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PETITIONER: BROACH DISTT. CO-OPERATIVE COTTON SALESGINNING & PRESSING SO

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, AHMEDABAD.

DATE OF JUDGMENT26/04/1989

BENCH: PATHAK, R.S. (CJ) BENCH: PATHAK, R.S. (CJ) KANIA, M.H.

CITATION:  1989 AIR 1493            1989 SCR  (2) 720  1989 SCC  (2) 679        JT 1989 (2)   267  1989 SCALE  (1)1138  CITATOR INFO :  RF         1992 SC1622  (4)

ACT:     Income        Tax       Act,        1961:        Section 81(i)(c)--Assessee--Co-operatire  Society--Income from  gin- ning and pressing--Whether exempt from tax.

HEADNOTE:     The assessee, a co-operative society, was rendering  the service of ginning and pressing raw cotton received from its members and marketing the finished product on their  behalf. The assessee charged the members a certain amount by way  of ginning and pressing charges and further charged  commission for  the  sale of the finished product. For  the  assessment years  1961-62  to 1963-64, the assessee  claimed  that  the receipts  from  the  ginning and  pressing  activities  were exempt  under section 81(i)(c) of the Income Tax  Act,  1961 (as it stood then) which provided that income-tax shall  not be  payable  by  a co-operative society in  respect  of  the profits and gains of business carried on by it, if it was  a society engaged in the marketing of the agricultural produce of its members.     The  Income Tax Officer declined to accept the claim  on the  ground  that  the assessee had been  carrying  out  the process  of ginning and pressing with the aid of power.  The Appellate Assistant Commissioner confirmed the orders of the Income  Tax  Officer.  The Appellate  Tribunal  allowed  the second  appeal of the assessee holding that the ginning  and pressing activities were to be regarded as an integral  part of  the marketing activity. The High Court,  while  deciding the  reference in favour of the Revenue, observed  that  the assessee carried on ginning and pressing of cotton with  the aid of power, and even if those activities were regarded  as ancillary  or  incidental to its marketing  .activity,  they would not come within the category of exempted activities in view of the proviso to the section. Allowing the appeals, this Court,     HELD: (1) Ginning and pressing was part of the  integral process  of  marketing.  It was an  activity  incidental  or ancillary to marketing, 721

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which  included the ginning and pressing of raw  cotton  and was not confined to selling activity alone. The members  did not  take back the cotton after it was ginned  and  pressed. All  the raw cotton so treated was marketed by the  assessee on behalf of its members to the outside world and not to its members. [723G-H; 724A]     Addl.   Commissioner of Income-Tax,  Karnataka v.  Ryots Agricultural  Produce Co-operative Society Ltd., [1978]  115 ITR  709; Commissioner of Income-Tax, Gujarat IV  v.  Karjan Co-op. Cotton Sale, Ginning & Pressing Society Ltd.,  [1981] 129 ITR 821, referred to.     (2)  The object of s. 81(i) of the Income Tax Act,  1961 was  to  encourage and promote the  growth  of  co-operative societies,  and consequently a liberal construction must  be given to the operation of that provision. [724A-B]     (3) The proviso to s. 81(i) operates to exclude from the exemption those activities which can be regarded as separate and  distinct from the activities enumerated in clauses  (a) to (f) of s. 81(i). If the activity in question is  inciden- tal or ancillary to one of the activities mentioned in those clauses, the proviso will not apply. [724B]     (4)  The  assessee is entitled to the exemption  of  the profits  and gains derived from the activity of  the  entire business of ginning and pressing of cotton and marketing  it by  virtue of cl. (c) of s. 81(i) of the Incometax Act,  and the High Court erred in holding to the contrary. [724F-G]

JUDGMENT:     CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5 135 15 (NT) of 1975.     From  the  Judgment  and Order dated  24.9.1973  of  the Gujarat High Court in Income Tax Reference No. 31 of 1971.     T.A.  Ramachandran, Mrs. A.K. Verma and D.N. Mishra  for the Appellant.     C.M.  Lodha,  K.C.  Dua and Ms. A.  Subhashini  for  the Respondent. The Judgment of the Court was delivered by     PATHAK, CJ. These appeals by certificate granted by  the High  Court of Gujarat are directed against the judgment  of the High Court 722 answering  the following question in favour of  the  Revenue and against the assessee:               "Whether,  on  the facts and  in  the  circum-               stances of the case, the income of the Society               from  ginning  and pressing was  exempt  under               section 81(i)(c) of the Income-Tax Act,  1961,               as  it  stood prior to its  amendment  on  1st               April, 1968?"     The  assessee  is a.  co-operative  society  constituted under  the  Cooperative Societies ACt. The  objects  of  the society  intend  that it should press cotton  and  pack  the bundles for its individual members as well as other  custom- ers,  to Use its machinery for any useful work of  its  mem- bers,  and to sell raw cotton seeds and  other  agricultural products.  The  assessee possesses a  ginning  and  pressing factory  to cater to the needs of its members. It  gets  raw cotton  from the members, and ginns and presses  the  cotton for  marketing on behalf of its members. For  rendering  the services  of ginning and pressing before selling the  goods, the assessee charges the members a certain amount by way  of ginning and pressing charges. It also charges commission for the sale of the finished product.

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   In  the  course of assessment for the  assessment  years 1961-62  to 1963-64, the assessee claimed that the  receipts from  the ginning and pressing activities were exempt  under s.  81(i)(c) of the Income Tax (as it stood then).  The  In- come-Tax  Officer, however, declined to accept the claim  on the  ground  that  the assessee had been  carrying  out  the process  of ginning and pressing with the aid of power.  The Appellate  Assistant  Commissioner confirmed orders  of  the Income  Tax Officer. In second appeal the Income Tax  Appel- late  Tribunal held that having regard to  the  circumstance that  the receipts were from members only, that there was  a general  market for ginning and pressing cotton only and  no evidence appeared of any dealing in raw cotton, the  ginning and  pressing activities were to be regarded as an  integral part  of the marketing activity, and therefore the  receipts from those activities were not liable to tax by virtue of s. 81(i)(c).  At  the  instance of the  Revenue  the  Appellate Tribunal referred the-question of law set out earlier to the High Court of Gujarat for its opinion.     For  the  purpose of contention raised before  the  High Court, and again before us the following provisions of s. 81 seem relevant:               "81. Income of Co-operative societies  Income-               tax shall               723               not be payable by a co-operative society--                       (i)  in  respect of  the  profits  and               gains of business carried on by it, if it is--                       (c) a society engaged in the marketing               of the agricultural produce of its members; or                       (e) a society engaged in the  process-               ing  without the aid of power of the  agricul-               tural produce of its members; or               Provided  that, in the case of a  co-operative               society  which is also engaged  in  activities               other  than  those mentioned in  this  clause,               nothing  contained herein shall apply to  that               part of its profits and gains as is attributa-               ble to such activities and as exceeds  fifteen               thousands rupees."     The  High Court proceeded on the view that if a  Society carries on certain activities which are exempted  activities according  to cls. (a) to (f) of s. 81(i) and certain  other activities  which  are not exempted, the profits  and  gains attributable to such non-exempted activities must necessari- ly  be  taxed.  The High Court observed  that  the  assessee carried  on ginning and pressing of cotton with the  aid  of power,  and even if those activities are regarded as  ancil- lary or incidental to its marketing activity they would  not come  within the category of exempted activities in view  of the  proviso, and therefore they would have to be taxed.  We find  ourselves unable to accept the view taken by the  High Court.  It  is apparent that the ginning, and  pressing  was part of the integral process of marketing. It was an activi- ty  incidental or ancillary to the marketing of the  produce of  its members. The ginning and pressing of the raw  cotton was  never regarded as a distinct process. When they  deliv- ered  the raw cotton to the assessee for marketing,  ginning and  pressing  was  regarded as part of  that  process.  The members did not take back the cotton after it was ginned and pressed.  They paid only the costs of ginning and  pressing. All the raw cotton s6 724 treated  by the assessee was received from its members,  and it  was only such’ cotton of its members which was  marketed

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by the assessee. The sale of the cotton was effected by  the assessee  to the outside world and not to its  members.  The object  of s. 81(i) was to encourage and promote the  growth of  cooperative societies, and consequently a  liberal  con- struction must be given to the operation of that  provision. The proviso to s. 81(i) operates to exclude from the  exemp- tion those activities which can be regarded as separate  and distinct  from the activities enumerated in clauses  (a)  to (f)  of s. 81(i). If the activity in question is  incidental or  ancillary  to one of the activities mentioned  in  those clauses, the proviso, in our opinion, will not apply. We may refer in this connection to the observations of the Karnata- ka High Court in Addl. Commissioner of Income-Tax, Karnataka v. Ryots Agricultural Produce Co-operative Marketing Society Ltd.,  [1978] 115 ITR 709 where reference has been  made  to the broad meaning of the expression ’marketing’ appearing in cl. (c) of s. 81(i), and it has been explained that in order to  make agricultural produce fit for marketing the  activi- ties  involved in enabling that to be done must be  regarded as  involved in the activity of marketing itself.  Reference may  also be made to Commissioner of Income-tax, Gujarat  IV v.  Karjan  Co-op. Cotton Sale, Ginning &  Pressing  Society Ltd.,  [1982] 129 ITR 821 where the concept  of  ’marketing’ was given a meaning which included the ginning and  pressing of  raw cotton and was not confined to the selling  activity alone.     An  attempt was made by learned counsel for the  Revenue to  raise  the point that ginning and pressing  into  cotton bales  changed  the character of the cotton  and  therefore, what  was marketed was not the agricultural produce  of  the members  of the assessee. This point was not raised  at  any earlier  stage by the Revenue and cannot be permitted to  be taken now.     We  are of opinion that the assessee is entitled to  the exemption of the profits and gains derived from the activity of the entire business of ginning and pressing of cotton and marketing  it  by  virtue  of cl. (c) of  s.  81(i)  of  the Income-tax Act, and that the High Court erred in holding  to the contrary.     In  the result the appeals are allowed and the  question referred  by the Income-tax Appellate Tribunal to  the  High Court must be answered in the affirmative, in favour of  the assessee  and against the Revenue. The assessee is  entitled to its costs. L S.S.                                  Appeals allowed. 725