1.  The provision of Section 80P(2)(a)(iii)  of Income in Income tax Act, 1961 :

80P(2)The sums referred to in sub-section(1) shall be the following, namely :—

( a )        in the case of a co-operative society engaged in—

( i)  to (ii) …….    

(iii) the marketing of agricultural produce grown by its members, or

(iv)  to (vii)…….

the whole of the amount of profits and gains of business “attributable” to any one or more of such activities…

2. Meaning of Co Operative Credit Society under Income Tax Act: Section 2(19) of IT Act,1961 :

Co-operative Society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies.

3. Meaning of marketing : (Judicial view)

(a) Para 5 …..It is the submission that the marketing generally means ‘the performance of all business activities involved in the flow of goods and services from the point of production until they are in the hands of the ultimate consumer’…[ CANARA MOTORS Vs. COMMISSIONER OF C. EX., MANGALORE [2011 (21) S.T.R. 407 (Tri. – Bang.)].

Author’s Note : Marketing commences when a any identifiable commodity comes in to existence. e.g. 1. Sugar cane marketing 2. Sugar crystals marketing. 3. Sugar cubes Marketing. 4. Sugar candy marketing. 5. Sugar syrup marketing.

4. Meaning of “Grown” :

(a)  Free online dictionary – meaning of grown is :

 Produced or cultivated in a certain way or place: locally grown 

(b)  Collins English dictionary – meaning of grown is :

to produce (plants) by controlling or encouraging their growth, esp for home consumption or on a commercial basis

(c) Merriam Webster’s dictionary – meaning of grown is –

to spring up and develop to maturity  b : to be able to grow in some place or situation *trees that grow in the tropics*

5. Meaning of “agricultural produce grown by its members” :

(a) The section 80P(2)(a)(iii) was amended by the Income-tax (Second Amendment) Act, 1999 amendment replaced the words ‘of its members’ in section 80P(2)(a)( iii) by the words ‘grown by its members’. The amendment sought to restrict the deduction to the profits derived by a co-operative society engaged in the marketing of agricultural produce grown by its members.

(b)The Hon. Punjab & Haryana High Court in the case of Punjab State Co-operative Supply & Marketing Federation Ltd.v. Union of India *[2011] 196 TAXMAN 401 ( Punj. & Har.) vide Para 11. It is not disputed that the assessee claimed deduction of income from marketing produce of the farmers without showing that the said produce was grown by the farmers. In view of the amendment which has been upheld by Hon’ble Supreme Court in National Agricultural Co-operative Marketing Federation the assessee was not entitled to the deduction.

6. Meaning of manufacture :

(a) The Hon Supreme Court referring to Paragraph 10 of the judgment of this Court in the case of CIT v. Oracle Software India Ltd. [2010] 320 ITR 546, wherein this Court has observed as follows “The terms ‘manufacture’ implies a change, but every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article fit (emphasis supplied by author : crystal sugar ) for use for which it is otherwise not fit, the operation/process falls within the meaning of the word ‘manufacture’.”(emphasis supplied by author : processing sugar cane juice in to crystal sugar ) and remanded the matter in the case of Morinda Co-operative Sugar Mills Ltd. v. Commissioner of Income-tax, Chandigarh* [2012] 26 taxmann.com 71 (SC) vide para  7 and observed that the above test has to be applied and adjudicated on case to case basis. It depends on the type of product which ultimately emerges from a given operation. In our view, this aspect has not been examined by the Courts below.

(b) Paying excise duty [emphasis supplied : “on crystal sugar” as per para 7 hereunder ] is arising only if there is change in name character and use as held by The Hon. Supreme Court in the case of Union of India v. Delhi Cloth and General Mills Ltd., 1963 Supp. (1) SCR 586 = 1977 E.L.T. (J 199).

7. Instances of Excise duty on sugar is being paid on manufacture of sugar : (Judicial view)

(a)Para 2.The appellant companies manufacture sugar by carbonation process as  against sulphitation process employed by some other manufacturers of sugar and pay excise duty on the sugar manufactured by them under Item 1 of Schedule 1 to the Act.[ SOUTH BIHAR SUGAR MILLS LTD. Vs. UNION OF INDIA 1978 (2) E.L.T. J 336 (S.C.)].

(b) Para 2.The appellants manufacture sugar at a factory at Laksar in Saharanpur District of the State of Uttar Pradesh. They are liable to pay excise duty and additional and special duties of excise.[ RAJ BAHADUR NARAIN SINGH SUGAR MILLS LTD. Vs. UNION OF INDIA 1996 (88) E.L.T. 24 (S.C.)].

 (c) Para -3 The assessee is the manufacturer of Sugar and Molasses.[ SARASWATI SUGAR MILLS Vs. COMMISSIONER OF C. EX., DELHI-III 2011 (270) E.L.T. 465 (S.C.)].

8. Meaning of word “attributable“ :

The word ‘attributable’ was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84 holding that, “the expression ‘attributable to’ is certainly wider in import than the expression ‘derived from’.” It was also held that by using the expression ‘attributable to’, the legislature intended to cover receipts from sources other than the actual conduct of business.

[emphasis supplied : respectfully submitted that attributable should be akin to word marketing of agricultural produce ].

9. Provisions relating to concessions are ordinarily expected to be rigidly interpreted :

                The Hon‟ble Apex Court rendered in the case of Union of India v. Wood Papers Ltd (AIR 1991 SC 2049) and the decision of Hon‟ble Andhra Pradesh High Court rendered in the case of CIT v. Anakapalli Co-operative Marketing Society Ltd., [(2000) 245 ITR 616 (AP)], wherein it was held that the provisions relating to concessions are ordinarily expected to be rigidly interpreted.

10. Concept of mutuality why not applicable to Co Operative Socities: (judicial view)

(a)There is no aspect of mutuality in the case of the assessee registered under the Co-operative Societies Act as one of the objectives of a co-operative society will be to make profits and declare dividends to its members. In the case of a mutual concern, there is no room for such intention of making profit and distribute the same among the members.[ Totgar’s Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) ; 229 CTR 209].

(b)The Hon. Andha Pradesh high Court in the case of   CIT Vs. Secunderabad Cricket Club (2012) 21 Taxmann.com 54 (A.P. HC.) vide Para 34 with respect to any transaction of business nature having an motive of profit than the concept of mutuality do not apply and transaction would be liable to Income tax.

Para 34 ………The ratio therein is that, if an incorporated entity is engaged in trade, the profit from it, even if they are transactions with members, would be taxable and the principle of mutuality would have no application.

11. Meaning of member :

The Hon. ITAT Jaipur in the case of M/s.Moondla Tilhan Utpadak Sahakari Vs. The Income Tax Officer ITA No.21/JP/2012 Asstt. Year : 2006-07 considered with respect to meaning of member as under :

The term ‘members’ is not defined in the Act. Therefore, the normal rule of interpretation requires that the word in the section must be given its natural meaning. When the legislation is dealing with the subject of Co-operative Societies Act & using the word ‘member’ in that section, it is to be presumed that the legislature wants to deal with the category of members as is used in the Co-operative Societies Act. Therefore, the word ‘member’ as used in Rajasthan Co-operative Societies Act, 2001 has to be considered. The word ‘member’ is defined in Section 2(p) of the said Act (PB 21) to mean a person joining in the application for the registration of a co-operative society & a person admitted to membership after such registration in accordance with this Act & the rules 7 the bye laws & includes a nominal & an associate member. Section 17 (PB 22-23) provides that a co-operative society may admit a prescribed class of persons or prescribed local authority or a self help group as a nominal member or the spouse of a member in a prescribed class of society as an associate members. Such nominal or an associate member shall neither be entitled to any share in any form whatsoever in the assets or profits of the society nor have any right to vote in the affairs of the society, but shall have such other rights of a member & be subject to such liabilities of a member as may be specified in this Act, rules or the bye laws of the society & all the provisions of this Act, rules & the bye laws relating to membership, shall apply to him. As per Rule 15 of the Rajasthan Co-operative Societies Rules, 2003 (PB 24-25), the following may be admitted as nominal members:-

(i)      to (iii)   ………………………………….

(iv) in case a marketing society, a person who carries business in agricultural commodities in the area of operation of the society & has dealings with it, and From the above, it can be noted that member includes a person who carries on business in agricultural commodities in the area of operation of the society & has dealings with it even if he has no voting right to vote or share in the profits of the society.

12. “Buying Sugar cane” and “selling sugar” is not “marketing of agricultural produce” “grown by it’s  members” :

(a) The Hon.Supreme Court in the case of Assam Co-operative Apex Marketing Society Ltd. v. CIT [1993] 201 ITR 338  wherein the Society engaged in marketing of agricultural produce of its members also had other co-operative societies as its members. Since the agricultural produce marketed by the Society was not produced by the primary marketing Societies, being its members, the assessee society was not held entitled to exemption under section 81(1)(c) [now section 80P(2)(a)(iii )].

(b)The Hon’ble Punjab & Haryana High Court in the case of Karnal Co-operative Sugar Mills Ltd. v. CIT [2001] 170 CTR (P&H) 590 : [2002] 253 ITR 659 (P&H) has held as under :

“………….assessee processed the sugarcane. It manufactured and sold sugar. The product which was sold in the market did not belong to the members. Sugar had not been described as an agricultural produce in the Act. Thus, it could not be said that the petitioner was marketing an agricultural produce. The society was incorporated for the primary purpose of manufacturing sugar. Thus, its basic activity was production of sugar. It was engaged in manufacturing and not marketing. Since, it was the admitted position that the petitioner was using power and even paying excise duty, it was not entitled to the special deduction under s.80P (2)( a )( iii ).”[ Gurdaspur Co-Op. Sugar Mills v.Deputy Commissioner of Income-tax [2009] 122 TTJ 528(ASR)].

(c)    Assessee buying surgarcane from agriculturists, crushing same and then selling sugar , was not entitled to deduction under section 80P(2)(a)(iii)  [In favour of revenue] [Assessment year 2003-04] Gurdaspur Co-Op. sugar  Mills v.Deputy Commissioner of Income-tax [2009] 122 TTJ 528(ASR).

(d)   The Hon. Tribunal ITAT DELHI BENCH ‘A’ in the case of Karnal Co-op. Sugar Mills Ltd. v. DCIT  held as under [1998] 66 ITD 521 (DELHI) :

The assessee was a co-operative society incorporated for manufacture of sugar from sugarcane. It purchased sugarcane from its members and non-members as well as co-operative society at a price fixed by the Government, manufactured sugar to sell the same in open market and earned profit therefrom. It claimed deduction under section 80P(2)(a)(iii ). The Assessing Officer noticed that the end product which was the result of complicated manufacturing process, was no more an agricultural produce, the character of agricultural produce having undergone a complete change, the activity carried on by the assessee could not be termed as ‘marketing of agricultural produce of its members’. The Assessing Officer, therefore, rejected the claim. On appeal, the Commissioner (Appeals) upheld the disallowance for all assessment years except in respect of assessment year 1992-93 where he allowed the exemption claimed.

(e)   The Hon. Tribunal ITAT PUNE BENCH in the case of Dudhganga Vedganga S.S.K. Ltd. v. DCIT held as under [1995] 54 ITD 97(PUNE) :

The activity of marketing of agricultural produce of its members, referred to in section 80P(2)(a)(iii) , must be confined to the direct produce from agriculture and not to anything manufactured or processed out of it. A plain reading of the section shows that the idea and intention behind the provision was to encourage basic-level societies engaged in cottage industries in marketing the agricultural produce of their members and those engaged in purchasing and supplying agricultural implements, seeds, etc., to their members and so on. The words agricultural produce of its members’ must be understood consistent with this object. If they are not so understood, even a co-operative society comprising traders dealing in agricultural produce would become entitled to the exemption which could never have been the intention of the Parliament. Agricultural produce produced by the agriculturists can legitimately be called agricultural produce in their hand but in the hands of traders, it would not be appropriate to call it an agricultural commodity and it would not be their agricultural produce.

13.The following Judgment requires reconsideration :

(a)    Whether a co-operative sugar mill engaged in manufacture and marketing of sugar products from sugarcane supplied by its members would be eligible for deduction under section 80(p)(2)(a)(iii) – Held, yes [2012] 21 taxmann.com 111 [(Punj. & Har. H.C.)].

(b)   Section 80P of the Income-tax Act, 1961 – Deductions – Income of co-operative societies – Assessment year 1995-96 – Whether a co-operative society, which manufactures and produces sugar  from sugarcane grown by its members with aid of power, shall be entitled to deduction under section 80P(2)(a)(iii)  – Held, yes[2009] 184 TAXMAN 165 (PUNJ. & HAR. H.C. )

(c) Section 80P of the Income-tax Act, 1961 – Deduction – Income of co-operative societies – Assessment year 1995-96 – Assessee-cooperative Society was engaged in marketing of agricultural produce of its members – Assessing Officer rejected assessee’s claim of deduction under section 80P(2)(a)(ii) on ground that sugar  and molasses were by-products of a complex manufacturing process which involved usage of plant and machinery – Commissioner (Appeals) deleted addition holding that in case of sugarcane only method of marketing available to a co-operative society was to produce sugar  and sell same – Tribunal dismissed appeal filed by revenue against order of CIT(A) – Whether there was no error in order of Tribunal – Held, yes [In favour of assessee] [2011] 16 taxmann.com 14 (Punj. & Har.H.C. )Note : The matter is remanded for reconsideration by SC vide para 6(a) above.

14. Status of Co Operative Society for Tax Audit purpose, Return filing  & for Issuance of notice u/s 133(6) :

(a)The status of co operative society and Bank for the purpose of section 44AB is that of  Artificial Juridical Person. A society constituted under the Co-operative Societies Act is an artificial juridical person and so much so it answers the definition of ‘person’.  . M.V. Rajendran V. ITO 260 ITR 442  Ker. HC or [2003] 128 TAXMAN 385 (KER.HC).

15. Is it necessary for society is required to file return :

(a) Therefore, every society will have to file its return and the same would be subject to scrutiny by the department. The Assessing Officer is, therefore, free to call for books of account to convince himself about the correctness of the return filed. Therefore, books of account of the society and its transactions are subject to scrutiny by the Assessing Officer in the normal course. M.V. Rajendran V. ITO 260 ITR 442  Ker. HC or [2003] 128 TAXMAN 385 (KER.HC). [ In view of above ITR – 6 needs to be filed by corporate entity which is called artificial juridical person ].

16. Time limit for submission of Tax Audit report :

(a)    Whether obtaining of audit report and furnishing a copy thereof before completion of assessment is sufficient compliance with provisions of section 44AB –Yes Mathura Zila Sahkari Bank Ltd. v. Deputy Commissioner of Income-tax [2004] 4 SOT 248 (AGRA).

17. Whether Co Op. are immune from issue of notice under section 133(6)?:

(a)    In view of Karnataka Bank Ltd. v. Secretary, Government of India [2002] 255 ITR 508 that it is not a condition for the issuance of a notice under section 133(6) that any proceedings should be pending against the person with respect to whom the information is called for. [ Mattul Service Co-operative Bank Ltd. v. Income-tax Officer  (CIB), Kozhikode [2010] 186 TAXMAN 409 (KER.HC) Pinarayi Service Co-operative Bank Ltd.v. Income-tax Officer (CIB)* , Kozhikode [2009] 184 TAXMAN 138 (KER.)].

18. Whether Co Op. Socities are immune from issue of notice under section 147/148?:

(a)   Merely because the assessee-society is engaged prima facie in banking activities does not disentitle the assessing authority from issuing the impugned notice under section 147/148 and calling in question, the taxability/deductibility of the aforesaid interest income of as ‘income from other sources’ unless such interest income is shown to be ‘profits and gains from business’ of banking society.[ Pushtikar Laghu Vyaparik Pratishthan Bachat Evam Sakh Sahkari Samiti Ltd. v.Union of India* [2012] 17 taxmann.com 131 (Raj.)].

19.  Applicability of Section 44AB of income Tax Act,1961 to Co Operative Credit Socities :

(a)    Once it is held to be Bank then turnover or gross receipt if exceeds Rs. 100 lakh/Rs. 25 Lakh then the Tax audit is compulsory and failure to get accounts audited would attract penalty under section 271B of Income tax Act, 1961.

20. Whether Co operative societies are excluded from definition of AOP :

(a) The “Co-operative societies” are specifically exempted from the definition of “Association of Persons” in section 40(ba), meaning thereby the Income-tax Act does not debar deduction of payment of interest to the members of a co-operative society [Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam Cooperative Bank Ltd.* [2011] 13 taxmann.com 190 (Visakhapatnam)].

21. Whether proportionate expenses be disallowed vide section 14A on allowing deduction under Section 80 of chapter VIA :

It has been uniformly and consistently held that in the absence of express language to the contrary, deduction if allowed does not mean that the said income ceases to be part of the total income. [CIT vs M/S Kribhco on 18 July, 2012 ITA NO. 444/2011 (Del. HC) (available on indiakanoon.org) followed Cambay Electric Supply Industrial Co. Ltd. vs. Commission of Income Tax, Gujarat-II, [1978] 113 ITR 84 (SC) and Distributors (Baroda) Private Limited versus Union of India and Others, (1985) 155 ITR 120(SC) ].

22. Concealment Penalty whether leviable on making of wrong claim under section 80P:

Making of wrong claim under section 80P is not at par with concealment or giving of inaccurate information, which may call for levy of penalty under section 271(1)( c ). [2010] 322 ITR 73 (PUNJ. & HAR.).

23. Penalty for a failure to carry out a statutory obligation :

The hon’ble apex court in the case of Hindustan Steel Limited vs. State of Orissa (1972) 83 ITR 26 (SC), penalty for a failure to carry out a statutory obligation will not ordinarily be imposed even where it is legal to do so, unless the defaulter acts in conscious disregard of its obligations.

24.  There should be no discrimination in tax system with similar type of activities carried-on    by different class of person :

In absence of any requirement in law that ‘medical care’ services must be provided by doctors, similar services provided by non-doctors e.g., qualified psychologists, etc. could also be ‘medical care’ and, accordingly, exempt from service tax – [2012] 22 taxmann.com 187 (ECJ)[ foreign Court judgment].

The Bom.H.C, vide Para 22 sub para 13 in the case of Star Television News Ltd. Vs. UOI (2009) 184 Taxman 400 with respect to discrimination have quoted The Hon.  Supreme Court :  in EP. Royappa v. State of Tamil Nadu [1974] 4 SCC 3 it was held that the basic principle which informs both articles 14 and 16 is equality  and inhibition against discrimination, this Court further observed as under :

‘From a positivistic point of view, equality   is antithetic to arbitrariness. In fact, equality  and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is, therefore, violative of article 14, and if it affects any matter relating to public employment, it is also violative of article 16. Articles 14 and 16 strike at arbitrariness in State action and ensure fairness and equality  of treatment.’ (p. 85)

Analysis of Author : The above judgment brings to light that there should be no discrimination in tax system with similar type of activity carried-on by different class of people.

In an exactly reverse situation with respect to Manufacturing and marketing of sugar by an independent company who is liable to Income tax, therefore the society procuring sugar cane but manufacturing and marketing sugar are also liable to income tax as the benefit is strictly given to the marketing of agricultural produce grown by its members.

25.                  As per Section 80A(5), assessee must claim benefit, if not claimed, no benefit shall be allowed. 

26. Taxability of Dividend received from Co Op.Credit society/ Pat Pedhi etc. by Individual :

Dividend received from a Co Operative  society by an Individual will be taxable as income from other sources. Since dividend distribution Tax u/s 115-O of IT Act, 1961 is abolished w.e.f. 01.06.2011 on Co Operative society vide Finance Act 2011.

(The author is can be reached at his email id rbpopat@gmail.com)

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