2006 (11) TMI 174 - HC - Income Tax

Deductions u/s 80P(2)(e) - Co-operative society - income derived from commission/margin without letting out godown of warehouse - agent of the State Government for storing the essential commodities - whether the assessee was storing the commodities in question in his godown or warehouse for the purpose of storage, processing and facilitating marketing of such commodities or was using his godown for the purpose of its own business of trading for holding stocks as a part of its trading necessity - HELD THAT - Once we reach this conclusion that it is a part of trading activity of the co-operative society, in respect of which supplies of the essential commodities as authorised wholesaler on payment of price reaches him, the property in goods passes on to the authorised holder as under a completed sale and thereafter subsequent transactions by the assessee in the ordinary course are his marketing activities. If that is the right conclusion, which we think so, the additional amount received by the assessee over and above price paid by him is his gross profit. He is allowed to retain the difference between the purchase price and sale price not by way of commission but as his own surplus. It is misnomer to call it commission received from the Government. He receives nothing from the Government. Whatever he receives from the retailer are his business receipts and is received on account of sale of the essential commodities and not for use of his godown or for any services rendered to facilitate marketing of that commodity. The respondent co-operative society was storing its own trading stocks in its godowns, whether owned by him or acquired on hire for the purpose of safe custody of its stock-in-trade. No commission could be received by him for storing the essential commodities as part of its own stock-in-trade at its godown. He could not render service to himself to refer any part of receipts to letting out godown for storage or for use or lending incidental services to facilitate marketing of the commodities for someone else. The Bombay High Court in CIT v. Bhandara Zilla Sahakari Kharedi Vikri Sangh Ltd. 1992 (1) TMI 13 - BOMBAY HIGH COURT came to the conclusion that the entire amount received by the assessee under different heads was not to be excluded from taxable income but only what was properly referable to the letting of godown and for facilitating marketing of the commodities could be deducted and for that matter was restored to the Tribunal for determining the receipts for different and specific purpose were to be computed while reserving the exclusive trading rights. Thus, the paddy contract also did not result in passing of property in the goods to the assessee. Yet the deduction was restricted to income properly referable to section 80P(2)(e). That being the position, the Bombay High Court decision is based on its own facts and is distinguishable. Therefore, we are of the opinion that since the assessee was storing the commodities in question in godown as a part of its own trading stock, it being trader in the essential commodities in question, the provisions of section 80P(2)(e) are not applicable, to be invoked by the assessee. He is only entitled to claim deduction of expenses incurred by him on hiring of godown, and the depreciation, as may be allowable on godowns owned by it as business assets, while computing income from its business. Accordingly, all the appeals are allowed. The order of the Tribunal as well as of the Commissioner (Appeals) are set aside and the Assessing Officer is directed to recompute the income in the light of the aforesaid, judgment.

Summary

Issues Involved:
1. Entitlement to deductions under section 80P(2)(e) of the Income-tax Act.
2. Nature of the income derived from the commission/margin without letting out godowns or warehouses.
3. Classification and treatment of income from storing essential commodities.

Detailed Analysis:

1. Entitlement to Deductions under Section 80P(2)(e):
The primary issue was whether the assessee-society, a co-operative society engaged in running a consumer co-operative store, was entitled to deductions under section 80P(2)(e) of the Income-tax Act. The claim was based on the income derived from commission/margin without letting out godowns or warehouses. The court examined section 80P(2) and its relevant clauses, noting that the provision aims to extend concessions to co-operative societies based on their activities and types of income. The court emphasized that for a co-operative society to claim deductions under section 80P(2)(e), the income must be derived from letting out godowns or warehouses for storage, processing, or facilitating the marketing of commodities.

2. Nature of the Income Derived from Commission/Margin:
The court analyzed whether the income derived from the commission/margin by the assessee-society, which acted as an authorized wholesaler of essential commodities, could be considered as income from letting out godowns or warehouses. The court found that the assessee was not merely storing the commodities on behalf of the State Government but was engaged in trading activities. The commodities were part of the assessee's trading stock, and the income derived was from the sale of these commodities, not from letting out godowns or warehouses.

3. Classification and Treatment of Income from Storing Essential Commodities:
The court examined the nature of the assessee's business activities, including the regulatory framework under the Essential Commodities Act and the Rajasthan Food Grains and Other Essential Articles (Regulation of Distribution) Order, 1976. The court concluded that the assessee was a trader in essential commodities, holding the commodities as part of its trading stock. The income derived from the sale of these commodities was considered as business income. The court rejected the contention that the income was derived from letting out godowns or warehouses for storage purposes.

Conclusion:
The court held that the assessee-society was not entitled to deductions under section 80P(2)(e) of the Income-tax Act. The income derived from the commission/margin was part of the assessee's trading activities and not from letting out godowns or warehouses. The court directed the Assessing Officer to recompute the income in light of the judgment, allowing deductions only for expenses incurred on hiring godowns and depreciation on owned godowns as business assets. The appeals were allowed, and the orders of the Tribunal and Commissioner (Appeals) were set aside. No order as to costs was made.