1998 (5) TMI 6 - SC - Income Tax

Charitable Trust - claim for exemption u/s 80P(2)(a)(iii) in respect of profits earned by it out of the purchases made from the member societies - held that assessee is entitled to deduction

Summary

Issues Involved:
1. Entitlement of co-operative societies to deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961.
2. Interpretation of the term "agricultural produce of its members" in section 80P(2)(a)(iii).
3. Applicability of the decision in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338.

Detailed Analysis:

1. Entitlement of Co-operative Societies to Deduction under Section 80P(2)(a)(iii):

The primary issue in the batch of cases was whether co-operative societies are entitled to deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961, for profits earned from purchases made from member societies. The Kerala State Co-operative Marketing Federation Limited, an apex society, claimed exemption for the assessment year 1980-81 on profits earned from purchases made from primary co-operative societies, which are its members. The Income-tax Officer rejected the claim, but the Commissioner of Income-tax (Appeals) allowed it, specifying that the exemption did not apply to purchases from non-member societies. The Appellate Tribunal upheld this view, and the High Court initially ruled in favor of the assessee but later reversed its decision based on the Supreme Court's ruling in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338.

2. Interpretation of "Agricultural Produce of Its Members":

The court examined whether the phrase "agricultural produce of its members" includes agricultural produce marketed by an apex society on behalf of its member societies. The argument centered on whether the term should be restricted to produce raised directly by individual members or could include produce acquired from other sources but marketed by the member societies. The court concluded that the term "of its members" should be interpreted broadly to mean "belonging to" its members, not necessarily "raised by" them. This interpretation aligns with the purpose of encouraging co-operative societies in marketing agricultural produce, whether the produce is directly raised by the members or acquired from other sources.

3. Applicability of the Decision in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338:

The court revisited the decision in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338, which had interpreted section 81(i)(c) of the Income-tax Act (repealed and replaced by section 80P) to restrict the exemption to primary societies. The court noted that this interpretation was unduly narrow and did not consider the broader legislative intent to promote co-operative societies. The court emphasized that section 80P does not limit the exemption to agricultural produce raised by members alone but includes produce marketed by member societies. The court cited several High Court decisions supporting this broader interpretation and concluded that the Assam Co-operative Apex Marketing Society decision required reconsideration.

Conclusion:

The Supreme Court reversed the Kerala High Court's decision, ruling that co-operative societies engaged in marketing agricultural produce of their members are entitled to deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961. The court clarified that the term "agricultural produce of its members" includes produce marketed by member societies, not just produce directly raised by individual members. This broader interpretation aligns with the legislative intent to encourage co-operative societies in the rural economy. The court dismissed related civil appeals following this decision.