Co-op society denied tax exemption on fertilizer commission income. Tribunal decision overturned.

The High Court held that the co-operative society was not entitled to exemption from income tax on the commission earned from handling and distributing fertilizers as the income did not stem from letting godowns for storage. The Tribunal's decision granting the exemption was overturned, and the society was directed to pay income tax on the commission earned. The court instructed the society to specify the exemption claim details to the tax authorities. The assessee was allowed to seek a certificate for appealing to the Supreme Court.

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Issues Involved:
1. Interpretation of Section 80P(2)(e) and Section 81(iv) of the Income-tax Act, 1961.
2. Eligibility for exemption from income-tax on commission earned by a co-operative society on handling of commodities.

Issue-wise Detailed Analysis:

Issue 1: Interpretation of Section 80P(2)(e) and Section 81(iv) of the Income-tax Act, 1961
The core issue revolves around the interpretation of Section 80P(2)(e) and Section 81(iv) of the Income-tax Act, 1961. Section 81, relevant for the assessment year 1967-68, was substituted by Section 80P for the assessment year 1968-69 and thereafter. Both sections deal with the exemption of income derived by a co-operative society from the letting of godowns or warehouses for storage, processing, or facilitating the marketing of commodities.

The Gujarat High Court in Surat Vankar Sahakari Sangh Ltd. v. CIT [1971] 79 ITR 722 interpreted Section 81(iv) to mean that the exemption applies only if the godowns or warehouses are let for any of the three purposes: storage, processing, or facilitating the marketing of commodities. The Madras High Court in CIT v. South Arcot District Co-operative Marketing Society Ltd. [1973] 92 ITR 371 provided a broader interpretation, suggesting that the term "letting" should include the mere use of godowns, not necessarily by letting them out. The Karnataka High Court in Udupi Taluk Agricultural Produce Co-operative Marketing Society Ltd. v. CIT [1987] 166 ITR 365 supported the view that income must be related to the letting out or use of godowns or warehouses.

Issue 2: Eligibility for Exemption from Income-tax on Commission Earned by a Co-operative Society on Handling of Commodities
The assessee, a co-operative society, claimed exemption from income-tax on the commission earned from handling chemical fertilizers under the relevant sections of the Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim, but the Tribunal allowed it, stating that the income was derived from "facilitating the marketing of commodities."

The Tribunal's decision was based on the terms of the agreement between the assessee and the Government of Jammu and Kashmir, which appointed the assessee as the sole agent for the import and distribution of chemical fertilizers. The agreement outlined various responsibilities, including taking delivery, transportation, storage, and distribution of fertilizers. The Tribunal concluded that the commission received was for facilitating the marketing of commodities.

However, the High Court disagreed with the Tribunal's interpretation. The court referred to the Supreme Court judgment in CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117, which emphasized that the essential activity must be the letting of godowns for storage to qualify for exemption. The court noted that in the present case, the main activity was handling, distribution, and sale of fertilizers, with storage being only an incidental part. Therefore, the income was not derived from the letting of godowns, and the assessee was not entitled to the exemption.

The High Court concluded that the Tribunal was wrong in granting the exemption and held that the assessee was liable to pay income-tax on the commission earned. The court directed the assessee to indicate the manner and extent of the exemption claim before the concerned income-tax authorities based on the break-up of figures for the relevant assessment years.

Conclusion:
The High Court ruled that the assessee was not entitled to the exemption from income-tax on the commission earned from handling and distribution of fertilizers, as the income was not derived from the letting of godowns for storage. The references were answered accordingly, without any order as to costs. The assessee was given the opportunity to file an application for a certificate to appeal to the Supreme Court.

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