P.I. Mohan Singh, Judicial Member -
(1.) THESE appeals of the assessee relate to the assessment years 1976-77 and 1977-78 and arise out of the order of the Commissioner (Appeals), Nagpur dated 23-9-1981. The aforesaid appeals involve a common issue and are, therefore, heard together and disposed of by common consolidated order for the sake of convenience.
(2.) The main controversy in the aforesaid appeals relates to the exemption claimed by the assessee under Sections 80P(2)(a)(iii) and 80P(2)(a)(iv) of the Income-tax Act, 1961 ('the Act'). The brief facts of the case are as under.
The assessee is a co-operative society at Hinganghat and is functioning at Hinganghat Tahsil. The assessee-society is functioning as per its constitution and bye-laws as per provisions of the Maharashtra Co-operative Societies Act, 1960, As per the constitution and bye-laws of the society it can have different types of members such as (i) individual members, (ii) associate members, (iii) nominal members and (iv) sympathiser members. During the year in question the assessee-society had 273 individual members, 68 sahakari sanstha members (i.e., primary societies), 275 nominal members, one State Government member and 10,572 cotton cultivator nominal members.
During the years under appeal, the assessee-society, earned income by commission from the Maharashtra State Co-operative Marketing Federation Ltd. on account of marketing the cotton of their cultivator members to the said Federation. The total amount of commission accrued during the year from marketing the cotton of cultivator members amounted to Rs. 2,59,678. The assesse-society has also earned the profit on sale and supply seeds, pump sets, pesticides, etc., to the primary societies. The profit earned on sale and supply of goods to the primary society members during the year amounted to Rs. 73,273. On these transactions of sale and supply, the assessee also earned Rs. 35,926 by way of commission from the dealers from whom the goods were purchased for supply to the primary society members, nominal members and individual members. The assessee-society has also earned Rs. 9,933 by way of service and transportation charges in respect of sale and supply of above referred goods. Thus, the total amount earned from the business of sales and supply of seeds, pump sets, insecticides to the primary societies, nominal members and individual members amounted to Rs. 1,19,132. The assessee claimed exemption under Section 80P(2)(a)(iii) in respect of cotton commission received from the Federation because the said commission was earned by marketing the agricultural produce of the members of the assessee-society, viz., 10,572 cotton cultivators and other individual and nominal members. The assessee also claimed exemption in respect of profit, commission and service charges amounting to Rs. 1,19,132 earned out of the transaction of supplying agricultural implements, seeds and other articles intended for agriculture to its members under Section 80P(2)(a)(iv). The assessee has also claimed deduction on account of certain expenses and outgoings appropriated out of the gross profits as provided under Section 65 of the Maharashtra Co-operative Societies Act. In view of the exemptions and deductions claimed, the assessee had no taxable income and hence it filed a nil return. The ITO did not allow deduction in respect of profit earned by way of commission from the Federation on account of marketing the agricultural produce, namely, cotton, of 10,572 cultivators. Similarly, the ITO did not allow exemption in respect of supplies of agricultural implements and articles to the primary society members and nominal members. The ITO thus computed total taxable income at Rs. 1,84,964 as against nil income shown by the assessee. Since the proposed variation was more than Rs. 1,00,000, the ITO referred the matter under Section 144B of the Act to the IAC. The IAC gave hearing to the assessee. The assessee reiterated the contentions made before the ITO and also submitted further written and oral arguments. The IAC rejected the submissions of the assessee and directed the ITO to complete the assessment on the lines stated in Section 144B proceedings by his detailed order dated 7-8-1979. The ITO accordingly completed the assessment by his order dated 16-8-1979 on a total income of Rs. 1,84,960.
As against this order of the ITO, the assessee went in appeal before the Commissioner (Appeals) before whom the learned counsel for the assessee, apart from reiterating the submissions made during the course of of assessment proceedings, further submitted that the cultivators and the nominal members are members of the society for all practical purposes. It is vehemently argued that the nominal members and the cotton cultivator members figure in the list of members and all such members have contributed capital though in the case of cotton cultivator members, it is by way of deduction of 1 per cent out of sale price payable to them for the cotton procured. This, however, is in no way prejudicial to the claim of the assessee.
Regarding the ground of disallowance of Rs. 1,19,132 under Section 80P(2)(a)(iv), it was contended by the learned counsel for the assessee that in the instant case there was unmistakably a sale of goods to the primary societies. Even if it was felt that this was not a case of sale, there was certainly a supply of goods. The counsel for the assessee submitted that in Section 80P(2)(a)(iv) the expression used is 'supply'. The assessee's counsel further explained the modus operandi of the transactions of sales by the assessee-society to the primary societies, namely, Sahakari Sewa Sanstha and tried to explain to the Commissioner (Appeals) as to how the sales take place between the assessee-society and the primary society.
Regarding the ground relating to the deduction of Rs. 2,26,610 the learned counsel for the assessee contended that the assessee has made the claim as the aforesaid amount is debited to the profit and loss account as per Section 65 of the Maharashtra Co-operative Societies Act. The Commissioner (Appeals), after hearing the contentions made by the learned counsel for the assessee, wrote a detailed order agreeing with the order of the ITO. While arriving at the aforesaid conclusion, the Commissioner (Appeals) took into consideration the following factors, namely:
1. Whether the person described as a 'member' has some proprietary interest and relating to the organisation by virtue of capital contribution or otherwise?
2. Whether the person described as a 'member' has any control in the affairs of the organisation?
3. What are the entitlements of the person in the profits of the organisation in the assets in the event of widening up and what is his liability?
While examining the aforesaid aspects, he took note of Sections 24(2) and 24(8) of the Co-operative Societies Act according to which nominal members and sympathiser members shall not be entitled to any share in any firm whatsoever in the profits and assets of the society as such members. Further, according to Section 27(8), the nominal or sympathiser members shall not have the right to vote. Therefore, according to the learned Commissioner (Appeals), nominal or sympathiser members are not regular members who are entitled for exemption under Section 80P(2)(a)(iii).
Regarding the claim made by the assessee under Section 80P(2)(a)(iv), the Commissioner (Appeals) observed that even by the use of the expression 'supply' appearing in Section 80P(2)(a)(iv), the basic question will remain to be answered, namely, to whom the property in the goods is intended to be transferred. According to him, the intention is to provide goods to the cultivators who are members of the primary societies but not the assessee-society. With the aforesaid observation in his order, the Commissioner (Appeals) has agreed with the order of the ITO on this ground, namely, the ground relating to disallowance under Section 80P(2)(a)(iv).
In dealing with the aforesaid grounds, in view of the fact that according to him nominal members could not be equated with regular members and in view of the fact that' he has held that the so-called supplies to the primary societies' members are in reality to the cultivators who are non-members of the assessee-society, he gave direction to the ITO to withdraw reduction of Rs. 2,128, as according to him it was wrongly allowed in the assessment.
(3.) AS against this order of the Commissioner (Appeals) the assessee is in appeal before us. The learned counsel for the assessee besides reiterating the contentions made before the lower authorities further contended that the word 'member' used in Section 80P is not defined in the Act. Section 80P deals with exemption to co-operative societies. Though the word 'member' is not denned in the Act, it has been defined in Section 2(19) of the Maharashtra Co-operative Societies Act which is inclusive definition and includes nominal, associate and sympathiser members. According to him, therefore, there is no basis for restricting the meaning only to the category of regular members and exclude other categories of members. The word 'member' according to him must be given its natural and liberal meaning and its meaning cannot be artificially reduced. It is, therefore, contended that the commission received from the marketing federation in marketing the produce of the sympathiser and nominal members would be exempt under Section 80P(2)(a)(iii)- The learned departmental representative, on the other hand, relying on the orders of the lower author ties contended before us that the word 'member' as used in the Act should be given restrictive meaning as to mean only regular members.
Regarding the issue relating to the disallowance under Section 80P(2)(a) (iv), the learned counsel for the assessee reiterated the contentions made before the lower authorities and further submitted that in deciding the aforesaid issue it is necessary to find out whether there is a sale of these goods by the assessee-society to the primary societies who are its members or whether it is a sale to the members of the primary societies who are not its members. In case if it is former the assessee would be entitled to exemption under Section 80P(2)(a)(iv) but in case it is latter the assessee will not be entitled to such exemption.;