1948 (4) TMI 2 - HC - Income Tax

Co-operative society selling tea to members liable for agricultural income tax despite mutuality principle defense

The Privy Council HC held that a co-operative society incorporated under the Industrial and Provident Societies Act 1893 was not exempt from Assam ... Liability to Assam Agricultural Income-tax for the cultivation and/or manufacture of tea at its Deckiajuli Estate, sold to its members - co-operative society incorporated under the Industrial and Provident Societies Act of 1893 - no profit accrued by sales as the prices obtained were below the cost of production - principle of mutuality - principle of Style's case - HELD THAT:- As the accompanying statement of facts merely stated that the tea produced by the appellant Society (apart from the dust tea) was sold to its members and said nothing of the price, it can be inferred that the Board member intended to submit the question whether a business carried on by a society or company, whether incorporated or not, which cultivates produce on its own land and sells it exclusively to its own members, is by its nature incapable of begetting profits as that term is understood in the Assam Agricultural Income-tax Act or, since there is no distinction on this point, the Indian or the United Kingdom Income-tax Acts. The statement of facts shows that in the ordinary sense of the word profits might well result, for the proceeds of the sales might and probably did exceed the expenses of production and management and the interest on loans; that profits would result was in fact contemplated and there are rules providing for the application of the net profits. These rules are made under the Industrial and Provident Societies Act, 1893, Section 10 which contemplates that a society registered under the Act will be a profit-making concern and, therefore, requires that all societies registered under the Act shall make such rules. The application of net profits which may be made under the rules is in essentials not different from the application of net profits which might be made by any trading company, and it need not result in the distribution of all profits among the members of the society. Thus any net profits applied under heads (a), (c), (d) and (f) would be retained by the appellant Society. It is expedient, in view of the defects of the question, to answer it not by a simple affirmative, but by declaring that the Society is not exempt from liability to Assam agricultural income-tax in respect of profits from the sale to its members of tea cultivated or manufactured at its Deckiajuli Estate in the Province of Assam. Their Lordships will, therefore, humbly advise His Majesty that the judgment of the High Court should be varied by the substitution for an affirmative answer to the question of this following answer:― 'The Society is not exempt from liability to Assam agricultural income-tax in respect of profits from the sale to its members of tea cultivated or manufactured at its Deckiajuli Estate in the Province of Assam' and that subject thereto the appeal should be dismissed. Appeal dismissed. Issues Involved:1. Liability to Assam Agricultural Income-tax2. Nature of the Society's Business Operations3. Applicability of Mutual Trading Principles4. Interpretation of the Assam Agricultural Income-tax Act and Relevant Rules5. Relevance of Previous Case LawDetailed Analysis:1. Liability to Assam Agricultural Income-tax:The core issue was whether the Society is chargeable to Assam agricultural income-tax for the cultivation and/or manufacture of tea at its Deckiajuli Estate, sold to its members. The High Court answered affirmatively, indicating that the Society is not exempt from such liability. The Assam Agricultural Income-tax Act applies to all agricultural income derived from land in Assam, and agricultural income is defined as income derived from land used for agricultural purposes.2. Nature of the Society's Business Operations:The Society, incorporated in the UK under the Industrial and Provident Societies Act, 1893, grows and manufactures tea at its Deckiajuli Estate. The tea, except for inferior grades sold locally, is sold to its two members at market rates. The Society's operations include receiving advances from members to cover production costs, selling the tea at market prices, and applying net profits according to specific rules. The dual relationship of creditor-debtor and buyer-seller between the Society and its members was genuine, and the Society genuinely sold tea at market prices, potentially generating profits.3. Applicability of Mutual Trading Principles:The Society argued that it operates as a mutual trading concern, similar to mutual insurance companies, where members contribute to a common fund and receive surplus funds back, implying no taxable profits. However, the judgment clarified that mutual trading principles do not apply to an association that grows produce on its own land and sells it, even if exclusively to its members. The Society's business model, which closely resembles a profit-making concern, does not align with mutual trading principles as established in Styles' case.4. Interpretation of the Assam Agricultural Income-tax Act and Relevant Rules:Under the Assam Agricultural Income-tax Act, agricultural income-tax is charged on the total agricultural income of the previous year. The Act's scheme taxes 60% of income derived from the sale of tea grown and manufactured by the seller in Assam. The Society's argument that it should be exempt from tax because it distributes tea only to its members was rejected. The judgment emphasized that the Society's operations could generate profits, taxable under the Act.5. Relevance of Previous Case Law:The Society relied on a previous Madras High Court decision (English and Scottish Joint Co-operative Wholesale Society, Ltd. v. Commissioner of Income-tax, Madras) which held that the Society was a purely mutual co-operative society making no profits. However, the present judgment disagreed, noting that the Society's operations and rules indicate it is a trading concern deriving profits. The judgment also referenced Styles' case and other relevant cases, concluding that the mutual trading principle does not apply to the Society's business model.Conclusion:The judgment concluded that the Society is not exempt from liability to Assam agricultural income-tax in respect of profits from the sale to its members of tea cultivated or manufactured at its Deckiajuli Estate. The appeal was dismissed, and the Society was ordered to pay the costs of the appeal. The judgment of the High Court was varied to state explicitly that the Society is liable to tax, rather than simply affirming the question.