Karnal Co-operative Sugar Mills Ltd. vs Commissioner of Income Tax

Jawahar Lal Gupta, J.—Is the assessee entitled to exemption u/s 80P(2)(a)(iii) of the income tax Act, 1961 (''the Act'')? This is the short question that arises in these four income tax references. The assessee is a co-operative society. It was incorporated for the manufacture of sugar from sugar-cane. It purchases sugar-cane from its members as well as the other growers. The assessee claimed deduction in respect of the assessment years 1992-93 to 1995-96, u/s 80P(2)(a)(iii). The Assessing Officer declined the claim. It was noted that the assessee was buying sugar-cane, manufacturing sugar and selling it in the market. Sugar is not an agricultural produce. It did not belong to the members. Accordingly, it was held that the assessee was not marketing agricultural produce of its members.

The assessee appealed. Its claim in respect of the assessment year 1992-93 was accepted by the Commissioner (Appeals), Rohtak, vide the order dated 25-7-1995. It was held that ''marketing'' included taking over the agricultural produce from the producer and handing over the marketable commodity to the consumer.

The appeals relating to the assessment years 1993-94 to 1995-96, were dismissed by the Commissioner (Appeals), Shimla, vide orders dated 25-4-1996 and 2-4-1997. It was, inter alia, held that sugar is not an ''agricultural produce''.

Aggrieved by the order in respect of the assessment year 1992-93, the revenue filed an appeal. The assessee challenged the orders for the assessment years 1993-94 to 1995-96. Ultimately, the Tribunal accepted the contention of the revenue and restored the order passed by the Assessing Officer. The assessee sought rectification u/s 254(2) of the Act. The application was dismissed by the Tribunal vide its order dated 21-12-1998.

The assessee filed an application u/s 256(1). The Tribunal on consideration of the matter has referred the following question for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in law in holding that income derived by assessee from sale of sugar converted out of sugar-cane purchased from members who are cultivators themselves was not exempt u/s 80P(2)(a)(iii)?

Mr. M.L. Garg contended that the petitioner is a co-operative society. It is running a sugar mill. It has 35,000 members who grow sugar-cane. The assessee purchases sugar-cane from the members as well as the other growers. It markets an ''agricultural produce''. Thus, it falls within the ambit of section 80P(2)(a)(iii) and is entitled to the grant of exemption as claimed.

On the other hand, Mr. R.P. Sawhney, the learned counsel for the revenue, submitted that the petitioner is manufacturing sugar. It is paying excise duty. It is not marketing or selling an ''agricultural produce''. Thus, it is not entitled to the grant of exemption as contemplated u/s 80P(2)(a)(iii).

The short question that arises for consideration is - Does the petitioner''s case fall within section 80P(2)(a)(iii)?

The provision reads as under:

80P. Deduction in respect of income of co-operative societies.- (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely:-

(a)in the case of a co-operative society engaged in-

(i)carrying on the business of banking or providing credit facilities to its members, or

(ii)a cottage industry, or

(iii)the marketing of the agricultural produce grown by its members, or

(iv)the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

(v)the processing, without the aid of power, of the agricultural produce of its members, or

(vi)the collective disposal of the labour of its members, or

(viii)fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,

The above provision has been made to promote the co-operative sector. Even to help the rural economy. To achieve this object, the Parliament has provided for the grant of exemption from the levy of income tax. However, to qualify for exemption, the activity of the co-operative society must fall within one of the sub-clauses of clause (2).

The assessee in the present case claims to be marketing an ''agricultural produce''. Firstly, what is ''marketing''?

According to Webster''s Third New International Dictionary, ''marketing'' means "an aggregate of functions involved in transferring title and in moving goods from producer to consumer including among others buying, selling, storing, transporting, standardising, financing, risk bearing and supplying market information". Thus, ''marketing'' is a comprehensive term. It does not mean merely buying and selling. It encompasses much more.

What is the petitioner doing? The petitioner buys sugar-cane from its members and others. It pays them the price. Thereafter, it processes the sugar-cane and produces sugar. The end product is sold in the market. The profits are of the assessee. These are not shared with the members.

Mr. Garg contended that the provision should be liberally construed. ''Marketing'' includes even ''processing''. If so construed, the petitioner''s activity falls within the ambit of ''marketing of agricultural produce grown by the members''. Mr. Garg placed reliance on the decision of the Karnataka High Court in Addl. Commissioner of Income Tax, Karnataka Vs. Ryots Agricultural, Produce Co-operative Marketing Society Ltd.,

In this case, the assessee was engaged in the marketing of ''rice grown by its members after hulling it in its mill which was run by power. Similarly, it had marketed the oil derived from the groundnut grown by its members after converting it into oil in its expeller run by power''. It was held by their Lordships that "the goods in question having been marketed and the business of the assessee being marketing of the agricultural produce of its members, the case clearly falls u/s 81(i)(c), even though it may not fall under clause (e) thereof. The fact that the goods which are ultimately marketed had been earlier processed with the aid of power would, therefore, be of no consequence insofar as exemption granted u/s 81(i)(c) is concerned". The provisions of section 81(i)(c) are akin to those of section 80P(2)(a)(iii).

The learned counsel also placed reliance on the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat-IV Vs. Karjan Co-op. Cotton Sale, Ginning and Pressing Society Ltd., In this case, the dispute related to the sale of cotton which had been ginned and pressed. While considering the matter, it was held that the assessee was entitled to the exemption. Relying upon these decisions, the counsel contended that the processing of goods is a part of the marketing activity. Is it so?

In both these cases, the end-product which reached the consumer was agricultural produce. It is true that rice becomes available on dehusking of paddy. Similarly, cotton has to be ginned. Yet, both are agricultural produce. Thus, the Court had taken the view in favour of the assessee. However, in the present case, it is the admitted position that the assessee processes the sugar-cane. It manufactures and sells sugar. The product which is sold in the market does not belong to the members. Sugar has not been described as an agricultural produce in the Act. Thus, it cannot be said that the petitioner is marketing an agricultural produce.

Mr. Garg submitted that in case of Ryots Agricultural Produce Co-operative Marketing Society Ltd. (supra), the Court had even upheld the assessee''s claim in respect of oil extracted from groundnut. It is undoubtedly so. However, the question as to whether or not it is an agricultural produce does not appear to have been raised.

Mr. Garg also referred to the decision of this Court in Commissioner of Income Tax Vs. Haryana State Co-operative Supply and Marketing Federation Ltd., This was the case where the assessee was engaged in the sale of wheat, gram and other agricultural produce. The issue was the interpretation of the term - ''marketing of agricultural produce of its members''. The counsel can derive no advantage from this decision. Since the produce being marketed was admittedly the ''agricultural produce'', the decision is of no assistance in the present case.

The counsel also referred to the decision of the Kerala High Court in MEENACHIL RUBBER MARKETING AND PROCESSING CO-OPERATIVE SOCIETY LTD. Vs. COMMISSIONER OF Income Tax., In this case, the assessee-society purchased raw latex from its members. It processed it by scientific method and sold the commodity. The assessing authority had rejected the claim for exemption on the ground that ''when the assessee purchased raw latex from its members and effected the sale after processing, what was sold by the assessee was its own commodity''. The claim of the assessee was upheld by the Commissioner and the Tribunal. In this situation, the question was answered in favour of the assessee on the ground that marketing had to be construed ''in a manner which would achieve the benevolent purpose of exemption rather than defeat the said purpose''. It was further held that ''the co-operative society is marketing the agricultural produce of the members of the society and the income earned as profits and gains of the business of marketing of the said agricultural produce is liable to be exempted''.

In Broach Distt. Co-operative Cotton Sales Ginning and Pressing Society Limited Vs. Commissioner of Income Tax, Ahmedabad, it was, inter alia, contended before their Lordships of the Supreme Court that ''ginning and pressing into cotton bales charged the character of the cotton and, therefore, what was marketed was not the agricultural produce of the members of the assessee''. Their Lordships did not consider this question as ''this point was not raised at any earlier stage by the revenue...."

Lastly, reliance was placed on the decision of their Lordships of the Supreme Court in Kerala State Co-operative Marketing Federation Ltd. and Others Vs. Commissioner of Income Tax, In this case, the society was engaged in the business of marketing cotton. It was, inter alia, held that ''the only condition required for qualifying the assessee''s income for exemption is that the assessee''s business must be that of marketing, the marketing must be of agricultural produce and that agricultural produce must have belonged to the members of the assessee-society before they came up for marketing by it whether on its own account or on account of the members themselves''. It was further held that ''the society engaged in the marketing of agricultural produce of its members would mean not only such societies which deal with the produce raised by the members who are individuals or societies which are members thereof who may have purchased such goods from the agriculturists''. Such is not the controversy in the present case.

On an examination of the decisions, it is clear that-

(i)the purpose of exemption u/s 80P(2)(a)(iii) is to encourage the activities of co-operative societies in the interest of rural economy. Thus, the provision has to be given a purposive interpretation so that the intended objective is achieved.

(ii)''marketing'' means the transfer of goods from the point of agricultural production to the hands of the consumer. So long as the end product which reaches the consumer is an ''agricultural produce'', the assessee shall be entitled to exemption u/s 80P(2)(a)(iii).

The question that arises is - Is the petitioner entitled to the grant of exemption?

Mr. Garg contended that the petitioner has a large number of members. They grow a substantial quantity of sugar-cane. It cannot be marketed in its original form. It can only be processed to make sugar or brown-sugar and sold. Thus, the exemption as prayed for deserves to be granted.

It may be true that the petitioner has 35,000 members. It may also be true that the quantity of sugar-cane would be substantial. Yet, the exemption can be granted only when the case falls within the parameters of the provision. The condition precedent for the grant of exemption is that the society must market agricultural produce. It appears to us that the petitioner is not really marketing ''agricultural produce''.

According to the judicial opinion as expressed in the cases noted above, the provision has to be given a liberal interpretation. Thus, ''marketing'' cannot connote merely ''buying and selling''. It means more. It is also true that hulling of paddy and ginning of cotton, etc., have been treated as a part of the process of marketing. However, would the position be same if a mill was buying cotton, ginning it and then making and marketing yarn and fibre? Would it be marketing cotton? Similarly, can it be said that a society which buys barely and makes beer is marketing an agricultural produce? Equally, if the co-operative society was buying raw latex and making tyres, could it be said that it was marketing an agricultural produce? We think not. Even on a liberal construction, we find that a case shall fall within the parameters of the provision only when the processing is limited to making the commodity marketable. Otherwise not.

Mr. Garg contended that sugar-cane cannot be marketed in its original form. It is only by making sugar that the sugar-cane can be marketed. Is it so?

A reference to sub-clause (v) of section 80P(2)(a) shows that the processing of agricultural produce qualifies for the grant of exemption from payment of tax. However, it is only when processing is done without the aid of power. The obvious intention is to promote the small scale sector which may form a part of the co-operative movement. It is true that if a case falls under one of the heads, it is not necessary to resort to the second. However, the provision is indicative of the legislative intent. In case of societies which are engaged in processing of agricultural produce, the exemption is admissible only when the processing is done without the aid of power. Not otherwise.

Thus, even if it is assumed that ''marketing'' includes ''processing'' to make the ''produce'' marketable, it cannot be of such a nature as may go beyond the permissible limit embodied in sub-clause (v). Otherwise, the liberal interpretation of sub-clause (iii) would result in violence to the plain words in clause (v). It would enable every co-operative society to avoid payment of tax on the pretext of ''marketing'', while it is actually ''manufacturing''.

In the present case, the co-operative society, according to the statement of the case, was incorporated for the primary purpose of manufacturing sugar. Thus, its basic activity is production of sugar. It is engaged in manufacturing. Not marketing. Since, it is the admitted position that the petitioner is using power and even paying excise duty, we are of the opinion that the case does not fall within section 80P(2)(a)(iii).

No other point was raised.

In view of the above, we hold that:

(i) Section 80P has been enacted with the object of promoting the cooperative movement. It has to be liberally construed.

(ii) ''Marketing'' is a comprehensive term. It does not mean merely buying and selling. It includes ''processing'' which may be necessary for making the agricultural produce marketable. However, the processing should conform to the provision in sub-clause (v). If the processing involves use of power, the exemption shall not be admissible.

The question is, accordingly, answered against the assessee.

CWP No. 7025 of 1999 had been filed by the petitioner with the prayer that the order dated 21-12-1998 by which respondent No. 1 had rejected the prayer for rectification, be quashed. No additional argument was raised in the case. However, we find that in view of our answer to the question as referred to this Court by the Tribunal, the prayer for rectification was rightly declined by the Tribunal. The writ petition is, accordingly, dismissed. No costs.