Sahakari Khand Udyog Mandali Ltd. vs The State of Gujarat

Divan, C.J.—Since the principal question arising in each of these five references is the same question substantially, all these five references

were taken up for regular hearing before a Division Bench consisting of two of us (P. D. Desai and B. R. Mehta, JJ.), but thereafter these five

matters have been referred to a larger Bench, so that the impact of the decision of the Supreme Court in Khedut Sahakari Ginning and Pressing

Society Ltd. Vs. The State of Gujarat, , so far as the five assessees before us, each one of which is a co-operative society manufacturing sugar in

the co-operative sector, can be considered.

A short historical background is necessary in order to appreciate the contentions raised in this case. In Sales Tax Reference No. 1 of 1966

decided by a Division Bench consisting of one of us (Divan, C.J., and J. B. Mehta, J.) decided on 1st July, 1968, the assessee was the Khedut

Sahakari Ginning and Pressing Society Ltd. In that reference, after examining the authorities available till that date and after considering the bye-

laws of that particular co-operative society, which was a co-operative society of cotton growers and which society was also running a ginning and

pressing factory, it was held that when unginned cotton was brought to the society by each individual member and thereafter was pooled together

by the society in accordance with bye-law No. 48, the relationship between the members of that particular co-operative society and the society

was that of vendor and purchaser and not that of principal and agent. The Division Bench tried to look at the real substance of the transaction

without being bound down by the terminology in which the parties had chosen to clothe the transaction. It was held that the transactions in question

were those of purchase of cotton by the co-operative society concerned from its members.

This decision in Khedut Sahakari Ginning and Pressing Society''s case (Sales Tax Reference No. 1 of 1966 decided on 1st July, 1968 (Gujarat

High Court).) was followed by the same Division Bench of this High Court in Sales Tax Reference No. 7 of 1966 decided on 4/5th July, 1968.

There, the assessee was Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd., which is the assessee before us in Sales Tax Reference No. 24

of 1977, that is, one of the five matters under consideration in this judgment. In Sales Tax Reference No. 7 of 1966, the Division Bench examined

the scheme of the bye-laws of the co-operative society and it was pointed out that in the case of Bileshwar Khand Udyog Khedut Co-operative

Society Ltd. (Sales Tax Reference No. 7 of 1966 decided on 4/5 July, 1968 (Gujarat High Court).) the facts were much stronger so far as

revenue was concerned, as compared to the Khedut Sahakari Ginning and Pressing Society''s case (Sales Tax Reference No. 1 of 1966 decided

on 1st July, 1968 (Gujarat High Court).) because, in terms, the bye-laws provided for sale of sugarcane produced by the members to the society.

Prices were to be fixed at the end of the season by the Board of Directors and those prices were to be paid to the producer-members under the

bye-laws. All the essentials of the transaction of sale were present in the case, namely, agreement to sell, transfer of property from the producer-

member to the society and the parties being competent to contract. Looking to all these circumstances, the Division Bench held that in the case of

this particular co-operative society manufacturing sugar from the supply of sugarcane by producer-members to the society, the transaction was of

sale by such member and the purchase amounted to a purchase of sugarcane by the society from the member concerned. Hence, the particular

question referred to the High Court was answered accordingly.

After these two decisions, one in the case of Khedut Sahakari Ginning and Pressing Society Ltd. (Sales Tax Reference No. 1 of 1966 decided

on 1st July, 1968 (Gujarat High Court).) and the other in the case of Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd. (Sales Tax

Reference No. 7 of 1966 decided on 4/5 July, 1968 (Gujarat High Court).) were delivered, the second decision following the reasoning of the

decision in the earlier case, the matter was taken in appeal to the Supreme Court, and by its decision in Khedut Sahakari Ginning and Pressing

Society Ltd. Vs. The State of Gujarat, , the Supreme Court reversed the decision of the Gujarat High Court and in the light of the principle

underlying Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, the formation of Co-operative societies and the object

behind the formation of producers'' society, and further in the light of the definition of ""producers'' society"" set out in section 3(h)(2) of the Bombay

Co-operative Societies Act, 1925, the Supreme Court held that in that particular case, the transaction was one of entrustment of cotton crop of the

producer-members to the society which was acting as the collective agent of the members, and it was held that the society was the agent of all its

members and the society''s principals were many. Because of the bye-laws, the several principals must be deemed to have appointed a common

agent, the society, for disposing of their goods in the manner most advantageous to them. It is because of this decision of the Supreme Court in

Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, that the Division Bench before which all these five references in the

case of sugar co-operative societies came up for final hearing, referred all the five matters to a larger Bench and thereafter the matters have come

up before us for final hearing.

It may be pointed out that, for the sake of easier reference, Messrs. Sahakari Khand Udyog Mandali Ltd., Gandevi, the assessee in Sales Tax

Reference No. 4 of 1976, will be referred in the course of this judgment as the Gandevi Society; Messrs. Khedut Sahakari Khand Udyog Mandali

Ltd., Bardoli, the assessee in Sales Tax Reference No. 7 of 1976, will be referred to as the Bardoli Society; Messrs. Madhi Vibhag Khand Udyog

Sahakari Mandaii Ltd., Madhi, the assessee in Sales Tax Reference No. 8 of 1970 will be referred as Madhi Society; Messrs. Chalthan Vibhag

Khand Udyog Sahakari Mandali Ltd., the assessee in Sales Tax Reference No. 10 of 1976, will be referred as the Chalthan Society; and Messrs.

Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd., the assessee in Sales Tax Reference No. 24 of 1977, will be referred as the Bileshwar

Society. It may be pointed out that the Gandevi, Bardoli and Bileshwar Societies were all registered when the provisions of the Bombay Co-

operative Societies Act, 1925, were in force, whereas the Madhi and Chalthan Societies were registered under the provisions of the Gujarat Co-

operative Societies Act, 1961 (Gujarat Act 10 of 1962). By section 169(1) of the Gujarat Co-operative Societies Act of 1961, the Bombay Co-

operative Societies Act, 1925, was repealed and, under sub-section (2), all societies registered or deemed to be registered under the Bombay

Co-operative Societies Act, 1925, the registration of which was in force immediately before the commencement of the Gujarat Act, shall, on such

commencement, be deemed to be registered under the Gujarat Act. Therefore, by virtue of section 169(2), even the Gandevi, Bardoli and

Bileshwar Societies are deemed to have been registered under the Gujarat Co-operative Societies Act and all the five societies before us are

governed by the provisions of the Gujarat Co-operative Societies Act on the footing that either in fact or under the deeming fiction set out in

section 169(2) of the Gujarat Co-operative Societies Act, 1961, the societies are to be treated as registered under this Act.

The bye-laws of the Gandevi and Bileshwar Societies are originally in English, whereas the bye-laws of the Bardoli, Madhi and Chalthan

Societies are in Gujarati in original, but barring some variations which will be pointed out in the course of this judgment, the bye-laws of all the five

societies are on the same lines and the bye-laws of each of these five societies use identical language, whether in English or in Gujarati and,

therefore, we will have to consider these bye-laws in order to ascertain whether the supply of sugarcane by the producer-members of the society

concerned amounted to a transaction of purchase.

It may be pointed out that, in the case of the Gandevi Society, we are concerned with the Bombay Sales Tax Act, 1959. So also, we are

concerned with the Bombay Sales Tax Act of 1959 in Sales Tax Reference No. 8 of 1976 where the Madhi Society is the assessee. In the case of

the Chalthan Society, we are concerned with the Gujarat Sales Tax Act, 1969, whereas in the case of the Bardoli Society and the Bileshwar

Society, we are concerned both with the Bombay Sales Tax Act, 1959, and the Gujarat Sales Tax Act, 1969. In order to understand the problem

arising under the Sales Tax Act, it is necessary to point out that the Bombay Sales Tax Act, 1959, was enacted, as the preamble of the Act points

out, ""to consolidate and amend the law relating to the levy of a tax on the sale or purchase of certain goods in the State of Bombay"". Schedule A to

the Act sets out different items of goods, sale or purchase of which was free from all taxes under the Bombay Sales Tax Act. Section 5 of the

Bombay Sales Tax Act stated that no tax would be payable on the sales or purchases of any goods specified in Schedule A, but subject to the

conditions or exceptions (if any) set out against each of the goods specified in column 3 of Schedule A. Under sub-section (2) of section 5, the

State Government was empowered to enlarge any entry in Schedule A, or relax or omit any condition or exception specified therein, if it was done

by a notification in the official Gazette, and thereupon the said schedule was to be deemed to be amended accordingly. We are not concerned with

sub-section (3) of section 5 of the Bombay Sales Tax Act. Entry 48 of Schedule A mentioned sugarcane. This entry was deleted by Gujarat Act

50 of 1961 with effect from 27th December, 1961. The Bombay Sales Tax Act of 1959 came into force on 1st January, 1960, and hence, from

1st January, 1960, to 26th December, 1961, entry 48 of Schedule A mentioned sugarcane as one of the exempted goods in respect of which no

sales tax or purchase tax was to be levied under the provisions of the Bombay Sales Tax Act, 1959. By Government notification dated 6th April,

1962, ""sugar"" as defined in entry 1 of the First Schedule to the Central Excises and Salt Act, 1944, was added as entry 47 in Schedule A, and

between 1st January, 1961, and 5th April, 1962, entry 47 read as ""Sugar as defined in item No. 8 of the First Schedule to the Central Excises and

Salt Act, 1944"". Thus as from 5th April, 1962, sugar was exempted from the levy of either sales tax or purchase tax under the provisions of the

Bombay Sales Tax Act, whereas, with effect from 26th December, 1961, exemption from levy of purchase tax or sales tax was taken away by the

deletion of entry 48 regarding sugarcane. By the very amending Act by which entry 48 relating to sugarcane was deleted from Schedule A, section

14-B was inserted in the Bombay Sales Tax Act. By section 14-B, it was provided that there shall be levied a sales tax or purchase tax on the

turnover of sales or, as the case may be, turnover of purchases, of sugarcane sold or purchased for such purposes and at such rate not exceeding

ten naye paise in the rupee and at such one stage as the State Government may, by notification in the official Gazette, specify; and the seller or

purchaser, as the case may be, shall be liable to pay tax on such turnover notwithstanding anything contained in section 3. Thereafter, a notification

was issued providing that purchase tax at the rate of ten naye paise in the rupee, that is, at the rate of ten per cent, should be paid on the turnover

of purchases of sugarcane. Schedule E to the Bombay Sales Tax Act, 1959, sets out goods, sale or purchase of which is subject to sales tax,

general sales tax, purchase tax and retail sales tax and the rate of sales tax, etc. Entry 22 in that schedule mentions all goods other than those

specified from time to time in section 14-B and in Schedules A, B, C and D and in the preceding entries. So far as the goods, that is, sugareane,

specified in section 14-B was concerned, the purchase tax on that item was to be governed by the provisions of section 14-B and not by the

entries in Schedule E. It may be pointed out that, by notification dated 26th December, 1961, issued in exercise of power conferred by section 14-

B of the Bombay Sales Tax Act, 1959, the Government of Gujarat specified that, on and with effect from 27th December, 1961, there shall be

levied purchase tax at the rate of ten naye paise in the rupee on the turnover of purchases of sugarcane of a purchaser, where such sugarcane is

purchased by the purchaser either directly or through an agent for being used by him in the manufacture of sugar as defined in item No. 1 of the

First Schedule to the Central Excises and Salt Act, 1944.

It may be pointed out that the definitions in the Gujarat Sales Tax Act, 1969, are on the same lines as the definitions in the Bombay Sales Tax

Act, 1959, and hence, it will be easier to refer to the definitions in the Gujarat Sales Tax Act. u/s 2, sub-section (11), of the Bombay Sales Tax

Act, ""dealer"" means ""any person who whether for commission, remuneration or otherwise carries on the business of buying or selling goods in the

State, and includes a State Government which carries on such business, and also any society, club or other association of persons which buys

goods from, or sells goods to, its members"". Under the exception to section 2(11), ""an agriculturist who sells exclusively agricultural produce

grown on land cultivated by him personally, shall not be deemed to be a dealer within the meaning of this clause"". u/s 2(22), ""purchase price

means ""the amount of valuable consideration paid or payable by a person, for any purchase made including any sum charged, for anything done by

the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or installation, when such cost

is separately charged"". Section 2(28) defines ""sale"" to mean ""a sale of goods made within the State, for cash or deferred payment or other valuable

consideration, and includes any supply by a society or club or an association to its members on payment of a price or of fees or subscription, but

does not include a mortgage, hypothecation, charge or pledge; and the words ''sell'', ''buy'' and ''purchase'', with all their grammatical variations and

cognate expressions, shall be construed accordingly"". u/s 2(29), ""sale price"" means ""the amount of valuable consideration paid or payable to a

dealer for any sale made including any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery

thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged"". It is clear in view of the exception to

section 2(11) that an agriculturist selling his agricultural produce grown on land cultivated by him personally is not a dealer and, therefore, there is

no question of sale price so far as an agriculturist is concerned and it is only the co-operative society concerned, if it is held ultimately to buy or

purchase the sugareane from its members that can be dealt with as a purchaser and in respect of purchase price a purchase tax may have to be

paid.

It may be pointed out that in the Gujarat Sales Tax Act, 1969, section 18 is the same and equivalent to section 14-B of the Bombay Sales Tax

Act, 1959.

Under the Gujarat Co-operative Societies Act, 1961, which came into force on 1st March, 1962, there is no categorisation into purchaser-

society or other seller-society, as is to be found in the Bombay Co-operative Societies Act of 1925, and u/s 12, ""the Registrar may classify all

societies in such manner, and into such classes, as he thinks fit, and the classification of a society under any head of classification by the Registrar

shall be final"". u/s 37 of the Gujarat Co-operative Societies Act, ""a society on its registration shall be a body corporate by the name under which it

is registered, with perpetual succession and common seal, and with power to acquire, hold and dispose of property, to enter into contracts, to

institute and defend suits and other legal proceedings and to do all such things as are necessary for the purpose for which it is constituted.

Section 4 of the Gujarat Co-operative Societies Act enacts that ""a society, which has as its object the promotion of the economic interests or

general welfare of its members, or of the public, in accordance with co-operative principles, or a society established with the object of facilitating

the operations of any such society, may be registered under this Act"". Therefore, the emphasis is on co-operative principles so that the object of

the society should be the promotion of economic interest or general welfare of its members or of the general public in accordance with co-

operative principles. It was emphasised by the Supreme Court in the Khedut Sahakari Ginning and Pressing Society''s case ([1972] 29 S.T.C.

105 at 112 (S.C.).) :

It must be remembered that by and large the farmers are illiterates. They do not know the ways of business. The general belief is that taking

advantage of the ignorance and illiteracy of the farmers, businessmen exploit them. To avoid such exploitation, the Act authorised the formation of

co-operative societies of the farmers through which they can sell their goods. Those societies merely function as agents for the farmers who are

their members. By becoming members of those societies and subscribing to their bye-laws, they had given large powers to their agents so that their

produce may be sold in the best possible manner.

As pointed out by K. S. Gupte in his Commentary on the Bombay Co-operative Societies Act of 1925 (Fifth Edition), ""co-operation stands

for the freedom of the individual and encourages him to improve his economic status by self-help and mutual aid"". It has been, pointed out by

Gupte in his Commentary at page 5 :

Co-operation thinks not only of how to secure maximum profits for all those concerned in production, but also of how to secure the commodities

at the cheapest rates so as to lighten the burden of a consumer. Between the producer and the consumer, however, at present there is quite an

army of middlemen, the dalals, the wholesale merchants, the retail shopkeepers, the carriers by land and by sea, the exporters and the importers.

The result is while the consumer pays a heavy price for the article he needs, the producer of those articles receives very little for all his trouble and

skill. The difference goes to the middlemen, the dalal, the wholesale merchant and so on. With its belief in the doctrine of protection of the weak,

with its firm desire for distributive justice, co-operation naturally hates exploitation by one group of another. Therefore, elimination of middleman is

one of the great objects of the co-operative movement. This elimination, it proposes to bring about by the consumers or the producers themselves

performing the necessary services. A multi-purpose society acts as an agent for the sale of farm produce and other products of rural industry of its

members and members of other societies, and a joint farming society arranges for the joint sales of the produce of the farm. A better farming

society undertakes the collective disposal of produce.

It may also be pointed out that according to the Encyclopedia Britannica, 1972 Edition, Volume I, page 348 :

The need for farmers to be represented by organisations operating in their interests has sparked the development of agricultural cooperatives in all

countries. The average farmer is a comparatively small producer. Membership in a cooperative increases his bargaining power when he sells his

crops, when he purchases farm supplies or when he requires credit, insurance or other services that he can obtain by joint efforts through

cooperatives.

Furthermore, supply cooperatives have pioneered in improving the quality of feed, fertilizer, seeds and other items farmers buy. Marketing

cooperatives have been leaders in developing methods to improve product quality and minimize speculative risks. One method employed to reduce

speculative risks is the cooperative practice known as pooling. Returns from sales of members'' products of like quality are pooled by many

associations. This practice involves recording, according to quality and quantity, all products delivered by each member during the pooling period

and making payments of sales returns to members based on the average price received per unit for all products of the same quality. In individual

associations, the pooling period may extend from a few days to an entire marketing season.

Cooperatives, in addition, promote operating economy. If their capital permits, they invest in more efficient plants and laboursaving machinery and

equipment whenever the directors are convinced that the investment will reduce handling margins or provide needed services. Such action by a

cooperative is an application of the practice of improving service for members. As other efficient firms usually follow the lead of cooperatives in

reducing handling margins, all farmers in the area benefit, whether they are members or not.

It has also been pointed out in the Encyclopaedia Britannica 1972 E VI 447 :

Cooperative organisations founded for mutual economic aid exist in most countries of the world - in advanced as well as in developing countries

and colonial possessions, and in urban as well as in rural areas. The cooperative way of doing business takes many forms, ranging from local to

centralized and federated organizations, and from highly specialised to multi-purpose societies.

As regards the development of co-operative societies in the United States of America, it has been pointed out at page 450 :

Cooperatives in the United States may be classified by specific functions as : (1) farmer-owned marketing, processing, purchasing, and service

associations;

(2) retailer-owned wholesale cooperatives; (3) credit and banking cooperatives; (4) mutual insurance companies; (5) rural electric cooperatives;

(6) consumer goods stores; (7) group health and medical plans. Miscellaneous services to farmers include widely varied activities ranging from

cotton ginning to artificial breeding of dairy cattle. Farm credit and rural electric cooperatives are some times included among miscellaneous farm

services; but, because of their extent and very specific nature, they are listed and classified separately here.

Also at page 450, it has been pointed out :

This glimpse of cooperative history reveals two streams of endeavour - one directed towards savings in cost of consumer goods; the other

directed towards higher net farm incomes through increased returns and stabilized markets or savings in costs of production. Both are stronger in

rural areas than in urban communities, although cooperative supermarkets and cooperative apartments are found in and near metropolitan centres

................. Farmer cooperatives, on the other hand, underscore business objectives; higher prices for their commodities when marketed,

increased savings on cooperative purchases, and interest on invested capital.

As regards the characteristics of co-operatives in the United States, it has been pointed out :

In their operating technique and organizational structure, cooperatives closely resemble other types of business and have similar motives.

Distinguishing characteristics of cooperatives are their ownership by patrons (rather than by investors who may or may not be patrons), their

distribution or allocation of all net earnings annually among member-owners in proportion to their patronage, and their control by directors who are

themselves typically members, owners, and patrons. Moreover, cooperatives stress service to members to a degree that shapes their policies.

At page 453, regarding co-operative movement in India, the Encyclopaedia Britannica says : ""Production and marketing cooperatives were

widely organized for handloom weavers, sugarcane growers, spinners, and cottage industries."" And it has been pointed out that ""cooperatives were

assigned a major role in achieving economic development"" in India. Thus, Mr. Kaji for the five assessees before us is right when he contends that in

considering the scheme of the bye-laws of the five co-operative societies before us and in interpreting the terms used in the bye-laws, we must

bear in mind what may he called ""brooding presence"" of co-operative principles. Indeed, that was the approach of the Supreme Court in the

Khedut Sahakari Ginning and Pressing Society''s case ([1972] 29 S.T.C. 105 (S.C.) .). It was emphasised in the judgment of the Supreme Court

that the two objectives intended to be achieved by the Bombay Co-operative Societies Act, 1925, were providing for self-help by members of the

society and for mutual aid among themselves and, after considering the definition of ""producers'' society"" which says that a producers'' society

means a society formed with the object of producing and disposing of goods as the collective property of its members and includes a society

formed with the object of the collective disposal of the labour of the members of the society, the Supreme Court proceeded to examine the bye-

laws of that particular co-operative society before it against the background of the preamble of the Act as well as the definition of ""producers''

society"". The overall principle is that co-operative societies of farmers were authorised by the Co-operative Societies Act and it was to avoid

exploitation of the farmers at the hands of businessmen that the co-operative societies were being formed. ""The brooding presence"" of the co-

operative principles which we have mentioned in brief herinabove is the basic objective lying behind the co-operative movement, namely, to

eliminate the middleman, so as to benefit the producer-members and to get the maximum advantage and benefits to their members, is to he kept in

mind while considering the scheme of the bye-laws before us. It may be emphasised that, according to the Supreme Court, ""whether a particular

agreement is an agency agreement or an agreement of sale depends upon the terms of the agreement. For deciding that question, the terms of the

agreement have got to be examined. The true nature of a transaction evidenced by a written agreement has to he ascertained from the covenants

and not merely from what the parties choose to call it. The terms of the agreement must he carefully scrutinised in the light of the surrounding

circumstances"". The Supreme Court examined the provisions of the Act as well as the relevant bye-laws which took the place of agreement

between the parties and it is in the light of these well-recognised principles stated by the Supreme Court in Khedut Sahakari Ginning and Pressing

Society Ltd. Vs. The State of Gujarat, that we will now proceed to examine the bye-laws before us.

For the sake of easier reference, we will take up the bye-laws of the Gandevi Society and after examining the scheme and the provisions of

these bye-laws, we will point out the difference in terminology used in the bye-laws of the other societies. As we have already indicated, the bye-

laws are on the same set of model in the case of all the five co-operative societies before us and though the bye-laws of the Bardoli, Madhi and

Chalthan Societies are in Gujarati, the terminology used in the bye-laws of these three societies is more or less on the same lines as the bye-laws of

the Gandevi and Bileshwar Societies.

The bye-laws of the Gandevi Society are in English and bye-law 2 which sets out the aims and objects of the society, mentions the object of

the society as :

......... to encourage proper development of agricultural industries amongst members on co-operative lines by introducing modern methods of

agriculture and by promotion of principles of co-operative and joint farming methods, so as to secure best advantages of modern large scale

agricultural production to the owners or tenant cultivators of land; and for that purpose :

* * * *

(2) To acquire lands either by way of sale, lease or otherwise for cultivation of sugarcane and other crops and for the erection of buildings,

machinery, etc.

(3) To inculcate amongst members improved modern methods of agriculture and cultivation of sugarcane and to supply seed, material, manure,

implements, etc., for growing sugarcane and other crops and to promote agricultural/ industrial education and well-being amongst members.

(4) To manufacture sugar, jaggery and their by-products out of sugarcane grown and supplied by members of the society and others and to sell the

same to the best advantage.

(5) To establish sugar manufacturing factory and to manage it and for that purpose :

(a) to raise share capital and/or to borrow necessary capital from the co-operative societies, the Industrial Finance Corporation of India and from

other sources on the security of the property or otherwise,

(b) to acquire necessary lands by way of purchase, lease or otherwise for construction of buildings, for installation of machinery, equipments, etc.,

and for providing transport,

(c) to arrange and run means of transport, ......

* * * *

(f) to cultivate sugarcane crop for manufacture of sugar and to purchase from members and non-members sugarcane, jaggery, raw material and

other requirements for this factory.

Clause (6) of bye-law 2 mentions : ""To make advances to members on the security of sugarcane or sugar made out of their sugarcane and to

advance loans for raising their crops and development of agriculture."" Under clause (ii) of the bye-law, one of the objects of the society is ""to

undertake subsidiary and allied industries which are conducive to the development and benefit of the society"". Under bye-law 5, it has been

provided :

There shall be three classes of members :

(A) Producer-members,

(B) Ordinary members, and

(C) Nominal members.

NOTE :- Nominal member is a member who has no right to dividend or participation in the management of the society.

Under clause (a) of bye-law 5, it has been provided ""No person or co-operative societies or institutions registered under the Trusts Act shall

be admitted as a member of class (A), unless (1) he has completed 18 years of age and is competent to contract""; and under condition (2) unless

he holds land as an owner or a tenant and is a producer of at least 1/2 acre of sugarcane in the area of operation, and contracts to the society to

bring up the sugarcane of the required standard, and agreed to bring the cane at a pooling place himself, if so required by the Board of Directors;

(3) his written application for membership and contract for supply of sugarcane is approved by the Board of Directors and he holds at least one

share of Rs. 500 per 1/2 acre of sugarcane or part thereof; (4) he has paid an entrance fee of Rs. 2 and has paid the required amount of share or

shares allotted to him; (5) he enters into the agreement with the society to carry out the plans, the programme and methods of cultivation under the

direction of the Board of Directors or a person authorised in that behalf; (6) he executes an agreement in the form prescribed in Schedule C to the

effect that such charge or charges or interest which he may have created or may create hereafter in favour of any co-operative society or of

Government for securing finance for purpose of cultivation and/or improvement of his lands, he shall retain in his own name and title and shall not

alienate or create a charge or interest of any kind on the lands owned by him in the society''s area of operation to the extent specified below : (a) in

the case of land irrigated by canal, the entire lands in the sugarcane block registered in his name; (b) in the case of lands irrigated other than by

canal, caneable lands of thrice the area in respect of which shares are held by him"". Under clause (b) of bye-law 5, it is provided :

Ordinary membership under class (B) shall be open to Government co-operative institutions, individuals residing in the area of operation of the

society and to such co-operative institutions other than co-operative credit banks whose area of operation extends over the area of operation of

the society. No person shall be admitted as a member of class (B) unless (1) he has completed 18 years of age and is competent to contract, (2)

his written application for membership is approved by the Board of Directors and he holds at least one share and (3) he has paid an entrance fee

of Rs. 2 and has paid the required amount of share or shares allotted to him (the Government is exempted).

We are not concerned with nominal members in this case. Under bye-law 6, provision is made for the limited liability of members or producer-

members. In the case of a producer-member, the liability shall be limited to twice the face value of the shares held by him during the pendency of

the loan of the Industrial Finance Corporation of India to the society which is to be guaranteed by Government (or is under guarantee by

Government) and for the specific purpose of repayment of this loan, his liability shall, extend to thrice the face value of the shares held by such a

member. The liability of an ordinary member shall be limited to the amount, if any, in respect of the shares held by him. Thus, a departure is made

in bye-law 6 from the ordinary rule that the liability of a member in a corporate organisation of this kind should be equivalent to the face value of

the shares held by him in the corporate organisation. Under buy-law 7, a producer-member shall be bound to carry out the instructions of the

Board of Directors in respect of every matter connected with the method of cultivation, production, protection of crops, marketing of produce, etc.

Under buy-law 8, it has been provided : ""Every member shall be bound to sell sugarcane grown on all his lands in factory area to the factory. The

factory will, however, be bound to buy sugarcane only up to the total acreage covered by the shares held by a member."" It must be noticed that in

the case of buy-law 8, the word ""producer-member"" is not used and the words used are ""every member"", that is, an ordinary member as well as a

producer-member. Under clause (b) of buy-law 10, ""a producer-member shall immediately cease to exercise any right or privilege to which he

may otherwise be eligible in his capacity as such member including the right or privilege of tendering to the society the sugarcane grown by him if he

commits any breach at any time in due observance of the agreement for non-alienation or non-charging of his lands executed by him under the

provisions of buy-law No. 5(a)."" Buy-law 21 provides for the composition of a Board of Directors of the society and the Board shall consist of 19

Directors, 10 of whom have to be elected by producer-shareholders admitted under buy-law 5(a) and two members have to be elected by

ordinary members admitted under bye-law 5(b). The remaining members are nominees of the Government, the Registrar of Co-operative Societies

and other organisations. The Managing Directed is an ex officio member of the Board of Directors. The duties of the Board of Directors have been

provided under bye-law 27. Under clause (4), one of the duties of the Board is to appoint the Managing Director and Manager and to fix their

remuneration. Clause (6) of buy-law 27 provides that it is the duty of the Board ""to fix the price for the purchase of sugarcane and the terms and

conditions thereof"". Bye-law 29 provides that there shall be an executive committee consisting of not more than 6 persons under (1) the Chairman

of the Board of Directors, (2) not more than three Directors nominated by the Board. (3) the Registrar''s nominee and (4) the Director nominated

by the Central Financing Agency. The Managing Director shall be the ex officio member-secretary of the executive committee. The duties and

functions of the executive committee are provided in bye-law 30. Under clause (4), one of the duties of the executive committee is to appoint

agents for supply and sale of goods, requisite farm produce and other equipments. It is this executive committee which appoints agents for the sale

of goods. Bye-law 31 provides : ""The Board of Directors shall draw up a programme of sugarcane cultivation within the area of operation and

shall assign such cultivation to producer-member and/or to joint farming societies if so formed by members. Every member (of a tenant member)

who has been assigned an area for growing sugarcane crop shall enter into a contract to rear up the crop according to the programme and to

deliver the same to the society at such rates and at such place as may be fixed by the Board of Directors from time to time. The variety of

sugarcane, the period of plantation and manufacturing shall be decided by the Agricultural Officer appointed for the purpose. Any member failing

to carry out the programme of cultivation and supply of sugarcane shall be liable to such penalty as may be provided for in the agreement entered

into by the members. The penalty and damages thus payable shall be recoverable as if they are debts to the society under the provisions of section

96 of the Gujarat Co-operative Societies Act."" Under bye-law 32, it is provided : ""The Board of Directors shall each year fix the price to be paid

for sugareane supplied by members. This price per ton of sugareane ex field delivery shall not exceed by more than Rs. 10, the average per maund

of sugar realised by the society during the particular season. In special cases this may exceed Rs. 10. However, when a price exceeding Rs. 10 is

fixed, all the amount payable to a producer-member in respect of the excess of the price above Rs. 10 shall be credited as a deposit by him under

bye-law 37. So long as the society has not redeemed the share capital contributed by the Government and/or has not fully repaid the loan taken

from the Industrial Finance Corporation and/or the Central Financing Agency on block capital account, the Board of Directors shall not fix the

price to be paid for the sugarcane supplied by the members of the society, except with the prior approval of the Government."" Under bye-law 35,

if any member has been allotted a sugarcane area for cultivation, fails to bring up crop as required in the contract, it will he competent for the

Agricultural Officer to cause the crop being reared up and to incur any expenditure incidental thereto including manure and other expenditure and

to debit the same as loan advance to the member and such advance shall carry interest at the rate not exceeding 9 per cent. and shall be

recoverable from out of the produce and any balance left thereafter shall be recoverable as a loan advanced by the society with interest"". Bye-law

36 provides that any debt due by the member shall have a first charge on the sugarcane cultivated by the member and shall be recovered from the

sale proceeds of the sugareane. Bye-law 38 provides for the method of calculating net profits, and the various deductions to be made are provided

in sub-clauses (1), (2) and (3) of bye-law 38. The balance remaining after interest, working expenses and depreciation mentioned in clauses (1),

(2) and (3) of bye-law 38 have been provided for as under :

The balance remaining thereafter shall be deemed to be net profit and shall be available for distribution as under :-

(a) 25 per cent. shall he carried to reserve fund;

(b) 4 per cent. shall be carried to capital redemption reserve fund, which shall be utilised for redeeming preference shares issued to the

Government of Gujarat.

(c) 5 per cent. shall be carried to price fluctuation fund.

(d) To pay dividend not exceeding 8 per cent. per annum on the said share capital provided (i) the same shall not exceed 4 1/2 per cent. per

annum until the share capital contributed by the Government is repaid, (ii) the instalment of principal and interest due on the loan to the corporation

up to the year are paid or has made provisions satisfactory to the corporation for making the aforesaid payments.

A sum not exceeding 2 per cent. on the paid-up share capital may then be credited in the year to the fund called ''The Dividend Equalisation Fund''

until the total amount of the fund amounts to 9 per cent. of the paid-up share capital. Except for the purpose of paying dividend (1) up to 4 1/2 per

cent. till the share capital contributed by the Government is repaid and (2) up to 9 per cent. after the share capital contributed by the Government

is fully repaid. No withdrawal from the fund shall be made without the previous sanction of the Registrar.

(e) A sum shall be set aside for contribution towards the education fund of the Gujarat State Co-operative Union at the rate of 1 per cent. of the

net profit, 1.25 per cent. of the net profit or 1.5 per cent. of the net profit or 2 per cent. of the net profit according to the rate of dividend is 3 per

cent., between 3 per cent. and 4 per cent., between 4 per cent. and 5 1/2 per cent. or above 6 1/4 per cent. respectively.

(f) The balance available shall be used for payment of bonus on supply of cane to members and bonus to employees not exceeding 2 months basic

pay and for research and agricultural development and charitable purposes.

Schedule B sets out the list of villages which come within the area of operation of the Gandevi Society and similar schedules are to be found

attached to the bye-laws of the remaining societies as well. Schedule C sets out the form of contract between a producer-member and the society

as contemplated by bye-law 5(a).

Before proceeding further, it may be pointed out that u/s 115 of the Gujarat Co-operative Societies Act, 1961, it has been provided,

whenever any society is wound up :

Any surplus assets, as shown in the final report of the liquidator of a society which has been wound up, shall not he divided amongst its members

but shall be devoted to any object or objects provided in the bye-laws of the society, if they specify that such a surplus shall he utilised for the

particular purpose. Where the society has no such bye-law, the surplus shall vest in the Registrar, who shall hold it in trust and shall transfer it to the

reserve fund of a new society registered with a similar object, and serving more or less an area which the society to which the surplus belonged

was serving.

In case no such society exists or is registered within three years ending on being wound up, the Registrar may distribute the surplus in the

manner he thinks best among any or all purposes of public utility or of local interest as may be recommended in the general meeting held u/s 114,

etc. Therefore, it is clear from the provisions of section 115 of the Gujarat Co-operative Societies Act that in no event are the surplus funds of the

society, after all its liabilities are met, to be paid to the members concerned.

It may be pointed out that in the case of the Gandevi, Bardoli and Bileshwar Societies, the word used in the respective bye-laws in para 2,

clauses (2), (4), (5) and (6), is ""purchase"" whereas in the case of bye-laws of the Madhi and Chalthan Societies, the relevant word is ""obtain"" or

to get"" in clause (11) of the bye-laws of these two societies. Under bye@-law 7-A of the bye-laws of the Bardoli, Madhi and Chalthan Societies,

it has been provided that the member concerned shall he liable to cut his sugarcane and transport it to the factory of the assessee, but it would be

open to the executive committee of the society to provide collective arrangement for such cutting and transport if it is possible to do so and the

expenditure incurred for cutting and transport shall be allocated on an average basis amongst the members. No such clause similar to bye-law 7-A

is to be found in the bye-laws of the Gandevi and Bileshwar Societies. In bye-law 8 of the Gandevi. Bardoli and Bileshwar Societies, the word

used is ""sell"" the sugarcane to the society, whereas the word used in the case of the Madhi and Chalthan Societies is ""give"" and not ""sell"". In the

case of all the five societies, clause (6) of bye-law 27 deals with powers and duties of the Directors to fix sugareane price. In the case of Chalthan,

there is no specific correlation between the price per ton of sugarcane to be paid to the members and average price per maund of sugar, but the

co-relation on the basis of the price of sugarcane per ton not to exceed more than Rs. 10 over the price per maund of sugar is to be found in the

case of the remaining four societies.

In the case of the Bardoli, Madhi and Chalthan Societies, one finds bye-law 36-A which is not to be found in the case of the other two

societies, namely, Gandevi and Bileshwar. Bye-law 36-A is in these terms :

An advance not more than 70 per cent. of the market price of sugarcane and jaggery pledged with the society may be advanced to any member.

The Board of Directors shall decide the terms and rate of interest for such advances. The Board of Directors may advance loans to individual

members for the purchase of seed for cultivation of sugarcane, manure, implements, etc. The Board of Directors shall decide the terms and the rate

of interest. Such advance shall be seasonal and shall be recovered as first charge from sugarcane crop.

While dealing with these bye-laws and considering whether the transactions of supply of sugareane by the members of the society, whether

producer-members or ordinary members, amount to transactions of purchase or not, it must he borne in mind that the concepts of sale have

undergone a change. In Bhopal Sugar Industries Ltd. v. Sales Tax Officer ([1977] 40 S.T.C. 42 47 (S.C.).), Fazal Ali, j., speaking for the Bench

of three learned Judges of the Supreme Court, has pointed out :

Thus the essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or

promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of

a sale has, however, undergone a revolutionary change, having regard to the complexities of the modern times and the expanding needs of the

society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may

by virtue of an agreement impose a number of restrictions on the buyer, e.g., fixation of price, submission of accounts, selling in a particular area or

territory and so on. These restrictions Per so would not convert a contract of sale into one of agency, because in spite of these restrictions the

transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale

inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and

under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be

indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer - pure and simple. In Halsbury''s Laws

of England, Volume I, 4th Edition, in para 807 at page 485, the following observations are made :

''The relation of principal and agent raises by implication a contract on the part of the principal to reimburse the agent in respect of all expenses,

and to indemnify him against all liabilities, incurred in the reasonable performance of the agency, provided that such implication is not excluded by

the express terms of the contract between them, and provided that such expenses and liabilities are in fact occasioned by his employment.''

* * * *

It is well-settled that while interpreting the terms of the agreement, the court has to look to the substance rather than the form of it. The mere fact

that the word ''agent'' or ''agency'' is used or the words ''buyer'' and ''seller'' are used to describe the status of the parties concerned is not sufficient

to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a

person as an agent or a buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an

agent.

In the Bhopal Sugar Industries'' case ([1977] 40 S.T.C. 42 (S.C.).), the Supreme Court cited the following extract in Sri Tirumala

Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry ([1968] 21 S.T.C. 312 at 316 (S.C.).) :

As a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on

behalf of the principal and make over either the sale proceeds or the goods to the principal. The essence of a contract of sale is the transfer of title

to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid

and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his

own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale

proceeds.

One significant feature which is to be noticed in all these bye-laws is that, though there is a mention of the maximum price of sugarcane by co-

relating the price per ton of sugarcane to the price per maund of sugar, no requirement is laid down regarding the fixation of selling price of the

sugar manufactured by the society. The bye-laws do contemplate this that after receiving the sugarcane from producer-members, the sugarcane is

processed in the factory of the society and the sugar manufactured by the society is sold in open market or in accordance with the provisions of

law relating to the sale of sugar by any producer, for example, under the control regulations laid down by Government orders from time to time

under the Essential Commodities Act, if there are any such restrictions. But the executive committee with its power to sell the sugar is expected to

sell the sugar at the best price available for its commodity, so that, ultimately, the benefit is passed on to the society as a whole.

Before proceeding to see what the bye-laws mean and what is the relationship between the supplier of sugarcane and the society, it is

necessary that we should bear in mind what has been stated by the Supreme Court in the case of Rohtas Industries Ltd. v. State of Bihar ([1961]

12 S.T.C. 615 (S.C.).) In that case, the assessee was a limited liability company manufacturing cement. The assessee and some other cement

manufacturing companies on the one hand entered into an agreement with the Cement Marketing Company of India Ltd. on the other whereby the

marketing company was appointed as the ""sole and exclusive sales manager"" for the sale of cement manufactured by the manufacturing companies

and the manufacturing companies agreed not to sell directly or indirectly any cement to any person save and except through the marketing

company. The manufacturing companies were entitled to be paid a certain sum per ton for the cement supplied by them or at such other rate as

might be decided upon by the directors of the marketing company. The marketing company was authorised to sell cement at such price or prices

and on such terms as it might in its sole discretion think fit and it agreed to distribute to the manufacturing companies, in proportion to the number

of tons of cement of every variety and kind supplied by the manufacturing companies, the whole of its net profit less six per cent. on its paid-up

capital. The question before the Supreme Court was whether the transaction between the assessee and the marketing company was sale or their

relationship was that of agent and principal; and it was held by the Supreme Court that the cement delivered, despatched, or consigned by the

assessee to the marketing company or to its orders or in accordance with its directions was sold by the assessee to the marketing company and the

sale was therefore liable to be taxed under the Bihar Sales Tax Act, 1944. Shah, j., as he then was, delivering the judgment of the Supreme Court,

observed at page 618 of the Reports :

The true nature of a transaction evidenced by a written agreement has indeed to be ascertained from the covenants and not merely from what the

parties chose to call it. The words of an agreement must be carefully scrutinized in the light of the surrounding circumstances.

At page 620 of the Reports, Shah, J., further observed :

On a review of these terms of the agreement, it is manifest that the manufacturing companies had no control over the terms of the contracts of sale

by the marketing company and that the price at which cement was sold by the marketing company could not be controlled by the manufacturing

companies; that the manufacturing companies were entitled, for ordinary cement, to be paid at the rate of Rs. 24 per ton at works, or at such other

rate as might be decided upon by the directors of the marketing company, and in respect of special cements, at such additional rates as the

directors of the marketing company might determine; that sale by the marketing company was not for and on behalf of the manufacturing

companies but for itself and the manufacturing companies had no control over the sales nor had they any concern with the persons to whom

cement was sold. In fine, the goods were supplied to the order of the marketing company which had the right, under the terms of the agreement, to

sell on such terms as it thought fit, and that the manufacturing companies had the right to receive only the price fixed by the marketing company.

The relationship in such cases can be regarded only as that of a seller and buyer and not of principal and agent.

It was further pointed out at page 621 of the Reports by Shah, J. :

There is no covenant, again, rendering the manufacturing companies liable in the event of the transactions of the marketing company resulting in

loss. The marketing company enters into contracts on its own behalf and not on behalf of the manufacturing companies : it supplies goods as its

own, and not as those of the manufacturing companies and it is not entitled to be indemnified for loss suffered by it. The mere covenant for sharing

the overall net profits, after deducting 6 per cent. on the paid-up capital of the marketing company, does not convert the relationship into one of

principal and agent. The liability to account for the sale proceeds is not for the purpose of paying over to the manufacturing companies a share of

the profits in each individual transaction. The liability to account, if any, is only for enforcement of the covenant contained in clause 24.

This decision in the case of Rohtas Industries Ltd. ([1961] 12 S.T.C. 615 (S.C.).) lays down the following principles :

The test to determine whether the transaction is that of sale or that of agency is to determine whether the property in the goods has passed to the

so-called agent and secondly, whether there was payment of price by the so-called agent to the so-called principal;

On an examination of the agreement between the parties, the question to be asked is whether any goods which were to be sold by the so-called

principal were sold as the goods of the so-called principal and whether the goods were sold by the so-called agent for itself or on behalf of the so-

called principal.

One of the tests to be applied for determination of this question is whether the so-called principal had any control over the sales, or any

concern with the concern to whom the commodity in question, namely, the cement, was sold by the so-called agent. Moreover, the test as to who

is to bear the loss in case the overall transaction results in loss at the hands of the so-called agent, is also a guiding factor. The ultimate division of

dividend after the net profits are ascertained is no criterion for holding the transaction to be that of a principal and agent.

Where, however, as pointed out by the Supreme Court in Hafiz Din Mohammad Haji Abdulla v. State of Maharashtra ([1962] 13 S.T.C. 292

(S.C.).), the goods are to be sold at the price fixed by the supplier, the prices are liable to be altered at the instance of the supplier, the person to

whom the goods are supplied is to receive a fixed remuneration for his exertion and is liable to remit the price only after the sale is effected. These

facts are clear indications that the relation is of principal and, agent and not of vendors and purchasers.

It is by now well-settled in the light of the different decisions which we@ have referred to above, including the decision in Khedut Sahakari

Ginning and Pressing Society Ltd. Vs. The State of Gujarat, and the decision in the The Bhopal Sugar Industries Ltd. Vs. Sales Tax Officer,

Bhopal, , that the designation which the parties choose to give to the relation of the parties is not conclusive. The court has in each case, having

regard to the terms and the attending circumstances, to ascertain the true relationship between the parties without giving undue importance to the

special expressions used by them.

In Deputy Commercial Tax Officer, Saidapet and Another Vs. Enfield India Ltd., Co-operative Canteen Ltd., , it was pointed out by the

Supreme Court, speaking through Shah, J., as he then was :

A registered society is a body corporate with power to hold property and is capable of entering into contracts. It cannot be assumed that

property which it holds is property of which its members are owners. The property in law is the property of the society. The members are

undoubtedly entitled to compel the society to act according to its constitution and to apply the property for the purposes for which it is held, but on

that account the property of the society cannot be treated as the property of the members. The society is a person : the property in the

refreshments which it supplies to its members is vested in the society and when refreshments are supplied for a price paid or promised transfer of

property in the refreshments results. In the case of an unincorporated society, club or a firm or an association ordinarily the supply and distribution

by such a society, club, firm or an association of goods belonging to it to its members may not result in sale of the goods which are jointly held for

the benefit of the members by the society, club, firm or the association, when by virtue of the relinquishment of the common rights of the members

the property stands transferred to a member in payment of a price, and the transaction may not Prima facie be regarded as a ''sale'' within the

meaning of the Act.

At page 325 it was observed :

We are not dealing in this case with liability criminal or quasi-criminal. The question is one of liability under a taxing statute and the court in

determining the liability of the society to pay tax cannot ignore the form and look at what is called the ''substance of the transaction''. Ex facie, the

transaction is one in which the legal owner of property transfers it to another pursuant to a contract for a price, and that transaction must he

regarded as a sale. Whether by appropriate provisions in the Articles of Association or Rules, a scheme may be devised under which the goods

supplied may be treated as belonging to the members of the society, and the society merely acts as an agent in supplying the food to its members,

need not be considered in the present case. It will suffice to state that it cannot be urged as a proposition of law that when a co-operative society

supplies to its members refreshments for a price under a scheme for distribution or supply of refreshments, the transaction can in no event be

regarded as a sale of the refreshments supplied for a price.

The same reasoning will apply to the case before us. It cannot be urged as proposition of law that when the co-operative society obtains

supplies of raw materials, namely, sugarcane, from its members for a price under a scheme for the supply of sugarcane by members and others to

the sugar factory run by the society, the transaction can in no event be regarded as sale of sugarcane supplied for a price. So, even the ""brooding

presence"" of the co-operative principles cannot render it necessary that in every case in which a co-operative society obtains supplies of raw

materials for its factory from its members it should he regarded as a transaction of principal and agent and can in no event be regarded as a sale by

a member or a non-member to the co-operative society.

It may be pointed out that in the Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, , the Supreme Court found, as

a matter of interpretation, that the members entrusted their cotton crop to the society. It was found as a matter of fact and on an interpretation of

the bye-laws that none of the bye-laws of the society went to show that the society had purchased the goods entrusted to them by its members.

The earlier decision of the Supreme Court in the Rohtas Industries Ltd.''s case ( [1961] 12 S.T.C. 615 (S.C.).) was referred to by the Supreme

Court and at page 113, the decision in Rohtas Industries Ltd.''s case ([1961) 12 S.T.C. 615 (S.C.).) was distinguished in this manner :

One of the clauses in the agreement relied on by this court for coming to the conclusion that the agreement in question was an agreement of sale

was that the marketing company had to pay certain price for the cement supplied to it and that price was ordinarily required to be fixed having

regard to the cost of production. Further the marketing company was entitled to fix price at which the cement was to be sold and such price could

be even less than the cost of manufacture. It is true that some of the clauses in that agreement are similar to those we are considering in this case,

yet no clause in that agreement mentioned that the cement manufacturing companies were merely entrusting their cement to the marketing company

nor was there any provision in that agreement for the marketing company to advance loans to the manufacturers on the security of the cement

entrusted to it. Further the manufacturing companies were not required to pay any interest on the amount paid to them by the marketing company.

In the case of Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, , the decision of the Supreme Court rested on the

following factors : (1) The entrustment of the cotton crop by the members to the society for the purpose of being ginned and baled and then sold;

(2) That the society could advance an amount of not more than seventy-five per cent of the estimated value at the market rate from time to time of

the goods insured and entrusted to the society against the security of the goods if it was convenient to do so and that the rate of interest of advance

will be fixed by the managing committee from time to time. This bye-law 45(1) of that particular co-operative society, according to the Supreme

Court, clearly indicated that the members of the society were merely entrusting their goods to the society and not selling them to the society. It was

found that that particular society was independently formed primarily with the object of selling the goods of its members as their collective goods.

The Supreme Court held that the object of the society was not to purchase or sell any cotton or cotton-seeds on its own behalf. The membership

of the society was confined to farmers of the villages mentioned in the bye-law and to co-operative societies of the talukas mentioned therein.

Under bye-law 48 of that particular society on which the Supreme Court relied, it was provided : ""The goods of all the members will be gathered

together either by grading according to the grades fixed by the general body or without grading and then sold either ginned or unginned. At the end

of the season after making up the accounts the society will pay in full to all the members according to average rates gradewise or if grades are not

made then generally after deducting the dues of the society and the charges for ginning, pressing the goods and expenses for sale, etc."" According

to the Supreme Court, this bye-law referred to the goods of the members of the society and not to the goods of the society. These are the principal

factors which weighed with the Supreme Court in holding that the society was the common agent for the farmers who were the members. By

becoming members of the society and by subscribing to the bye-laws, the members had given large powers to their agents so that their produce

may be sold in the best possible manner.

It is thus clear that it is the feature of the entrustment of the goods brought by its members to the co-operative society which, after ginning and

pressing, sold the goods of the members to the outsiders and after deducting the dues of the society and charges for ginning and pressing and the

expenses for sale, etc., paid in full to all the members according to the average rates gradewise or, if the grades were not fixed then generally, that

weighed with the Supreme Court to decide in that particular case that the transaction was not of sale by the members of the society or of purchase

by the society from the members. In that particular case, it was the feature of entrustment of the cotton to the society for the purpose of being

ginned and pressed in bales and sold which led the Supreme Court to hold that the society was the agent for all the members of the society.

In the instant case, we must bear in mind that merely because we are dealing with the bye-laws of a co-operative society, we are not

precluded from holding, if the interpretation of the bye-laws of the society so justifies it, that the transaction was a transaction of purchase by the

society. Whatever the practice may he in the United States, in India, as laid down by the conspectus of authorities referred to above, it is the bye-

laws of the society which constituted agreement between the members of the society and in the light of these bye-laws which thus constitute

agreement, we have to decide the nature of the transactions between the members of the society. In our opinion, the features which distinguish the

present case from the Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, are the following : (1) In the instant case, the

society obtains supplies of sugarcane not only from producer-members, but from others as well. Such other persons may be ordinary members or

may even he outsiders. (2) The price to he paid to the supplier of sugarcane is fixed at the end of the season by the Board of Directors and that

purchase price has to be fixed in the light of the Government regulations in force from time to time regarding fixation of price of agricultural

commodities including that of sugarcane. (3) The price at which sugar is sold by the society acting through its executive committee is not controlled

by the members, nor have the members any voice as to whom these goods are sold. Barring the provisions in the case of the Chalthan Society, in

all other bye-laws there is a maximum limit fixed for the purchase price of sugarcane, namely, that the purchase price must not exceed by more

than Rs. 10, the average price per maund of sugar realised by the society during a particular season. The mention of this maximum in the light of the

co-relation between the price per ton of sugarcane and the average price per maund of sugar sold by the Society does not and cannot mean that

the Board of Directors is bound to fix the price of sugarcane at a particular figure co-related to the price per maund of sugar sold by the society.

The bye-laws, as we have pointed out, make it clear, under clause (4) of bye-law 2, that the sugarcane may be grown and supplied by the

members of the society and others and from the sugarcane thus supplied by the members and others, the society has to manufacture sugar, jaggery

and other by-products and to sell the same to the best advantage. Barring the requirement that the end-products manufactured by the society,

namely, sugar, jaggery and other by-products, are to he sold to the best advantage, no other restriction is placed on the society as to at what price

or at what rate sugar or other commodities manufactured by the society are to be sold to outsiders. (4) The liability of the members for the losses

incurred by the society in its overall transactions cannot be passed on to the members. The members'' liability is limited by clause (6) so far as

producer-members are concerned to twice the face value of shares held by them during the pendency of the loan of the Industrial Finance

Corporation of India, given to the society, which loan is guaranteed by the Government and for the specific purpose of repayment of this amount

the member''s liability shall extend to thrice the face value of the shares held by such member and the liability of an ordinary member shall he limited

to the amount unpaid, if any, in respect of the shares held by him. Thus, though the liability of an ordinary member and a producer-member is not

limited in the same manner, it is a limited liability. As pointed out by the Supreme Court in Deputy Commercial Tax Officer, Saidapet and Another

Vs. Enfield India Ltd., Co-operative Canteen Ltd., , the property under the bye-laws of the society before us - the property in sugar and other

end-products sold by the society - vested in the society as a corporate body before the sale. Moreover, in the instant case, the bye-laws do not

disclose a scheme under which the goods supplied to the society are to be treated as belonging to the members of the society, the society merely

acting as an agent in processing sugarcane of its members and selling the final end-product to the outside world as the agent of the members.

Though we are dealing with a co-operative society with the ""brooding presence"" of the co-operative principles, we must not overlook the fact that

in determining the liability of the society to tax the court cannot ignore the form and merely look at what is called the substance of the transaction.

Ex facie, the transaction by which sugarcane is supplied by producer-members, ordinary members and non-members to the society is one in which

the legal owner of the property transfers it to the society pursuant to the agreement set out in the bye-laws and that too for a price. (5) It is true that

as in the case of the bye-laws of the Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, , clause (6) of bye-law 2

mentioned as one of its objects to make advances to members on security of sugarcane or sugar made out of that sugarcane and advance loans for

raising other crops and development of agriculture. It has been found by the Tribunal in the instant case of the Bardoli Society - and that holds

good in the case of the other societies also - that interest was not in fact being charged to the members when a portion of the price was being paid

in advance to the members. That feature, in our opinion, goes a long way to explain the real purport and object of making the advance to the

members. The Board of Directors have the power to fix the price for the purchase of sugarcane and the terms and conditions thereof, and by the

operation of bye-law 32, it necessarily means that the Board has to fix the price at the end of the season because the maximum is co-related to the

average per maund of sugar realised by the society during a particular season. Under bye-law 36, any debt due by a member shall have a first

charge on the sugarcane cultivated by the member and shall be recovered from the sale proceeds of the sugarcane. What is the quantum of the sale

proceeds of the sugarcane supplied by a member to the society can he determined only at the end of the season and though the sale proceeds are

not in the form of price of sugar manufactured out of the quantum supplied by a member but are in the form of sale proceeds of the quantum

supplied by the members to the society, there is no provision in clause (6) of bye-law 2 for interest and the whole object of this set of bye-laws

seems to be to carry on manufacture of sugar in an area growing sugarcane, with producer-members having control through a majority of Directors

in the Board of Directors. Moreover, it must not be forgotten that by the process of manufacture through sophisticated machinery, the sugarcane is

converted into a different commodity, namely, sugar. All that happens in the case of cotton when it is ginned and pressed is that cotton-seeds and

other impurities are separated from cotton or cotton fibre and pure cotton is simply pressed. A different commodity as such does not come into

existence in the case of ginned cotton. The whole of the material, namely, sugarcane, supplied by the members is processed and changed

completely out of recognition altogether as compared to its original state.

The learned Advocate-General on behalf of the State in these matters relied upon certain passages from Gower''s Principles of Modern

Company Law, Gore-Browne on Companies, Palmer on Company Law and Ramaiya''s Commentary on the Companies Act of India, for the

purpose of urging that the Board of Directors were not the agents of the members and that the Board, because of overall powers of management

conferred upon it, was in sole charge of the management and the members had no control over the management and hence the members could not

be said to be the principals. We are not inclined to place reliance on the principles of company laws for the interpretation of the bye-laws of a co-

operative society because we are not dealing with shareholders. We are dealing with members who come together for the purpose of mutual aid

and self-help through the organisation of their co-operative society.

It has been pointed out in paragraph 701 at page 418 of the Fourth Edition of Halsbury''s Laws of England, Vol. I :

The terms ''agency'' and ''agent'' have in popular use a number of different meanings, but in law the word ''agency'' is used to connote the relation

which exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal and third

parties.

The relation of agency arises whenever one person, called ''the agent'', has authority to act on behalf of another, called ''the principal'', and

consents so to act. Whether that relation exists in any situation depends not on the precise terminology employed by the parties to describe their

relationship, but on the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent. If an

agreement in substance contemplates the alleged agent acting on his own behalf, and not on behalf of a principal, then, although he may be

described in the agreement as an agent, the relation of agency will not have arisen. Conversely, the relation of agency may arise despite a provision

in the agreement that it shall not.

A servant or an independent contractor, though not necessarily the employer''s agent, may often have authority to act as such when relations with

third parties are involved. Nevertheless an agent, as such, is not a servant. An agent, although bound to exercise his authority in accordance with all

lawful instructions which may he given to him from time to time by his principal, is not, unless he is also the servant of the principal, subject in the

exercise of his authority to the direct control or supervision of the principal.

The essence of the agent''s position is that he is only an intermediary between two other parties. So it is essential to an agency in this sense that a

third party should be in existence or contemplated, and, if a person who is employed as an agent to buy or sell property for another seeks to sell

his own property to his principal or to buy the property of his principal, he violates the first condition of his employment, and changes the intrinsic

nature of the contract between them.

The main principle that emerges from these passages from Halsbury''s is that the essential requirement of agency is that the agent must only he

an intermediary between two other parties and the third party should be in existence or contemplated at the time when the contract of agency is

entered into. In the instant case, when we examine the bye-laws, the third parties are never known nor are they ever disclosed to the members. All

that the members know is the purchase price fixed by the Board of Directors for the sugarcane and the total amount of the sale price fetched by

their sugar and other end-products.

It is true that under the bye-laws, the society helps the members to secure better seeds, to get proper supply of manure, also to provide

transport for conveying sugarcane from the field to the sugar, factory. It also advances loans to its members and gives instructions regarding when

to plant sugarcane and how to look after the sugarcane crop, but all this is done by the society as a corporate body so that a better quality of

sugarcane is secured, but that does not render the society an agent of its principals. It is difficult to envisage a situation where the agent issues

instructions to its principal, but it may be permitted in the special concept of a co-operative society principle that the society helps its members

under the principle of mutual aid and self-help to improve their crops and to improve the quality of their sugarcane. But, the ultimate test of an agent

acting as a conduit pipe between the members as a body and the outside, world, that is, those who purchase sugar and other by-products of the

society, is missing in this link. The society is not a conduit pipe or merely an intermediary. By applying any standard regarding the passing of

property in the goods, the property in the goods passes to the society, but ultimately the moment it is supplied, ex field, for the purpose of the

factory and from that stage onwards, the only right of the supplier of sugarcane is to receive the purchase price that may ultimately he determined

by the Board of Directors and in the meanwhile to receive advances without interest against the quantum of purchase price that the society will

ultimately determine at the end of the season.

It is not correct to say, as Mr. Kaji for the petitioner submitted before us, that the features of the bye-laws before us are broadly the same

features as were before the Supreme Court in the Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, . Under these

circumstances, it must be held that the transaction between the co-operative society and the members who supply sugarcane to it is that of sale and

purchase and not a transaction of agency with the members being principals and the society being the collective agent of all its members. Though

the definition of ""producer society"" which was set out in the Bombay Co-operative Societies Act, 1925, no longer applies, the concept behind that

classification of a producer society has been borne in mind by us but it cannot be overlooked that the essential features of agency are lacking in this

case and the basic features of a purchase are all present, and the decision in Deputy Commercial Tax Officer, Saidapet and Another Vs. Enfield

India Ltd., Co-operative Canteen Ltd., points out the approach which has to be adopted in dealing with a co-operative society even in the light of

the concept of co-operative principles.

Question No. (3) in Sales Tax Reference No. 4 is in the following terms :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of sugarcane grown by applicants on

land of the members under arrangement to share profit or loss, the applicant was purchasing sugarcane from partnership firms and was liable to

pay purchase tax in respect of the said sugarcane ?

In paragraph 14 of its order, the Tribunal has dealt with the facts in the light of which question No. (3) is framed. A copy of the agreement

regarding the lands on which sugarcane was grown on the land of the members was produced before the Tribunal. In clause 3 of the agreement it

was stated that after deducting all expenses, whatever profit or loss would arise would he distributed between the society and owners of the land in

equal share. In paragraph 6 of the agreement it was provided that the cultivation of sugarcane made on the lands being of joint ownership, no

question of agency right would survive. It is true that the land was not taken on lease from the owner for cultivation of sugarcane by the society, but

the Tribunal held that a partnership was formed between the society and the member concerned for growing sugarcane and it was the partnership

thus formed which sold its sugarcane to the society. A copy of the agreement between the society and the members is also shown to us. The

original of that agreement is in Gujarati and the agreement is for the entrustment of the management of the land of the members to the society, so

that experiments may be carried on scientific lines for the purpose of increasing the production of sugarcane, application of seeds of better variety

and sugarcane may be cultivated on these lines. Clause 1 of the agreement provides that the society with the object of increasing the cultivation of

sugarcane in Valsad District and increasing the productivity of sugarcane and also with the object of improving seeds and multiplying seeds, may

carry out scientific experiments and seed of sugarcane of different varieties may be produced and moreover, the agriculturists in the surrounding

fields may be encouraged for higher production by way of administrative formation and it is for this purpose that the society by employing expert

officers of its own would render the formation and for this purpose the land of the member of the society was taken under the agreement so that

the cultivation of sugarcane might develop and through that means the sugar factory may also develop in future and thus, both the parties have

interest in this particular project. For this, the owner of the land, being the member of the society, entrusts his own land and the means of irrigation,

etc., to the society by handing over physical possession. The duration of the agreement was for a period of three years under clause 2, and the land

was to he managed by the society during this period of three years. Under sub-paragraph of clause 2, the period of the agreement could be

extended at the end of three years. Under clause 3, separate account of the cultivation in connection with this land was to be maintained by the

society. Compensation in respect of the land and the means of irrigation was to he paid at the particular rate mentioned in the agreement. After

deducting this amount of compensation and deducting the price of the seeds, manure, labour, bonus, pesticides and insecticides, irrigation,

supervision, whatever figure of profit or loss that might he arrived at would be shared equally half and half between the society and the owner of

the land. It is difficult to read an agreement of partnership in this case. All that was done was that the land was being placed at the disposal of the

society, so that cultivation of sugarcane on the land may serve the purpose of administrative formation of the surrounding cultivators and better

cultivation on scientific lines with better production might be reached. The cultivation was joint but that does not bring in any principle of

partnership. No business was being carried on by the society and the member concerned, nor was one being made an agent of the other for the

purpose of carrying on the activities contemplated by the agreement. It is difficult to read into this clause any partnership agreement between the

parties. The society was raising its own crop on the land placed at its disposal by the members for con sideration and hence it is difficult to accept

the conclusion of the Tribunal that this agreement amounted to a partnership, or that the partnership was selling sugarcane crop to the society and

hence the conclusion of the Tribunal that in respect of sugarcane grown on such land of the members under an agreement of this type, purchase tax

was payable, is not correct in law and, therefore, question No. (3) in Sales Tax Reference No. 4 of 1976 must be answered in the negative, that is,

in favour of the assessee and against the revenue.

In Sales Tax Reference No. 4 of 1976, questions Nos. (1) and (2) referred to us are as follows :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the judgment of the Gujarat High Court in the

case of Bileshwar Khand Udyog Mandali (Sales Tax Reference No. 7 of 1966 decided on 5th July, 1968 (Gujarat High Court).), has not been

superseded by the decision of the Supreme Court in Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, and that the

Tribunal was bound to follow the said judgment of the Gujarat High Court, and that in view of the said judgment the supplies of sugarcane by the

producer-members to the society were purchases liable to purchase tax u/s 14-B of the Bombay Sales Tax Act, 1959 ?

Corrections have been made in the question framed by us to bring out the real controversy between the parties because the case of Sales Tax

Reference No. 4 of 1976 is governed by the provisions of the Bombay Sales Tax Act. Question No. (2) is as follows :

(2) Whether, on the facts and in the circumstances of the case and on correct interpretation of the bye-laws of the applicant-society, the

transactions of supply of sugarcane by the grower-members of the applicant-society to the society were transactions of purchase by the society, so

as to attract the purchase tax u/s 14-B of the Bombay Sales Tax Act, 1959 ?

Question No. (3), we have already set out herinabove. We answer question No. (1) in the affirmative, that is, in favour of the revenue and

against the assessee. Question No. (2) : The transactions were of purchase by the society and hence liable to purchase tax u/s 14-B of the

Bombay Sales Tax Act, 1959. Question No. (3) in the negative, that is, in favour of the assessee and against the revenue.

Sales Tax Reference No. 7 of 1976 : The question referred to us is answered in the affirmative, that is, in favour of the revenue and against the

assessee.

Sales Tax Reference No. 24 of 1977 : It may he pointed out that the additional question No. (2) in this reference has not been pressed by Mr.

Kaji on behalf of the assessee, and question No. (1), in the light of the discussion above is answered as follows : Supply of sugarcane by grower-

members of the society to the society amounted to purchase of sugarcane by the society.

Sales Tax Reference No. 10 of 1976 : The question referred to us is answered in the affirmative, that is, in favour of the revenue and against

the assessee.

Sales Tax Reference No. 8 of 1976 : Question No. (1) : In the affirmative.

Question No. (2) : The transactions were transactions of purchase so as to attract the purchase tax.

In view of the fact that the position after the decision in the Khedut Sahakari Ginning and Pressing Society Ltd. Vs. The State of Gujarat, was

not very clear, there will be no order as to costs in all these references.

References answered accordingly.