Section 80P of Income-tax Act, 1961:  Deduction in respect of income of co-operative societies.-

80P. (1) Where, in the case of an assessee being a co- operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub- section (2) in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely: -

(a) to (d) ……..

(e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;"

Facts of the Case:

Appellant-society is a co-operative society registered under Rajasthan Co-operative Societies Act, 1965. Appellant is running a consumer co-operative store at Udaipur since 1963. It has 30 branches. Appellant is dealing in non-controlled commodities through its branches. In addition, appellant is also doing the work of distribution of controlled commodities such as wheat, sugar, rice and cloth on behalf of the Government under the Public Distribution Scheme (PDS) for which it is getting commission. The distribution of the controlled commodities is regulated by the District Supply Officer (DSO-Authoriesed Officer) under Rajasthan Foodgrains & Other Essential Articles (Regulation of Distribution) Order, 1976 (for short, "1976 Order").

Appellant claims to be stockist/distributor of controlled commodities. It takes delivery from Food Corporation of India (FCI) and Rajasthan Rajya Upbhokta Sangh as per the directives of the State Government.

The price, quantity and the person from whom the delivery is to be taken is fixed by the State Government under the said 1976 Order. After taking the delivery, appellant stores these goods in its godowns, both owned and rented. The storage godowns are open to checking by the concerned officers of the State Government. The stocks stored by the appellant are delivered to the Fair Price Shops (FPS-retailers) as per the directions of the State Government. The quantity, price and the FPS to whom the delivery is to be given is fixed by the State Government.

On 31.8.1990, appellant filed its returns for assessment year 1989-90 claiming deduction under Section 80P(2)(e) of the 1961 Act  on the income of commission received by it from the Government for storage of controlled commodities. Further, appellant filed its returns of income for subsequent assessment years 1990- 91, 1991-92, 1992-93, 1993-94, 1994-95, 1995-96 inter alia claiming deduction on the income of commission received by it from the State Government for storage of controlled commodities.

Decision of the AO

Vide Order dated 26.3.92, the A.O. disallowed the claim on the ground that the appellant-society is a wholesaler of foodgrains and it is not a mere stockist as claimed and consequently it was not entitled to deduction under Section 80P(2)(e) of the 1961 Act.

Decision of CIT(A)

CIT(A) held that the appellant was entitled to deduction under Section 80P(2)(e) of the 1961 Act on the income of commission received from the State Government for stocking and storing the above foodgrains.

Decision of ITAT

Decision of CIT(A) was affirmed by the Tribunal vide its decision dated 20.10.2000 dismissing the Department's appeal by a common order holding that the appellant was entitled to deduction under the said Section.

Decision of HC

Rajasthan High Court took the view that the appellant-society was storing the said controlled commodities in its godowns as part of its own trading stocks; that the appellant acted as a trader in the essential commodities in question and consequently the appellant was not entitled to deduction under Section 80P(2)(e) of the 1961 Act.

Decision of SC

SC affirmed the view of HC and held that assessee is not entitled to deduction under section 80P(2)(e).  Udaipur Sahkari Upbhokta Thok Bhandar Ltd. Versus Commissioner of Income-tax [2009 -TMI - 34151 - SUPREME COURT]

While delivering detailed ruling on the issue of interpretation and scope of deduction u/s 80P(2)(e), SC has observed various previous rulings as under:

Assessee heavily relied upon the following decision:

Commissioner of Income-tax, Madras v. South Arcot District Co-operative Marketing Society Ltd. - [2008 -TMI - 5266 - SUPREME Court]

While distinguishing the above decision, apex court said,

In our view the judgment of this Court in South Arcot (supra) has no application to the facts of the present case. Firstly, in every case of this nature one has to examine the contract between the parties. One has also to examine the conduct of the parties. In the case before us we are concerned with Rajasthan Foodgrains & Other Essential Articles (Regulation of Distribution) Order, 1976. In the present case we are concerned with statutory or compulsory sales. Each contract has to be interpreted on its own terms. In the case of South Arcot (supra) statutory or compulsory sale was not in issue. Secondly, in the case before us we have a situation in which there are two sales. The first sale is between the Government (through FCI) and the appellant-society, and the second sale is between the appellant-society and Fair Price Shop. The former is the condition precedent to the latter. That situation was not there in the case of South Arcot (supra). Thirdly, in the case before us issue price is set-off against the sale price which clearly indicates that the netting/difference between the two prices constituted receipt on a commercial basis or net profit. Lastly netting/difference also indicated that the appellant had treated the stock as its own trading stock as correctly held by the impugned judgment.

Therefore, in our view the judgment of this Court in the case of South Arcot (supra) will not apply to the facts of the present case and consequently the appellant is not entitled to exemption/special deduction under Section 80P(2)(e) of the 1961 Act.

For full text of judgments visit:

Udaipur Sahkari Upbhokta Thok Bhandar Ltd. Versus Commissioner of Income-tax [2009 -TMI - 34151 - SUPREME COURT]

Commissioner of Income-tax, Madras v. South Arcot District Co-operative Marketing Society Ltd. - [2008 -TMI - 5266 - SUPREME Court]