TaxTMI 
TaxTMI 
2009 (5) TMI 63
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....and manufacture of sugar from the sugarcane grown by its members. The claim made by the assessee had been disallowed by the Revenue in view of a Division Bench decision of this court in Karnal Co-operative Sugar Mills Ltd.'s case [2002] 253 ITR 659. Drawing attention to the dispute between the two sides in this appeal, the Bench further inscribed that it was against disallowance of the assessee's claim under section 80P(2)(a)(iii) of the Income-tax Act, 1961 (for short "the 1961 Act") which had been so done primarily keeping in view the restrictions provided in sub-clause (v) of section 80P(2)(a) of the 1961 Act. The Bench articulated its prima facie view that while deciding the claim for deductions under section 80P(2)(a)(iii), reference to sub-clause (v) was not called for. 3. It is apposite now to indicate the factual matrix in which the appeal has been preferred. The assessee co-operative sugar mill came to be in appearance with the object of promoting the economic interest of its members who all are the sugarcane growers. To achieve the said object, the appellant set certain norms for processing of the agricultural produce of its members, to say, to make the sugarcane marketa....
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.... [2002] 253 ITR 659 had not appreciated the legal position in its right perspective and on reconsideration of the said pronouncement the same requires to be decided in favour of the assessee. 8. Mr. Sethi, learned counsel appearing for the respondent-Revenue, relied upon the decision of the Division Bench in Karnal Co-operative Sugar Mills Ltd.'s case [2002] 253 ITR 659 and submitted that in view of the embargo laid down under sub-clause (v) of section 80P(2)(a) where any manufacturing activity is carried on by a co-operative society with the aid of power, no deduction under sub-clause (iii) shall be exigible. 9. The cardinal issue which evokes the attention of the Full Bench relates to the construction of section 80P(2)(a)(iii) vis-a-vis section 80P(2)(a)(v) of the 1961 Act and more specifically grant of deduction from the profits made by the societies by marketing of the agricultural produce grown by the members. The bone of contention that is engaging the attention of this court narrows down to one question, whether a co-operative society, which manufactures and produces sugar from the sugarcane grown by its members with the aid of power, shall be entitled to deduction under s....
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.... exceeds fifteen thousand rupees." 12. The Finance (No. 2) Act, 1967 amended the 1961 Act with effect from April 1, 1968 wherein section 80P was introduced by replacing section 81(i), which provided for deduction with respect to income of the co-operative societies. Sub-clause (iii) of section 80P(2)(a) provided for exemption to the co-operative societies engaged "in marketing of the agricultural produce of its members". Sub-clause (v) of section 80P(2)(a) related to deduction regarding income of the co-operative societies engaged in "processing of the agricultural produce of its members without the aid of power". Sub-clause (iii) of section 80P(2)(a) came up for consideration before the apex court in Assam Co-operative Apex Marketing Society Ltd. v. Addl. CIT [1993] 201 ITR 338 (SC) wherein it was recorded that the expression "agricultural produce of its members" must be held to mean the agricultural produce which was produced by its members. Based on this decision, the Kerala High Court in CIT v. Kerala State Co-operative Marketing Federation Ltd. [1994] 207 ITR 319 (Ker) held that the exemption was not available to the State co-operative society where the agricultural produce w....
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....o-operative societies marketing the agricultural produce of their farmer members. In the case of Kerala State Co-operative Marketing Federation Ltd. v. CIT [1998] 231 ITR 814 (SC) the hon'ble Supreme Court held that the use of the words 'of its members' in the relevant clause would mean the agricultural produce belonging to the members and not necessarily grown by them. The interpretation given to the use of the words in the provision is not in accordance with the legislative intent of the existing provision. In respect of income arising from transactions with non-members, the co-operatives are not different from other assessees, and such co-operatives are required to be taxed in the same manner as companies or other assessees engaged in marketing of agricultural produce. If an amendment in section 80P(2)(a)(iii) is not made, it is likely to have serious impact on revenues. The proposed amendment, therefore, replaces the words 'of its members' by the words 'grown by its members'. The amendment seeks to restrict the deduction to the profits derived by a co-operative society engaged in the marketing of agricultural produce, grown by its members." 15. According to the plain reading o....
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....er observed as under (page 291): "Encyclopedia Britannica, 1960 Edn., Vol. 14, p. 9 15, says that marketing consists of those activities which effect transfers in the ownership of goods and services and provide for their physical distribution. Similarly, the Encyclopedia of Social Science, 1969 Edn., Vol. 10, 133, says that as an economic concept the term 'marketing' is susceptible of various interpretations. It was pointed out that a common but fallacious theory was that it was concerned chiefly, if not wholly, with finished goods and was the activity of specialized class of middlemen or that it was limited to adding time, place and possibly possession utilities to completed goods. The 'marketing process' was infinitely far-reaching than the transfer of goods from manufacturers to final consumers." 19. A similar view with regard to "marketing" is to be found in U. P. State Warehousing Corporation v. ITO [1974] 94 ITR 129 (All) and Addl. CIT v. Ryots Agricultural Produce Co-operative Marketing Society Ltd. [1978] 115 ITR 709 (Karn). 20. The expression "marketing" has been used in its wide import and it generally means the performance of all business activities involved in the fl....
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.... those activities which were connected with the process of taking over from the agricultural-producer-member and handing over marketable commodities to the purchasers and all the intermediate processes connected with the marketing of the agricultural produce of the members. It was further said that the term "marketing" could not be restricted only to the buying and selling activities. 24. The issue before the Kerala High Court in Meenachil Rubber Marketing and Processing Co-operative Society Ltd. v. CIT [1992] 193 ITR 108 was regarding an assessee-society which purchased raw latex from its members, processed it by scientific method and sold the commodity. The High Court upheld the claim of the assessee by observing that "marketing" had to be construed in a manner which would achieve the benevolent purpose of exemption rather than defeat the said purpose. It was further held that the co-operative society was marketing the agricultural produce of the members of the society and the income earned as profits and gains from the business of marketing of the said agricultural produce was liable to be exempted. 25. The apex court in Broach Distt. Co-operative Cotton Sales Ginning and Pres....
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....stion is incidental or ancillary to one of the activities mentioned in those clauses, the proviso, in our opinion, will not apply. We may refer in this connection to the observations of the Karnataka High Court in Addl. CIT v. Ryots Agricultural, Produce Co-operative Marketing Society Ltd. [1978] 115 ITR 709 where reference has been made to the broad meaning of the expression 'marketing' appearing in clause (c) of section 81(i), and it has been explained that in order to make agricultural produce fit for marketing, the activities involved in enabling that to be done must be regarded, as involved in the activities of marketing itself. Reference may also be made to CIT v. Karjan Co-operative Cotton Sale Ginning and Pressing Society Ltd. [1981] 129 ITR 821 (Guj) where the concept of 'marketing' was given a meaning which included the ginning, and pressing of raw cotton and was not confined to the selling activity alone." 26. The issue again came up for pointed consideration before the apex court in Kerala State Co-operative Marketing Federation Ltd. v. CIT [1998] 231 ITR 814. The Supreme Court, while approving the view expressed by the Karnataka High Court Ryots Agricultural, Produce ....
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....that processing of goods means that the goods must be adopted for a particular use. The variety of acts performed in respect of goods or their subjection to a process need not be such as may lead to the production of any new article. The act of subjecting goods to a particular temperature for a long period of time as in cold storage amounts to processing of goods. On the other hand, manufacture is a transformation of an article which is commercially different from the one which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. In Union of India v. Delhi Cloth and General Mills Co. Ltd., AIR 1963 SC 791, this court pointed out (AIR page 794): 'The word "manufacture" used as a verb is generally understood to mean as bringing into existence a new substance and does not mean 'merely to produce some change in a substance, however minor in consequence, the change may be.' In the same decision the following passage from the Permanent Edition of Words and Phrases from an American judgment was quoted with approval (AIR page 795): 'Manufacture implies a change but every change is not manufacture, and yet every change o....
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....e been intended by the Legislature. An intention to produce an unreasonable result is not to be imputed to a statute if there is some other construction available. Where to apply words literally would defeat the obvious intention of the legislation and produce a wholly unreasonable result the court must do some violence to the words so as to achieve that obvious intention and produce a rational construction." 29. In view of the above and plethora of judicial enunciations noticed hereinbefore, it is indeed held that section 80P has been enacted with the object of promoting the co-operative movement. The provision is introduced with a view to encourage and promote growth of co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. It has to be liberally construed. "Marketing" is a comprehensive term. It does not mean merely buying and selling. It includes "processing" which may be necessary for making the agricultural produce marketable. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises, as to whe....