1989 (1) TMI 3 - SC - Income Tax

Co-operative Society - Whether, the sum received by the assessee-society from the Madras Government under an agreement for stocking and distribution of ammonium sulphate was exempt u/s 14(3)(iv) - Whether, on the construction of the agreement between the assessee and the State Government, the Tribunal s finding that the receipts were mostly for letting out the godowns and that the servicing was an insignificant portion of the whole amount is reasonable

Summary

Issues:
1. Whether the sum received by the assessee from the State Government is exempt under section 14(3)(iv) of the Indian Income-tax Act, 1922?
2. Whether the findings of the Appellate Tribunal regarding the nature of the receipts and services rendered are reasonable and consistent with the agreement?

Analysis:
The case involved an appeal by the assessee, a co-operative society, against the judgment of the High Court of Madras, which ruled in favor of the assessee and against the Revenue. The assessee had entered into an agreement with the State Government to hold and store ammonium sulphate in its godowns. The assessee received a sum described as commission for these services. The Income-tax Officer denied tax exemption, but the Income-tax Appellate Tribunal granted the exemption, leading to the reference to the High Court.

The High Court upheld the Tribunal's decision, emphasizing the nature of the agreement and the services provided. The Supreme Court agreed with the lower courts, citing the objective of encouraging co-operative societies to construct warehouses for rural development. The Court noted that the exemption provision should be liberally construed. It concluded that the assessee essentially let out its godowns for storing the ammonium sulphate, with other services being incidental. The amount received was considered remuneration for the use of the godowns, leading to the assessee being entitled to the exemption.

In the final judgment, the Supreme Court dismissed the appeal, affirming the decision in favor of the assessee. The Court highlighted that the amount received was for the use of the godowns and that the services provided were secondary to the main purpose of storing the stock. The judgment emphasized the liberal construction of exemption provisions for co-operative societies and the importance of considering the true substance of agreements in tax matters.