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Broach Distt. Coop. Cotton Sales Ginning & Pressing Society Ltd. v. Cit
Factual and Procedural Background
The assessee, a cooperative society constituted under the Cooperative Societies Act, owns and operates a ginning and pressing factory. Its objects include:
- Pressing cotton and packing bundles for its members and other customers.
- Using its machinery for members’ benefit.
- Selling raw cotton, cotton seeds, and other agricultural products.
The society receives raw cotton exclusively from its members, gins and presses it, and markets the finished product on their behalf, charging ginning/pressing fees and commission on sales.
During assessment years 1961-62 to 1963-64, the society claimed exemption of these receipts under Section 81(1)(c) of the Income-tax Act, 1961 (as it then stood). The Income-tax Officer and, on appeal, the Appellate Assistant Commissioner disallowed the claim, treating the ginning and pressing carried out with the aid of power as non-exempt activities. The Income-tax Appellate Tribunal reversed those findings, but the High Court of Gujarat, on a reference, ruled for the Revenue. The present appeals arise from certificates granted by that High Court decision.
Legal Issues Presented
- Whether income derived from ginning and pressing cotton, performed with the aid of power and integrally linked to marketing the agricultural produce of members, is exempt under Section 81(1)(c) of the Income-tax Act, 1961 (prior to its 1-4-1968 amendment).
- Whether the proviso to Section 81(1) removes the exemption when the society undertakes ginning and pressing with power as part of its marketing activity.
Arguments of the Parties
Assessee's Arguments
- Ginning and pressing are integral, incidental, or ancillary components of marketing members’ cotton; therefore, receipts fall squarely within Section 81(1)(c).
- The activity is confined to the agricultural produce of members; there is no distinct or independent processing business.
- The statutory objective of Section 81(1) is to promote cooperative societies, warranting a liberal interpretation in favour of exemption.
Revenue's Arguments
- Because ginning and pressing are carried out with the aid of power, they constitute “processing with power,” attracting the proviso and losing the exemption.
- (Raised belatedly) Conversion of raw cotton into pressed bales allegedly changes its character, so what is marketed is no longer the agricultural produce of members.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT (Addl.) v. Ryots Agricultural Produce Cooperative Marketing Society Ltd., (1978) 115 ITR 709 (Karn HC) | “Marketing” in Section 81(1)(c) has a broad meaning encompassing activities needed to make produce fit for market. | Relied upon to support that ginning and pressing are within the marketing activity itself, not a separate processing business. |
| CIT v. Karjan Coop. Cotton Sale, Ginning & Pressing Society Ltd., (1981) 129 ITR 821 (Guj HC) | Ginning and pressing of raw cotton form part of “marketing” and are not confined merely to the act of selling. | Cited to reinforce that the term “marketing” is not limited to sales and includes preparatory acts like ginning and pressing. |
Court's Reasoning and Analysis
The Supreme Court rejected the High Court’s view that the proviso automatically excludes profits from ginning and pressing with power. Key steps in its analysis were:
- Integral Nature of Activity: Ginning and pressing constituted an “integral process of marketing.” Members never reclaimed the cotton after processing; it was marketed directly by the society.
- Liberal Construction: Section 81(1) aims to encourage cooperative societies; hence, exemptions should receive a liberal interpretation.
- Scope of the Proviso: The proviso excludes only profits from activities that are “separate and distinct” from those enumerated in clauses (a)–(f). Incidental or ancillary activities remain covered.
- Precedential Support: Karnataka and Gujarat High Court decisions interpreting “marketing” broadly were approved.
- Late-Raised Argument Dismissed: The Revenue’s contention that processing altered the nature of the agricultural produce was not considered, as it had not been raised earlier.
Holding and Implications
Holding: The assessee’s income from ginning, pressing, and marketing members’ cotton is exempt under Section 81(1)(c); the High Court’s contrary judgment is set aside, and the reference is answered in favour of the assessee.
Implications: The decision clarifies that activities incidental to marketing agricultural produce—such as ginning and pressing performed with power—remain within the exemption for cooperative societies under the pre-1968 Section 81(1)(c). It affirms a liberal, purposive construction of cooperative exemptions and limits the reach of the proviso to genuinely distinct, non-marketing activities.
R.S Pathak, C.J— These appeals by certificate granted by the High Court of Gujarat are directed against the judgment of the High Court answering the following question in favour of the Revenue and against the assessee:
“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 1-4-1968?”
2. The assessee is a cooperative society constituted under the Cooperative Societies Act. The objects of the society intend that it should press cotton and pack the bundles of its individual members as well as other customers, to use its machinery for any useful work of its members, and to sell raw cotton, cotton seeds and other agricultural products. The assessee possesses a ginning and pressing factory to cater to the needs of its members. It gets raw cotton from the members, and ginns and presses the cotton for marketing on behalf of its members. For rendering the services of ginning and pressing before selling the goods, the assessee charges the members a certain amount by way of ginning and pressing charges. It also charges commission for the sale of the finished product.
3. In the course of assessment for the assessment years 1961-62 to 1963-64, the assessee claimed that the receipts from the ginning and pressing activities were exempt under Section 81(i)(c) of the Income Tax Act (as it stood then). The Income Tax Officer, however, declined to accept the claim on the ground that the assessee had been carrying out the process of ginning and pressing with the aid of power. The Appellate Assistant Commissioner confirmed the orders of the Income Tax Officer. In second appeal the Income Tax Appellate Tribunal held that having regard to the circumstance that the receipts were from members only, that there was a general market for ginning and pressing cotton only and no evidence appeared of any dealing in raw cotton, the ginning and pressing activities were to be regarded as an integral part of the marketing activity, and therefore the receipts from those activities were not liable to tax by virtue of Section 81(i)(c). At the instance of the Revenue, the Appellate Tribunal referred the question of law set out earlier to the High Court of Gujarat for its opinion.
4. For the purpose of contention raised before the High Court, and again before us the following provisions of Section 81 seem relevant:
“81. Income of cooperative societies.—Income tax shall not be payable by a cooperative society —
(i) in respect of the profits and gains of business carried on by it, if it is —
(a) * * *
(b) * * *
(c) a society engaged in the marketing of the agricultural produce of its members; or
(d) * * *
(e) a society engaged in the processing without the aid of power of the agricultural produce of its members; or
(f) * * *
Provided that, in the case of a cooperative 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. The High Court proceeded on the view that if a Society carries on certain activities which are exempted activities according to clauses (a) to (f) of Section 81(i) and certain other activities which are not exempted, the profits and gains attributable to such non-exempted activities must necessarily be taxed. The High Court observed that the assessee carried on ginning and pressing of cotton with the aid of power, and even if those activities are regarded as ancillary or incidental to its marketing activity they would not come within the category of exempted activities in view of the proviso, and therefore they would have to be taxed. We find ourselves unable to accept the view taken by the High Court. It is apparent that the ginning and pressing was part of the integral process of marketing. It was an activity incidental or ancillary to the marketing of the produce of its members. The ginning and pressing of the raw cotton was never regarded as a distinct process. When they delivered the raw cotton to the assessee for marketing, ginning and pressing was regarded as part of that process. The members did not take back the cotton after it was ginned and pressed. They paid only the costs of ginning and pressing. All the raw cotton so treated by the assessee was received from its members, and it was only such cotton of its members which was marketed by the assessee. The sale of the cotton was effected by the assessee to the outside world and not to its members. The object of Section 81(i) was to encourage and promote the growth of cooperative societies, and consequently a liberal construction must be given to the operation of that provision. The proviso to Section 81(i) operates to exclude from the exemption those activities which can be regarded as separate and distinct from the activities enumerated in clauses (a) to (f) of Section 81(i). If the activity in question is incidental or ancillary to one of the activities mentioned in those clauses, the proviso, in our opinion, will not apply. We may refer in this connection to the observations of the Karnataka High Court in CIT (Addl.) v. Ryots Agricultural Produce Cooperative Marketing Society Ltd. (1978) 115 ITR 709 (Karn HC), where reference has been made to the broad meaning of the expression “marketing” appearing in clause (c) of Section 81(i), and it has been explained that in order to make agricultural produce fit for marketing the activities involved in enabling that to be done must be regarded as involved in the activity of marketing itself. Reference may also be made to CIT v. Karjan Coop. Cotton Sale, Ginning & Pressing Society Ltd. (1981) 129 ITR 821 (Guj HC), where the concept of “marketing” was given a meaning which included the ginning and pressing of raw cotton and was not confined to the selling activity alone.
6. An attempt was made by learned counsel for the Revenue to raise the point that ginning and pressing into cotton bales changed the character of the cotton and therefore, what was marketed was not the agricultural produce of the members of the assessee. This point was not raised at any earlier stage by the Revenue and cannot be permitted to be taken now.
7. We are of opinion that the assessee is entitled to the exemption of the profits and gains derived from the activity of the entire business of ginning and pressing of cotton and marketing it by virtue of clause (c) of Section 81(i) of the Income Tax Act, and that the High Court erred in holding to the contrary.
8. In the result the appeals are allowed and the question referred by the Income Tax Appellate Tribunal to the High Court must be answered in the affirmative, in favour of the assessee and against the Revenue. The assessee is entitled to its costs.
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