While a co-operative society is treated under the Income-tax Act, 1961, as an assessee for extending certain concessions in computing taxable income, the income of a co-operative society is not exempt in its entirety. The Act has classified co-operative societies on the basis of various activities carried out by them.
A co-operative society that is a consumer co-operative society has been treated differently from other types of co-operative societies. Co-operative societies engaged in the business of banking or providing facilities for industrial production or marketing are treated differently in the matter of grant of tax exemption or benefit of deduction in respect of income from various sources.
In the case of consumer co-operative societies engaged in activities other than co-operative societies prescribed under clause (a) or (b) of sub-section (2) of section 80-P of the Income-tax Act, 1961, the entire income has not been exempted but the minimum limit of taxable income has been made higher than for other assessees under the Act. Section 80-P(2)(e) deals with income derived by a co-operative society from letting out godowns or warehouses.
Storing of commodities by a trader or a consumer co-operative society of its “stock-in-trade” during the course of carrying on its business of trading does not fall within the ambit of the scheme of section 80-P(2)(e).
This provision grants exemption 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. (Surat Vankar Sahakari Sangh v. C.I.T. (79 I.T.R. 722); Udupi Taluk Agricultural Produce Co-operative Marketing Society Ltd v. C.I.T. (166 I.T.R. 365)).
This point was also considered by the Rajasthan High Court in C.I.T. v. Udaipur Shahkari Upbhokta Thok Bhandar Ltd. (295 I.T.R. 164). The facts in this case were that the assessee was a co-operative society engaged in running a consumer co-operative store and had 30 branches in Udaipur.
The assessee earned commission as wholesale dealer of controlled commodities, viz., wheat, rice and sugar. The commodities in question were declared as essential commodities and became part of regulated trade through the public distribution system in terms of orders issued by the appropriate Government under the Essential Commodities Act.
The assessee had its own godowns and had hired other godowns for the purpose of its business, including dealing in essential commodities. Wheat and rice are included in Schedule I of the Rajasthan Food Grains and Other Essential Articles (Regulation of Distribution) Order, 1976 and sugar is also included in Schedule II of the order. The assessee held licence as an “authorised wholesaler” under the provisions of the Order of 1976.
The assessee claimed special deduction under section 80-P on the commission. It was claimed that the assessee was only acting as agent of the State Government for storing the essential commodities for facilitating public distribution of such commodities by the State Government and commission was paid to the assessee only for the purpose of storage of the essential commodities at its godowns. The Assessing Officer rejected the claim but the Commissioner of Income-tax (Appeals) and the Tribunal accepted it.
On appeal, the Rajasthan High Court held that the assessee was a consumer co-operative society and second, it owned godowns and hired godowns for storing its merchandise, including essential commodities in which it was trading under an authorisation but it was not a society engaged in the activity of constructing warehouses for the purpose of earning income therefrom.
Earning income from leasing out warehouses was not the primary activity of the assessee but only incidental to its activity of dealing in consumer articles.
The wholesale authorisation was in Form B appended to the Order of 1976 containing terms and conditions under which the authorised holder has to carry on his trade of selling such commodities.
Frequent and independent use of the expression “sale of the essential commodities by the authorisation holder” — whether as authorised wholesaler or authorised fair price shopkeeper — indicated that authorisation holders were required to sell and purchase the essential commodities and not merely act as agent of the State Government nor were they subordinate to the State Government in any respect.
The break-up of the price showed that when the goods went out of the godowns of the Food Corporation of India, the price included the issue price plus octroi paid thereon and significantly also included “the sales tax chargeable on such issue price” and surcharge on sales tax.
This envisaged the passing of property in the commodity from the Food Corporation of India to the authorised holder on payment of sale consideration, which is an essential ingredient of the activity of sale.
The passing of property in the goods to the buyer was an essential ingredient of sale of goods to attract sales tax. The authorised holder was not an agent of the Government to hold stocks on behalf of the Government at its godowns but was a trader who received commodities under a transaction of sale and purchase.
On payment of price, the property in goods passed on to him. The additional amount received by the assessee was over and above the price paid by him. This was his gross profit. It was a misnomer to call it commission.
According to the Court, there is parity of expressions in respect of income derived from letting out of godowns or warehouses used in Section 80-P(2)(e) regulating the claim for deduction from total income and Section 10(29) regarding exemption of such income. If the owner of the warehouse does the warehousing activity for his own benefit, he will not get any tax benefit in respect of income from letting out of the warehouse.
In the latter provision, the term `marketing’ clearly excludes the idea of an activity done for one’s own self. The word `marketing’ has been used in the wider sense to include the various activities that generally go to form the trade of marketing.
Since the assessee was storing the commodities in question in a godown as a part of its own trading stock, it being a trader in the essential commodities in question, the provisions of 80-P(2)(e) were not applicable to the assessee. It was only entitled to claim deduction of expenses incurred on hiring of godowns, and the depreciation as may be allowable on the godowns owned by it as business assets, while computing income from its business.
To sum up, `letting,’ in this sub-section, is used not in the technical sense but in a comprehensive sense to include a transaction under which the society stores the goods of its members or outsiders and renders them incidental services. In cases where the activities of the assessee include other activities to facilitate the marketing of commodities, it is for the assessee to determine such part of the income derived by it from the exempt activity.