Reportable  

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4399  OF 2009 (Arising out of S.L.P.(C) No.23889 of 2007)

Udaipur Sahkari Upbhokta Thok Bhandar Ltd. … Appellant (s)

Versus

Commissioner of Income-tax … Respondent(s)

J U D G M E N T

S. H. KAPADIA, J.

1. Leave granted.

2. The short question which arises for consideration in this civil  

appeal  turns  on  the  interpretation  of  Section  80P(2)(e)  of  the  

Income-tax Act,  1961 whose predecessor was Section 14(3)(iv)  of  

the Income-tax Act, 1922.  

FACTS

3. The  facts  giving  rise  to  this  civil  appeal  are  few  and  

undisputed and may be briefly stated as follows.  Appellant-society  

is a co-operative society registered under Rajasthan Co-operative  

Societies Act, 1965.  Appellant is running a consumer co-operative

store at Udaipur since 1963.  It  has 30 branches.  Appellant is  

dealing in  non-controlled commodities  through its  branches.   In  

addition,  appellant  is  also  doing  the  work  of  distribution  of  

controlled commodities  such as wheat,  sugar,  rice  and cloth on  

behalf  of  the Government under  the Public  Distribution Scheme  

(PDS) for which it is getting commission.  The distribution of the  

controlled commodities is regulated by the District Supply Officer  

(DSO-Authoriesed  Officer)  under  Rajasthan  Foodgrains  &  Other  

Essential  Articles  (Regulation  of  Distribution)  Order,  1976  (for  

short, “1976 Order”).  Appellant claims to be stockist/distributor of  

controlled commodities.  It takes delivery from Food Corporation of  

India  (FCI)  and  Rajasthan  Rajya  Upbhokta  Sangh  as  per  the  

directives of  the State Government.   The price,  quantity and the  

person from whom the delivery is to be taken is fixed by the State  

Government under the said 1976 Order.  After taking the delivery,  

appellant  stores  these  goods  in  its  godowns,  both  owned  and  

rented.   The  storage  godowns  are  open  to  checking  by  the  

concerned officers of the State Government.  The stocks stored by  

the appellant are delivered to the Fair Price Shops (FPS-retailers) as  

per the directions of  the State Government.   The quantity,  price  

and the FPS to whom the delivery is to be given is fixed by the State  

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Government.   According  to  the  appellant,  therefore,  the  above  

modus operandi indicates that the State Government exercises total  

control  over  the  stock  of  controlled  commodities  stored  in  the  

godowns  of  the  appellant-society.   On  28.2.1977  appellant  was  

granted  licence  for  purchase/sale/storage  for  sale  of  goodgrains  

under Rajasthan Foodgrains Dealers Licensing Order, 1964.

4. It  exercises the powers conferred by Section 3 of  Essential  

Commodities Act, 1955, the Government of Rajasthan issued the  

1976  Order.   Following  are  the  relevant  provisions,  reproduced  

from the 1976 Order, which read as under:

“Clause  2.  Definitions.  –  In  this  Order,  unless  the  context otherwise requires :-  

(b)  “Authorisation”  means  an  authorization  issued  under clause 3 of this Order;   (c) “Authorised Fair Price Shop Keeper” means a retail  dealer incharge of a shop authorized under clause 3 and  shall  include  a  person  incharge  of  a  shop  where  foodgrains and other essential articles are sold and is  under the control of the State Government;

(d)  “Authorisation  Holder”  means  an  authorized  wholesaler or an authorized Fair price shopkeeper;    (e)  “Authorised Officer” means District  Supply Officer  for the District Headquarter Municipal area, Executive  Officer of Municipal Board for rest municipal area and  Vikas  Adhikari  for  rural  area  and  any  other  officer  authorized as such by the State Government;

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(f) “Authorised Wholesaler” means a person, a firm, an  association of persons or a co-operative society or any  other  institution  authorized  appointed  as  an  agent  under clause 3 of this Order by the State Government or  the Collector.

Clause 3.  Issue of Authorisation. –  

(1) The Collector or any other officer authorized by the  State  Government  may issue  an authorization to  any  person  being  an  authorized  wholesaler/fair  price  shopkeeper to obtain and supply foodgrains and other  Essential Articles in the area specified therein.

(2) No person other than an authorization holder shall  sell any of the foodgrains or any other essential articles  supplied by the Government for distribution under this  Order or any other Order.

Clause  20  –  Power  to  issue  directions  regarding  purchase/sale/distribution  of  foodgrains  and  other  essential  articles.  –  Every  authorisation  holder  shall  comply  with  all  general  or  special  directions  given  in  writing, from time to time by the State Government or  the Collector in regard to  purchase, sale, storage for  sale,  distribution  and  disposal  of  foodgrains and  other  essential  articles  on  permits  or  ration  cards  or  otherwise  and  the  manner  in  which  the  accounts  thereof shall be maintained and returns submitted.

4. We  also  quote  hereinbelow  the  Terms  and  Conditions  

annexed to the said 1976 Order which read as under:

“Terms & Conditions – General

Clause  (1)  No  authorization  holder  shall  store  Foodgrains & other essential articles at any place other  than those specified in this authorization without prior  permission in writing of the Collector.

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  Clause (2)  No authorization holder shall refuse to  sell  Foodgrains and other essential articles during business  hours  on  the  presentation  to  him  of  a  valid  permit/indent/ration card to the extent of the amount  of  Foodgrains  or  other  essential  articles  due  on  the  permit/indent/ration card.

Clause (3) No authorization holder shall sell Foodgrains  at  a  price in  excess  of  that  fixed  by  the  State  Government  or  the  Collector  or  shall  sell  any  other  essential articles at a price in excess of that fixed by the  Central  Government  or  the  State  Government  or  any  authority  or  Officer  of  such  Government  or  the  manufacturer, as the case maybe, in that behalf.

Clause (5)   The authorization holder shall  maintain a  stock register in Form ‘C’  showing correctly,  the daily  receipt  and  sale  of  the  each  Foodgrains  and  other  essential  articles.   A  daily  sale  register  shall  also  be  maintained  in  Form ‘D’  by  the  authorized  wholesaler  and in Form ‘E’ by the authorized fair price shopkeeper.  All  books  of  accounts,  permits,  voucher  etc.  shall  be  kept  at  the  business  premises  specified  in  the  authorization and shall be made available for inspection  whenever required.   Clause (6)   Every authorization holder  shall  submit  a  true monthly stock and sale return in Form ‘F’ to the  Collector so as to reach him within five days after the  close of the month to which it relates.

Clause (8)   The authorization holder shall  display the  opening  balance  and  prices  of  each  variety  of  Foodgrains and other essential articles at a conspicuous  place at his business premises in bold letters.”

5. On 31.8.1990, appellant filed its returns for assessment year  

1989-90 claiming deduction under Section 80P(2)(e) of the 1961 Act  

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on the income of commission received by it from the Government  

for  storage  of  controlled  commodities.   On 31.10.1990 appellant  

filed its returns of income for subsequent assessment years 1990-

91,  1991-92,  1992-93,  1993-94,  1994-95,  1995-96  inter  alia  

claiming  deduction  on  the  income  of  commission  received  by  it  

from the State Government for storage of controlled commodities.  

Vide  Order  dated 26.3.92,  the  A.O.  disallowed  the  claim on the  

ground that the appellant-society is a wholesaler of foodgrains and  

it is not a mere stockist as claimed and consequently it was not  

entitled to deduction under Section 80P(2)(e) of the 1961 Act.  This  

order was applied for assessment years in question.  Aggrieved by  

the assessment order(s), appellant filed appeals before CIT (A), on  

18.4.92.  By order dated 28.10.93, CIT(A) held that the appellant  

was entitled to deduction under Section 80P(2)(e) of the 1961 Act  

on the income of commission received from the State Government  

for stocking and storing the above foodgrains.  This decision was  

affirmed  by  the  Tribunal  vide  its  decision  dated  20.10.2000  

dismissing the Department’s  appeal  by a common order  holding  

that the appellant was entitled to deduction under the said Section.  

This view of the Tribunal, however, was overruled by the impugned  

decision dated 2.11.06 by the Rajasthan High Court which took the  

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view  that  the  appellant-society  was  storing  the  said  controlled  

commodities in its godowns as part of its own trading stocks; that  

the  appellant  acted  as  a  trader  in  the  essential  commodities  in  

question  and  consequently  the  appellant  was  not  entitled  to  

deduction under  Section 80P(2)(e)  of  the 1961 Act.   Against  the  

impugned decision,  appellant  has come to  this  Court  by way of  

petition for special leave.

6. The issue which arises for determination in this civil appeal  

is:  whether,  on  the  facts  and  the  circumstances  of  this  case,  

“commission” received by the appellant from the State Government  

was really in the nature of payment for the letting of the godowns  

maintained by the appellant for storage?

7. At  the  outset  it  needs  to  be  noted  that  appellant  has  

composite  business.   Appellant  is  a  dealer  in  non-controlled  

commodities  and  it  is  an  Authorisation  Holder  in  respect  of  

controlled commodities under the 1976 Order.  It owns godowns  

and it also hires godowns on rent.  It earns commission during the  

relevant assessment years at the rate of 2.25 per quintal (e.g. for  

rice).   As  stated  above,  under  clause  20  of  1976  Order  every  

authorization  holder  has  to  comply  with  general  or  special  

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directions given in writing, from time to time by the Collector in  

regard to purchase, sale, storage for sale, distribution and disposal  

of  controlled  commodities.   At  this  stage,  one  important  aspect  

needs to be noted.  Appellant earns commission on the principle of  

“netting”.  In other words, appeallant sets-off “issue price” against  

“sale price” and retains commission fixed at Rs.2.25 per quintal.  

We quote hereinbelow the rate-fixation mechanism indicated by one  

of the orders issued on 12.3.87 w.e.f.1.5.87 under clause (20) of the  

1976 Order:

“S.No./F1:2:1/Rice/Rate/85 Dated 12.5.87

To,  Subdivisional officer/Tehsildar

Sub.: Regarding rate fixation of rice to be distributed  in general areas

As a result of change in the distribution rate and surcharge  of rice by the State Government, the new rates for rice is fixed in  the following manner.  Order to be operative from 1.5.87.

A. if the godown of the Food Corporation and wholesale dealer is  in the same city:

Common Fine Superfine 1. Issue rate of food corporation 239.00 251.00 266.00 2. Octroi 0.20 0.20 0.20

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239.20 252.20 266.20 3. Sales tax @ 3% 7.18 7.54 7.99 4. Surcharge on sale tax @20% 1.44 1.50 1.60

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5. Amount  payable  to  food  corporation [issue price]

247.82 260.24 275.79

6. Commission/transportation  of  wholesale dealer

2.25 2.25 2.25

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7. For upto 10km from godowns  of Food Corporation

1.00 1.00 1.00

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Sale Price charged from FPS 251.07 263.49 279.04 8. Commission of retail dealer 2.50 2.50 2.50 9. Transportation of retail dealer 2.00 2.00 2.00

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255.57 267.99 283.54 10. Equalisation amount 6.43 7.01 6.46

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262.00 275.00 280.00

B.   if  the  godowns  of  the  Food  Corporation  and  the  wholesale dealer are in different cities:

Common Fine Superfin e

1. Issue  rate  of  food  corporation

239.00 251.00 266.00

2. Octroi 0.20 0.20 0.20 --------------------------------------------------------------------------------------------------------

239.20 252.20 266.20 3. Sales tax @ 3% 7.18 7.54 7.99 4. Surcharge on sale tax @20% 1.44 1.50 1.60

--------------------------------------------------------------------------------------------------------

5. Amount  payable  to  food  corporation  

247.82 260.24 275.79

6. Commission  of  wholesale  dealer

2.25 2.25 2.25

--------------------------------------------------------------------------------------------------------

250.07 262.49 278.04”

8. The above working indicates that Rs.247.82 (issue price)  is  

treated by the appellant as expense and it is set-off against the sale  

price of Rs.251.07.  In other words, the working indicates cost plus  

mechanism  i.e.  Rs.247.82  is  the  cost  plus  profit  margin  which  

includes Rs.2.25 as commission. Therefore, Rs.2.25 is part of the  

profit margin.  One aspect needs to be highlighted. According to the  

written submissions, filed by the appellant,  it had taken into its  

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books of accounts the consolidated value of the closing stock.  This  

circumstance  reinforces  the  finding  of  the  High  Court  in  its  

impugned judgment that the appellant was storing the commodities  

in its godowns as a part of its own trading stock.    

9. The question before us is : whether appellant was entitled to  

claim special deduction under Section 80P(2)(e) of the 1961 Act by  

claiming that the amount received under the head “commission” is  

really in the nature of payment for the user of its godowns?

10. To answer the above question, we quote hereinbelow Section  

14(3)(iv)  of  the  Income-tax Act,  1922,  Section 81(iv)  and Section  

80P(2)(e) of the 1961 Act which read as under:

“Income-tax Act, 1922

Section 14. Exemption of a general nature  

(3) The tax shall not be payable by a co-operative society -–  

(iv) in respect of any income derived from the letting of  godowns  or  warehouses  for  storage,  processing  or  facilitating the marketing of commodities;  

“Income-tax Act, 1961

Section 81. Income of co-operative societies. – Income- tax shall not be payable by a co-operative society –  

(iv) in respect of any income derived from the letting of  godowns  or  warehouses  for  storage,  processing  or  facilitating the marketing of commodities;”  

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“Income-tax Act, 1961

Deduction  in  respect  of  income  of  co-operative  societies.-

80P.  (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: -

(e) in respect of any income derived by the co-operative  society from the letting of  godowns or warehouses for  storage,  processing  or  facilitating  the  marketing  of  commodities, the whole of such income;”  

11. At the outset it may be noted that Sections 81(iv), followed by  

Section 14(3)(iv) in the 1922 Act, as amended, was a predecessor to  

Section 80P(2)(e)  of  the 1961 Act,  and it  came for consideration  

before  the  Gujarat  High  Court  in  the  case  of  Surat  Vankar  

Sahakari Sangh Ltd. v. Commissioner of Income-tax, Gujarat II  

– (1971) 79 ITR 722 (Guj.), in which it was held:

“This section is obviously enacted with a view to encouraging and  promoting  growth  of  co-operative  sector  in  the  economic  life  of  the  country in pursuance of the declared policy of the Government. There are  five different  heads of exemption enumerated in the section.  Each is  a  

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distinct and independent head of exemption. Whenever a question arises  whether  a  particular  category  of  income  of  a  co-operative  society  is  exempt from tax, it will have to be seen whether such income falls within  any of the several heads of exemption : if it falls within any one head of  exemption, it would be free from tax notwithstanding that the conditions  of  another  head  of  exemption  are  not  satisfied  and  such  income  is,  therefore, not free from tax under that head of exemption : vide U. P. Co- operative Bank Ltd. v. Commissioner of Income-tax.- (1966) 61 ITR 563  (All). The ambit and coverage of clause (iv) of section 81 must, therefore,  depend on the true interpretation of the language used by the legislature in  that  clause  assisted  only  by  such  external  aids  of  construction  as  are  permissible according to well-recognised principles of interpretation.  

Turning first to the language of section  81(iv), it  exempts a co- operative society from tax in respect of income derived from the letting of  godowns  or  warehouses  for  storage,  processing  or  facilitating  the  marketing of commodities.  Two possible constructions of this provision  were  suggested  before  us  in  the  course  of  the  argument,  one  by  the  assessee and the other by the revenue. The construction put forward by the  assessee  was  that  the  words  "letting  of  godowns  and  warehouses  for  storage",  "processing"  and  "facilitating  the  marketing  of  commodities"  constituted different alternatives and income derived from three different  sources  was,  therefore,  sought  to  be  exempted  under  section  81(iv),  namely, (1) income derived from the letting of godowns and warehouses  for storage; (2) income derived from processing; and (3) income derived  from facilitating the marketing of commodities. The revenue on the other  hand  urged  that  income  which  was  sought  to  be  exempted  was  only  income derived from the letting of godowns or warehouses if they were let  for any of the three purposes, namely, storage, processing or facilitating  the  marketing  of  commodities.  The  words  "storage,  processing  or  facilitating the marketing of commodities", according to the revenue, were  governed by the preposition "for" and they denoted the purposes for which  godowns or warehouses should be let  in order that  the income derived  from  such  letting  should  be  exempt  from  tax.  Now,  on  the  plain  grammatical  construction  of  the  language  used  by  the  legislature,  it  appears that the construction suggested on behalf of the revenue is more  commendable than that canvassed on behalf of the assessee. As we read  the  words  of  the  clause,  it  is  apparent  that  there  is  no  break  in  the  continuity  of  idea  after  the word "storage";  the  idea  flows on into  the  words  "processing  or  facilitating  the  marketing  of  commodities".  As  a  matter of fact, if we read the clause as a whole, there is no doubt that the  words  "storage,  processing  or  facilitating  the  marketing  commodities"  constitute one single composite clause governed by the preposition "for"  signifying that the letting of godowns or warehouses contemplated by the  section is letting for any of the three purposes, namely, storage, processing  

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to establish that exemption is available in respect of income derived  

from the letting of godowns or warehouses, only where the purpose  

of  letting  is  storage,  processing  or  facilitating  the  marketing  of  

commodities.   If  the  godown  is  let  out  (including  user)  for  any  

purpose besides storing, processing or facilitating the marketing of  

commodities, then, the assessee is not entitled to such exemption.  

[See:  Law  and  Practice  of  Income-tax  by  Kanga  &  Palkhivala,  

Eighth Edition, page 995]

14. Coming to the case law on the distinction between contract of  

sale and contract of agency, we may state that there is no straight-

jacket formula.  However, some important circumstances do bring  

out  the  effect  of  the  transaction.   In  the  case  of  Ramchandra  

Rathore  and  Bros.  v.  Commissioner  of  Sales  Tax,  Madhya  

Pradesh,  Nagur  –  (1957)  8  STC  845  (MP),  the  terms  of  the  

agreement between the assessee, a dealer in  bidis, and his agent  

who was required to sell the goods, under the agreement, at prices  

fixed by the assessee,  indicated  that  the assessee  would not  be  

responsible for any shortage in transit and that the assessee would  

not be liable to receive any unsold stock if  the agreement stood  

terminated.   The  accounts  of  the  assessee-dealer  also  indicated  

that  when  despatches  were  made,  the  price  was  debited  to  the  

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agent and credited to him when the money was received.  These  

circumstances  were  taken  into  account  by  the  High  Court  in  

judging the real effect of the transactions.  Accordingly, it was held  

that the impugned transaction was a “sale” liable to sales tax under  

Section 2(g) of C.P. and Berar Sales Tax Act, 1947.  In the case of  

Udupi  Taluk  Agricultural  Produce  Co-operative  Marketing  

Society Ltd. v. Commissioner of Income-tax - (1987) 166 ITR  

365(Kar.), the assessee, a co-operative society, claimed exemption  

under Section 80P(2)(e)  of  the 1961 Act in respect  of  its income  

derived  by  way  of  commission  from  Karnataka  Food  and  Civil  

Supplies  Corporation  for  procurement  of  paddy  and  rice  and  

reimbursement of transport charges.  Following the judgment of the  

Gujarat High Court in Surat Vankar Sahakari Sangh Ltd. (supra),  

the Karnataka High Court held that under Section 80P(2)(e) of the  

1961 Act, exemption is available in respect of income derived only  

from letting out of godowns or warhouses.  The income derived by  

the co-operative society for the purpose of exemption under clause  

(e) must be relatable to the letting out or the use of its godowns for  

any of  the three purposes mentioned in clause (e).   Any income  

derived by the society unconnected with such letting or use of the  

godowns  would  not  fall  under  clause  (e).   In  the  case  of  M/s.  

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Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial Tax Officer and  

others – AIR 1978 SC 449, a seven-judge Bench of this Court held  

that  transction  between  the  rice-millers  on  one  hand  and  the  

wholesalers  on  the  other  hand  constituted  “sales”  within  the  

meaning of Bengal Finance (Sales Tax) Act, 1941 and sales tax was  

leviable  on  the  turnover.   In  that  case  Vishnu  Agencies  was  a  

licensed stockist of cement who was permitted to stock cement in  

its godown, to be supplied to persons in whose favour allotment  

orders are issued, at the price stipulated and in accordance with  

the conditions of permit issued by the authorities concerned.  In  

that  case  Vishnu  Agencies  supplied  cement  to  various  allottees  

from time to time in pursuance of the allotment orders issued by  

Appropriate Authorities and in accordance with the terms of  the  

licence obtained by it for dealing in cement.  It  was assessed to  

sales tax by CTO in respect of the said transactions.  The main  

contention of Vishnu Agencies was the measures adopted to control  

the supply of cement left no option to parties to bargain; that, the  

transaction in question constituted a “compulsory sale”;  that, by  

virtue  of  the  provisions  of  the  Cement  Control  Act  and  Cement  

Licensing  Order  no  volition  or  bargaining  power  was  left  to  the  

assessee  and  since  there  was  no  element  of  mutual  consent  

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between the stockist  and the allottee,  the transaction was not a  

“sale” within the meaning of the Sales Tax Act.  This argument was  

rejected by this Court observing that the limitations placed on the  

normal rights of the dealer and consumers to supply and obtain the  

goods  by  the  Cement  Control  Order  do  not  militate  against  the  

position  that  eventually,  the  parties  must  be  deemed  to  have  

completed the transactions under an agreement by which one party  

bound itself to supply the stated quantity of goods to the other at a  

price  not  higher  than  the  notified  price  and  the  other  party  

consented  to  accept  the  goods  on  the  terms  and  conditions  

mentioned in  the order  of  allotment  issued in  its  favour  by  the  

competent authority.  It was held that offer and acceptance need  

not always be in an elementary form, nor does the Law of Contract  

or Sale of Goods Act require that the consent to a contract must be  

express.  It is commonplace that offer and acceptance can be spelt  

out from the conduct of the parties.  This is because law does not  

require  offer  and  acceptance  to  conform  to  any  set  pattern  or  

formula.

15. As can be seen from the discussion hereinabove, two points  

arise  for  determination,  namely,  whether  appellant  acted  as  an  

agent of the Government in the subject transaction and the real  

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nature  of  payment  received by the said  Society  under  the Head  

“commission”.  Both the points stand covered by the judgment of  

the Supreme Court in A. Venkata Subbarao, etc. v. The State of  

Andhra  Pradesh,  etc.  –  AIR  1965  SC  1773.   In  that  case,  

appellants  were  owners  of  rice  mills  in  the  Districts  of  West  

Godavari,  East  Godavari  and  Krishna.   Appellant  was  in  the  

business  of  purchasing  paddy  from  producers,  milling  their  

purchase in their mills and selling the rice so milled to wholesale  

dealers in rice.  This was prior to 1946-47 when severe restrictions  

were imposed in the State of Madras on the trade in foodgrains in  

order to maintain their supplies and ensure proper and equitable  

distribution of foodgrains to the community.  Accordingly, in 1946,  

pursuant  to  the  power  vested  in  the  State  Government  under  

Essential Supplies (Temporary Powers) Act, 1946, two Orders came  

to  be  issued,  namely,  Foodgrains  procurement  Order,  1946 and  

Foodgrains Licensing Order,  1946 which prohibited all  trades in  

foodgrains including rice  except  by those who held licences  and  

subject only to the terms and conditions of the licence.  A. Venkata  

Subbarao was one such licensee who was authorized to deal in rice  

under the Licensing Order, 1946.  It may be mentioned that the  

prices at which paddy could be procured as well as the prices at  

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which the rice could be sold by the licensed dealers, were fixed by  

Orders,  notifications  issued  under  the  Essential  Supplies  Act.  

While  A.  Venkata  Subbarao  (appellant)  was  carrying  on  his  

business subject  to  the  provisions of  the  above  two Orders,  the  

prices at which he could sell rice which he milled out of the paddy  

procured by him stood enhanced on three different occasions – July  

1947, December 1947 and November 1948, and on each occasion  

he was directed to submit a statement indicating the stock of paddy  

and rice held by him on the day just prior to the date on which the  

increased prices came into effect and on that basis the Government  

directed A. Venkata Subbarao to pay a “surcharge” on the amount  

representing the increase on the stock held by him.  This levy of  

“surcharge” became the point of challenge in the suit filed by A.  

Venkata  Subbarao  in  the  trial  court.   The  principal  point  in  

controversy  between  the  parties  related  to  the  precise  legal  

relationship between the procuring agent and the Government.  It  

was found by the Supreme Court that the procuring agent had to  

buy the grain from the producers with their own money.  The grain  

purchased was transported to the godowns at their cost and stored  

by them at their own risk.  The rent of the godown(s) was also paid  

by the procuring agent.  If there was any depreciation in the quality  

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or  there  was  any  shortfall  owing  to  driage,  action  of  rodents,  

insects, moisture, theft, etc. the loss would of the procuring agent.  

It  was also further found by the Court that the procuring agent  

could pledge his goods to raise loans from banks and lastly the  

procuring  agent  had  a  right  to  sell  the  grain  to  the  person  

authorized by and at the price not exceeding the price fixed under  

the  notification  and Orders  issued  from time to  time.   In  other  

words, sales at free-market rate were prohibited.  On the basis of  

the aforestated circumstances, this Court held that the property in  

the  goods  purchased  by  the  procuring  agents  vested  in  them.  

However, it was urged on behalf of the State that the purchase and  

sale of commodities by the procuring agent/dealer was on behalf of  

the Government.  In this connection, reliance was placed on the  

agreement, executed by the procuring agent, in which he undertook  

to purchase paddy from the areas allotted by the Government; he  

undertook to store the paddy or rice in a proper godown for which  

he was responsible for the safe custody of the grain and that the  

procuring  agent  further  undertook  to  sell  the  stock  of  rice  to  

persons nominated by the Government.  On these considerations it  

was urged on behalf of the Government that A. Venkata Subbarao  

was an “agent” of the Government to buy paddy, to store the grain  

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purchased on behalf of the Government in secure godowns and to  

sell  the  goods  purchased  on  behalf  of  the  Government  to  such  

persons  nominated  by  the  Government.   It  was,  therefore,  

submitted that A. Venkata Subbarao was an “agent” who on one  

hand indemnified the Government from any loss in the business of  

agency  of  purchase  and  storage  and  sale  on  behalf  of  the  

Government and on the other hand he was bound to make over to  

the  Government  such  profits that  he  might  obtain  out  of  the  

business of the agency.  It was the further case of the Government  

that the difference between the procurement price and the price  

which  was  fixed  for  sale  constituted  “commission”  or  

“remuneration” which would belong to the agent.  In other words,  

two questions arose for determination before this Court, namely,  

the precise legal relationship between the procuring agent/dealer  

on one hand and the Government on the other hand as also real  

nature  of  payment  received  by  A.  Venkata  Subbarao.   It  is  

interesting to note one more argument advanced on behalf of the  

Government.   It  was  urged  that  the  margin  between  the  

procurement price and the price at which the rice could be sold  

constituted “remuneration”.  This argument found favour with the  

High Court.  However, it was rejected by this Court and while doing  

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so this Court observed as follows:

“29. Before proceeding further,  it  is  necessary to clarify  two matters.  First,  though  Mr.  Agarwala  referred  to  the  margin between  the  procurement price and the price at which the procured paddy or rice could  be sold as "remuneration", a contention which found favour with the High  Court, we do not find it possible to accept the submission.  There was a  similar margin between the price at which a wholesaler could buy rice and  that  at  which he could  sell and similarly,  it  was  the case of  the  retail  dealer,  but  it  is  hardly  possible  to  call  these  as  "remuneration".  This  margin or difference in the purchase and sale price was necessary in order  to induce any one to engage in this business and was of the essence of a  control  over  procurement  and  distribution  which  utilised  normal  trade  channels.  It would, therefore, be a misnomer to call it "remuneration" or  "commission" allowed to an agent and so really no argument can be built  on it in favour of the relationship being that of principal and agent.”  

(emphasis supplied)

16. Coming to the question of agency, this Court in the case  

of  A.  Venkata Subbarao (supra) held  that  the  Government  can  

derive  no  advantage  from  the  works  of  “Procurement  agent”  

mentioned  in  the  Procuring  Order,  1946  whether  from  the  

agreement  executed  by  such  procuring  agent.   This  Court  

specifically vide paras 32 to 35 dismissed the argument advanced  

on behalf of the Government that A. Venkata Subbarao (appellant)  

had acted as an “agent” on behalf of the Government.  We quote  

hereinbelow paras 32 to 35 which read as under:

“32. No  doubt,  the  description  in  the  Procurement  Order and  the  agreement as "agent" is of some value, but is not decisive and one has to  gather  the  real  relationship  by  reference  to  the  entire  facts  and  circumstances. To start with, it is clear that as the purchases were made by  

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the procuring agents out of their own funds, stored at their own cost, the  risk of any deterioration, driage or shortfall fell on them, they were the full  owners of  the  paddy procured  and  they  pledged  the  goods  for  raising  funds.  This  aspect  of  their  full  ownership  of  the  grain  purchased  is  highlighted  by  the  fact  that  they  entered  into  agreements  with  the  Government itself to sell the rice with them to District Supply Officers at  the  controlled  market  prices.  Any contention  that  the  procuring  agents  were not full owners of paddy or rice procured by them must manifestly  fail  as being inconsistent  with the basis  upon which this agreement by  them to sell Government was entered into. If further confirmation were  needed it is provided by the fact that  on the sales by procuring agents to  Government under their Supply agreement sales-tax was payable which on  the terms of the Madras General Sales Tax Act in force at the relevant  time  would  not  have  been  payable  if  the  paddy and rice  were  that  of  Government and which they were holding merely as commission agents  on behalf of the Government.  

33. Next, it may be pointed out that these plaintiffs held licences under the  Licensing  Order  under  the  Madras  Foodgrains  Control  Order,  1947 in  order that they might deal in the rice in their possession. In the licence  which  was  granted  to  the  plaintiffs  which  was  in  statutory  form  the  foodgrains in their possession were referred to  as their stocks. It may be  pointed  out  that  the  form  of  the  licence  granted  to  procuring  agents,  wholesalers and retailers was the same.  

34.  Learned Counsel urged that even assuming that the property in the  goods purchased passed to the procuring agents that would not by itself  negative the relationship of principal and agent. For this purpose reliance  was placed on Article 76 of Bowstead on Agency which runs :  

"Where  an  agent,  by  contracting  personally,  renders  himself  personally liable for the price of goods bought on behalf of his  principal, the property in the goods, as between the principal and  agent, vests in the agent, and does not pass to the principal until he  pays for the goods, or the agent intends that it shall pass."  

He also referred us to certain decisions of the Madras and Punjab High  Courts in which the principle laid down in this passage had been applied.  We do not consider it necessary to examine this question in its fulness  because  we are satisfied  that  the  procuring agent,  when he bought  the  goods, was purchasing it for himself and not on behalf of the Government.  The acceptance of the argument addressed on this aspect would mean that  if the procurement agent so desired he might contract in the name of the  principal, namely, the Government and thus establish privity between the  Government and the purchaser and make the Government liable to pay for  

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the price of the goods at which he had purchased. This situation would, in  our opinion, be unthinkable on the scheme of the Procurement Orders and  generally of the Food Control Orders under which the procurement and  distribution of foodgrains was placed under statutory control.  What the  Government desired and what was implemented by these several orders  was  merely  the  regulation  and  control  of  the  trade  in  foodgrains  by  rendering every activity connected with it subject to licensing and to the  directions to be issued in pursuance thereof and not directly to engage in  the trade in foodgrains.  

35. The respondent can derive no advantage from the obligation on the  part  of  the  procuring  agents  to  store  the  paddy  or  rice  properly  -  a  stipulation on which Mr. Agarwala laid considerable stress - and this for  two reasons : (1) The purpose of the clause was to ensure that there was no  loss of foodgrains which were then a scarce commodity.  That this is so  would  be  apparent  from the  terms  of  section  3(2)(d)  of  the  Essential  Supplies  Act which was effectuated by clause 9 of the licence granted  under the Madras Foodgrains Control Order,  1947 which applied to all  dealers in foodgrains, be they procuring agents (who also, as stated earlier,  had to obtain and obtained these licences), wholesalers or retailers. This  clause reads :  

"9.  The  licensee  shall  comply  with  any directions  that  may  be  given  to  him by the  Government  or  by  the  officer  issuing  this  licence in regard to the purchase sale or storage for sale of any of  the foodgrains mentioned in paragraph (1).............."  

The second reason is that the agreement executed by the procuring agents  in which this clause as regards storage in proper godowns and undertaking  responsibility for the safe-custody of the grain occurs, is one which was a  form  intended  for  execution  not  merely  by  procuring  agents  but  also  authorised  wholesale  distributors i.e.,  those  who  purchased  their  requirements from procuring agents; admittedly  the authorised wholesale  dealers were not "agents" and the fact that this condition was insisted on  even in their case is clear proof that it has no relevance to the question  now  under  discussion.  If  therefore,  appears  to  us  that  the  expression  "agent" was used in the Intensive Procurement  Order as well  as in the  agreements merely as a convenient expression to designate this class of  dealers.”  

17. Applying the judgment of this Court in the case of A. Venkata  

Subbarao (supra) we hold that the High Court was right in coming  

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to the conclusion that the assessee was storing the commodities in  

question in its godowns as part of its own trading stock, hence it  

was not entitled to claim deduction for such margin under Section  

80P(2)(e) of the 1961 Act.   

18. Before concluding, we may refer to the judgment of this Court  

in  the case  of  Commissioner  of  Income-tax,  Madras  v.  South  

Arcot District Co-operative Marketing Society Ltd. – (1989) 176  

ITR 117 (SC).  This judgment is heavily relied upon by the counsel  

appearing on behalf of the appellant.  In that case the facts were as  

follows.   Assessee  was  a  co-operative  society  under  Madras  Co-

operative Societies Act.  In the previous year ending June 30, 1960,  

the  Society  entered  into  an  agreement  with  the  Government  of  

Madras under which it agreed to hold ammonium sulphate stock of  

the  Government  of  Madras  and  it  agreed  to  store  the  stock  on  

behalf of the Government of Madras and to maintain a true and full  

account  for  the stocks received and returned every month for  a  

commission of Rs.5 per ton on the quantity of fertilizer issued by  

the assessee from the stock.  The assessee received Rs.31,316  on  

this account.  The said sum of Rs.31,316 was originally included in  

its turnover, in the case of assessment proceedings, the assessee  

claimed exemption under Section 14(3)(iv)  of the Income-tax Act,  

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1922.   The  ITO  held  that  the  assessee  was  not  entitled  to  

exemption on the ground that the said amount of Rs.31,316 had  

been  received  for  services  rendered.   The  assessee  appealed  to  

CIT(A)  who  agreed  with  the  ITO  stating  that  the  said  amount  

received was for services rendered and as such the assessee was  

not  entitled  to  exemption.   Before  the  Tribunal  the  assessee  

contended  that  the  receipt  was  for  letting  out  its  godown  for  

storage,  and,  therefore,  the  said  receipts  came  directly  under  

Section 14(3)(iv) of the 1922 Act.  The Revenue contended that the  

receipts  from  letting  of  godowns,  etc,  to  members  alone  were  

exempt and the receipts in the present case being on a commercial  

basis will not fall within the scope of the exemption.  The Tribunal,  

however, held that the assessee was entitled to exemption under  

Section  14(3)(iv)  by  observing  that  the  agreement  with  the  

Government of Madras clearly indicated that the receipts were for  

letting of the godowns.  The Tribunal further observed that some  

service element was there which constituted part of the receipts but  

it  was  an  insignificant  part  of  the  whole  amount  of  Rs.31,316.  

Hence, the Society was entitled to exemption.  The Madras High  

Court analysed the agreement between the parties and came to the  

conclusion that the assessee was a stock-holder who had agreed to  

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hold ammonium sulphate stock of the Government of Madras and  

safely  store the same on their  behalf  and to  issue the same on  

certain terms and conditions.  Under the Agreement, the fertilizers  

bags had to be stocked in a manner as directed by the officers of  

the Government.  The stocking and storage of the bags had to be  

done in the manner indicated by the Government.  The assessee  

had to maintain particulars of fertilizers received, released and held  

in stock.   The assessee had to engage at its own cost,  godown-

keepers and clerks to properly and efficiently carry on its duties  

under the agreement.  The assessee was to get a commission of  

Rs.5 per ton of the quantity of fertilizers issued from the stocks on  

the  instructions  of  the  Government.   On  the  analysis  of  the  

agreement,  the  High  Court  came  to  the  conclusion  that  the  

assessee was a mere stock-holder and that the sum of Rs.5 per ton  

shown as commission from the Government was only for letting of  

godowns and though some services provided to were incidental to  

such storage, the service element and payment thereof constituted  

an  insignificant  portion  of  the  amount  received.   In  the  

circumstances, the High Court upheld the view of the Tribunal that  

the receipt of Rs.31,316 was exempt under Section 14(3)(iv) of the  

1922 Act.  This view was upheld by this Court.   

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19. In  our  view  the  judgment  of  this  Court  in  South  Arcot  

(supra) has no application to the facts of the present case.  Firstly,  

in  every  case  of  this  nature  one  has  to  examine  the  contract  

between the parties. One has also to examine the conduct of the  

parties.  In the case before us we are concerned with Rajasthan  

Foodgrains & Other Essential Articles (Regulation of Distribution)  

Order, 1976.  In the present case we are concerned with statutory  

or compulsory sales.  Each contract has to be interpreted on its  

own  terms.   In  the  case  of  South  Arcot  (supra) statutory  or  

compulsory sale was not in issue.  Secondly, in the case before us  

we have a situation in which there are two sales.  The first sale is  

between the Government (through FCI) and the appellant-society,  

and the second sale is between the appellant-society and Fair Price  

Shop. The former is the condition precedent to the latter.   That  

situation  was  not  there  in  the  case  of  South  Arcot  (supra).  

Thirdly, in the case before us issue price is set-off against the sale  

price  which clearly  indicates  that  the netting/difference between  

the two prices  constituted  receipt  on a commercial  basis  or  net  

profit.  Lastly netting/difference also indicated that the appellant  

had treated the stock as its own trading stock as correctly held by  

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the impugned judgment.  Therefore, in our view the judgment of  

this Court in the case of South Arcot (supra) will not apply to the  

facts  of  the  present  case  and consequently  the  appellant  is  not  

entitled to exemption/special deduction under Section 80P(2)(e) of  

the 1961 Act.

20. For  the  aforestated  reasons,  we  find  no  infirmity  in  the  

impugned judgment, and, accordingly we hereby dismiss the civil  

appeal of the appellant-assessee with no order as to costs.

……………………………J.                                    (S.H. Kapadia)

……….………………….J.                                     (Aftab  Alam)   

New Delhi; July 16, 2009.

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