Brief of the case
In the case of Nileswar Range Kallu Chethu Vyavasaya Thozhilali Sahakarana Sangham Vs. CIT, High court of Kerla at Ernakulam has held that the collective disposal of the labour of the members of the society is not resulting in the generation of any income to the society. The income of the society has nothing to do with the collective disposal of the labour of its members, but is entirely from out of the price realised by it for the sale of toddy through the society’s own toddy shops. When that is the activity of the society, it cannot be said that the sum referred to in section 80P(1) entitling the society for deduction is generated out of the collective disposal of the labour of the appellant societies
Facts of the case
1. The assessee’s are three co-operative societies registered under the Kerala Co-operative Societies Act, 1969 In the returns filed by the societies, they claimed the benefit of deduction under section 80P (2) (a) (vi) of the Income Tax Act.
2. Denying that claim, the Assessing Officer completed the assessments by holding that The members of the society are also working as employees and are being paid remuneration based on their output of toddy. The assessee is not a labour contract co-op society. The main objectives of the Society as per registered bye laws are to run toddy shops under license from Excise Department; purchase implements for tapping toddy for use of members; arrange buildings, furniture and vehicles for setting up toddy shops etc. There is no mention about the collective disposal of labour of the members. The assessee is collecting toddy from members and also purchasing toddy from outside. The compensation by way of wages paid to members depends on the quantity of toddy supplied by them to the society. Toddy is also purchased from outside. The difference between the purchase price per litre of toddy and the compensation per litre of toddy procured from members is marginal. The main activity of the assessee is doing business of procuring and selling toddy and thereby making profit. The profit is not seen utilized for the immediate benefit of the members. For all these reasons the assessee cannot be considered to be a Society engaged in the collective disposal of labour of its members or in any other activity as is mentioned in section 80P(2)(a). Accordingly the claim of deduction u/s.80P(2) is not allowable.”
3. Aggrieved by the order of AO, aseessee preferred an appeal before CIT(A), who has upheld the claim of the societies for the deduction in question and set aside the orders of the Assessing Officer. Against the said order revenue filed an appeal before Tribunal, and The Tribunal, by its common order dated 17.1.2014, allowed the appeals and restored the orders of the Assessing Officer.
Aggrieved against the said decision, the Assessee preferred an appeal before High Court
whether, in the facts and circumstances of the case, the Tribunal was right in setting aside the order of the first appellate authority and in holding that the appellant societies cannot be considered as co-operative societies engaged in the collective disposal of labour of its members as contemplated under section 80P (2) (a) (vi) of the Act and therefore, ineligible for deduction under section 80P (1) of the Act?
High Court decision / observations
1. The case of a co-operative society, the gross total income includes any income generated out of the collective disposal of the labour of its members, such income shall be deducted in accordance with and subject to the condition in the proviso to the section in computing the total income of the society.
2. The scope of this provision came up for consideration of the Orissa High Court in the judgment in Nilagiri Engineering Co-operative Society Ltd. v. Commissioner of Income Tax [(1994)208 ITR 326] wherein court has held that “………………there has been no direct proximate connection between the work executed and the speciality of the members of the society as diploma holders or graduate engineers. Mr.Dash has brought to our notice that the question was raised before the two-member Tribunal even earlier to the order, annexure-3, the appeals relating to the assessment years 1974-75 to 1978-79. The order is annexure-2 to the writ petition. There the two-member Tribunal held that section 80P(2)(a)(vi) would restrict the exemption to the income earned from the labour of its members. It further explained: “. . . . In other words, if besides the labours of its members the income has been earned from labour employed by the society or out of the benefit of any capital available with the society it would not come under clause (vi) though it may fall under any other clause so that in the present case, the income actually derived from the labour of the members of the assessee would be exempt but not any income derived as a result of investment of capital or execution of any jobs by employed labour.”
3. In Commissioner of Income Tax v. M/s.Uralungal labour Contract Cooperative society [2010 KHC 59] The respondent herein is a co-operative society and its members are all workers. The society was engaged in construction work and was also engaged in purchase and sale ofconstruction materials like sand. The claim of the society was upheld and that order was challenged by the Revenue before this Court. Repelling the challenge, this Court held thus:
“. . . . . . . However, after going though the Tribunal’s order and after considering the constitution and nature of activities of the respondent – Society, we feel the Society is entitled to deduction under S.80P(2)(vi) on the entire income because in the first place, all the members of the Society are workers and they engage themselves in the execution of civil works undertaken by them. There is no case for the department that Society consists of any member other than construction worker and there is also no case that all the member – workers are not engaged in the activities of the Society which is execution of civil construction work. A workers’ Society undertaking civil construction work and executing the work by themselves rightly answers the activity referred to in S.80P(2)(vi) i.e. Collective disposal of labour of the members of the Society. If members of the Society are engaged in construction activities, then the Society itself should be held to be engaged in collective disposal of labour of its members. Therefore, the income earned from construction work qualifies for deduction under S.80P(2)(vi) of the Act. The remaining issue is only with regard to the trading done in construction materials like sand which are stated to have been purchased and sold by the Society. Here again, the transactions are incidental in nature and the members themselves are engaged in handling of the goods in the course of purchase and sale of the same. Construction material involved is also sand where the labour involved is substantial and the income earned is also not found to be attributable to profit in trading and not attributable to labour inputs. . . . . . .”
4. Both the above judgement make it clear that the earning of the society must be through utilisation of the particular kind of labour in which the members are specialised. It is also clear that it is only when collective disposal of a disposable commodity over which the society has control is made, the benefit is earned by the society. Such disposal shall be of the labour of the members of the society. This position is also clear from the judgment of this Court in M/s.Uralungal labour Contract Cooperative society (supra)
5. The judgment of the Gujarat High Court in Gora Vibhag Jungle Kamdar Mandali v. Commissioner of Income Tax [(1986) 161 ITR 658], this Court in Commissioner of Income Tax v. Palghat Food Corporation of India Labour Contract Co-operative Society Ltd. [(2004) 266 ITR 315] and Madras High Court in Commissioner of Income Tax v. Salem District Printers Service Industrial Cooperative Society Ltd. [(2007) 290 ITR 371], we find that the controversies resolved in these cases are not helpful for the purpose of disposal of these appeals.
6. We have also gone through the bye-laws of the society. The factual findings of the Assessing Officer, which was confirmed by the appellate Tribunal show that though membership of the society is confined to persons who are enrolled as members of the Toddy Workers Welfare Fund Board and are toddy tapers, for the toddy that are tapped and delivered by them to the society, they are paid remuneration based on the quantity of toddy delivered. On similar terms, toddy is collected from non-members also. The bye-laws of the society show that the main object of the society is establishment and management of the toddy shops. The activity of the society is therefore purchase of toddy from its members and non-members on payment of the agreed remuneration and its sale through the toddy shops established by the society itself.
7. This, therefore, shows that the collective disposal of the labour of the members of the society is not resulting in the generation of any income to the society. On the other hand, toddy tapped and delivered by the members of the society and nonmembers are purchased by it and remuneration is paid to them at agreed rates. The toddy thus purchased is sold through the Toddy Shops established by the society. Therefore, the income of the society has nothing to do with the collective disposal of the labour of its members, but is entirely from out of the price realised by it for the sale of toddy through the society’s own toddy shops. When that is the activity of the society, it cannot be said that the sum referred to in section 80P(1) entitling the society for deduction is generated out of the collective disposal of the labour of the appellant societies.
8. For the aforesaid reasons, the Tribunal is fully justified in holding that the appellant societies are not eligible for the benefit of section 80P(2)(a)(vi) of the Act.