1998 (5) TMI 6 - SC - Income Tax

Society entitled to exemption under section 80P(2)(a)(iii) for marketing members' agricultural produce; purchases from non-members excluded

SC allowed the appeal, set aside the HC order and held the society was entitled to exemption under section 80P(2)(a)(iii) for profits from marketing ... Charitable Trust - claim for exemption u/s 80P(2)(a)(iii) in respect of profits earned by it out of the purchases made from the member societies - income from procurement of cashewnuts from the member societies - phrase 'agricultural produce of its members' - HELD THAT:- The expression 'marketing' is an expression of wide import. It involves exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial activities such as standardisation, financing, marketing intelligence, etc. Such activities can be carried on by an apex society rather than a primary society. So long as agricultural produce handled by the assessee belonged to its members it was entitled to exemption in respect of the profits derived from the marketing of the same. Whether the members came by the produce because of their own agricultural activities or whether they acquired it by purchasing it from cultivators was of no consequence for the purpose of determining whether the assessee was entitled to the exemption. The only condition required for qualifying the assessee's income for exemption was that the assessee's business must be that of marketing, the marketing must be of agricultural produce and that agricultural produce must have belonged to the members of the assessee-society before they came up for marketing by it, whether on its own account or on account of the members themselves. Thus, there is no scope to limit the exemption. The co-operative societies are engaged in marketing of an agricultural produce both of its members as well as of non-members. In the latter case, there is no difference between a co-operative society or any other business organisation and so will not be entitled to exemption. The exemption is intended to cover all cases where a co-operative society is engaged in marketing agricultural produce of its members. Section 80P does not in effect limit the scope of the exemption to agricultural produce raised by members alone but includes agricultural produce raised by others but belonging to co-operative societies. The contrast in the said provision is with reference to the marketing of agricultural produce of the members of the society or that purchased from non-members. It is clear, therefore, that the Legislature did not intend to limit the scope of exemption only to those which are primary societies. If a small agricultural co-operative society does not have any marketing facilities it can certainly become a member of the apex society which may market the produce of its members. We hold that the society engaged in the marketing of agricultural produce of its members would mean not only such societies which deal with the produce raised by the members who are individuals or societies which are members thereof who may have purchased such goods from the agriculturists. Thus, we allow the civil appeal by setting aside the order made by the High Court and answering the question referred to us in the affirmative in favour of the assessee and against the Revenue. Issues Involved:1. Entitlement of co-operative societies to deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961.2. Interpretation of the term 'agricultural produce of its members' in section 80P(2)(a)(iii).3. Applicability of the decision in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338.Detailed Analysis:1. Entitlement of Co-operative Societies to Deduction under Section 80P(2)(a)(iii):The primary issue in the batch of cases was whether co-operative societies are entitled to deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961, for profits earned from purchases made from member societies. The Kerala State Co-operative Marketing Federation Limited, an apex society, claimed exemption for the assessment year 1980-81 on profits earned from purchases made from primary co-operative societies, which are its members. The Income-tax Officer rejected the claim, but the Commissioner of Income-tax (Appeals) allowed it, specifying that the exemption did not apply to purchases from non-member societies. The Appellate Tribunal upheld this view, and the High Court initially ruled in favor of the assessee but later reversed its decision based on the Supreme Court's ruling in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338.2. Interpretation of 'Agricultural Produce of Its Members':The court examined whether the phrase 'agricultural produce of its members' includes agricultural produce marketed by an apex society on behalf of its member societies. The argument centered on whether the term should be restricted to produce raised directly by individual members or could include produce acquired from other sources but marketed by the member societies. The court concluded that the term 'of its members' should be interpreted broadly to mean 'belonging to' its members, not necessarily 'raised by' them. This interpretation aligns with the purpose of encouraging co-operative societies in marketing agricultural produce, whether the produce is directly raised by the members or acquired from other sources.3. Applicability of the Decision in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338:The court revisited the decision in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338, which had interpreted section 81(i)(c) of the Income-tax Act (repealed and replaced by section 80P) to restrict the exemption to primary societies. The court noted that this interpretation was unduly narrow and did not consider the broader legislative intent to promote co-operative societies. The court emphasized that section 80P does not limit the exemption to agricultural produce raised by members alone but includes produce marketed by member societies. The court cited several High Court decisions supporting this broader interpretation and concluded that the Assam Co-operative Apex Marketing Society decision required reconsideration.Conclusion:The Supreme Court reversed the Kerala High Court's decision, ruling that co-operative societies engaged in marketing agricultural produce of their members are entitled to deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961. The court clarified that the term 'agricultural produce of its members' includes produce marketed by member societies, not just produce directly raised by individual members. This broader interpretation aligns with the legislative intent to encourage co-operative societies in the rural economy. The court dismissed related civil appeals following this decision.