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Issues Involved:
1. Whether rice obtained after milling paddy purchased by the society is considered agricultural produce. 2. Whether the society can claim exemption u/s 81(i)(c) of the Income-tax Act, 1961, for income from the sale of rice milled from paddy purchased from its members. 3. Whether the activity of milling paddy and selling rice amounts to marketing the agricultural produce of the members of the society. Summary: Issue 1: Agricultural Produce Definition The court examined whether rice obtained after milling paddy purchased by the society remains agricultural produce. The Tribunal held that rice remains agricultural produce even after milling. The court agreed, stating, "The term agricultural produce has not been defined in the Income-tax Act and, therefore, we have to adopt the meaning as commonly understood and incorporated in the dictionaries." The court concluded that rice, like wheat, is commonly known as agricultural produce. Issue 2: Exemption u/s 81(i)(c) The society claimed exemption u/s 81(i)(c) of the Income-tax Act, 1961, for income from the sale of rice milled from paddy purchased from its members. The Income-tax Officer and the Appellate Assistant Commissioner rejected this claim, arguing that the society became the owner of the paddy upon purchase and thus the rice obtained was not the agricultural produce of the members. The Tribunal, however, upheld the society's claim. The court disagreed with the Tribunal, stating, "The language in sub-clause (c) to section 81(i) clearly indicates that the exemption was granted for such income which the Society may earn from the activities of marketing the 'agricultural produce' of its members." Issue 3: Marketing Agricultural Produce The court evaluated whether the society's activity of milling paddy and selling rice constitutes marketing the agricultural produce of its members. The court noted that the society purchased paddy from its members, milled it, and sold the rice as its own property, bearing the risk of price fluctuations. The court concluded, "The terms 'marketing and processing' used in relation to co-operative societies in sub-clauses (c) and (e) of section 81 (i) of the Income-tax Act clearly indicate that the exemption covers only such income which arises out of the activity of processing or marketing of the 'agricultural produce' of the members and not the income arising out of the business of purchase of paddy and sale of rice by the Society on its own account." Conclusion: The court answered the reference by stating, "On the facts and in the circumstances of the case, the Tribunal was not right in holding that a portion of the assessee's income from the sale of rice, in so far as it related to paddy purchased from the members of the Society, is exempt under section 81(i)(c) of the Income-tax Act, 1961."
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