vil Appeal Nos
5 135 15 NT of 1975
From the Judgment and Order dated 2491973 of the Gujarat High Court in Income Tax Reference No 31 of 1971
TA Ramachandran Mrs AK Verma and DN Mishra for the Appellant
CM Lodha KC Dua and Ms A Subhashini for the Respondent
The Judgment of the Court was delivered by PATHAK CJ
These appeals by certificate granted by the High Court of Gujarat are directed against the judgment of the High Court 722 answering the following question in favour of the Revenue and against the assessee Whether on the facts and in the circum stances of the case the income of the Society from ginning and pressing was exempt under section 81ic of the Income Tax Act 1961 as it stood prior to its amendment on 1st April 1968 The assessee is a co operative society constituted under the Cooperative Societies ACt
The objects of the society intend that it should press cotton and pack the bundles for its individual members as well as other custom ers to Use its machinery for any useful work of its mem bers and to sell raw cotton seeds and other agricultural products
The assessee possesses a ginning and pressing factory to cater to the needs of its members
It gets raw cotton from the members and ginns and presses the cotton for marketing on behalf of its members
For rendering the services of ginning and pressing before selling the goods the assessee charges the members a certain amount by way of ginning and pressing charges
It also charges commission for the sale of the finished product
In the course of assessment for the assessment years 1961 62 to 1963 64 the assessee claimed that the receipts from the ginning and pressing activities were exempt under section 81ic of the Income Tax as it stood then
The In come Tax Officer however declined to accept the claim on the ground that the assessee had been carrying out the process of ginning and pressing with the aid of power
The Appellate Assistant Commissioner confirmed orders of the Income Tax Officer
In second appeal the Income Tax Appel late Tribunal held that having regard to the circumstance that the receipts were from members only that there was a general market for ginning and pressing cotton only and no evidence appeared of any dealing in raw cotton the ginning and pressing activities were to be regarded as an integral part of the marketing activity and therefore the receipts from those activities were not liable to tax by virtue of section 81ic
At the instance of the Revenue the Appellate Tribunal referred the question of law set out earlier to the High Court of Gujarat for its opinion
For the purpose of contention raised before the High Court and again before us the following provisions of section 81 seem relevant 81
Income of Co operative societies Income tax shall 723 not be payable by a co operative society i in respect of the profits and gains of business carried on by it if it is c a society engaged in the marketing of the agricultural produce of its members or e a society engaged in the process ing without the aid of power of the agricul tural produce of its members or Provided that in the case of a co operative society which is also engaged in activities other than those mentioned in this clause nothing contained herein shall apply to that part of its profits and gains as is attributa ble to such activities and as exceeds fifteen thousands rupees
 The High Court proceeded on the view that if a Society carries on certain activities which are exempted activities according to cls
a to f of section 81i and certain other activities which are not exempted the profits and gains attributable to such non exempted activities must necessari ly be taxed
The High Court observed that the assessee carried on ginning and pressing of cotton with the aid of power and even if those activities are regarded as ancil lary or incidental to its marketing activity they would not come within the category of exempted activities in view of the proviso and therefore they would have to be taxed
We find ourselves unable to accept the view taken by the High Court
It is apparent that the ginning and pressing was part of the integral process of marketing
It was an activi ty incidental or ancillary to the marketing of the produce of its members
The ginning and pressing of the raw cotton was never regarded as a distinct process
When they deliv ered the raw cotton to the assessee for marketing ginning and pressing was regarded as part of that process
The members did not take back the cotton after it was ginned and pressed
They paid only the costs of ginning and pressing
All the raw cotton s6 724 treated by the assessee was received from its members and it was only such  cotton of its members which was marketed by the assessee
The sale of the cotton was effected by the assessee to the outside world and not to its members
The object of section 81i was to encourage and promote the growth of cooperative societies and consequently a liberal con struction must be given to the operation of that provision
The proviso to section 81i operates to exclude from the exemp tion those activities which can be regarded as separate and distinct from the activities enumerated in clauses a to f of section 81i
If the activity in question 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 Karnata ka High Court in Addl
Commissioner of Income Tax Karnataka vs Ryots Agricultural Produce Co operative Marketing Society Ltd where reference has been made to the broad meaning of the expression marketing  appearing in cl
c of section 81i and it has been explained that in order to make agricultural produce fit for marketing the activi ties involved in enabling that to be done must be regarded as involved in the activity of marketing itself
Reference may also be made to Commissioner of Income tax Gujarat IV vs Karjan Co op
Cotton Sale Ginning  Pressing Society Ltd 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
An attempt was made by learned counsel for the Revenue to raise the point that ginning and pressing into cotton bales changed the character of the cotton and therefore what was marketed was not the agricultural produce of the members of the assessee
This point was not raised at any earlier stage by the Revenue and cannot be permitted to be taken now
We are of opinion that the assessee is entitled to the exemption of the profits and gains derived from the activity of the entire business of ginning and pressing of cotton and marketing it by virtue of cl
c of section 81i of the Income tax Act and that the High Court erred in holding to the contrary
In the result the appeals are allowed and the question referred by the Income tax Appellate Tribunal to the High Court must be answered in the affirmative in favour of the assessee and against the Revenue
The assessee is entitled to its costs
L SS Appeals allowed


Summary:
This appeal by the Sales Tax authorities was directed against the judgment and order of the Orissa High Court passed under article 226 of the Constitution quashing five orders of assessment covering five quarters made against the respondents who carried on the business of collection and sale of Kendu leaves in the erstwhile Feudatory State of Pallaliara to which on its merger into the province of Orissa on January 1 1948 the provisions of the Orissa Sales Tax Act 1947 were extended on March 1 1949
On the same date the Government of Orissa issued a notification under section 41 of the Act which was in the following terms  In exercise of the powers conferred by sub section 1 of Section 4 Of the Orissa Sales Tax Act 1947 Orissa Act XIV of 1947 as applied to Orissa State the Government of Orissa are pleased to appoint the 31st March 1949 as the date with effect from which every dealer whose gross turnover during the year ending the 31st March 1949 exceeded Rs 5000 shall be liable to pay 521 under the said Act on sales effected after the said date Section 4 Of the Act inter alia provided   1  with effect from such date as the Provincial Government may by notification in the Gazette appoint being not earlier than thirty days after the date of the said notification every dealer whose gross turnover during the year immediately preceding the commencement of this Act exceeded Rs 5000 shall be liable to pay tax under the Act on sales effected after the date so notified 2 Every dealer to whom sub section 1 does not apply shall be liable to pay under this Act with effect from the commencement of the year immedi ately following that during which his gross turnover first exceeded Rs 5000 
The goods were admittedly delivered for consumption at various places outside the State and the Sales Tax Officer as well as the Assistant Collector in appeal proceeding on the basis that the sales took place in the State held that the respondents were liable to Sales Tax for all the five quarters two of which fell before the commencement of the Constitution and three thereafter
The contention of the respondents before the High Court was that the notification under section 41 Of the Act was invalid as it ran counter to the provisions of that sub section and no part of that charging section could therefore come into force
It was further contended that the assessment for the three quarters following the commencement of the Constitution was invalid by reason or article 286 of the Constitution
The High Court found entirely in favour of the assessee  Held per Das C J Venkatarama Aiyar section K Das and Vivian Bose jj that the decision of the High Court in so far as it related to the three post Constitution quarters was correct and must be upheld
The orders of assessment for those quarters contravened both article 286 of the Constitution and section 30ra1 of the Orissa Sales Tax Act and were without jurisdiction and must be set aside
So far as the two pre Constitution quarters were concerned the assessees were clearly liable under section 42 of the Act
Per Das C J and Venkatarama Aiyar J
The first part of the impugned notification appointing the date from which the liability was to commence was in consonance with section 41 Of the Act and therefore clearly intra vires whereas the second part indicating the class of dealers on whom the liability was to fall went beyond that section and must therefore be held to be ultra vires and invalid
But since the two parts were severable the invalidity of the second part could in no way affect the validity of the first part which brought the charging section into operation and the assessees were liable for the two pre Constitution quarters under section 41 as well
Per section K Das and Vivian Bose JJ
It would not be correct to say that the second part of the notification was a mere surplusage severable from the rest of the notification
Liability to pay the 522 tax under section 41 of the Act could arise only on the issue of a valid notification in conformity with the provisions of that sub section and as there was no such notification the assessees were not liable under section 41 Of the Act which did not come into operation
Subsections 1 and 2 Of section 4 are mutually exclusive and their periods of application being different both could not apply at the same time and no notification was necessary to bring into operation sub section
2 Of the Act
The goods having been admittedly sold and delivered for consumption outside the State of Orissa under article 286 1a read with the Explanation as also under section 301a1 of the Act the sales were outside the State of Orissa and consequently the assessment for the three post Constitution quarters were without jurisdiction
The State of Bombay vs The United Motors India Ltd  and The Bengal Immunity Company Limited vs The State of Bihar  relied on
Per Sarkar J
There could be no liability under section 41 Of the Act till a date was appointed thereunder and where the notification as in the instant case fixing such a date was not in terms of that sub clause there was no fixing of a date at all and the sub clause could not come into play and no liability could arise under it
It was impossible to ignore the second part of the notification in question as a mere surplusage since the notification read as a whole had one meaning and another without it
The Government could not be heard to say that what it had said in the notification was not what it actually meant
Both the sub clauses Of section 4 having been brought into force at the same time by the same notification they applied to all dealers together and contemplated a situation in which the liability of a dealer under sub cl
1 might arise
It was apparent from the scheme of the Act that sub cl
2 was not intended to have any operation till a date was appointed under sub cl
1 and a liability under it might have arisen