JUDGMENT
Thanikkachalam, J.
1. In compliance with the direction given by this Court dt. 14th February, 1983, the Tribunal referred the following two questions for the opinion of this Court :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order under S. 263 of the IT Act, 1961 for the asst. yr. 1975-76 ?
2. Whether, on the facts and in the circumstances of the case and having regard to the provisions of S. 80P(2)(a)(iv) of the IT Act, 1961 the Tribunal was right in holding that the assessee would be entitled to the exemption on the income arising out of the sale of the articles such as manure, pesticides and cattle feed ?”
2. The assessee is a co-operative society engaged in the activity of rendering agricultural services to its members. As part of the services, the assessee distributes manure mixture under the name Ashok Mark. The assessee was also supplying cattle-feed. Out of the total income of Rs. 2,59,997 returned by the assessee for the previous year ended 30th June, 1974 corresponding to the asst. yr. 1975-76, the income by supply of manure, pesticides and cattle-feed were Rs. 8,677, Rs. 7,07,773 and Rs. 3,260 respectively. The ITO while making assessment had exempted these income by applying the provisions of S. 80P(2)(a)(iv) of the Act. However on the scrutiny of the assessment order, the CIT came to the conclusion that the order passed by the ITO in granting exemption under S. 80P(2)(a)(iv) of the Act is erroneous and prejudicial to the interest of the Revenue. According to the CIT the assessee is not purchasing manure and pesticides and selling the same as such to the agriculturists. The CIT pointed out that the assessee after purchasing the manure is mixing one with the other and selling a different product under a different trade name to its members. So also the assessee used to purchase pesticides and after mixing the same with one another, the assessee is selling the mixture to its members. The CIT further pointed out that the cattle feed sold by the assessee-co-operative society has got no nexus with the agricultural operation. For these reasons, the CIT came to the conclusion that the exemption granted under S. 80P(2)(a)(iv) of the Act for the income derived by selling manures, pesticides and cattle-feed were erroneous and prejudicial to the interest of the Revenue. Hence he invoked the jurisdiction under S. 263 of the Act and after hearing the counsel appearing for the assessee, directed the ITO to bring to assessment these three amounts which were allowed in the original assessment made for 1975-76 on 31st March, 1976.
3. Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal held that the assessee was purchasing manure and supplying the same to its members. So also, the Tribunal found that the pesticides which was purchased by the assessee was supplied to its members and therefore, it cannot be said that what was sold by the assessee is not a different product from what was purchased by the assessee. In so far as cattle-feed is concerned, the Tribunal held that it has got direct nexus to the agricultural operation since the cattle which are live-stocks cannot function without cattle-feed. Accordingly, the Tribunal set aside the order passed by the CIT under S. 263 of the Act and restored the exemption granted by the ITO in its original assessment.
4. Before us, learned Standing Counsel appearing for the Department submitted that the assessee is purchasing manures of various kinds and after mixing them with one another, the assessee is producing a different product and selling the same to its members. Therefore, according to the learned Standing Counsel, what was purchased was not sold as it is by the assessee to its members. Learned Standing Counsel pointed out that in so far as the manure is concerned, after mixing various kinds of manures, the assessee is selling under separate trade name called Ashok Mark complex manure. Therefore, according to the learned Standing Counsel, there is manufacturing activity and processing activity in selling the manure by the assessee. So also it was submitted that the pesticides of different kinds were purchased and they were mixed together and the mixed pesticides was sold to the members of the co-operative society. Here also, according to the learned Standing Counsel, what was purchased by the assessee is not the same as it was sold to the members of the co-operative society. In so far as the cattle-feed is concerned, learned Standing Counsel pointed that it has got no nexus with the agricultural operation. Therefore, it will not be coming under exemption as contemplated under S. 80P(2)(a)(iv) of the Act. For these reasons, it was submitted that the Tribunal was not correct in setting aside the order passed by the CIT under S. 263 of the Act since the exemption granted by the ITO on these three items is erroneous and prejudicial to the interest of the Revenue.
5. On the other hand, learned counsel appearing for the assessee submitted that what was purchased by the assessee was manure and what was sold by the assessee was also manure. In between that for the sake of convenience of the small illiterate farmers, the co-operative society used to mix the manures according to crop and the quality of the land and sell the mixed manure to the agriculturists. Therefore, according to the learned counsel, it would not amount to manufacturing or processing of goods as suggested by the Department. So also in the case of pesticides, it was submitted that pesticides of different kinds are purchased by the assessee and in accordance with the need of the farmers for the purpose of their crop and quality of the land, the mixed pesticides are sold to them. Inasmuch as what was purchased was pesticides and what was sold was also pesticides, it cannot be said that there is any manufacturing activity or processing of goods in mixing the pesticides according to the need of the farmers. In so far as the cattle is concerned, learned counsel submitted that cattle is live-stocks. The cattle cannot survive without cattle-feed. Therefore, cattle-feed is necessary for the up-keep of the live-stocks. Hence, it cannot be said that the cattle-feed has got no nexus to the agricultural operation. Therefore, it was submitted the CIT was not correct in exercising jurisdiction under S. 263 of the Act since the order passed by the ITO in granting exemption under S. 80P(2)(a)(iv) of the Act is in order.
6. We have heard both the learned Standing Counsel appearing for the Department as well as the learned counsel appearing for the assessee. The assessee is a co-operative society. The assessee purchases manures, pesticides and cattle feed and is selling them to the members of the co-operative society who are agriculturists.
The ITO in the original assessment granted exemption for the income derived from the sale of the abovesaid three goods in view of the provisions contained in S. 80P(2)(a)(iv) of the Act. According to the CIT, the manure and pesticides purchased by the assessee were not the same as the goods sold to its members. The CIT pointed out that the assessee after purchasing the manures and pesticides used to mix the manures of various kinds and pesticides of various kinds and sell the mixture to the agriculturists. Therefore, the CIT pointed that the assessee is indulging in manufacturing activities and processing of goods. Hence, according to the CIT, the assessee is not entitled to deduction as contemplated under S. 80P(2)(a)(iv) of the Act.
7. Even though the CIT pointed out in his order that the assessee is indulging in manufacturing activities and processing of goods, there is no material on record to show what kind of manufacturing activities the assessee is indulging in and what kind of processing activities the assessee is engaged. Unless the details are given and established that the end product is different from the raw materials, it is not possible for the CIT to say that the assessee is engaging in the manufacturing activities and processing of goods. It remains to be seen that what was purchased by the assessee was the same as it was sold to the agriculturists. For the purpose of convenience to small farmers, the assessee used to purchase manures of various kinds and mix them according to the need of the crop and the land in question and sell the same in retail to the farmers. Therefore, it cannot be said that what was sold by the assessee to the small farmers is not manure. So also the pesticides is concerned, the small farmers may need different kind of pesticides for different kinds of crops. In order to fulfil the needs of the farmers, the assessee co-operative society used to purchase various kinds of pesticides and mix them up together to suit the need of the farmers, the land and the crop. Therefore, it cannot be said that what was purchased as pesticides was not sold as such to the farmers. It should also be remembered that the co-operative society cannot sell the goods in wholesale; it has got to sell to its members in retail. In such a case, the assessee has got to sell the goods purchased by it in small quantities out of the wholesale purchase made by the assessee. While the assessee was engaged in the process of selling in retail and in accordance with the needs of the farmers, it has got necessarily to mix the manures and the pesticides. Therefore, simply because the assessee-co-operative society is mixing up the manures and the pesticides to fulfil the needs of the small farmers, it cannot be said that the assessee is engaging in the manufacturing activities or in processing the goods. Further, in the absence of any evidence on record to say that what kind of manufacturing activities the assessee was engaged in or what kind of processing the assessee was doing and what is the raw material purchased by the assessee and what is the end product, it cannot be said that the assessee is engaging in manufacturing activities or processing of goods. Therefore, the ITO was correct in granting exemption under S. 80P(2)(a)(iv) of the Act in so far as the income relating to the sale of manures and pesticides. In so far as the cattle feed is concerned, it is said that it has got no nexus to the agricultural operation. The cattle-feed is meant for live-stock. The live-stock cannot survive without cattle feed. For necessity, while the assessee-co-operative society is engaged in purchase and sale of live-stock, it has also got to feed the live-stock for their survival. When the live-stock are used for agricultural operation, the cattle-feed which is a food for live-stock, cannot be separated from the live-stock and say that it has got no connection with the agricultural operation.
8. Learned standing counsel for the Department relied upon a decision of Allahabad High Court in the case of U.P. Co-operative Federation Ltd. vs. CIT , wherein the Allahabad High Court held that coal is not an article which can be described as an ‘article intended for agriculture’ for the purpose of S. 14(3)(i)(d) of the Indian IT Act, 1922, and, therefore, the exemption from tax of profits of a co-operative society which is derived from the purchase of agricultural implements, seeds, live-stock and other articles intended for agriculture, for purposes of supplying them to its members, will not apply to profits from the supply of coal. But in the present case, we are not dealing with coal. Therefore, that decision was rendered on the facts arising in that case. Therefore, this decision would not render any help to the learned Standing Counsel to contend that the assessee in the present case is not entitled to exemption under S. 80P(2)(a)(iv) of the Act. Learned standing counsel also relied upon a decision of this Court in TC No. 742 of 1982 and 301 and 303/83 wherein this Court by judgment dt. 29th March, 1995 [reported as CIT vs. E.I.D. Parry (India) Ltd. held by following the decision of Allahabad High Court in the case of Tarai Development Corpn. vs. CIT held that processing of seeds would amount to manufacturing activity and therefore, the assessee is entitled to relief under S. 80J of the Act. In that case, this Court considered that after the seeds are processed they are not fit for human consumption. They are only fit for agricultural operation. Therefore, it was held that the end product is not fit for human consumption. Therefore, on facts, in that case, this Court held that processing of seeds would amount to manufacturing activity. But on the other hand, according to the facts arising in the present case by purchasing different kinds of manures and pesticides and mixing them up for the purpose of selling the same to the small farmers in retail, it cannot be said that the assessee is indulging in any manufacturing activity or processing of goods. In fact, there is no material on record in the present case to say as to what kind of manufacturing activity the assessee was indulging in and what kind of processing the assessee was doing. In the absence of materials, it is not possible to come to the conclusion that the assessee is either manufacturing or processing the goods while mixing up the manures and pesticides.
9. In view of the foregoing reasons, we consider that the ITO was correct in granting exemption under S. 80P(2)(a)(iv) of the Act and the CIT was not correct in coming to the conclusion that grant of such exemption by the ITO is erroneous and prejudicial to the interest of Revenue. Accordingly, the order passed by the Tribunal in setting aside the order of CIT under S. 263 of the Act is in order. In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs.