UDAIPUR SAHKARI UPBOKTA THOK BHANDER LD. vs. COMMR.OF INCOME TAX

Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURI ICTION CIVIL APPEAL NO. 4399 OF 2009 (Arising out of S.L.P.(C) No.23889 of 2007) Udaipur Sahkari Upbhokta Thok Bhandar Ltd. … Appellant (s) Versus Commissioner of Income-tax … Respondent(s) J U D G M E N T S. H. KAPADIA, J.

store at Udaipur since 1963. It has 30 branches. Appellant is dealing in non-controlled commodities through its branches. In addition, appellant is 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 is getting commission. The distribution of the controlled commodities is regulated by the District Supply Officer (DSO-Authoriesed Officer) under Rajasthan Foodgrains & Other Essential Articles (Regulation of Distribution) Order, 1976 (for short, “1976 Order”). Appellant claims to be stockist/distributor of controlled commodities. It takes delivery from Food Corporation of India (FCI) and Rajasthan Rajya Upbhokta Sangh as per the directives of the State Government. The price, quantity and the person from whom the delivery is to be taken is fixed by the State Government under the said 1976 Order. After taking the delivery, appellant stores these goods in its godowns, both owned and rented. The storage godowns are open to checking by the concerned officers of the State Government. The stocks stored by the appellant are delivered to the Fair Price Shops (FPS-retailers) as per the directions of the State Government. The quantity, price and the FPS to whom the delivery is to be given is fixed by the State 2

Government. According to the appellant, therefore, the above modus operandi indicates that the State Government exercises total control over the stock of controlled commodities stored in the godowns of the appellant-society. On 28.2.1977 appellant was granted licence for purchase/sale/storage for sale of goodgrains under Rajasthan Foodgrains Dealers Licensing Order, 1964. 4. It exercises the powers conferred by Section 3 of Essential Commodities Act, 1955, the Government of Rajasthan issued the 1976 Order. Following are the relevant provisions, reproduced from the 1976 Order, which read as under: “Clause 2. Definitions. – In this Order, unless the context otherwise requires :- (b) “Authorisation” means an authorization issued under clause 3 of this Order;

(c) “Authorised Fair Price Shop Keeper” means a retail dealer incharge of a shop authorized under clause 3 and shall include a person incharge of a shop where foodgrains and other essential articles are sold and is under the control of the State Government; (d) “Authorisation Holder” means an authorized wholesaler or an authorized Fair price shopkeeper;

(e) “Authorised Officer” means District Supply Officer for the District Headquarter Municipal area, Executive Officer of Municipal Board for rest municipal area and Vikas Adhikari for rural area and any other officer authorized as such by the State Government; 3

(f) “Authorised Wholesaler” means a person, a firm, an association of persons or a co-operative society or any other institution authorized appointed as an agent under clause 3 of this Order by the State Government or the Collector. Clause 3. Issue of Authorisation. – (1) The Collector or any other officer authorized by the State Government may issue an authorization to any person being an authorized wholesaler/fair price shopkeeper to obtain and supply foodgrains and other Essential Articles in the area specified therein. (2) No person other than an authorization holder shall sell any of the foodgrains or any other essential articles supplied by the Government for distribution under this Order or any other Order. Clause 20 – Power to issue directions regarding purchase/sale/distribution of foodgrains and other essential articles. – Every authorisation holder shall comply with all general or special directions given in writing, from time to time by the State Government or the Collector in regard to purchase, sale, storage for sale, distribution and disposal of foodgrains and other essential articles on permits or ration cards or otherwise and the manner in which the accounts thereof shall be maintained and returns submitted.

Clause (2) No authorization holder shall refuse to sell Foodgrains and other essential articles during business hours on the presentation to him of a valid permit/indent/ration card to the extent of the amount of Foodgrains or other essential articles due on the permit/indent/ration card. Clause (3) No authorization holder shall sell Foodgrains at a price in excess of that fixed by the State Government or the Collector or shall sell any other essential articles at a price in excess of that fixed by the Central Government or the State Government or any authority or Officer of such Government or the manufacturer, as the case maybe, in that behalf. Clause (5) The authorization holder shall maintain a stock register in Form ‘C’ showing correctly, the daily receipt and sale of the each Foodgrains and other essential articles. A daily sale register shall also be maintained in Form ‘D’ by the authorized wholesaler and in Form ‘E’ by the authorized fair price shopkeeper. All books of accounts, permits, voucher etc. shall be kept at the business premises specified in the authorization and shall be made available for inspection whenever required.

Clause (6) Every authorization holder shall submit a true monthly stock and sale return in Form ‘F’ to the Collector so as to reach him within five days after the close of the month to which it relates. Clause (8) The authorization holder shall display the opening balance and prices of each variety of Foodgrains and other essential articles at a conspicuous place at his business premises in bold letters.”

on the income of commission received by it from the Government for storage of controlled commodities. On 31.10.1990 appellant filed its returns of income for 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 26.3.92, the A.O. disallowed the claim on the ground that the appellant-society is a wholesaler of foodgrains and it is 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 assessment years in question. Aggrieved by the assessment order(s), appellant filed appeals before CIT (A), on 18.4. 92. By order dated 28.10.93, CIT(A) 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 and storing the above foodgrains. This decision was affirmed by the Tribunal vide its decision dated 20.10.2000 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 impugned decision dated 2.11.06 by the Rajasthan High Court which took the 6

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, appellant has come to this Court by way of petition for special leave.

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. At this stage, one important aspect needs to be noted. Appellant earns commission on the principle of “netting”. In other words, appeallant sets-off “issue price” against “sale price” and retains commission fixed at Rs.2.25 per quintal. We quote hereinbelow the rate-fixation mechanism indicated by one of the orders issued on 12.3.87 w.e.f.1.5.87 under clause (20) of the 1976 Order: “S.No./F1:2:1/Rice/Rate/85 Dated 12.5.87 To, Subdivisional officer/Tehsildar Sub.: Regarding rate fixation of rice to be distributed in general areas As a result of change in the distribution rate and surcharge of rice by the State Government, the new rates for rice is fixed in the following manner. Order to be operative from 1.5. 87. A. if the godown of the Food Corporation and wholesale dealer is in the same city: Common Fine Superfine

rate

of food corporation 239.00 251.00 266.00

books of accounts the consolidated value of the closing stock. This circumstance reinforces the finding of the High Court in its impugned judgment that the appellant was storing the commodities in its godowns as a part of its own trading stock.

“Income-tax Act, 1961 Deduction in respect of income of co-operative societies.- 80P. (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: - (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;”

distinct and independent head of exemption. Whenever a question arises whether a particular category of income of a co-operative society is exempt from tax, it will have to be seen whether such income falls within any of the several heads of exemption : if it falls within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is, therefore, not free from tax under that head of exemption : vide U. P. Co- operative Bank Ltd. v. Commissioner of Income-tax.- (1966) 61 ITR 563 (All). The ambit and coverage of clause (iv) of section 81 must, therefore, depend on the true interpretation of the language used by the legislature in that clause assisted only by such external aids of construction as are permissible according to well-recognised principles of interpretation. Turning first to the language of section 81(iv), it exempts a co- operative society from tax in respect of income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities. Two possible constructions of this provision were suggested before us in the course of the argument, one by the assessee and the other by the revenue. The construction put forward by the assessee was that the words "letting of godowns and warehouses for storage", "processing" and "facilitating the marketing of commodities" constituted different alternatives and income derived from three different sources was, therefore, sought to be exempted under section 81(iv), namely, (1) income derived from the letting of godowns and warehouses for storage; (2) income derived from processing; and (3) income derived from facilitating the marketing of commodities. The revenue on the other hand urged that income which was sought to be exempted was only income derived from the letting of godowns or warehouses if they were let for any of the three purposes, namely, storage, processing or facilitating the marketing of commodities. The words "storage, processing or facilitating the marketing of commodities", according to the revenue, were governed by the preposition "for" and they denoted the purposes for which godowns or warehouses should be let in order that the income derived from such letting should be exempt from tax. Now, on the plain grammatical construction of the language used by the legislature, it appears that the construction suggested on behalf of the revenue is more commendable than that canvassed on behalf of the assessee. As we read the words of the clause, it is apparent that there is no break in the continuity of idea after the word "storage"; the idea flows on into the words "processing or facilitating the marketing of commodities". As a matter of fact, if we read the clause as a whole, there is no doubt that the words "storage, processing or facilitating the marketing commodities" constitute one single composite clause governed by the preposition "for" signifying that the letting of godowns or warehouses contemplated by the section is letting for any of the three purposes, namely, storage, processing 1

or facilitating the marketing of commodities. If the intention of the legislature was that "letting of godowns or warehouses for storage", "processing" and "facilitating the marketing of commodities" should be read distinctively as constituting different alternative sources of income, the legislature would have, according to the dictates of plain grammar, used the words "income derived from letting of godowns or warehouses for storage or from processing or from facilitating the marketing of commodities." The introduction of the words "or from" before "processing" and "facilitating the marketing of commodities" would have brought about the disjunctive effect so as to relate the three alternatives to the words "income derived from." But the legislature instead used words which clearly go of to suggest that the words "storage, processing or facilitating the marketing of commodities" are merely purposes for which godowns or warehouses should be let to attract the exemption under section 81(iv). The presence of the definite article "the" before letting and its absence before the words "processing" and "facilitating the marketing of commodities" considerably reinforces this conclusion. It is again difficult to see why the legislature should have indiscriminately mixed up in section 81(iv) widely different sources of income such as "letting of godowns or warehouses for storage, processing and facilitating the marketing of commodities". The conclusion appears to be clear 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 warehouse provided the letting is for any of the three purposes, namely, "storage", "processing" or "facilitating the marketing of commodities".

"14. (3) The tax shall not be payable by a co-operative society, including a co-operative society carrying on the business of banking - (i) in respect of profits and gains of business carried on by it;... 1

(iii) in respect of any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities;..." Clause (i) of this unamended section exempted from tax profits and gains of business carried on by a co-operative society. If, therefore, a co- operative society carried on the activity of processing, profits and gains arising from such activity would be exempt under clause (i). If that be so, why was it necessary to enact in clause (iii) that income derived from processing shall be exempt from tax ? If the construction contended for on behalf of the assessee were correct, the word "processing" in clause (iii) would be rendered totally superfluous for income derived from processing would be covered by clause (i). The only way in which full meaning and effect can be given to the word "processing" in clause (iii) is by reading that clause in the manner suggested on behalf of the revenue, namely, that the words "storage", "processing" and "facilitating the marketing of commodities" denoted different alternative purposes of letting of godowns or warehouses. We are, therefore, of the view that 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.”

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. If the godown is let out (including user) for any purpose besides storing, processing or facilitating the marketing of commodities, then, the assessee is not entitled to such exemption. [See: Law and Practice of Income-tax by Kanga & Palkhivala, Eighth Edition, page 995]

agent and credited to him when the money was received. These circumstances were taken into account by the High Court in judging the real effect of the transactions. Accordingly, it was held that the impugned transaction was a “sale” liable to sales tax under Section 2(g) of C.P. and Berar Sales Tax Act, 1947. In the case of Udupi Taluk Agricultural Produce Co-operative Marketing Society Ltd. v. Commissioner of Income-tax - (1987) 166 ITR 365(Kar.), the assessee, a co-operative society, claimed exemption under Section 80P(2)(e) of the 1961 Act in respect of its income derived by way of commission from Karnataka Food and Civil Supplies Corporation for procurement of paddy and rice and reimbursement of transport charges. Following the judgment of the Gujarat High Court in Surat Vankar Sahakari Sangh Ltd. (supra), the Karnataka High Court held that under Section 80P(2)(e) of the 1961 Act, exemption is available in respect of income derived only from letting out of godowns or warhouses. The income derived by the co-operative society for the purpose of exemption under clause (e) must be relatable to the letting out or the use of its godowns for any of the three purposes mentioned in clause (e). Any income derived by the society unconnected with such letting or use of the godowns would not fall under clause (e). In the case of M/s. 1

Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial Tax Officer and others – AIR 1978 SC 449, a seven-judge Bench of this Court held that transction between the rice-millers on one hand and the wholesalers on the other hand constituted “sales” within the meaning of Bengal Finance (Sales Tax) Act, 1941 and sales tax was leviable on the turnover. In that case Vishnu Agencies was a licensed stockist of cement who was permitted to stock cement in its godown, to be supplied to persons in whose favour allotment orders are issued, at the price stipulated and in accordance with the conditions of permit issued by the authorities concerned. In that case Vishnu Agencies supplied cement to various allottees from time to time in pursuance of the allotment orders issued by Appropriate Authorities and in accordance with the terms of the licence obtained by it for dealing in cement. It was assessed to sales tax by CTO in respect of the said transactions. The main contention of Vishnu Agencies was the measures adopted to control the supply of cement left no option to parties to bargain; that, the transaction in question constituted a “compulsory sale”; that, by virtue of the provisions of the Cement Control Act and Cement Licensing Order no volition or bargaining power was left to the assessee and since there was no element of mutual consent 1

between the stockist and the allottee, the transaction was not a “sale” within the meaning of the Sales Tax Act. This argument was rejected by this Court observing that the limitations placed on the normal rights of the dealer and consumers to supply and obtain the goods by the Cement Control Order do not militate against the position that eventually, the parties must be deemed to have completed the transactions under an agreement by which one party bound itself to supply the stated quantity of goods to the other at a price not higher than the notified price and the other party consented to accept the goods on the terms and conditions mentioned in the order of allotment issued in its favour by the competent authority. It was held that offer and acceptance need not always be in an elementary form, nor does the Law of Contract or Sale of Goods Act require that the consent to a contract must be express. It is commonplace that offer and acceptance can be spelt out from the conduct of the parties. This is because law does not require offer and acceptance to conform to any set pattern or formula.

nature of payment received by the said Society under the Head “commission”. Both the points stand covered by the judgment of the Supreme Court in A. Venkata Subbarao, etc. v. The State of Andhra Pradesh, etc. – AIR 1965 SC 1773. In that case, appellants were owners of rice mills in the Districts of West Godavari, East Godavari and Krishna. Appellant was in the business of purchasing paddy from producers, milling their purchase in their mills and selling the rice so milled to wholesale dealers in rice. This was prior to 1946-47 when severe restrictions were imposed in the State of Madras on the trade in foodgrains in order to maintain their supplies and ensure proper and equitable distribution of foodgrains to the community. Accordingly, in 1946, pursuant to the power vested in the State Government under Essential Supplies (Temporary Powers) Act, 1946, two Orders came to be issued, namely, Foodgrains procurement Order, 1946 and Foodgrains Licensing Order, 1946 which prohibited all trades in foodgrains including rice except by those who held licences and subject only to the terms and conditions of the licence. A. Venkata Subbarao was one such licensee who was authorized to deal in rice under the Licensing Order, 1946. It may be mentioned that the prices at which paddy could be procured as well as the prices at 1

which the rice could be sold by the licensed dealers, were fixed by Orders, notifications issued under the Essential Supplies Act. While A. Venkata Subbarao (appellant) was carrying on his business subject to the provisions of the above two Orders, the prices at which he could sell rice which he milled out of the paddy procured by him stood enhanced on three different occasions – July 1947, December 1947 and November 1948, and on each occasion he was directed to submit a statement indicating the stock of paddy and rice held by him on the day just prior to the date on which the increased prices came into effect and on that basis the Government directed A. Venkata Subbarao to pay a “surcharge” on the amount representing the increase on the stock held by him. This levy of “surcharge” became the point of challenge in the suit filed by A. Venkata Subbarao in the trial court. The principal point in controversy between the parties related to the precise legal relationship between the procuring agent and the Government. It was found by the Supreme Court that the procuring agent had to buy the grain from the producers with their own money. The grain purchased was transported to the godowns at their cost and stored by them at their own risk. The rent of the godown(s) was also paid by the procuring agent. If there was any depreciation in the quality 2

or there was any shortfall owing to driage, action of rodents, insects, moisture, theft, etc. the loss would of the procuring agent. It was also further found by the Court that the procuring agent could pledge his goods to raise loans from banks and lastly the procuring agent had a right to sell the grain to the person authorized by and at the price not exceeding the price fixed under the notification and Orders issued from time to time. In other words, sales at free-market rate were prohibited. On the basis of the aforestated circumstances, this Court held that the property in the goods purchased by the procuring agents vested in them. However, it was urged on behalf of the State that the purchase and sale of commodities by the procuring agent/dealer was on behalf of the Government. In this connection, reliance was placed on the agreement, executed by the procuring agent, in which he undertook to purchase paddy from the areas allotted by the Government; he undertook to store the paddy or rice in a proper godown for which he was responsible for the safe custody of the grain and that the procuring agent further undertook to sell the stock of rice to persons nominated by the Government. On these considerations it was urged on behalf of the Government that A. Venkata Subbarao was an “agent” of the Government to buy paddy, to store the grain 2

purchased on behalf of the Government in secure godowns and to sell the goods purchased on behalf of the Government to such persons nominated by the Government. It was, therefore, submitted that A. Venkata Subbarao was an “agent” who on one hand indemnified the Government from any loss in the business of agency of purchase and storage and sale on behalf of the Government and on the other hand he was bound to make over to the Government such profits that he might obtain out of the business of the agency. It was the further case of the Government that the difference between the procurement price and the price which was fixed for sale constituted “commission” or “remuneration” which would belong to the agent. In other words, two questions arose for determination before this Court, namely, the precise legal relationship between the procuring agent/dealer on one hand and the Government on the other hand as also real nature of payment received by A. Venkata Subbarao. It is interesting to note one more argument advanced on behalf of the Government. It was urged that the margin between the procurement price and the price at which the rice could be sold constituted “remuneration”. This argument found favour with the High Court. However, it was rejected by this Court and while doing 2

so this Court observed as follows:

“29. Before proceeding further, it is necessary to clarify two matters. First, though Mr. Agarwala referred to the margin between the procurement price and the price at which the procured paddy or rice could be sold as "remuneration", a contention which found favour with the High Court, we do not find it possible to accept the submission. There was a similar margin between the price at which a wholesaler could buy rice and that at which he could sell and similarly, it was the case of the retail dealer, but it is hardly possible to call these as "remuneration". This margin or difference in the purchase and sale price was necessary in order to induce any one to engage in this business and was of the essence of a control over procurement and distribution which utilised normal trade channels. It would, therefore, be a misnomer to call it "remuneration" or "commission" allowed to an agent and so really no argument can be built on it in favour of the relationship being that of principal and agent.” (emphasis supplied)

“32. No doubt, the description in the Procurement Order and the agreement as "agent" is of some value, but is not decisive and one has to gather the real relationship by reference to the entire facts and circumstances. To start with, it is clear that as the purchases were made by 2

the procuring agents out of their own funds, stored at their own cost, the risk of any deterioration, driage or shortfall fell on them, they were the full owners of the paddy procured and they pledged the goods for raising funds. This aspect of their full ownership of the grain purchased is highlighted by the fact that they entered into agreements with the Government itself to sell the rice with them to District Supply Officers at the controlled market prices. Any contention that the procuring agents were not full owners of paddy or rice procured by them must manifestly fail as being inconsistent with the basis upon which this agreement by them to sell Government was entered into. If further confirmation were needed it is provided by the fact that on the sales by procuring agents to Government under their Supply agreement sales-tax was payable which on the terms of the Madras General Sales Tax Act in force at the relevant time would not have been payable if the paddy and rice were that of Government and which they were holding merely as commission agents on behalf of the Government.

the price of the goods at which he had purchased. This situation would, in our opinion, be unthinkable on the scheme of the Procurement Orders and generally of the Food Control Orders under which the procurement and distribution of foodgrains was placed under statutory control. What the Government desired and what was implemented by these several orders was merely the regulation and control of the trade in foodgrains by rendering every activity connected with it subject to licensing and to the directions to be issued in pursuance thereof and not directly to engage in the trade in foodgrains.

"

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.

hold ammonium sulphate stock of the Government of Madras and safely store the same on their behalf and to issue the same on certain terms and conditions. Under the Agreement, the fertilizers bags had to be stocked in a manner as directed by the officers of the Government. The stocking and storage of the bags had to be done in the manner indicated by the Government. The assessee had to maintain particulars of fertilizers received, released and held in stock. The assessee had to engage at its own cost, godown- keepers and clerks to properly and efficiently carry on its duties under the agreement. The assessee was to get a commission of Rs.5 per ton of the quantity of fertilizers issued from the stocks on the instructions of the Government. On the analysis of the agreement, the High Court came to the conclusion that the assessee was a mere stock-holder and that the sum of Rs.5 per ton shown as commission from the Government was only for letting of godowns and though some services provided to were incidental to such storage, the service element and payment thereof constituted an insignificant portion of the amount received. In the circumstances, the High Court upheld the view of the Tribunal that the receipt of Rs.31,316 was exempt under Section 14(3)(iv) of the 1922 Act. This view was upheld by this Court. 2

the impugned judgment. Therefore, in our view the judgment of this Court in the case of South Arcot (supra) will not apply to the facts of the present case and consequently the appellant is not entitled to exemption/special deduction under Section 80P(2)(e) of the 1961 Act.