(Appeals by special leave against the judgment and order, dated July 13,1976, of the Gauhati High Court in I.T.R. No. 15 of 1973).

Income-tax-

----Cooperative Societies---Exemption---Society engaged in the marketing of "agricultural produce of its members"---Assessee Society comprising other Societies as members---No agriculturist as such member of assessee---Assessee not entitled to exemption---Indian Income Tax Act, 1961, S. 81(i)(c).

The appellant, a registered cooperative society at the apex; was appointed as the procuring agent for paddy by the Assam Government. The members of the appellant were primary marketing societies. Village service co operative societies were members of the primary marketing societies, and only the members of the village societies were agriculturists who produced agricultural produce. No agriculturist who produced agricultural produce was a member of the appellant. The village procured the agricultural produce of its members at the prescribed price and made it over to the primary marketing societies, and these societies in turn made it over to the appellant. The remuneration for the procuring activity was a commission of Re. l per maund. The appellant took 19 paisa of the commission, the village societies took 19 paisa and the primary marketing societies took the balance of 62 paisa. The question was whether the appellant was entitled to exemption from income-tax under section 81(i)(c) of the Income Tax Act, 1961, in relation to its share of the commission. The Appellate Tribunal held that the appellant `vas not entitled to the exemption and, on a reference, the High Court confirmed the decision of the Appellate Tribunal. On appeal to the Supreme Court:

Held, affirming the decision of the High Court, that the words "agricultural produce of its members" in section 81(i)(c) meant the agricultural produce produced by the members, and since the agricultural produce marketed by the appellant was not produced by its members, viz., the primary marketing societies, the appellant was not entitled to the exemption under section 81(i)(c).

BY THE COURT: A reading of section 81(i)(c) shows that the idea and intention behind the provision was to encourage basic-level societies engaged in cottage industries, in marketing the agricultural produce of their 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: If it is not so understood, even a cooperative society comprising traders dealing in agricultural produce would become entitled to the exemption which could never have been the intention of Parliament. 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 an agricultural commodity: ii would not be their agricultural produce.

Assam Cooperative Apex Marketing Society v. CIT (Addl) (1977) 110 ITR 33 affirmed

P. H. Parekh, Advocate for Appellant

G. Viswanatha lyer, Senior Advocate (Ms. A. Subhashini, Advocate with him) for Respondent.

JUDGMENT

This appeal is preferred against the judgment of the Gauhati High Court answering the question referred to it against the assessee. The question referred is:

"Whether, on the facts and in the circumstances of the case, the assessee i.e., Assam Cooperative Apex Marketing Society Ltd., is entitled to exemption under section 81(i)(c) in respect of their income arising out of procurement of paddy and other agricultural produce?"

The assessment year concerned herein is 1962-63, the first assessment year under the Income Tax Act, 1961. During the accounting year relevant to the said assessment year, the appellant, the Assam Cooperative Apex Marketing Society Ltd., Assam, was appointed as the procuring agent for paddy by the Government under a scheme evolved by the Government of Assam and contained in its proceeding, dated November 23, 1962. The assessee is a society registered under the Assam Cooperative Societies Act, 1949. The objects of the society are:

(i)to arrange for the sale of produce of the members of affiliated societies and other members to the best advantage;

(ii)to purchase and sell agricultural produce and farm and farmers requisites including seeds, manures, fertilizers and machinery etc.;

(iii)to act as agent of members for the disposal of their produce; and

(iv)to act as a central purchasing agency for agricultural as well as consumers society and for other members. The membership of the assessee society is divided into three classes as follows:

(a)A-Class consisting of cooperative institutions;

(b)B-Class consisting of individual cultivators and sympathisers;

(c)C-Class consisting of traders and commission agents, etc.

(d)The State Government."

There are various categories of societies in the State of Assam. We are concerned with two such categories i.e., village service cooperative societies and primary marketing societies. The assessee, of course, is at the apex. The village service cooperative societies are at the base of the pyramid. Their membership consists of agriculturists. These village societies are the members of the primary marketing societies. The primary marketing societies in turn are members of the assessee society. It does not. appear that any agriculturists as such are members of the assessee society.

The system of procurement was that the village service cooperative societies procured agricultural produce from their respective members at the prescribed price and made it over to the primary marketing society. The primary marketing society in turn made over the same to the assessee society. In lieu of this procuring activity, the assessee society was being paid remuneration at the rate of Re.1 per maund. This one rupee commission was divided between the three cooperative societies. The apex society took 19 paisa, the village service cooperative society was entitled to 19 paisa and the remaining 62 paisa went to the primary marketing society.

In the assessment proceedings, the assessee claimed exemption of its income from the said activity under section 81(i)(c), as it then stood. This plea was negatived by the Income-tax Officer but, on appeal, the Appellate Assistant Commissioner agreed with the assessee. The Revenue went up in appeal to the Tribunal. The appeal was allowed, whereupon the assessee obtained the reference aforesaid.

Section 81(i) read thus:

"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)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 a 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 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 ass exceeds fifteen thousand rupees;"

Sub-clause(c) of clause (1) exempt the income of a cooperative society "engaged in the marketing of the agricultural produce of its members"

The contention of Sri Parekh; learned counsel for the assessee-appellant, is that inasmuch as the assessee has marketed the agricultural produce of its members, namely, the .agricultural produce belonging to primary marketing societies, the assessee is entitled to the benefit of the said sub-clause. Learned counsel submits that the High Court was not right in holding that for obtaining the benefit of the said sub-clause, the agricultural produce by such members (sic). Such an interpretation, according to the learned counsel, amounts to adding words to the said clause which are not there. We find it difficult to agree with the learned counsel. 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 cooperative 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 cooperative society, the assessee cannot claim the benefit of the said exemption. The High Court was right in holding that the benefit of the said sub-clause is not available to the assessee herein. .

Mr. Parekh then contended that wherever the Act wanted to provide that it should be the produce raised by the members of such society, it has provided so expressly, as in sub-clause (f), which speaks of "milk raised by its members." Counsel says that no such words are found in sub-clause (c), which is an indication of the intention of Parliament. It is not possible to agree. Sub clause (f) speaks of a primary cooperative society engaged in supplying milk to a federal milk cooperative society. Evidently, Parliament did not want to use the words "milk of its members" which would have been inappropriate and awkward, and that is why it used the words "milk raised by its members". The idea again was to provide an exemption only in favour of the base-level society.

For the reasons stated above, the appeal fails and is dismissed. No order as to costs.

M.BA./2448/TAppeal dismissed.