COMMISSIONER OF INCOME TAX VS BHANDARA ZILLA SAHAKARI KHAREDI VIKRI SANGH LTD., 1996 PTD-BOMBAY-HIGH-COURT-INDIA 602 (1992)

Income-tax---

----Cooperative society---Special deduction---Income from letting out o godowns---Meaning of "letting "---Letting includes use of godowns-Income from letting out godowns .for distribution of fertilizers---Entitled to fill deduction---Income from sub-agency for procurement of paddy --- Income attributable to letting out godown for storage of paddy is entitled to special deduction---Matter remanded---Indian Income Tax Act, 1961, S.80-P(2)(e)

Normally, cooperative societies which have storage facilities receive, goods from their members, agriculturists or others for storage and charge certain fees depending upon the quality of the goods delivered for storage. In such case use godowns are not let out to the others but possession of the godowns is retained by the societies and the societies merely take charge of the goods brought by the member, agriculturists or others and stores the same. Thus, most of the activity of the society consists in taking custody of the goods of others and storing the same in their godowns or warehouses. It must be taken that the Legislature when it introduced the above provisions was quite aware of the usual activities of cooperative societies which maintained the godowns and warehouses for storage purposes. It cannot be taken to be the intention of the Legislature to except only the rents received from letting out of the godowns and not the amounts received by the cooperative society for permitting the user of the godowns for storage by its members, agriculturists or others. In the setting in which the word "letting" occurs, it should be understood as having a wide and comprehensive sense so as to include even the mere user of the godowns either by the society or others.

The assessee, a cooperative society, had constructed certain godowns which were used and earning income of commission under two different agreements, (i) dated March 31, 1970, for distribution of fertilizers within the State of Maharashtra ("the fertiliser agreement" for short), (ii) dated September 13, 1968, pertaining to sub-agency for procurement of paddy/rice under the Monopoly Purchase, Scheme of the Government, with the Maharashtra State Cooperative Marketing Federation Limited (the "paddy agreement" for short). The assessee claimed exemption in respect of these commissions under section 80-P (2)(e) of the Income Tax Act. The Income Tax Officer disallowed the claim on the ground that no part of the claim fell under section 80-P (2)(e). The Appellate Assistant -Commissioner and the Tribunal allowed the full deduction. On a reference:

Held, (i) that the entire income of commission received under the fertilizer agreement was entitled to deduction under section 80P(2)(e);

CIT v. South Arcot District Cooperative Marketing Society Ltd. (1989) 176 ITR 117 (SC) applied.

(ii) that under the paddy agreement, the assessee was appointed as a sub-agent under the scheme of the monopoly procurement of paddy/rice. The State Government had totally banned private trade in paddy/rice and had bestowed upon itself the exclusive right to procure and market those commodities. The Government had appointed the marketing federation as its chief purchasing and milling agent under the scheme and had authorised the said federation to appoint purchasing and milling sub-agents in respective areas. The sub-agent was to purchase paddy/rice, store the commodities in godowns, maintain proper accounts and also to mill the commodities. For all this, the assessee was entitled to commission. The nature of the agreement and the break up of the commission showed that the entire income could not be said to have been derived from the letting of the godowns. While a splitting up of the income would in law be fair and permissible the Court could not do so in the instant case in view of the scanty material available. The only reasonable course was to direct the adjudication of actual deduction by the Tribunal. [Matter remanded].

CIT v. South Arcot-District Cooperative Marketing Society Ltd. (1989) 176 ITR 117 (SC) and CIT v. South Arcot District Cooperative Marketing Society Ltd. (1973) 92 ITR 371 (Mad.) fol.

CIT v. Ahmedabad Maskati Cloth Dealers Cooperative Warehouses Society Ltd. (1986) 162 ITR 142 (Guj.); Surat Vankar Sahakari Sangh Ltd. v. CIT (1971) 79 ITR 722 (Guj.); Udupi Taluk Agricultural Produce Cooperative Marketing Society Ltd. v. CIT (1987) 166 ITR 365 (Kar.) ref.

P.N. Chandurkar and Smt. S. Wandile for the Commissioner.

C.J., N. J. and P.C. Thakkar for the Assessee.

JUDGMENT

V.A. MOHTA, J.---Following question needs to be answered in this reference under section 256(1) of the Income Tax Act, 1961 ("the I.T. Act"), at the behest of the Commissioner of Income-tax, Nagpur:

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of section 80-P(2)(e) of the Income Tax Act were applicable to the case and the assessee was eligible for relief under the said section in respect of the income earned by it from activities carried on during the year?"

The relevant years are 1970-71, 1971-72, 1972-73 and 1974-75. The assessee, the Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd., Bhandara, is a "cooperative society" under the Maharashtra Cooperative Societies Act. It had constructed certain godowns which were used in earning income of commission under the two different agreements--(i) dated March 31, 1970, for distribution of fertilisers with the State of Maharashtra ("the fertiliser agreement" for short), (ii) dated September 13, 1968, pertaining to sub-agency- for procurement of paddy/rice under the Monopoly Purchase Scheme of the Government, with the Maharashtra State Cooperative Marketing Federation Limited ("the paddy agreement" for short). The assessee claimed exemption in respect of those commissions under section 80P(2)(e) of the Income Tax Act. The Income Tax Officer disallowed the claim on the ground that no part of the claim fell under section 80P(2)(e). The Appellate Assistant Commissioner and the Tribunal allowed the full deduction applying the ratio of the decision of the Madras High Court in the case of CIT v. South Arcot District Cooperative Marketing Society Ltd. (1973) 92 ITR 371 which, since then, has been affirmed by the Supreme Court in CIT v. South Arcot Distna Cooperative Marketing Society Ltd. (1989) 176 ITR 117.

Since the whole controversy centres round the application of the ratio of that decision, it would be proper to first notice what the said case decides and its basic background.

The South Arcot District Cooperative Marketing Society Ltd. ("the SADCM Society" for short) was appointed a stockist of ammonium sulphate belonging to the Government of Madras, for the purposes of distributing it to the consumers as directed by the Government. Under the agreement, the society was to hold the stock, store the goods in godowns, preserve them, maintain full and true account and sell them as per directions of the Government. For all this the said society was to get commission at the rate of Rs.5 per tonne on the quantities actually sold.

The assessee had claimed deduction of the commission amount under section 14(3)(iv) of the old Income Tax Act which is analogous to section 80P(2)(e) of the new Income Tax Act. The controversy was whether the said income was derived "from the letting of godowns" as contemplated under section 80P(2)(e) or it was derived from the services rendered. The Madras High Court held that the receipts were mostly for letting of the godowns. Some servicing was also done, but it was merely insignificant and incidental to the essential responsibility of using the godowns for storage of stock. Taking note of the purpose of exemption and the basic activity of the cooperative society, the word "letting' was given a wider and comprehensive meaning so as to include even the mere user of the godowns for the purposes stated in the exemption clause. The High Court rejected both the contentions of the Revenue ---(i) that, to attract exemption income must be by letting, and (ii) that letting must be to the member of the society. Consequently the entire sum, though described as commission for services rendered, was held eligible for deduction.

The material portion of section 80-P reads thus:

"80P. (1) Where, in the case of an assessee being a cooperative society, the gross total income includes any income referred to in subsection (2), there shall be deducted, in accordance with and subject to the provisions of the section, the sums specified in subsection (2), in computing the total income of the assessee.

(2) The sums referred to in subsection (1) shall be the following, namely: ....

(e) in respect of any income derived by the cooperative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income: .... "

Since much depends upon the terms and nature of the agreement and comparisons are inevitable, we reproduce from the Madras High Court decision in CIT v. South Arcot District Cooperative Marketing Society Ltd. (1973) 92. ITR 371, the gist of the agreement, it was called upon to examine (at page 373):

"Under the agreement the assessee as a stock-holder has agreed to hold ammonium sulphate stock of the Government of Madras and safely store the same on their behalf and to issue the same on certain terms and conditions. The assessee has to take delivery of the fertiliser at such times and at such places notified by the Collector of the District and store the same in dry godowns where the fertiliser will not be affected by dampness. The fertiliser bags shall be stocked in such a manner as to admit of easy checking and inspection by the officers of the: Government and they shall be in the custody of the assessee who is responsible for the same until disposed of under instructions from the Government. The assessee has to strictly observe the instructions of the Government issued from time to time for the stocking and storage of the fertiliser bags in the godowns and the doors of the godowns should be kept open between certain stated hours. If the ammonium sulphate is sent by rail the assessee shall take delivery of the same from the concerned railway stations after check and weighment and should transport the same to its godowns or its distribution depots at its own cost. The assessee has to maintain and render true and full particulars of fertilisers received, released and held in stock once in a fortnight. The assessee has to engage at its own cost, clerks, godowns keepers, assistants or servants or watchmen at such wages and for such period as may be necessary for properly and efficiently carrying on its duties under the agreement. The assessee has to also bear the cost of all loss, deterioration and damage due to its negligence in carrying out the instructions of the Government or their officers. The assessee will get a commission of Rs. 5 per tonne of the quantity of fertiliser issued from the stocks on the instructions of the Government. "

The High Court observed (at page 375):

"Normally, cooperative societies who have got storage facilities receive goods from its members, agriculturists or others for storage and charge certain fee depending upon the quantity of the goods delivered for storage. In such cases, the godowns are not let out to the others but possession of the godowns is retained by the society and the society merely takes charge of the goods brought by the members, agriculturists or others and stores the same. Thus, most of the activity of the society consists in taking custody of the goods of others and storing the same in their godowns or warehouses. It must be taken that the Legislature when it introduced the above provision was quite aware of the usual activities of the cooperative society which maintained the godowns and warehouses for storage purposes. It cannot be taken to be the intention ~he Legislature to exempt only the rents received from letting out of the godowns and not the amounts received by the cooperative society for permitting the user of the godowns for storage by its members, agriculturists or others. We are, therefore, of the view that in the setting in which the word 'letting' occurs, it should be understood as having a wide and-comprehensive sense so as to include even the mere user of the godowns either by the society or by others."

Upholding the correctness of the above approach, the Supreme Court in CIT v. South Arcot District Cooperative Marketing Society Ltd. (1989) 176 ITR 117, observed (at page 119):

"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. As was observed by the Gujarat High Court in CIT v. Ahmedabad Maskati Cloth Dealers Cooperative Warehouses Society Ltd. (1986) 162 ITR 142, while considering the analogous provision of section 80P(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 rural economy and exemption was granted from income-tax in respect of income derived from the letting of such warehouses for the storage of fertilizers and other related commodities concerned with cooperative marketing. 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 the ammonium sulphate handed over to it by the State Government. The retraining 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 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. "

We now take up for consideration the gist of the two agreements in question. They do not appear to us to be similar and, therefore, each has to be separately examined. First the fertiliser agreement. It relates to wholesale distribution of fertilisers under the Fertiliser (Control) Order, 1957, and the Inorganic Fertiliser (Movement and Control) Order, 1960. The assessee was to hold the stocks, store the goods in godowns, preserve them, maintain account and sell the goods as per directions of the Government. For all this it was to get commission at varying rates ranging between Rs.35 and Rs.50 per tonne of goods actually sold. It is thus apparent that there is no difference whatsoever between the essential nature of this agreement and the essential nature of the agreement considered in the case of CIT v. South Arcot District Cooperative Marketing Society Ltd. (1989) 176 ITR 117 (SC). The ratio of that decision therefore, straightaway applies to the entire income of commission receive under the fertiliser agreement and the whole of it is entitled to deduction undo; section 80P(2)(e).

Now, the paddy agreement. Under this agreement, the assessee was appointed as a sub-agent under the scheme of the monopoly procurement of paddy/rice. The State Government had totally banned private trade in paddy/rice and had bestowed upon itself the exclusive right to procure and market those commodities. The Government had appointed the marketing federation as its chief purchasing and milling agent under the scheme and had authorised the said federation to appoint purchasing and milling sub-agents in respective areas. The sub-agent was to purchase paddy/rice, store the commodities in godowns, maintain proper accounts and also to mill the commodities. For all this, the assessee was entitled to commission at the rate of Rs.4.80 per quintal (out of the commission received at the rate of Rs.9.90 per quintal from the Government) the break-up of which was as under:

Two submissions are made regarding the paddy agreement by Shri Chandurkar, learned counsel for the Revenue. The first submission is to the effect that income derived by way of, commission under the agreement was totally ineligible for deduction because no part of it represents income from letting out of godowns. In support of this proposition strong reliance was placed upon the Karnataka High Court decision in the case of Udupi Taluk Agricultural Produce Cooperative Marketing Society Ltd. v. CIT (1987) 166 ITR 365. The second submission is that in no case the entire income of commission can be held to be deductible since, at least a part of it is attributable to the distinct activity of milling for which separate charges were fixed and which can have no nexus with the activity of user of godowns.

We see no substance in the first submission since it cannot be said that no part of the income is derived by the use of godowns. The Karnataka High Court decision pertains to income of commission under an altogether different variety of agreement. It is not possible to discern the exact terms of that agreement from the said judgment, but it appears that the income was derived from the procurement of paddy and rice and reimbursement of transport charges. The finding of fact reached by the Tribunal in that case was that no income was earned by the assessee from letting out the godowns or warehouses for the purposes of storage, processing or facilitating the marketing of commodities. It is against the aforesaid backdrop, that the High Court came to the conclusion that section 80P(2)(e) was not attracted and observed (at page 366):

"It may be, as observed by the Gujarat High Court, in Surat Vankar Sahakar Sangh Ltd. v. CIT (1971) 79 ITR 722, that the exemption is available in respect of the income derived only from letting out of godowns or warehouses. This is a strict construction of clause (e). Or, it may be available regarding the income derived by the society by the use of such godowns or warehouses without parting with possession by letting them out as held by the Madras High Court in CIT v. South Arcot District Cooperative Marketing Society Ltd. (1973) 92 ITR 371 (Mad.). This is a liberal construction of clause (e). But, nonetheless, it seems to us that the income derived by the cooperative society for the purpose of exemption under clause (e) must be relatable to the letting out or the use of its godowns or warehouses. Any income derived by the society unconnected with such letting out or use of the godowns or warehouses will not fall under clause (e)."

The ratio of that decision, therefore, can have no application to the paddy agreement.

We consider the second submission to be quite weighty. The nature of the agreement and the break-up of the commission amount leave no manner of doubt that the entire income cannot be said to have been derived from the letting of godowns. Shri Thakkar, learned counsel for the assessee, fairly did not dispute the obvious position that the entire income from commission of Rs.4.80 per quintal was not entitled to exemption under section 80P(2)(e). He submitted before us that the activities can be split up broadly in two groups-- (a) pertaining to use of godowns, and (b) pertaining to milling. Items Nos. (i) to (iv) mentioned in the break-up would fall in category (a) and items Nos. (v) to (viii) would fall in category (b). He further submitted that deduction restricted to a sum calculated at the rate of Rs.1.90 per quintal (total of items (i) to (iv)) can be straightaway allowed as deductible right here. While we agree with the principle that adoption of such a course of splitting up, wherever possible, will in law be fair and permissible, having regard to the scanty material before us, it will not be proper to undertake the exercise of adjudicating upon the exact quantum of deduction. In our view, the ratio of CIT v. South Arcot District Cooperative Marketing Society Ltd. (1989) 176 ITR 117 (SC) will have to be applied to each item (if necessary by making further inquiry) and only then the correct figure can be arrived at. The only reasonable course open, under the circumstances, is to direct the adjudication of actual deduction by the Tribunal.

Hence we record the answer to the question as under:

The assessee was entitled to the exemption of full income of commission received under the fertiliser agreement; it was entitled to exemption of only a part of the income of the commission received under the paddy agreement, the exact quantum of which the Tribunal to decide in accordance with law.

No order as to costs.

M.B.A./1066/T Reference answered.