1987 (3) TMI 105 - HC - Income Tax

Summary

Issues:
Assessment of profits from trading with members of a cooperative society as taxable income under the Income-tax Act, 1961.

Analysis:
The judgment pertains to three references under section 256(1) of the Income-tax Act, 1961, concerning the assessment years 1971-72, 1972-73, and 1973-74. The assessee, a registered cooperative society, engaged in trading activities with its members, resulting in profits. The assessee contended that the profits earned from sales to members should not be taxable as it was not the income of the society. The surplus from trading with members was calculated based on proportionate profit on sales. However, the claim of the assessee was rejected at all stages, leading to the references before the court.

The main question before the court was whether the profits earned from trading with members could be exempted as income from mutual trading. The court referred to a previous decision involving a cooperative store, where it was held that if there is no complete identity between contributors and participators, the principle of mutuality is defeated. In the present case, the assessee was found to be a profit-making organization engaging in trading with both members and non-members, indicating a lack of identity between contributors and participators. Therefore, the court concluded that the profits from trading with members cannot be exempted based on the principle of mutuality.

The court rejected the argument that profits earned from trading with members should be treated differently from those earned from non-members. It was emphasized that once mutuality is lost due to trading activities with non-members, the entire income becomes liable to tax. The court also disagreed with the proposition that income derived from trading with members can be dissected for tax purposes, citing Supreme Court precedents that did not support such dissection. Consequently, the Tribunal's decision to tax the profits from trading with members was upheld, and the references were answered in favor of the Revenue.

In conclusion, the court held that the sums of profits in question could not be exempted as income from mutual trading with members for the relevant assessment years. The references were disposed of in favor of the Revenue, with costs awarded against the assessee.