1971 (9) TMI 160 - SC - VAT and Sales Tax

Supreme Court rules in favor of appellant-assessee in society's cotton purchase case

The Supreme Court ruled in favor of the appellant-assessee, setting aside the High Court's judgment. It determined that the society did not purchase ... Whether on the facts and in the circumstances of the case, the transactions are purchases of cotton by the society from its members? Held that:- Appeal allowed. Therein this court on an examination of various clauses in the agreement held that the relationship between the assessee and its representatives was that of agent and principal and not of vendors and purchasers. Set aside the judgment of the High Court and discharge the answer given by the High Court and answer the question referred to the High Court in the negative and in favour of the assessee. Issues Involved:1. Whether the transactions in question constituted purchases of cotton by the society from its members.2. Examination of the nature of the agreement between the society and its members.3. Interpretation of relevant bye-laws of the society.4. Applicability of legal principles and precedents to determine the nature of the transactions.Issue-wise Detailed Analysis:1. Whether the transactions in question constituted purchases of cotton by the society from its members:The primary issue was whether the transactions constituted purchases of cotton by the society from its members. The High Court had answered this question affirmatively, leading to the appeal. The Supreme Court examined the nature of the transactions and the relevant bye-laws of the society to determine if the society acted as an agent or a purchaser.2. Examination of the nature of the agreement between the society and its members:The Court emphasized that the nature of an agreement, whether it is an agency agreement or an agreement of sale, depends on the terms of the agreement. The terms must be scrutinized in light of the surrounding circumstances. The Court referred to the decision in Rohtas Industries Ltd. v. State of Bihar, which held that the true nature of a transaction must be ascertained from the covenants of the agreement and not merely from what the parties choose to call it.3. Interpretation of relevant bye-laws of the society:The Court analyzed the bye-laws of the society, which were translated into English. The society, known as Khedut Sahakari Ginning and Pressing Society Ltd., Etola, was a co-operative society of farmers primarily constituted for ginning and pressing cotton. The relevant bye-laws indicated that the society's object was not to purchase or sell cotton or cotton seeds on its own behalf. Instead, the society was to gin, press, and sell the produce of its members as their collective property.Bye-laws Analysis:- Bye-law 2: Outlined the objects of the society, which included ginning, pressing, and selling cotton for its members, advancing money against goods, and distributing profits to members.- Bye-law 37: Empowered the managing committee to fix rates for ginning and pressing, lend money against goods, and arrange for the sale of members' agricultural produce.- Bye-law 45(1): Indicated that members merely entrusted their goods to the society, which could advance loans up to 75% of the estimated value of the goods on the security of those goods.- Bye-law 48: Stated that the goods of all members would be pooled, graded, and sold, and the proceeds distributed among the members after deducting society dues and charges.- Bye-law 49: Referred to goods sold through the society, not the society's own goods.- Bye-laws 52 and 54: Authorized the society to sell members' goods in outside markets and hedge goods by making forward sales.- Bye-laws 72 and 73: Dealt with the society's profits from its own sources of income, not from the sale of members' goods.The Court concluded that none of the bye-laws indicated that the society had purchased the goods from its members. Instead, the society functioned as an agent for its members, pooling and selling their goods collectively.4. Applicability of legal principles and precedents to determine the nature of the transactions:The Court referred to various legal principles and precedents to determine the nature of the transactions. The decision in Rohtas Industries Ltd.'s case was distinguished as it involved different terms and conditions. The Court agreed with the Mysore High Court's decision in Sherule Fazle and Co. v. Commercial Tax Officer, which held that pooling and selling goods by an agent did not change the nature of the agency relationship.The Court also referred to the decision in Hafiz Din Mohd. Haji Abdulla v. State of Maharashtra, which supported the view that the relationship between the society and its members was that of agent and principal. The agreements considered in other cases cited by the State were found to be different in nature from the bye-laws in this case.Conclusion:The Supreme Court allowed the appeal, set aside the judgment of the High Court, and answered the question referred to the High Court in the negative, in favor of the assessee. The appellant-assessee was entitled to its costs both in the Supreme Court and the High Court. The Court concluded that the society had not purchased cotton or cotton seeds from its members but acted as an agent for its members in selling their produce.