Co-operative society income treatment and exemption rules on reserve transfers, rice sales, and training institute donations.

A co-operative society's transfer of 75% of profits to reserve under a bye-law was treated as an application of income, because the obligation arose only after income had accrued and there was no diversion at source by overriding title. Profit from purchase, hulling and sale of paddy and rice was not exempt as income from marketing members' agricultural produce, since rice was a separate marketable commodity and hulling was not a process ordinarily employed by a cultivator to make the produce fit for market. Donation to a co-operative training institute qualified for exemption under section 15B(2)(v), because the recipient institution satisfied the statutory character required for the relief.

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Issues: (i) Whether the reserve created under the society's bye-law was includible in the society's income; (ii) Whether the profit from purchase, hulling and sale of paddy and rice was exempt as income from marketing the agricultural produce of members; (iii) Whether the donation to the co-operative training institute qualified for exemption under section 15B(2)(v).

Issue (i): Whether the reserve created under the society's bye-law was includible in the society's income.

Analysis: The bye-law, though registered in connection with the Co-operative Societies Act, did not have statutory force. The obligation to transfer 75% of the profits to reserve arose only after the income had accrued to the society. The amount was therefore not diverted at source by any overriding title, but was merely set apart by the society from its own profits.

Conclusion: The reserve was an application of income and was rightly included in the society's taxable income, against the assessee.

Issue (ii): Whether the profit from purchase, hulling and sale of paddy and rice was exempt as income from marketing the agricultural produce of members.

Analysis: The exemption applied only where the society was engaged in marketing the agricultural produce of its members. Paddy and rice were treated as different marketable commodities, and hulling was not regarded as a process ordinarily employed by a cultivator to render the produce fit for market. The rice sold by the society was therefore not the agricultural produce of its members within the statutory meaning.

Conclusion: The profit from these transactions was not exempt under section 14(3)(i)(c), against the assessee.

Issue (iii): Whether the donation to the co-operative training institute qualified for exemption under section 15B(2)(v).

Analysis: The donation was made to an existing co-operative training institute which was receiving financial help from the Government. The fact that the proposed college had not yet commenced functioning did not defeat the exemption, since the statutory requirement was satisfied by the character and financing of the institution receiving the donation.

Conclusion: The donation qualified for exemption under section 15B(2)(v), in favour of the assessee.

Final Conclusion: The reference was answered partly against the assessee and partly in its favour, with only the claim relating to the donation succeeding.

Ratio Decidendi: A sum transferred to reserve after income has accrued is an application of income, not a diversion by overriding title; and a co-operative society's exemption for marketing members' agricultural produce is not available where the produce sold is a processed commodity not ordinarily marketed by the cultivator as such.

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