that part of its profits and gains exceeding Rs. 15,000 as it attributable to such activities. In other words, if the activity of a co-operative society is not one as mentioned in clauses (a) to (f) of section 81(i), profits and gains exceeding Rs. 15,000 as may be attributable to such activity are liable to tax. The question, therefore, which arises in this reference is whether ginning and pressing activities with the aid of power carried on by the assessee-society come within any of the clauses (a) to (f) for purposes of claiming exemption from tax on profits and gains attributable to such activities ? In our opinion, clause (e) of section 81(i) is a pointer in the direction that activities of ginning and pressing carried on with the aid of power cannot claim to be within the ambit of any of the clauses (a) to (f) of section 81(i). In view of the exception contained in the proviso to section 81(i), we are of the opinion that the activities of ginning and pressing with the aid of power carried on by the assessee-society are not within the ambit of any of the activities mentioned in clauses (a) to (f) of section 81(i). If these activities are beyond the purview of clauses (a) to (f) of section 81(i), the conclusion is irresistible in view of the clear provision contained in the proviso that profits and gains attributable to such activities would not be entitled to claim exemption under section 81(i). Mr. K. C. Patel, learned advocate appearing on behalf of the assessee-society, urged that the assessee-society is for all intents and purposes a marketing society and if its main activities are marketing of the agricultural produce of its members, the mere fact that for effectively carrying out the objects of such society, if it renders services of ginning and pressing the cotton produced by its members so as to make the commodity marketable, it cannot be said that they would fall within the mischief of the proviso to section 81(i) and become liable to be taxed. Mr. Patel strenuously urged before us that if the case of the assessee-society falls within any one of the clauses (a) to (f) of section 81(i), it would be sufficient for purposes of claiming exemption from tax on its entire profits and gains of the business. We are not prepared to accede to this contention of Mr. Patel for the simple reason that the interpretation canvassed by him would not in that case give full effect to the proviso to section 81(i). The scheme of section 81(i) together with the proviso appears to be to give exemption to such profits and gains arising from the business activities as may fall within clauses (a) to (f) of section 81(i). But, if beyond these activities there are other activities which do not come within any of the clauses (a) to (f) of section 81(i) under the proviso the receipts from such activities are liable to be taxed. Mr. Patel in support of his contention relied on the decision of the Allahabad High Court in U. P. Co-operative Bank Ltd. v. Commissioner of Income-tax. The question before the court in that case was whether the assessee being a co-operative bank can claim exemption from tax of income from interest on securities exceeding Rs. 20,000 under section 14 (3) (i) of the Indian Income-tax Act, 1922, though it may not be entitled to claim exemption for the said receipts under section 14 (3) (iv) of the 1922 Act. In the context of this question, the court observed :
"Clauses (i) to (iv) of section 14 (3) enumerate the exempted sources of income of a banking co-operative society. All the four sources are exempted; it an income is derived from one of the sources it is exempted even though it cannot be said to have been derived from another of the sources. The securities in the instant case have been held by the assessee as its stock-in-trade and interest on them is chargeable to tax under section 8, but the assessee's total income exceeds Rs. 20,000 and consequently the income is not exempt under clause (iv). But it does not follow that it is not exempt under another clause even if that clause applies. If it can be said to be income from the profits and gains of the assessee's business, it is exempt under clause (i). Its not being exempt under clause (iv) is not a disqualification and does not make it not entitled to exemption under any other clause. If the income is exempted by any of the clauses it is enough, The only effect of its not being exempt under clause (iv) is that if it is not exempt under any other clause it must be taxed and not that even if it is exempt under any other clause it must be taxed. The non-applicability of clause (iv) does not deprive it of the benefit of any other clause if applicable."
6. We do not appreciate how this ruling is of any assistance to the assessee's case. The question here is whether any of the clauses (a) to (f) of section 81(i) is applicable or not. The question is whether when some of the activities are exempt under any one of the clauses (a) to (f) of section 81(i) and the other activities are not within the purview of those clauses, would the profits attributable to such non-exempt activities attract tax under the proviso or not ? Moreover, a proviso similar to the proviso with which we are concerned in this reference was added to section 14 (3) of the 1922 Act by Finance Act, 1960, whereas the Allahabad High Court in U. P. Co-operative Bank Ltd. v. Commissioner of Income-tax was concerned with the question of exemption of receipts from securities received by the assessee in the assessment years 1958-59 and 1959-60. The Allahabad High Court was, therefore, not concerned with what would be the effect of the proviso in cases where some of the activities of the assessee are the business activities entitled to exemption and some of them are not so entitled.
7. Mr. Patel has further relied on the decision of this High Court in Surat Vankar Sahakari Sangh Ltd. v. Commissioner of Income-tax for the limited purpose of impressing upon us that section 81 was obviously enacted with a view to encourage and promote the growth of economic life of the country. The Division Bench of this court was concerned in that case with the true effect and scope of sub-section (iv) of section 81. Bhagwati C. J. (as he then was) speaking for the court, observed after setting out section 81, as under :
"There are five different heads of exemption enumerated in the section. Each is a distinct and independent head of exemption. Whenever a question arises whether a particular category of income of a co-operative society is exempt from tax, it will have to be seen whether such income falls within any of the several heads of exemption : if it falls within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is, therefore, not free from tax under that head of exemption : vide U. P. Co-operative Bank Ltd v. Commissioner of Income-tax. The ambit and coverage of clause (iv) of section 81 must, therefore, depend on the true interpretation of the language used by the legislature in that clause assisted only by such external aids of construction as are permissible according to well recognised principles of interpretation."
8. We do not think that this case takes the case of the assessee any further.
9. Mr. Patel, therefore, next contended that, as the Tribunal has made a finding of fact that the activities of ginning and pressing with the aid of power were an integral part of the marketing activities of the society, this court should hold that the proviso is not attracted at all. We are not inclined to accept this submission of Mr. Patel for the simple reason that the exception carved out by the proviso from the general provision of exemption of profits and gains by a co-operative society arising out of certain activities specifically mentioned in clauses (a) to (f) of section 81(i) would not have full effect if the interpretation urged by Mr. Patel on behalf of the assessee and accepted by the Tribunal is confirmed by us. On a plain reading of the proviso, as we have said earlier, if the society carries on certain activities which are exempted activities which are non-exempted, the profits and gains attributable to such non-exempted activities must necessarily be taxed. The very fact that the assessee-society was carrying on its activities of ginning and pressing with the aid of power, though they may be ancillary or additional for purposes of its business comprising of marketing activities, in view of the clear provision made in the proviso, they do not come within the category of exempt activities and, therefore, they should necessarily be taxed.
10. The result is that we answer the question referred to us in favour of the revenue and against the assessee-society. Our answer is that, on the facts and in the circumstances of the case, the income of the assessee from ginning and pressing with the aid of power was not exempt under section 81(i)(c) of the Income-tax Act as it stood prior to its amendment on 1st April, 1965.
11. Having regard to the facts of this case that the society is a co-operative society, there should be no order as to costs of this reference.
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