TaxTMI 
TaxTMI 
1979 (11) TMI 253
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....onsisting of one of us (Divan, C.J., and J.B. Mehta, J.) decided on 1st July, 1968, the assessee was the Khedut Sahakari Ginning and Pressing Society Ltd. In that reference, after examining the authorities available till that date and after considering the bye-laws of that particular co-operative society, which was a co-operative society of cotton growers and which society was also running a ginning and pressing factory, it was held that when unginned cotton was brought to the society by each individual member and thereafter was pooled together by the society in accordance with bye-law No. 48, the relationship between the members of that particular co-operative society and the society was that of vendor and purchaser and not that of principal and agent. The Division Bench tried to look at the real substance of the transaction without being bound down by the terminology in which the parties had chosen to clothe the transaction. It was held that the transactions in question were those of purchase of cotton by the co-operative society concerned from its members. This decision in Khedut Sahakari Ginning and Pressing Society's case(1) was followed by the same Division Bench of this H....
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....f "producers' society" set out in section 3(h)(2) of the Bombay Co-operative Societies Act, 1925, the Supreme Court held that in that particular case, the transaction was one of entrustment of cotton crop of the producer-members to the society which was acting as the collective agent of the members, and it was held that the society was the agent of all its members and the society's principals were many. Because of the byelaws, the several principals must be deemed to have appointed a common agent, the society, for disposing of their goods in the manner most advantageous to them. It is because of this decision of the Supreme Court in the Khedut Sahakari Ginning and Pressing Society's case[1972] 29 S.T.C. 105 (S.C.). that the Division Bench before which all these five references in the case of sugar co-operative societies came up for final hearing, referred all the five matters to a larger Bench and thereafter the matters have come up before us for final hearing. It may be pointed out that, for the sake of easier reference, Messrs. Sahakari Khand Udyog Mandali Ltd., Gandevi, the assessee in Sales Tax Reference No. 4 of 1976, will be referred in the course of this judgment as the G....
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....sugarcane by the producermembers of the society concerned amounted to a transaction of purchase. It may be pointed out that, in the case of the Gandevi Society, we are concerned with the Bombay Sales Tax Act, 1959. So also, we are concerned with the Bombay Sales Tax Act of 1959 in Sales Tax Reference No. 8 of 1976 where the Madhi Society is the assessee. In the case of the Chalthan Society, we are concerned with the Gujarat Sales Tax Act, 1969, whereas in the case of the Bardoli Society and the Bileshwar Society, we are concerned both with the Bombay Sales Tax Act, 1959, and the Gujarat Sales Tax Act, 1969. In order to understand the problem arising under the Sales Tax Act, it is necessary to point out that the Bombay Sales Tax Act, 1959, was enacted, as the preamble of the Act points out, "to consolidate and amend the law relating to the levy of a tax on the sale or purchase of certain goods in the State of Bombay". Schedule A to the Act sets out different items of goods, sale or purchase of which was free from all taxes under the Bombay Sales Tax Act. Section 5 of the Bombay Sales Tax Act stated that no tax would be payable on the sales or purchases of any goods specified in S....
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....upee, that is, at the rate of ten per cent, should be paid on the turnover of purchases of sugarcane. Schedule E to the Bombay Sales Tax Act, 1959, sets out goods, sale or purchase of which is subject to sales tax, general sales tax, purchase tax and retail sales tax and the rate of sales tax, etc. Entry 22 in that schedule mentions all goods other than those specified from time to time in section 14-B and in Schedules A, B, C and D and in the preceding entries. So far as the goods, that is, sugarcane, specified in section 14-B was concerned, the purchase tax on that item was to be governed by the provisions of section 14-B and not by the entries in Schedule E. It may be pointed out that, by notification dated 26th December, 1961, issued in exercise of power conferred by section 14-B of the Bombay Sales Tax Act, 1959, the Government of Gujarat specified that, on and with effect from 27th December, 1961, there shall be levied purchase tax at the rate of ten naye paise in the rupee on the turnover of purchases of sugarcane of a purchaser, where such sugarcane is purchased by the purchaser either directly or through an agent for being used by him in the manufacture of sugar as defined....
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....erative society concerned, if it is held ultimately to buy or purchase the sugarcane from its members that can be dealt with as a purchaser and in respect of purchase price a purchase tax may have to be paid. It may be pointed out that in the Gujarat Sales Tax Act, 1969, section 18 is the same and equivalent to section 14-B of the Bombay Sales Tax Act, 1959. Under the Gujarat Co-operative Societies Act, 1961, which came into force on 1st March, 1962, there is no categorisation into purchaser-society or other seller-society, as is to be found in the Bombay Co-operative Societies Act of 1925, and under section 12, "the Registrar may classify all societies in such manner, and into such classes, as he thinks fit, and the classification of a society under any head of classification by the Registrar shall be final". Under section 37 of the Gujarat Co-operative Societies Act, "a society on its registration shall be a body corporate by the name under which it is registered, with perpetual succession and common seal, and with power to acquire, hold and dispose of property, to enter into contracts, to institute and defend suits and other legal proceedings and to do all such things as are nec....
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....rchant and so on. With its belief in the doctrine of protection of the weak, with its firm desire for distributive justice, co-operation naturally hates exploitation by one group of another. Therefore, elimination of middleman is one of the great objects of the co-operative movement. This elimination, it proposes to bring about by the consumers or the producers themselves performing the necessary services. A multi-purpose society acts as an agent for the sale of farm produce and other products of rural industry of its members and members of other societies, and a joint farming society arranges for the joint sales of the produce of the farm. A better farming society undertakes the collective disposal of produce." It may also be pointed out that according to the Encyclopaedia Britannica, 1972 Edition, Volume I, page 348: "The need for farmers to be represented by organisations operating in their interests has sparked the development of agricultural cooperatives in all countries. The average farmer is a comparatively small producer. Membership in a cooperative increases his bargaining power when he sells his crops, when he purchases farm supplies or when he requires credit, insu....
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....plans. Miscellaneous services to farmers include widely varied activities ranging from cotton ginning to artificial breeding of dairy cattle. Farm credit and rural electric cooperatives are sometimes included among miscellaneous farm services; but, because of their extent and very specific nature, they are listed and classified separately here." Also at page 450, it has been pointed out: "This glimpse of cooperative history reveals two streams of endeavour-one directed towards savings in cost of consumer goods; the other directed towards higher net farm incomes through increased returns and stabilized markets or savings in costs of production. Both are stronger in rural areas than in urban communities, although cooperative supermarkets and cooperative apartments are found in and near metropolitan centres...................Farmer cooperatives, on the other hand, underscore business objectives; higher prices for their commodities when marketed, increased savings on cooperative purchases, and interest on invested capital." As regards the characteristics of co-operatives in the United States, it has been pointed out: "In their operating technique and organizational structure, ....
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....tioned in brief hereinabove is the basic objective lying behind the cooperative movement, namely, to eliminate the middleman, so as to benefit the producer-members and to get the maximum advantage and benefits to their members, is to be kept in mind while considering the scheme of the bye-laws before us. It may be emphasised that, according to the Supreme Court, "whether a particular agreement is an agency agreement or an agreement of sale depends upon the terms of the agreement. For deciding that question, the terms of the agreement have got to be examined. The true nature of a transaction evidenced by a written agreement has to be ascertained from the covenants and not merely from what the parties choose to call it. The terms of the agreement must be carefully scrutinised in the light of the surrounding circumstances". The Supreme Court examined the provisions of the Act as well as the relevant bye-laws which took the place of agreement between the parties and it is in the light of these well-recognised principles stated by the Supreme Court in the Khedut Sahakari Ginning and Pressing Society's case[1972] 29 S.T.C. 105 (S.C.). that we will now proceed to examine the bye-laws b....
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....ugar and to purchase from members and non-members sugarcane, jaggery, raw material and other requirements for this factory." Clause (6) of bye-law 2 mentions: "To make advances to members on the security of sugarcane or sugar made out of their sugarcane and to advance loans for raising their crops and development of agriculture." Under clause (ii) of the bye-law, one of the objects of the society is "to undertake subsidiary and allied industries which are conducive to the development and benefit of the society". Under bye-law 5, it has been provided: "There shall be three classes of members: (A) Producer-members, (B) Ordinary members, and (C) Nominal members. NOTE: Nominal member is a member who has no right to dividend or participation in the management of the society." Under clause (a) of bye-law 5, it has been provided: "No person or cooperative societies or institutions registered under the Trusts Act shall be admitted as a member of class (A), unless (1) he has completed 18 years of age and is competent to contract"; and under condition (2) unless "he holds land as an owner or a tenant and is a producer of at least 1/2 acre of sugarcane in th....
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....liability shall be limited to twice the face value of the shares held by him during the pendency of the loan of the Industrial Finance Corporation of India to the society which is to be guaranteed by Government (or is under guarantee by Government) and for the specific purpose of repayment of this loan, his liability shall, extend to thrice the face value of the shares held by such a member. The liability of an ordinary member shall be limited to the amount, if any, in respect of the shares held by him. Thus, a departure is made in bye-law 6 from the ordinary rule that the liability of a member in a corporate organisation of this kind should be equivalent to the face value of the shares held by him in the corporate organisation. Under bye-law 7, a producer-member shall be bound to carry out the instructions of the Board of Directors in respect of every matter connected with the method of cultivation, production, protection of crops, marketing of produce, etc. Under bye-law 8, it has been provided: "Every member shall be bound to sell sugarcane grown on all his lands in factory area to the factory. The factory will, however, be bound to buy sugarcane only up to the total acreage cov....
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....d/or to joint farming societies if so formed by members. Every member (of a tenant member) who has been assigned an area for growing sugarcane crop shall enter into a contract to rear up the crop according to the programme and to deliver the same to the society at such rates and at such place as may be fixed by the Board of Directors from time to time. The variety of sugarcane, the period of plantation and manufacturing shall be decided by the Agricultural Officer appointed for the purpose. Any member failing to carry out the programme of cultivation and supply of sugarcane shall be liable to such penalty as may be provided for in the agreement entered into by the members. The penalty and damages thus payable shall be recoverable as if they are debts to the society under the provisions of section 96 of the Gujarat Co-operative Societies Act. " Under bye-law 32, it is provided: "The Board of Directors shall each year fix the price to be paid for sugarcane supplied by members. This price per ton of sugarcane ex field delivery shall not exceed by more than Rs. 10, the average per maund of sugar realised by the society during the particular season. In special cases this may exceed Rs. ....
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....ration up to the year are paid or has made provisions satisfactory to the corporation for making the aforesaid payments. A sum not exceeding 2 per cent on the paid-up share capital may then be credited in the year to the fund called 'The Dividend Equalisation Fund' until the total amount of the fund amounts to 9 per cent of the paid-up share capital. Except for the purpose of paying dividend (1) up to 4 1/2 per cent till the share capital contributed by the Government is repaid and (2) up to 9 per cent after the share capital contributed by the Government is fully repaid. No withdrawal from the fund shall be made without the previous sanction of the Registrar. (e) A sum shall be set aside for contribution towards the education fund of the Gujarat State Co-operative Union at the rate of 1 per cent of the net profit, 1.25 per cent of the net profit or 1.5 per cent of the net profit or 2 per cent of the net profit according to the rate of dividend is 3 per cent, between 3 per cent and 4 per cent, between 4 per cent and 5 1/2 per cent or above 6 1/2 per cent respectively. (f) The balance available shall be used for payment of bonus on supply of cane to members and bonus to ....
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....ovide collective arrangement for such cutting and transport if it is possible to do so and the expenditure incurred for cutting and transport shall be allocated on an average basis amongst the members. No such clause similar to bye-law 7-A is to be found in the bye-laws of the Gandevi and Bileshwar Societies. In bye-law 8 of the Gandevi, Bardoli and Bileshwar Societies, the word used is "sell" the sugarcane to the society, whereas the word used in the case of the Madhi and Chalthan Societies is "give" and not "sell". In the case of all the five societies, clause (6) of byelaw 27 deals with powers and duties of the Directors to fix sugarcane price. In the case of Chalthan, there is no specific correlation between the price per ton of sugarcane to be paid to the members and average price per maund of sugar, but the correlation on the basis of the price of sugarcane per ton not to exceed more than Rs. 10 over the price per maund of sugar is to be found in the case of the remaining four societies. In the case of the Bardoli, Madhi and Chalthan Societies, one finds bye-law 36-A which is not to be found in the case of the other two societies, namely, Gandevi and Bileshwar. Bye-law 36-....
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....mnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyerpure and simple. In Halsbury's Laws of England, Volume I, 4th Edition, in para 807 at page 485, the following observations are made: 'The relation of principal and agent raises by implication a contract on the part of the principal to reimburse the agent in respect of all expenses, and to indemnify him against all liabilities, incurred in the reasonable performance of the agency, provided that such implication is not excluded by the express terms of the contract between them, and provided that such expenses and liabilities are in fact occasioned by his employment.' * * * * It is well-settled that while interpreting the terms of the agreement, the court has to look to the substance rather than the form of it. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'seller' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or a buyer is not conclusive, unl....
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.....T.C. 615 (S.C.). In that case, the assessee was a limited liability company manufacturing cement. The assessee and some other cement manufacturing companies on the one hand entered into an agreement with the Cement Marketing Company of India Ltd. on the other whereby the marketing company was appointed as the "sole and exclusive sales manager" for the sale of cement manufactured by the manufacturing companies and the manufacturing companies agreed not to sell directly or indirectly any cement to any person save and except through the marketing company. The manufacturing companies were entitled to be paid a certain sum per ton for the cement supplied by them or at such other rate as might be decided upon by the directors of the marketing company. The marketing company was authorised to sell cement at such price or prices and on such terms as it might in its sole discretion think fit and it agreed to distribute to the manufacturing companies, in proportion to the number of tons of cement of every variety and kind supplied by the manufacturing companies, the whole of its net profit less six per cent on its paid-up capital. The question before the Supreme Court was whether the transac....
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....ontracts on its own behalf and not on behalf of the manufacturing companies: it supplies goods as its own, and not as those of the manufacturing companies and it is not entitled to be indemnified for loss suffered by it. The mere covenant for sharing the overall net profits, after deducting 6 per cent on the paid-up capital of the marketing company, does not convert the relationship into one of principal and agent. The liability to account for the sale proceeds is not for the purpose of paying over to the manufacturing companies a share of the profits in each individual transaction. The liability to account, if any, is only for enforcement of the covenant contained in clause 24." This decision in the case of Rohtas Industries Ltd.[1961] 12 S.T.C. 615 (S.C.). lays down the following principles: 1.. The test to determine whether the transaction is that of sale or that of agency is to determine whether the property in the goods has passed to the socalled agent and secondly, whether there was payment of price by the so-called agent to the so-called principal; 2.. On an examination of the agreement between the parties, the question to be asked is whether any goods which were to....
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....tled to compel the society to act according to its constitution and to apply the property for the purposes for which it is held, but on that account the property of the society cannot be treated as the property of the members. The society is a person: the property in the refreshments which it supplies to its members is vested in the society and when refreshments are supplied for a price paid or promised transfer of property in the refreshments results. In the case of an unincorporated society, club or a firm or an association ordinarily the supply and distribution by such a society, club, firm or an association of goods belonging to it to its members may not result in sale of the goods which are jointly held for the benefit of the members by the society, club, firm or the association, when by virtue of the relinquishment of the common rights of the members the property stands transferred to a member in payment of a price, and the transaction may not prima facie be regarded as a 'sale' within the meaning of the Act." At page 325 it was observed: "We are not dealing in this case with liability criminal or quasi-criminal. The question is one of liability under a taxing statu....
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.... distinguished in this manner: "One of the clauses in the agreement relied on by this court for coming to the conclusion that the agreement in question was an agreement of sale was that the marketing company had to pay certain price for the cement supplied to it and that price was ordinarily required to be fixed having regard to the cost of production. Further the marketing company was entitled to fix price at which the cement was to be sold and such price could be even less than the cost of manufacture. It is true that some of the clauses in that agreement are similar to those we are considering in this case, yet no clause in that agreement mentioned that the cement manufacturing companies were merely entrusting their cement to the marketing company nor was there any provision in that agreement for the marketing company to advance loans to the manufacturers on the security of the cement entrusted to it. Further the manufacturing companies were not required to pay any interest on the amount paid to them by the marketing company." (Emphasis* supplied by us.) In the case of Khedut Sahakari Ginning and Pressing Society(1), the decision of the Supreme Court rested on the follo....
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....the members to the outsiders and after deducting the dues of the society and charges for ginning and pressing and the expenses for sale, etc., paid in full to all the members according to the average rates gradewise or, if the grades were not fixed then generally, that weighed with the Supreme Court to decide in that particular case that the transaction was not of sale by the members of the society or of purchase by the society from the members. In that particular case, it was the feature of entrustment of the cotton to the society for the purpose of being ginned and pressed in bales and sold which led the Supreme Court to hold that the society was the agent for all the members of the society. In the instant case, we must bear in mind that merely because we are dealing with the bye-laws of a co-operative society, we are not precluded from holding, if the interpretation of the bye-laws of the society so justifies it, that the transaction was a transaction of purchase by the society. Whatever the practice may be in the United States, in India, as laid down by the conspectus of authorities referred to above, it is the bye-laws of the society which constituted agreement between the ....
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.... losses incurred by the society in its overall transactions cannot be passed on to the members. The members' liability is limited by clause (6) so far as producer-members are concerned to twice the face value of shares held by them during the pendency of the loan of the Industrial Finance Corporation of India, given to the society, which loan is guaranteed by the Government and for the specific purpose of repayment of this amount the member's liability shall extend to thrice the face value of the shares held by such member and the liability of an ordinary member shall be limited to the amount unpaid, if any, in respect of the shares held by him. Thus, though the liability of an ordinary member and a producer-member is not limited in the same manner, it is a limited liability. As pointed out by the Supreme Court in the Enfield India Ltd. Canteen's case[1968] 21 S.T.C. 317 (S.C.)., the property under the bye-laws of the society before us-the property in sugar and other end-products sold by the society-vested in the society as a corporate body before the sale. Moreover, in the instant case, the bye-laws do not disclose a scheme under which the goods supplied to the society are to b....
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....e members to the society, there is no provision in clause (6) of byelaw 2 for interest and the whole object of this set of bye-laws seems to be to carry on manufacture of sugar in an area growing sugarcane, with producermembers having control through a majority of Directors in the Board of Directors. Moreover, it must not be forgotten that by the process of manufacture through sophisticated machinery, the sugarcane is converted into a different commodity, namely, sugar. All that happens in the case of cotton when it is ginned and pressed is that cotton-seeds and other impurities are separated from cotton or cotton fibre and pure cotton is simply pressed. A different commodity as such does not come into existence in the case of ginned cotton. The whole of the material, namely, sugarcane, supplied by the members is processed and changed completely out of recognition altogether as compared to its original state. The learned Advocate-General on behalf of the State in these matters relied upon certain passages from Gower's Principles of Modern Company Law, GoreBrowne on Companies, Palmer on Company Law and Ramaiya's Commentary on the Companies Act of India, for the purpose of urging ....
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.... only an intermediary between two other parties. So it is essential to an agency in this sense that a third party should be in existence or contemplated, and, if a person who is employed as an agent to buy or sell property for another seeks to sell his own property to his principal or to buy the property of his principal, he violates the first condition of his employment, and changes the intrinsic nature of the contract between them." The main principle that emerges from these passages from Halsbury's is that the essential requirement of agency is that the agent must only be an intermediary between two other parties and the third party should be in existence or contemplated at the time when the contract of agency is entered into. In the instant case, when we examine the bye-laws, the third parties are never known nor are they ever disclosed to the members. All that the members know is the purchase price fixed by the Board of Directors for the sugarcane and the total amount of the sale price fetched by their sugar and other end-products. It is true that under the bye-laws, the society helps the members to secure better seeds, to get proper supply of manure, also to provide tra....
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....nd the basic features of a purchase are all present, and the decision in the Enfield India Ltd. Canteen's case[1968] 21 S.T.C. 317 (S.C.). points out the approach which has to be adopted in dealing with a cooperative society even in the light of the concept of co-operative principles. Question No. (3) in Sales Tax Reference No. 4 is in the following terms: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of sugarcane grown by applicants on land of the members under arrangement to share profit or loss, the applicant was purchasing sugarcane from partnership firms and was liable to pay purchase tax in respect of the said sugarcane?" In paragraph 14 of its order, the Tribunal has dealt with the facts in the light of which question No. (3) is framed. A copy of the agreement regarding the lands on which sugarcane was grown on the land of the members was produced before the Tribunal. In clause 3 of the agreement it was stated that after deducting all expenses, whatever profit or loss would arise would be distributed between the society and owners of the land in equal share. In paragraph 6 of the agreement it was provi....
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.... agreement. After deducting this amount of compensation and deducting the price of the seeds, manure, labour, bonus, pesticides and insecticides, irrigation, supervision, whatever figure of profit or loss that might be arrived at would be shared equally half and half between the society and the owner of the land. It is difficult to read an agreement of partnership in this case. All that was done was that the land was being placed at the disposal of the society, so that cultivation of sugarcane on the land may serve the purpose of administrative formation of the surrounding cultivators and better cultivation on scientific lines with better production might be reached. The cultivation was joint but that does not bring in any principle of partnership. No business was being carried on by the society and the member concerned, nor was one being made an agent of the other for the purpose of carrying on the activities contemplated by the agreement. It is difficult to read into this clause any partnership agreement between the parties. The society was raising its own crop on the land placed at its disposal by the members for consideration and hence it is difficult to accept the conclusion o....