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TMI Blog1990 (8) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has given rise to an important and interesting issue of law raised by Shri L.S. Dewani, the learned Counsel for the assessee who attempted to argue by resorting to Rule 27 of the Tribunal Rules that a co-operative society was not an association of persons and attempted to support the order of the CIT(Appeals) on the ground decided against him which was that the assessee is an association of persons. Certain facts in this regard may be stated. 4. The assessee which is a co-operative society derives income from ginning and pressing of cotton on behalf of the Maharashtra State Cotton Marketing Federation. It debited, during the relevant accounting year, an amount of Rs. 3,10,125 being the expenditure by way of facilities and incentives to cultivators by providing fertilizers, seeds, tools and implements for cultivation. It claimed deduction of Rs. 3,72,150 being 120% of the expenditure actually debited under section 35C of the Income-tax Act, 1961. Such claim was rejected by the ITO after obtaining direction of the IAC (Asstt.) under section 144A of the Act. In appeal, the CIT(A) allowed the claim of the assessee for weighted deduction under section 35C. He observed that the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was argued before the CIT(Appeals) that it was the practice of the society to provide specific agriculture oriented facilities such as fertilizers, seeds etc. to the cultivators so that they would grow cotton for which each cultivator was sanctioned certain amount which would be disbursed only in kind and never in cash. Complete details of the persons to whom such disbursement were made were available and had been produced before the ITO. It was argued that section 40A(2) was related only to expenditure by way of payments and in the present case, there was no payment at all but only disbursements of fertilizers, seeds etc., which did not fall within the ambit of that section. This argument was accepted by the CIT(Appeals). The CIT(Appeals) observed that where no expenditure as contemplated in clause (a) of section 40A(2) is incurred, the provision of sub-section 40A(2) cannot be invoked. He relied on the decision in the case of CIT v. A.K. Subbaraya Chetty Sons [1980] 123 ITR 592 (Mad.) and the decision in the case of CIT v. Udhoji Srikrishandas [1981] 21 CTR (MP) 171. The findings of the CIT(Appeals) in this regard are, in our opinion, not assailable and have to be confirmed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich indicated that the society was formed for the benefits of its members, for facilitating movement of goods and earning of rent and such other activities which would benefit and propogate the welfare of its member. 7.2 Shri Dewani also referred to section 29(2) of the Maharashtra Co-operative Societies Act which puts restriction on the members of the society for transfer of shares, interest in the capital or property of the society. In the case of an association of persons, Shri Dewani, argued that there is no such restriction. 7.3 He then referred to section 36 of the said Act which provides for registration of the society as a body corporate with perpetual succession and a common seat and with power to acquit, hold and dispose of property, to enter into contracts, to institute and defend suits and other legal proceedings and to do all such things as are necessary for the purpose for which it is constituted. Since a co-operative society was required to be registered as a body corporate, it could not be treated as an AOP. He also referred to section 45 of the said Act which provides that the transactions of the society with persons other than members shall be subject to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the Act would become inworkable. In particular, he referred to sections 67A, 86(v), 167A and 40(ba). He then argued that section 80P applies only to a co-operative society and, therefore, a different identity of a co-operative society as such was recognised by the Income-tax Act. Alternatively, and without prejudice to the above, Shri Dewani argued that the status of the assessee could be treated as that of an artificial juridical person or the assessee could be treated as an individual and relied on the decision of the Supreme Court in the case of Jogendra Nath Naskar v. CIT [1969] 74 ITR 33 and on the decision of the Allahabad High Court in the case of Bar Council of Uttar Pradesh v. CIT [1983] 143 ITR 584. If the co-operative society was treated as an AOP then while applying the provisions of section 40A(2), the assessee which is a company would be in a better position inasmuch as the only payments made to the directors and share-holders would come within the ambit of that section whereas in the case of a co-operative society, the payments made to its members would hit by application of that section if such co-operative society was to be treated as an AOP. He argued that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. ceed Rs. 10,000 (2) where the total income exceeds Rs. Rs. 1,500 plus 25% of the amount by 10,000 but does not exceed Rs. 20,000 which the total income exceed Rs. 10,000 (3) where the total income exceeds Rs. 4,000 plus 40% of the amount by Rs. 20,000 which the total income exceeds Rs. 20,000 " Further, in the notes Form No. 2 of the return form prescribed under rule 12(1)(b)(i) of the Income-tax Rules, the notes particulars thus reads as under :--- " 26. For indicating the status, please use one of the following codes : .................. (g) Association of persons (AOP) 07 (h) Association of persons (Trust) 08 (i) Body of Individuals (BOI) 09 (j) Artificial juridical person 10 (k) Co-operative Society 11 .................. Here, a separate code number is provided for a co-operative society to indicate the status as can be seen from above. A co-operative society is indicated as distinct from an association of persons (AOP) and an association of persons (Trust). Therefore, a statutory recognition has been given to the status of a co-operative society as such. We agree that the members of a co-operative society cannot ask for dissolution of the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : (b) The persons referred to in clause (a) are the following, namely : (i) Where the assessee is an individual any relative of the assessee ; (ii) where the assessee is a company, firm any director of the company, partner of the association of persons or Hindu undi- firm, or member of the association or vided family. family, or any relative of such director, partner or member ; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member ; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious provisions of the Maharashtra Co-operative Societies Act and for that reason cannot accept the finding of the Commissioner (Appeals) that the status of the co-operative society should be taken as an AOP particularly when the co-operative society has been independently identified and has been recognised by the Income-tax Act in the form of provision of separate rates by the Finance Act, 1982 and in the form of separate status other than the status of an AOP in the return of income prescribed for the purpose. We agree that the provisions in regard to a co-operative society have to be liberally construed as held by the Supreme Court in the case of Broach Distt. Co-operative Cotton Sales Ginning Pressing Society Ltd.'s case. Even if the status of a co-operative society is taken as that of an artificial juridical person or an individual, or a company, the expenditure of the type considered in the present case would not be hit by the application of section 40A(2). The arguments advanced, at length, by Shri Dewani, with reference to the definition of the term ' persons ' which he argued, is an inclusive definition and the other arguments with reference to the provisions of the Maha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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