1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR J U D G M E N T Commissioner of Income Vs. Udaipur Shahkari Tax Undiapur. Upbhokta Thok Bhandar Ltd. Udaipur. D.B. INCOME TAX APPEAL NO.45/2002 D.B. INCOME TAX APPEAL NO.46/2002 D.B. INCOME TAX APPEAL NO.49/2002 D.B. INCOME TAX APPEAL NO.50/2002 D.B. INCOME TAX APPEAL NO.51/2002 D.B. INCOME TAX APPEAL NO.53/2002 against the order dated 17.9.2001 passed in ITA Nos. 937/JP/97 , 936/JP/97, 935/JP/97 , 131/JU/99, 480/JP/95 & 132/JU/99 for assessment year 1991-92 to 1995-1996 Reportable Date of Judgment : 2nd November 2006 PRESENT HON'BLE MR. JUSTICE RAJESH BALIA HON'BLE MR. JUSTICE GOPAL KRISHAN VYAS Mr. K.K.Bissa, for the appellant. Mr. N.M.Ranka) Mr.R.K.Yadav) Mr.Sanjeev Johri), for the respondents. ------ BY THE COURT:- (PER HON'BLE RAJESH BALIA J.) In all these appeals relating to different assessment years from 1991-1992 to 1996-97, the 2 following common question has been raised. Since the matter has been decided by the Tribunal by common order, all the appeals are decided by this common order. “Whether on the facts & in the circumstances of the case the tribunal was justified in holding that the assesee Society is entitled to deductions u/s 80P (2) (e) of the Income Tax Act in respect of the income derived from Commission/margin without letting out godown of warehouse contrary to the income derived from letting of godown or warehouse and such income being deductible u/s 80P (2) (e) of the act?” The respondent – assessee is an Co- operative Society and engaged in running a Consumer Co-operative Store and having 30 branches in the city of Udaipur itself. It is dealing in non-controlled commodities as well as in controlled commodities. In the present case, we are concerned with amount included in the computation of taxable income arising from commission earned by the Assessee Society as wholesale dealer of the controlled commodities viz. wheat, rice and sugar. The commodities in questions were declared as essential commodities and became part of regulated trade through public distribution system in terms of Orders issued by Appropriate Govt. 3 under Essential Commodities Act. The assessee has its own godowns as well as hired godowns for the purpose of his business including dealing in the essential commodities. The food grains Wheat and Rice are included in Schedule I of the Rajasthan Food Grains and Other Essential Articles (Regulation of Distribution) Order, 1976 and other commodity viz 'Sugar' is also included in Schedule II of the said order. The assessee held the licence of 'authorized wholesaler' under the provisions of the aforesaid Order of 1976. In respect of the essential commodities in question the price at which the commodity concern was to be made available to consumer was fixed by the competent authority under the provisions of the Order 1976 and such price included commission to be charged by an authorised wholesale dealer as part of consideration at which he were to sell such commodities to retail authorised dealer at fair price shop. 4 The present dispute had arisen out of this commission retained by the Assessee Cooperative Society in respect of essential commodity viz wheat, rice & sugar sold by it to the retailers. There is no dispute that the commodities were to be supplied by the Food Corporation of India to the respondents- assessee. He was to pay the price of the essential commodities received by him and he was entitled to earn profit at fixed rate as part of the price at which he was required to sell the said commodities to the retailer, as per directions of the Govt. Apparently, since the goods were received as essential commodities by the assessee, it was to be stored in the godown until the same was transported to the retailer on the basis of the authorisation issued by the competent authority. The supply was to be distributed ultimately as an essential commodity in a particular area during the particular period through Authorised retailer as fair price shopkeeper. Initially, the assessee has claimed the commission, part of the price fixation, to be retained by him as its income arising from business of sale and purchase of the commodities. However, subsequently 5 the revised return was filed claiming that entire amount of the commission received by the assessee as exempted under Section 80P (2)(e) of the Income Tax Act, 1961 as income arising from leasing out godowns. It was claimed that the assessee was only acting as agent of the State Government for storing the essential commodities for facilitating the public distribution of such commodities by the State Government and commission was paid to the assessee only for the purpose of storage of the essential commodities at its godowns. The receiving of essential commodities was on the payment of price and its transportation to retailer in consideration of the price thereof was only an incidental service rendered by the assessee for facilitating the marketing, processing and distribution of essential commodities for the public. Therefore, the entire commission must be considered as income of society from letting out godowns or warehouses for the purpose of storage of essential commodities in question for facilitating the public distribution of such essential commodities by the State Government. 6 Buttressing the contention, it was urged on behalf of the assessee that stocks of the essential commodities which were supplied to the Assessee by the Food Corporation of India was only as its agent for carrying it to the public distribution system had remained throughout the property of the Food Corporation of India/State and whatever was allowed to be retained by the assessee was only for the purpose of storing of such essential commodities during transition period and providing incidental services of transportation to retailer for its distribution to the consumer at the fixed price as determined from time to time by the competent authority under the Order of 1976 and other relevant orders. In support of this contention, reliance was placed on the decision of Bombay High Court in ( Commissioner of Income-Tax Vs. Bhandara Zilla Sahakari Kharedi Vikri Sangh LTD.) 212 ITR 124 and the decision of Apex Court in CIT Vs. South Arcot District Cooperative Marketing Society case (1989) 176 ITR 117. The Assessing Officer had not accepted the contention and rejected the claim of the assessee to deduction under Section 80P(2)(e). However, the 7 contention urged by learned counsel for the assessee had been accepted by the CIT(A) and tribunal. Hence these appeals are preferred by Revenue. The learned counsel for Revenue has contended that godowns/warehouses owned or hired by the assessee for storing of the goods were as a part of its business of selling and purchasing of the commodities both essential and non-essential. He was not a mere storing agent on behalf of the State Government for the essential commodities but was duly authorised licence holder for the essential commodities as a wholesale dealer, albeit the area of its freedom in the matter of carrying on business was circumscribed by the statutory Orders issued in respect of Essential Commodities under the Essential Commodities Act by appropriate authorities. The exemption/deduction under Section 80P (2)(e) is not available to any cooperative society in all spheres of activity which may be using the godowns as a part of its own regular business activity. The deduction under Section 80P (2)(e) is available only in respect of such income derived from the use of the godwons leased out for the purpose of facilitating the business which is anterior to actual trading. Since 8 the assessee was having licence for dealing in Essential Commodities so declared under the Order of 1976 as a wholesaler and was receiving supplies of the essential commodities as a part of its wholesale trade, he having obtained the licence/authorisation of the wholesaler on his own volition, he was required to trade as per the terms and conditions imposed under the licence and after he received the essential commodities from Food Corporation of India and other agencies on payment of price fixed for such supplies he was to sell commodities to other authorised retailer/Fair Price shopkeeper at a price fixed for such sale by the State Government or other competent authority authorised in this behalf. In such event difference in price paid on supplies and price received on sale to retailer could properly be gross profit of such transaction and nothing else. In this connection, storage of the essential commodities by the assessee from the date of receipt of supplies to date of disposal was not as a recipient of the commodities for the storage on behalf of State but as a part of its own stock in trade. Merely because the stock in trade is in storage at a godown, which is integral feature of any trading activity in the commodities, the assessee cannot be said to be 9 rendering services of leasing out godown/warehouses for storing of essential commodities and receiving consideration for leasing one godown on rent or for use for incidental activities. That being the case, the nature of income embedded in the price at which assessee was required to sell the essential commodities to the retailer was not a remuneration received from the lessee for use of godown for the purpose of storing and facilitating marketing of that commodities. Learned counsel for the appellant places reliance on the decision of Karnataka High Court in Udupi Taluk Agricultrual Produce Co-operative Marketing Society Ltd. Vs. CIT 1987)166 ITR 365: In that case the tribunal recorded its finding that no income was earned by the assessee from letting out the godowns or warehouses for the purposes of storage, processing or facilitating the marketing of commodities. It is in the aforesaid backdrop, the High Court came to the conclusion that Section 80P(2)(e) 10 was not attracted and observed that the tribunal in coming to these conclusions had noticed the decision of Madras High Court in South District Corporative Marketing Society Ltd. (1973) 92 ITR 371 later on affirmed by Supreme Court and said:- “This is a liberal construction of clause (e). But, nonetheless, it seems to us that the income derived by the cooperative society for the purpose of exemption under clause (e) must be relatable to the letting out or the use of its godowns or warehouses. Any income derived by the society unconnected with such letting out or use of the godowns or warehouses will not fall under clause (e).” It will be apposite here to notice Section 80P(2) which reads as under:- (2)The sums referred to in sub-section(1) shall be the following namely:- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or [(iii) the marketing of agricultural produce grown by its members, or] (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or 11 (v) the processing, without the aid of power, of the agricultural produce of its members,[or] [(vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,] the whole of the amount of profits and gains of business attributable to any one or more of such activities : [Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:- (1)the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2)the co-operative credit societies which provide financial assistance to the society; (3)the State Government;] [(b) in the case of co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to- (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii)the Government or a local authority; or (iii) a Government company as defined in section 12 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public), the whole of the amount of profits and gains of such business;] (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as [ does not exceed,- (i) where such co-operative society is a consumers' co-operative society, [one hundred] thousand rupees; and (ii) in any other case, [fifty] thousand rupees. (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income; (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; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities [..........] or any income from house property chargeable under section 22. 13 From the perusal of the aforesaid provision it is apparent that while the cooperative society has been treated by the Act of 1961 as an assessee for extending certain concession in computing taxable income but at the same time, it has not exempted the income of cooperative society in its entirety. It has classified the cooperative societies on the basis of various activities carried out by the cooperative societies. The cooperative society which is a consumer cooperative society has been treated differently than other types of cooperative society namely the cooperative society engaged in business of banking or providing facilities for industrial or marketing, in the matter of grant of tax exemption or benefit of deduction in respect of its income from different sources. In the case of consumer cooperative society engaged in activities other than the cooperative society prescribed under clause (a) or (b )of Sub Section (2), the entire income has not been exempted but only the minimum limit of taxable income has been made higher than other assessees under the Act. 14 A consumer cooperative society is entitled to get deduction of 1,00,000/- out right from its total income from whatever source to the extent the consumer cooperative society has a taxable income up to 2,00,000/-. The income earned by it vary according to its business as a consumer cooperative society. The income of other cooperative societies, which do not fall within the purview of Sub Clause (a) and (b) of Sub Section 2 of Section 80 (2)(P) becomes taxable. The limit during the relevant period up to which any cooperative society would not become taxable was Rs.20,000/- and thereafter it has been enhanced to Rs. 1,00,000/-. It is significant to notice Explanation to Clause (e) of Sub Section (2) of 80(P), which defines, the Consumer cooperative society. While clauses (a) (b) & (c) deal with the case of the cooperative society for the purpose of granting certain tax exemption in respect of the total income, Clauses (d) (e) and (f) of Sub Section 80P(2) deal with the types of income earned by such cooperative society to be deducted from its total income for the purpose of computing its 15 taxable income. Clause (d) deals with income derived by way of interest and Clause (e) deals with income derived by the cooperative society from letting out the godowns or warehouses and clause (f) deals with the income earned as interest on securities or income from use of warehouse in respect of specific cooperative society whose gross total income comes to Rs. 20,00,000/-. It is with two fold view that the issue is to be examined. Firstly, that the assessee is a consumer cooperative society and secondly, it owns godown as well as hires godown for storing its merchandise including essential commodities in which it is trading under an authorisation but is not a Society engaged in the activity of the constructing warehouses for the purpose of earning income therefrom. Despite our querry, the constitution and by-laws of the cooperative society in question was not furnished to us. However, it can safely be inferred that earning income from leasing out warehouses is not the primary activity of the assessee society but it is only incidental to its activity of dealing in consumer articles. We may not be taken to have expressed opinion that benefit of Clause (e) of 16 sub Section 2 of Section 80P (2) is available only to the cooperative society whose object is to construction warehouse and then earn from storing the commodities for the purpose of processing and facilitating the marketing of the commodities. For that matter any other cooperative society, if it has godown or warehouse at its disposal owned or hired, and earns any income by leasing out and allowing its use for storage of processing or commodities for facilitating the marketing of such commodities, income derived from such activities by such cooperative society will also be falling within the ambit Clause (e) of Section 80P (2). Clause (e) of Section 80P (2) in that sense is generic in its application to where nature of income derived by it can be considered from letting out or from use of such godown or warehouse for facilitating the marketing of commodities. Therefore, the core question would be whether the assessee was storing the commodities in question in his godown or warehouse for the purpose of storage, processing and facilitating marketing of such commodities or was using his godown for the purpose of its own business of trading for holding 17 stocks as a part of its trading necessity. We are of the opinion that storing of commodities by a trader or for that matter the consumer cooperative society of its 'stock in trade' during the course of carrying of its business of trading does not fall within the ambit of the scheme of Clause (e) of Section 80P (2). If that were so the separate provision would have been redundant and the entire income of the Consumer Cooperative Society would have been deductible. Without keeping stocks, wherever stored, the trading activity by a trader cannot be conceived. Use of different phraseology for facilitating the marketing of commodities under Clause (e) can only mean storage of the commodities either for the purpose of processing of the commodities stored therein making them marketable or for providing such other services before its marketing. But where any commodity is stored there only as traders 'stock in trade', whether in godowns or warehouse owned by it or at such premises hired by it, It cannot be considered as activity of storage for facilitating and marketing. In other 18 words, the activity for which remuneration is charged by assessee cooperative society for use of the warehouses and godown is for the user, which must relate to a period anterior to its coming to marketable stage. Wholesaler as well as retailer both are traders engaged in sale and purchase of the commodities in which they trade. Taking any other view will mean that every wholesaler who passes on commodities to a retailer, before the commodities reach end consumer, will only be treated as provider of service for facilitating marketing. In other words except the end stage seller all middleman will be considered as storing commodities only for the purpose of facilitating marketing of commodities. That will be subverting the very object and purpose of the provision itself. 'Marketing' cannot be confined only to the end stage trading activity of sale by retailer and purchase by end consumer. To answer the question whether assessee was only storing the essential commodities in question at his godown on behalf of the State before it is marketed for a temporary period and the commission 19 of the wholesaler would be charged in the ultimate price to be charged from the consumer is only for the purpose of providing storage facilities by the assessee to the Government or other authority entrusted with the task of providing essential commodities or was actually holding the commodities as part of its trading stock albeit then under regulatory provision, the Order of 1976 promulgated for declaring and regulating trade in commodities as essential commodities and the terms and conditions of the licence issued thereunder needs attention. The key factor on which emphasis was laid by the assessee before us is that the cooperative society was only authorised to store the commodities on behalf of the State Government and it had no more role to play. This contention has been accepted by the tribunal by referring to the terms of the agreement. However no separate agreement in respect of different commodities has been placed before us despite the fact that we directed during the course of hearing of appeals to the revenue as well as the assessee to place on record the documents on the basis of which the tribunal has reached the conclusion and read the terms 20 of agreement. The copy of the wholesale authorization placed before us shows that it was in terms with Form B appended to the Order of the 1976 containing terms and conditions under which the authorization is made for acting as a wholesaler in respect of the essential commodities mentioned in the licence. In these circumstances, one must examine the scheme of the Order under which such licence authorisation was issued, the Essential Commodities Act under which the Orders are issued and different consequences that follow depending upon prevalent rules in the State at the relevant time in respect of the commodities in question. The preface of the Order of 1976 says that “this is necessary so to do for maintaining supplies of the foodgrains in essential commodities and securing its equitable distribution and availability of fair price shops. With this aim in view, if we look at sub 21 clause [c] of clause 2 of the Order defining 'Authorized Fair Price Shop keeper' it means a retail dealer, in change of a shop, authorized under Clause 3 and it includes a person in charge of the shop where foodgrains and other essential articles are sold under the control of the State Government. This definition shows that the distribution of Essential Commodities may be directly by the State Government through a shop maintained under its control or it may be done through a private retailer/dealer who is duly authorized to sell such Essential Commodities under Clause 3. Similarly 'Authorized Wholesaler' is defined in sub clause (f) of Clause 2 to mean a person, a firm, an association of persons or a co- operative society or any other institution authorised or appointed as an agent under clause 3 of this Order by the State Government or the Collector. Under Sub clause (b) of Clause 2 “Authorization” means an authorisation issued under clause 3 of this Order. 22 This takes us to Clause 3 of the order which envisages that the Collector or any other officer authorised by the State Government may issue an authorisation to any person being an 'authorised wholesaler/fair price shopkeeper' to obtain and supply foodgrains and other Essential Articles in the area specified therein. Sub clause (2) of clause 3