Co-operative society income treatment turns on member-produce marketing and statutory reserve fund diversion in mixed tax outcome.

Purchasing paddy from members, milling it and selling rice on the society's own account was held not to amount to marketing the agricultural produce of members, so deduction under section 80P(2)(a)(iii) was denied. The court treated the activity as a purchase-and-sale transaction by the society rather than member-produce marketing. By contrast, amounts compulsorily transferred to the reserve fund under the Co-operative Societies Act were treated as diverted by overriding title, because the statutory transfer placed the sum beyond the society's control before it became disposable income. That amount was therefore allowable as a deduction in computing business income, producing a mixed tax result.

---

---

Issues: (i) Whether purchasing paddy from members, milling it, and selling the rice amounted to marketing of the agricultural produce of the members so as to attract deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961. (ii) Whether the amount required to be transferred to the reserve fund under section 43(2) of the Madhya Pradesh Co-operative Societies Act, 1960 was an allowable deduction as business expenditure or on the ground of diversion by overriding title.

Issue (i): Whether purchasing paddy from members, milling it, and selling the rice amounted to marketing of the agricultural produce of the members so as to attract deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961.

Analysis: The activity was treated as purchase of paddy and sale of rice on the society's own account, not as marketing of the agricultural produce of members. The question was held to be covered by prior binding authority of the same court, which had denied exemption in similar circumstances.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the amount required to be transferred to the reserve fund under section 43(2) of the Madhya Pradesh Co-operative Societies Act, 1960 was an allowable deduction as business expenditure or on the ground of diversion by overriding title.

Analysis: The reserve fund was created under a statutory mandate and, once transferred, was subject to the control of the Registrar under section 44(2) of the Madhya Pradesh Co-operative Societies Act, 1960. Since the amount ceased to be available for the society's own use and represented real profit diverted by statute before reaching the assessee's disposable income, it was treated as deductible in computing business income.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The reference was disposed of with one question answered in favour of the Revenue and the other in favour of the assessee, resulting in a mixed outcome on the tax liability.

Ratio Decidendi: A statutory amount compulsorily transferred to a reserve fund and placed beyond the assessee's control may be deducted in computing real business income, but processing and sale of members' produce on the society's own account does not amount to marketing of agricultural produce for exemption purposes.

---