Members' quota sale proceeds passed through a cooperative society were not its taxable income where the difference was payable to members.

A cooperative society that sold members' yarn quota on their behalf, under its bye-laws and a member-approved revised arrangement, was treated as acting for the members rather than earning the rate difference for itself. The record showed the change was commercially justified to ensure the benefit reached members and not intermediaries, and the additional evidence supported the factual position that members owned the looms. On those facts, the amount representing the difference between market realisation and quota price was either received as agent for the members or diverted at source by overriding title, so it did not constitute the society's taxable income. The allegation of a colourable device was rejected.

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Issues: Whether the rate difference arising from sale of yarn quota and distributed to members pursuant to the society's resolution constituted the assessee-society's taxable income, or whether it was received only as agent of the members or stood diverted at source by overriding title.

Analysis: The society was formed for the economic benefit of its members, and its bye-laws authorised it to procure and sell raw materials and finished products in a manner conducive to that object. The quota system was altered at the request of members because the earlier method did not effectively benefit them and intermediaries were taking away the advantage. Under the revised arrangement, the society sold the yarn quota on behalf of the members and credited only the difference between the market realisation and the quota price to the members. The record showed that the change was commercially justified and was meant to maximise members' benefit, not to create an artificial profit distribution. The additional evidence regarding members' loom ownership supported the assessee's case on the factual controversy raised by the Revenue. On these facts, the sale proceeds, to the extent of the rate difference distributed to the members, were treated as received for and on behalf of the members, and alternatively as income diverted before it reached the assessee. The charge of a colourable device was rejected.

Conclusion: The rate difference distributed to the members was not taxable as the income of the assessee-society; the addition made by the Assessing Officer and sustained by the CIT(A) was deleted in favour of the assessee.

Ratio Decidendi: Where a cooperative society, under its governing arrangements and at the request of its members, sells members' quota entitlement on their behalf and is under a pre-existing obligation to pass the realised difference to them, the amount so passed on does not form the society's taxable income.

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