1 Income-tax Appeal No. 232 of 2003 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH --- Income tax Appeal No. 232 of 2003 Date of Decision: .5.2009 The Budhewal Co-op. Sugar Mills Limited --- Appellant Versus C.I.T. Aayakar Bhawan, Rishi Nagar, Ludhiana --- Respondent --- CORAM: HON‟BLE MR. JUSTICE M. M. KUMAR HON‟BLE MR. JUSTICE AJAY KUMAR MITTAL HON‟BLE MR. JUSTICE RAJESH BINDAL --- PRESENT: Mr. S.K. Mukhi and Mr. Rajesh Garg, Advocates for the appellant-assessee. Mr. Rajesh Sethi, Advocate and Mr. Sachin Gupta, Advocate for the respondent-revenue. --- AJAY KUMAR MITTAL, J. Expressing a plain divergence from the view held by a past Division Bench of this Court in Karnal Cooperative Sugar Mills Ltd. Versus Commissioner of Income Tax, (2002) 253 ITR 659, a Division Bench of the epoch of 2004, 2 Income-tax Appeal No. 232 of 2003 advocated for the decision of the following issue by a larger Bench:- “Whether a Cooperative Society, engaged in the business of manufacture and sale of Sugar out of the sugar-cane grown by its members, can be denied deduction under Section 80P(2) (a) (iii) of the Income Tax Act, 1961 on the ground that processing involves use of power? While doing so, the Division Bench noticed in the referral order passed on May 24, 2004 that the assessee in this case was a Cooperative Society which was engaged in sale and manufacture of sugar from the sugar-cane 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 Cooperative Sugar Mills Ltd's case (supra). 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 80-P (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 80-P (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 Income-tax Appeal No. 232 of 2003 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 sugar-cane 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 marketable in the form of sugar and in other ancillary by-products, and further to make arrangements for its sales and many more. The principal task, however, was to boost up the process of converting the agricultural produce into sugar and making it marketable. The appellant filed its return of income showing the same as nil for the assessment year 1995-96, on 31.10.1995. The return was processed at an income of Rs. 6,32,07,617/- on 8.11.1995 after making adjustment under Section 143(1)(a) of the 1961 Act by declining the claim of the appellant that its total income is exempt under Section 80P(2)(a)(iii), and the same was finally assessed under Section 143(3) of the said Act, at an income of Rs. 6,33,16,710/-. Against the order of the Assessing Officer, the appellant-society preferred an appeal before the Commissioner of Income-tax (Appeals), Ludhiana, which was disposed of vide order dated 31.3.1997. Having got no relief, the appellant still preferred an appeal before the 4 Income-tax Appeal No. 232 of 2003 Income Tax Appellate Tribunal, Chandigarh raising various grounds. Before the Tribunal, one of the grounds was that the appellant was entitled to claim deduction of full amount as per the provisions of Section 80-P(2)(a)(iii) of the 1961 Act in view of various decisions. The Tribunal, however, declined to accept the prayer of the appellant which impelled it to prefer the instant appeal. Since, as noticed above, the Division Bench dealing with the matter, while expressing doubts over the correctness of the decision of a Division Bench of an earlier era recommended the issue to be resolved by a larger Bench, the appeal came to be listed before us constituting the Full Bench. We have heard learned counsel appearing for the parties and have gone through the records with their assistance. Shri Mukhi, the learned counsel for the assessee- appellant emphatically asserted and maintained that the primary activity of the members of the appellant- Cooperative Society is agriculture, and any activity carried on by the appellant to convert agriculture produce grown by its members to make such produce marketable shall fall under sub-clause (iii) of Section 80P(2)(a), and the restriction imposed in sub-clause (v) thereof would have no applicability thereto. The main thrust of his argument has 5 Income-tax Appeal No. 232 of 2003 been that the decision of the Division Bench in Karnal Cooperative Sugar Mills Ltd‟s case (supra) had not appreciated the legal position in its right perspective and on re-consideration of the said pronouncement the same requires to be decided in favour of the assessee. Mr. Sethi, learned counsel appearing for the respondent-revenue relied upon the decision of the Division Bench in Karnal Cooperative Sugar Mills Ltd‟s case (supra) 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 Cooperative Society with the aid of power, no deduction under sub-clause (iii) shall be exigible. The cardinal issue which evokes the attention of the Full Bench relates to the construction of Section 80P(2)(a)(iii) vis-à-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 Cooperative Society, which manufactures and produces sugar from the sugar-cane grown by its members with the aid of power, shall be entitled to deduction under Section 80P(2)(a)(iii) under 6 Income-tax Appeal No. 232 of 2003 Chapter VIA of the 1961 Act. The controversy raises varied facets and is required to be adjudged from various angles. With this backdrop, before delving on the issue involved in the appeal, it would be essential to refer to the legislative history of sub-clauses (iii) and (v) of Section 80P(2)(a) of the 1961 Act, and the purpose underlined in enacting the same. The Cooperative Societies enjoyed exemption under the Income Tax Act, 1922 (in short “1922 Act”) by virtue of issuance of notification by the Governor General in Council in exercise of power conferred on him under Section 60 of that Act itself. The 1922 Act was amended by Finance Act, 1955 whereby sub-section (3) to Section 14 was inserted thereto and the exemption provision was made very wide. Amendments were made to the aforesaid provision by Finance Act, 1960. The amendment curtailed the general exemptions which were enjoyed by Cooperative Societies till then and, therefore, exemption was confined to societies engaged in the marketing of agricultural produce of their members. On coming into force the Income-tax Act, 1961, Section 14(3) of the 1922 Act became Section 81 of the 1961 Act. The provisions of Section 81(i)(c) and (e) which are relevant for our purpose read as under:- “81. Income of co-operative societies. 7 Income-tax Appeal No. 232 of 2003 Income-tax shall 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- (a) a society engaged in carrying on the business of banking or providing credit facilities to its members; or (b) a society engaged in a cottage industry; or (c) a society engaged in the marketing of the agricultural produce of its members; or (d) a society engaged in the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members; or (e) a society engaged in the processing without the aid of power of the agricultural produce of its members; or (f) a primary society engaged in supplying milk raised by its members to a federal milk co- operative society: Provided that, in the case of a co-operative society which is also engaged in activities other 8 Income-tax Appeal No. 232 of 2003 than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupee. 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 Cooperative Societies. Sub-clause (iii) of Section 80P(2)(a) provided for exemption to the Cooperative 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 Cooperative Societies engaged in “processing of the agricultural produce of its members without the aid of power”. The 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. Additional Commissioner of Income-tax, [1993] 201 ITR 338 (S.C.) 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 (Kerala) held that the exemption was 9 Income-tax Appeal No. 232 of 2003 not available to the State Cooperative Society where the agricultural produce was not produced by its members. On appeal, the Bench of three Hon‟ble Judges of the Apex Court in Kerala State Co-operative Marketing Federation Ltd., (1998) 231 ITR 814, while over-ruling its earlier decision in Assam Co-operative Apex Marketing Society Ltd.‟s case (supra) observed that the society engaged in the marketing of agricultural produce of its members would not mean only such societies which deal with the produce raised by the members who are individuals but also deal with member- Societies who may have purchased such goods from the agriculturists. The Parliament, by Income-tax (Second Amendment) Act, 1998, amended Section 80P(2)(a)(iii) retrospectively, from April 1, 1968. Section 80P(2)(a)(iii) and (v) as originally inserted reads thus: “80-P. Deduction in respect of income of co- operative societies.-(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:- 10 Income-tax Appeal No. 232 of 2003 (a) in the case of a co-operative society engaged in--- (i) … … … (ii) … … … (iii) the marketing of the agricultural produce of its members, or.” (iv) … … … (v) the processing, without the aid of power, of the agricultural produce of its members, Sub-clause (iii) of Section 80P(2)(a) after amendment by Income-Tax (Second Amendment) Act, 1998 retrospectively from April 1, 1968 reads thus: “(iii) the marketing of agricultural produce grown by its members, or” The validity of the aforesaid amendment was upheld by the Apex Court in National Agricultural Co- operative Marketing Federation of India Ltd. and another v. Union of India and others, (2003) 260 ITR 548 (S.C.). The Supreme Court while considering the reasons for amendment, referred to clause 6 of the statement of objects and reasons, which is to the following effect: "6. Clause 8 seeks to amend Section 80-P of the Income-tax Act. Under the existing provision, profits derived by a co-operative society engaged in the marketing of agricultural produce of its 11 Income-tax Appeal No. 232 of 2003 members are fully deductible in computing the taxable income under Section 80-P(2)(a)(iii) of the Income-tax Act. The deduction was intended for primary co-operative societies marketing the agricultural produce of their farmer members. In the case of Kerala State Co-operative Marketing Federation v. Commissioner of Income-tax, the Hon'ble Supreme Court held that the use of 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 80-P(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 12 Income-tax Appeal No. 232 of 2003 the deduction to the profits derived by a co- operative society engaged in the marketing of agricultural produce grown by its members." According to plain reading of Section 80P(2)(a)(iii), if a Cooperative Society earns income from marketing of the agricultural produce grown by its members, the deduction in respect of the profits and gains of business which are attributable to that marketing activity would be available under this provision. The main point that needs deliberation is the scope and ambit of the expression “marketing” occurring in sub-clause (iii) of Section 80P(2)(a) of the 1961 Act. The expression „marketing‟ has no where been defined in the 1961 Act and therefore, its meaning has to be understood as are given in the dictionaries and the authorities. A Division Bench of Gujarat High Court in Commissioner of Income-tax, Gujarat v. Gujarat State Warehousing corporation, (1980) 124 ITR 282(Gujarat), after considering various definitions and reference books, while defining the ambit and scope of „marketing‟, pointed out that “marketing process” was something more than merely buying and selling. It was recorded thus: “In the passage in Corpus Juris Secundum, vol.55, p.785, the term “marketing” has been defined as follows: 13 Income-tax Appeal No. 232 of 2003 “Marketing” signifies a bringing or sending to market, and includes buying as well as selling.” This would show that buying and selling is an activity which is included in the term „marketing”. Therefore, buying and selling is one of the activities in this field of marketing which does not exhaust its whole content. The passage from the “Principle and Practice of Marketing in India” by Dr. C.B. Mamoria and B.L. Joshi, is very important and instructive in this context. “Marketing” includes all activities involved in the creation of place, time and possession utilities. Place utility is created when goods and services are available at the places they are needed, time utility when they are needed, and possession utility when they are transferred to those who need them. The process of marketing makes goods and services much more valuable when they are wanted and transferred to the people and place who want them.” These authors have made the following classification of the marketing functions: (1) Activities involving transfer of ownership; (a) buying; (b) selling; (2) Activities involving physical supply: (a) transportation; 14 Income-tax Appeal No. 232 of 2003 (b) Storage; (3) Activities facilitating the foregoing functions; (a) standardization and grading; (b) financing; (c) risk taking; (d) market research, It was further observed as under: “Encyclopedia Britannica, 1960 Edn., Vol. 14, p.915, 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.” 15 Income-tax Appeal No. 232 of 2003 A similar view with regard to “marketing” is to be found in U.P. State Warehousing Corporation v. Income-tax Officer, A-Ward, Circle II, Lucknow and another, (1974) 94 ITR 129 (Allahabad) and Addl. Commissioner of Income-tax, Karnatka v. Ryots Agricultural, Produce Co-operative Marketing Society Ltd. (1978) 115 ITR 709 (Karnatka). The expression „marketing‟ has been used in its wide import and it generally means „the performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer. In order to make an agricultural produce fit for marketing it may have to be transported or processed, but all the activities involved are understood as amounting to a single activity, namely, marketing, and not independent activities, such as transporting, processing, selling etc. The marketing functions may involve exchange of functions such as buying and selling etc. (on commission or otherwise), physical function such as storage, transportation, processing and other commercial functions such as standardization, financing, market intelligence etc. If the legislative intent was to confine it to buying and selling then, in view of the well understood wider meaning of the expression „marketing‟, the Parliament would have used the words 16 Income-tax Appeal No. 232 of 2003 “buying and selling” of commodities instead of the term “marketing”. The field of operation of sub-clause (iii) of Section 80P(2)(a) of 1961 Act has been defined by various courts in different pronouncements. The Karnatka High Court in Ryots Agricultural Produce Co-operative Marketing Society Ltd.‟s case (supra) was considering the case of an assessee who was engaged in the marketing of rice grown by its members after hulling it in its mill which was run by power. Similarly, the assessee had extracted the oil derived from the groundnut grown by its members after converting it into oil in its expeller run by power. The Division Bench held that “the goods in question having been marketed and the business of the assessee being marketing of the agricultural produce of its members, the same clearly fell under Section 81(i)(c) of the 1961 Act. The Division Bench further recorded that the goods, which are ultimately marketed, had been further processed with the aid of power would, therefore, be of no consequence so far as exemption granted under Section 81(i) (c) was concerned. The provisions of Section 81(i)(c) are akin to those of Section 80P(2)(a)(iii). The Gujarat High Court in Commissioner of Income-Tax, Gujarat-IV v. Karjan Co-operative Cotton Sale, Ginning and Pressing Society Ltd. (1981)129 ITR 821 17 Income-tax Appeal No. 232 of 2003 (Gujarat) was seized of the matter relating to the sale of cotton which had been ginned and pressed. The Court had recorded that the concept of „marketing‟ in clause (iii) of Section 80P(2) (a) of the 1961 Act included all 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. The issue before the Kerala High Court in Meenachil Rubber Marketing and Processing Co-operative Society Ltd. v. Commissioner of Income Tax, (1992) 193 ITR 108 (Kerala) 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. 18 Income-tax Appeal No. 232 of 2003 The Apex Court in Broach Distt. Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. Commissioner of Income-tax, Ahmedabad, (1989)177 ITR 418 approved the judgment of the Karnatka High Court in Ryots Agricultural Produce Co-operative Marketing Society Ltd.‟s case (supra) and Gujarat High Court in Karjan Co- operative Cotton Sale, Ginning and Pressing Society Ltd‟s case (supra). The Apex Court was considering the scope of Section 81(i)(c) of the 1961 Act. The observations of the Supreme Court recorded therein, which are relevant for our purpose, are as under: ”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 s. 81(i) and certain other activities which are not exempted, the profits and gains attributable to such non-exempted activities must necessarily 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 ancillary 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 19 Income-tax Appeal No. 232 of 2003 High Court. It is apparent that the ginning and pressing was part of the integral process of marketing. It was an activity 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 delivered 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 so 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 s. 81(i) was to encourage and promote the growth of cooperative societies, and consequently a liberal construction must be given to the operation of that provision. The proviso to s. 81(i) operates to exclude from the exemption those activities which can be regarded as separate and distinct from the activities enumerated in clauses (a) to (f) of s. 81(i). If the activity in question is incidental or ancillary to one 20 Income-tax Appeal No. 232 of 2003 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. Commissioner of Income-Tax, Karnataka v. Ryots Agricultural Produce Co-operative Marketing Society Ltd., [1978] 115 ITR 709 (Karnatka) where reference has been made to the broad meaning of the expression 'marketing' appearing in cl. (c) of s. 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 Commissioner of Income-tax, Gujarat IV v. Karjan Co-op. Cotton Sale, Ginning & Pressing Society Ltd., [1982] 129 ITR 821 (Gujarat) 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.” The issue again came up for pointed consideration before the Apex Court in Kerala State Co-operative Marketing Federation Ltd.‟s case (supra). The Supreme