1989 (4) TMI 3 - SC - Income Tax

Profits from ginning, pressing and marketing cotton held exempt under s.81(i)(c) as ancillary to cooperative society

SC held that a co-operative society's profits from ginning, pressing and marketing cotton were exempt under s.81(i)(c) of the IT Act as it stood before 1 ... Exemption u/s 81 (i)(c) - Co-operative society - Whether, 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 I St April, 1968 ? - HELD THAT:- The sale of the cotton was effected by the assessee to the outside world and not to its members. The object of section 81 (i) 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. The proviso to section 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 section 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. 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 clause (c) of section 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 affirmative, in favour of the assessee and against the Revenue. Issues:Interpretation of section 81(i)(c) of the Income-tax Act, 1961 regarding exemption of income from ginning and pressing activities for a co-operative society.Analysis:The case involved an appeal against the High Court's judgment regarding the exemption of income from ginning and pressing activities under section 81(i)(c) of the Income-tax Act, 1961. The assessee, a co-operative society engaged in ginning and pressing cotton for its members, claimed exemption for the income derived from these activities. The Income-tax Officer initially rejected the claim, stating that ginning and pressing were conducted with the aid of power. However, the Income-tax Appellate Tribunal considered these activities as integral to marketing and exempt under section 81(i)(c). The High Court disagreed, stating that non-exempted activities must be taxed, including ginning and pressing. The Supreme Court, however, found that these activities were part of the marketing process, incidental and ancillary to marketing, and therefore qualified for exemption under section 81(i)(c).The High Court's interpretation that non-exempted activities like ginning and pressing must be taxed was rejected by the Supreme Court. The Court held that ginning and pressing were essential parts of the marketing process and should be considered exempt under section 81(i)(c). The Court emphasized that the proviso to section 81(i) excludes only activities separate from those mentioned in clauses (a) to (f) of section 81(i). Since ginning and pressing were integral to marketing, the proviso did not apply. The Court cited previous judgments highlighting the broad meaning of 'marketing' and the inclusion of ginning and pressing within this concept. Additionally, the Court dismissed a new argument raised by the Revenue regarding the change in the character of cotton due to ginning and pressing, as it was not raised earlier.In conclusion, the Supreme Court allowed the appeals, ruling in favor of the assessee. The Court held that the income derived from ginning and pressing activities for marketing cotton was exempt under section 81(i)(c) of the Income-tax Act, 1961. The High Court's decision was overturned, and the assessee was entitled to costs.