- Bookmark
- Share
- CaseIQ
Cit v. South Arcot Distt. Coop. Mktg. Society Ltd.
Factual and Procedural Background
The respondent-assessee is a cooperative society registered under the Madras Cooperative Societies Act. During the previous year ending 30-6-1960 (relevant to Assessment Year 1961-1962), it entered into an agreement with the State Government under which it agreed to hold and store a stock of ammonium sulphate belonging to the State Government in godowns that admittedly belonged to the assessee. The agreement also required the assessee to undertake steps necessary for the stocking and storage, including taking delivery at the rail-head and transporting the fertiliser to its godowns. In that previous year, the assessee received Rs 31,316 described as “commission” for these activities.
In assessment proceedings for AY 1961-1962, the assessee claimed exemption under Section 14(3)(iv) of the Income Tax Act, 1922 for the Rs 31,316. The Income Tax Officer denied the exemption, and the Appellate Assistant Commissioner confirmed that denial. On second appeal, the Income Tax Appellate Tribunal allowed the assessee’s appeal, holding that the agreement’s terms constituted consideration for letting the godowns and that any servicing was insignificant. At the Revenue’s instance, the Tribunal referred questions to the High Court of Madras, which answered the reference against the Revenue and in favour of the assessee. The present appeal (by certificate granted by the High Court) challenges the High Court’s reference judgment.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the sum of Rs 31,316 received by the assessee from the Madras Government under an agreement for stocking and distribution of ammonium sulphate was exempt under Section 14(3)(iv) of the Income Tax Act, 1922.
- Whether, on the construction of the agreement between the assessee and the State Government, the Tribunal’s finding that the receipts were mostly for letting out the godowns and that servicing was an insignificant portion of the whole amount was reasonable and consistent with the material on record.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Ahmedabad Maskati Cloth Dealers Coop. Warehouses Society Ltd. (1986) 162 ITR 142 (Guj) | While considering an analogous provision (Section 80-P(2)(e) of the Income Tax Act, 1961), the exemption for income from letting warehouses was intended to encourage cooperative societies to construct warehouses useful to rural economic development, including storage of fertilisers and related commodities concerned with cooperative marketing. | The court relied on this observation to emphasize the object of the exemption provision and to support giving it a liberal construction when assessing whether the assessee’s receipts were, in substance, income derived from letting godowns for storage. |
Court's Reasoning and Analysis
The court agreed with the Appellate Tribunal and the High Court that the assessee was entitled to the exemption. It placed weight on the legislative object underlying the exemption provision, referring to the Gujarat High Court’s discussion (in the context of the analogous Section 80-P(2)(e) of the 1961 Act) that such exemptions were intended to encourage cooperative societies to construct and let warehouses for storage of fertilisers and related commodities, thereby supporting rural economic development.
Having regard to that object, the court held that the provision should receive a liberal construction. On the “true substance” of the agreement and the “totality of the circumstances,” the court considered the essential responsibility undertaken by the assessee to be the letting out and use of its godowns for storing ammonium sulphate belonging to the State Government. The additional services (such as taking delivery at the rail-head and transporting the stock to the godowns) were treated as merely incidental to the core storage/letting arrangement.
Although the payment was described as “commission,” the court concluded that, in substance, the amount represented remuneration for the use of the godowns rather than consideration primarily for service activities. Therefore, the receipt qualified for exemption under Section 14(3)(iv) of the 1922 Act.
Holding and Implications
APPEAL DISMISSED. The court affirmed the High Court’s reference answers in favour of the assessee and against the Revenue, holding that the sum of Rs 31,316 was exempt under Section 14(3)(iv) of the Income Tax Act, 1922.
The direct consequence is that the assessee is entitled to exemption on the disputed receipt for AY 1961-1962. The opinion applies the exemption by emphasizing a liberal, object-oriented construction and by treating incidental services as subordinate to the principal activity of letting godowns for storage; no broader implications or new precedent beyond this application are stated in the provided opinion. There was no order as to costs.
R.S Pathak, C.J:— This appeal by certificate granted by the High Court of Madras is directed against the judgment of the High Court disposing of a reference in favour of the assessee and against the Revenue.
2. The respondent assessee is a cooperative society registered under the Madras Cooperative Societies Act. The assessee entered into an agreement with the State Government during the previous year ending 30-6-1960, relevant to Assessment Year 1961-1962, whereby the assessee agreed to hold a stock of ammonium sulphate belonging to, and on behalf of, the State Government, and to store it in godowns which admittedly belonged to the assessee. Under the agreement, the assessee was required further to take all necessary steps to enable such stocking and storage of the fertiliser, including taking delivery of the stock at the rail-head and transporting it to the godowns. During the previous year relevant to Assessment Year 1961-1962 the assessee received a sum of Rs 31,316, on this account, the amount being described as a commission.
3. In assessment proceedings for Assessment Year 1961-1962 the assessee claimed exemption from tax under Section 14(3)(iv) of the Income Tax Act, 1922 in respect of the said sum of Rs 31,316. The Income Tax Officer denied the exemption, and on appeal the Appellate Assistant Commissioner of Income Tax confirmed the denial. But on second appeal by the assessee, the Income Tax Appellate Tribunal held that the various terms of the agreement with the State Government constituted consideration for letting the godowns, and that any servicing done in that connection represented an insignificant part of the entire transaction. In the result, the Appellate Tribunal allowed the appeal and granted the exemption claimed by the assessee.
4. At the instance of the Revenue, the Income Tax Appellate Tribunal referred the following questions to the High Court of Madras:
(1) Whether, on the facts and in the circumstances of the case, the sum of Rs 31,316 received by the assessee Society from the Madras Government under an agreement for stocking and distribution of ammonium sulphate was exempt under Section 14(3)(iv) of the Income Tax Act, 1922?
(2) Whether, on the construction of the agreement between the assessee and the State Government, 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 Income Tax Appellate Tribunal and answered the reference against the Revenue and in favour of the assessee.
5. We have considered the matter carefully and to our mind it seems clear that the Appellate Tribunal and the High Court are right in the view adopted by them.
6. As was observed by the Gujarat High Court in CIT v. Ahmedabad Maskati Cloth Dealers Coop. Warehouses Society Ltd. (1986) 162 ITR 142 (Guj), while considering the analogous provision of Section 80-P(2)(e) of the Income Tax Act, 1961, the provision for exemption was intended to encourage cooperative societies to construct warehouses which were likely to be useful in the development of the rural economy, and exemption was granted from income tax in respect of income derived from the letting of such warehouses for the storage of fertilisers and other related commodities concerned with cooperative marketing.
7. 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 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 that stock. It is true that a certain sum was paid to the assessee and described as a commission for the services performed by it, but having regard to the totality of the circumstances and to the true substance of the agreement, it seems to us plain that the amount was paid merely by way of remuneration for the use of the godowns. In the result, the assessee is entitled to the exemption claimed by it.
8. Accordingly, the appeal fails and is dismissed. There is no order as to costs.
Alert