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26 Co-operative Society – Deduction under Section 80P(2)(e):
An assessee-society engaged in distribution of controlled commodities on behalf
of the government under Public Distribution System and getting commission is not
entitled to deduction under section 80P(2)(e), as it earned its income from
business and not from letting of godowns or warehouses for the purpose of
storage, processing or facilitating the marketing of commodities.
[B]
Udaipur Sahakari
Upbhokta Thok Bhandar Ltd. vs. CIT [2009] 315 ITR 21 (SC)
The appellant, a co-operative society registered under the
Rajasthan Co-operative Societies Act, 1965, was running a consumer co-operative
store at Udaipur since 1963. It had 30 branches. The appellant was dealing in
non-controlled commodities through its branches. In addition, the appellant was
also doing the work of distribution of controlled commodities such as wheat,
sugar, rice and cloth on behalf of the government under the public distribution
scheme (PDS) for which it was getting commission. The distribution of the
controlled commodities was regulated by the District Supply Officer (DSO
–Authorized Officer) under the Rajasthan Foodgrains and other Essential Articles
(Regulation of Distribution) Order, 1976 (for short, “the 1976 Order”). The
appellant claimed to be stockist/distributor of controlled commodities. It took
delivery from the Food Corporation of India (FCI) and the Rajasthan Rajya
Upbhokta Sangh, as per the directives of the state government. The price,
quantity and the person from whom the delivery was to be taken was fixed by the
state government under the said 1976 Order. After taking the delivery, the
appellant stored these goods in its godowns, both owned and rented. The storage
godowns were open to checking by the concerned officers of the state government.
The stocks stored by the appellant were delivered to fair price shops
(FPS-retailers), as per the directives of the state government. The quantity
price and the FPS to whom the delivery was to be given, were fixed by the state
government. According to the appellant, therefore, the above modus operandi
indicated that the state government exercised total control over the stock of
controlled commodities stored in the godowns of the appellant-society. On
February 28, 1977, the appellant was granted licence for purchase/sale/storage
for sale of foodgrains under the Rajasthan Foodgrains Dealers Licensing Order,
1964.
On August 31, 1990, the appellant filed its returns for the
assessment year 1989-90, claiming deduction under section 80P(2)(e) of the 1961
Act on the income of commission received by it from the government for storage
of controlled commodities. The appellant later filed its returns of income for
the subsequent assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95,
1995-96, inter alia, claiming deduction on the income of commission received by
it from the state government for storage of controlled commodities. Vide order
dated March 26, 1992, the AO (Assessing Officer) disallowed the claim on the
ground that the appellant-society was a wholesaler of foodgrains and it was not
a mere stockist as claimed, and consequently, it was not entitled to deduction
under section 80P(2)(e) of the 1961 Act. This order was applied for the
assessment years in question. Aggrieved by the assessment order(s), the
appellant filed appeals before the Commissioner of Income-tax (Appeals). The
Commissioner of Income-tax (Appeals) held that the appellant was entitled to
deduction under section 80P(2)(e) of the 1961 Act on the income of commission
received from the state government for stocking the above foodgrains. This
decision was affirmed by the Tribunal, vide its decision dated October 20, 2000,
dismissing the department’s appeal by a common order holding that the appellant
was entitled to deduction under the said section. This view of the Tribunal,
however, was overruled by the decision dated November 2, 2006, of the Rajasthan
High Court which took the view that the appellant-society was storing the said
controlled commodities in its godowns as part of its own trading stocks; that
the appellant acted as a trader in the essential commodities in question and
consequently the appellant was not entitled to deduction under section 80P(2)(e)
of the 1961 Act. Against the impugned decision, the appellant went to the
Supreme Court by way of petition for special leave.
The Supreme Court, at the outset, noted that the appellant
had composite business. The appellant was a dealer in non-controlled commodities
and it was an authorization holder in respect of controlled commodities under
the 1976 Order. It owned godowns and it also hired godowns on rent. It earned
commission during the relevant assessment years at the rate of 2.25 per quintal
(e.g. for rice). Under clause 20 of the 1976 Order, every authorization holder
had to comply with general or special directions given in writing from time to
time by the Collector in regard to purchase, sale, storage for sale,
distribution and disposal of controlled commodities. The Supreme Court further
noted that the appellant earned commission on the principle of “netting”. In
other words, the appellant set off “issue price” against “sale price” and
retained commission fixed at Rs.2.25 per quintal.
The Supreme Court, referring to the rate fixation mechanism
indicated by one of the orders issued on 12th March, 1987, w.e.f. 1st May, 1987
and adverting to the working given therein, observed that the said working
indicated that Rs.247.82 (issue price) was treated by the appellant as expense
and it was set off against the sale price of Rs.251.07. In other words, the
working indicated cost plus mechanism, i.e. Rs.247.82 was the cost plus profit
margin which included Rs.2.25 as commission. Therefore, Rs.2.25 was part of the
profit margin. The Supreme Court, referring to the written submissions filed by
the appellant, observed that the appellant had taken into its books of account
the consolidated value of the closing stock. According to the Supreme Court, the
circumstances reinforced the finding of the High Court in its impugned judgement
that the appellant was storing the commodities in its godowns as a part of its
own trading stock.
The Supreme Court noted that Section 81(iv), followed by the
Section 14(3)(iv) in the 1922 Act (as amended) was a predecessor to Section
80P(2)(e) of the 1961 Act; and it had come up for consideration before the
Gujarat High Court in the case of Surat Venkar Sahakari Sangh Ltd. vs. CIT
[1971] 79 ITR 722. In that case, it was inter alia held that:
(i) On a plain natural construction of the language used in
section 81(iv) that what is exempted under that section is income derived from
the letting of godowns or warehouses, provided the letting is for any of the
three purposes, namely, ‘storage’, ‘processing’ or ‘facilitating the marketing
of commodities”.
ii) On a proper interpretation of Section 14(3) (iv) and Section 81(iv), separate exemption is not granted in respect of income from the letting of godowns or warehouses for storage, income from processing and income from facilitating the marketing of commodities. But the exemption is available only in respect of income derived from letting of godowns or warehouses where the purpose of letting is storage, processing or facilitating the marketing of commodities.
The Supreme Court approved the reasoning given by the Gujarat High Court on the interpretation of Section 81(iv) and Section 14(3)(iv) of the 1922 Act. The Supreme Court held that on reading the above judgement, it became clear that under Section 80P(2) of the 1961 Act, an assessee is entitled to claim special deduction from its gross total income to arrive at total taxable income. The burden is on the assessee to establish that exemption is available in respect of income derived from the letting of godowns or warehouses, only where the purpose of letting is storage, processing or facilitating the marketing of commodities.
According to the Supreme Court two points arose for its determination, namely, whether the appellant acted as an agent of the government in the subject transaction, and the real nature of the payment received by the said society under the head “commission”. In the view of the Supreme Court, both the points stood covered by the judgement of the Supreme Court in A. Venkata Subbarao vs. State of Andhra Pradesh, AIR 1965 SC 1773. In that case, it was inter alia held that the margin or difference in the purchase and sale price was necessary in order to induce any one to engage in this business, and it was of the essence of a control over procurement and distribution which utilized normal trade channels. It would, therefore, be a misnomer to call it ‘remuneration’ or ‘commission’ allowed to an agent; and so, really no argument could be built on it in favour of the relationship being that of principal and agent. Coming to the question of agency, it was held that the government can derive no advantage from the words “procurement agent” mentioned in the Procuring Order, 1946, from the agreement executed by such procuring agent. The court specifically dismissed the argument advanced on behalf of the government that A. Vernkata Subbarao (appellant) had acted as an “agent” on behalf of the government.
Applying its judgement in the case of A. Venkata Subbarao, the Supreme Court held that the High Court was right in coming to the conclusion that the assessee was storing the commodities in question in its godowns as part of its own trading stock, hence, it was not entitled to claim deduction for such margin under Section 80P(2)(e) of the 1961 Act.
