Morinda Co-Operative Sugar Mills … vs Deputy Commissioner Of … on 9 June, 2000

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Income Tax Appellate Tribunal – Chandigarh
Morinda Co-Operative Sugar Mills … vs Deputy Commissioner Of … on 9 June, 2000
Equivalent citations: 2001 78 ITD 189 Chd
Bench: B Saluja, Judicial, J Pall, Accountant


ORDER

Per Saluja, J.M.

1. The assessee is in appeal against order of CIT dated 27-11-1996 made under section 263 mainly on the ground that order made by Assessing Officer under section 143(3) was not erroneous or prejudicial to the interests of the revenue and that the assessee is entitled to 100% deduction claimed of its income under section 80P(2)(a)(iii) of Income-tax Act.

2. The brief facts are that sugarcane growers are members of the assessee-society. The assessee claimed deduction under section 80P(2)(a)(iii), which specifies that in case of a cooperative society engaged in ‘the marketing of agricultural produce grown by its members’, the whole of the amount of profits and gains of business attributed to such activity shall be exempt from tax. Assessing Officer referred to the decision in Assam Co-operative Apex Marketing Society Ltd. v. Addl. CIT [1993] 201 ITR 338 (SC), wherein the objects of the said provisions were examined and it was observed that even a co-operative society comprising of traders dealing in agricultural produce would become entitled to exemption, which was not intention of the Parliament, and that it would be agricultural produce in the hands of agriculturists but it will be an agricultural commodity in the hands of traders or second party. In the present case. Assessing Officer did verify that agricultural produce was produced by fanners who are members of the assessee-society. He examined the issue as to whether marketing produce implied marketing of direct produce or whether the process involved in making produce marketable would entitle the assessee to claim benefit under section 80P(2)(iv). He referred to the decision in CIT v. Karjan Co-operative Cotton Sale Ginning & Pressing Society Lid [1981] 129 ITR 821 (Guj.), wherein it was held that the concept of marketing in section 80P(2)(a)(iii) includes all activities connected with the process of taking over the agricultural produce from members and handing over marketable commodity to the purchaser and all immediate processes connected with marketing of agricultural produce of its members. He held that the term ‘marketing’ cannot be restricted to buying and selling activity. Assessing Officer also

observed that in the said judgment, it was further clarified that the words in section 80P(2)(a)(iii) were not ‘agricultural produce grown by its members’ but ‘agricultural produce of its members’. He referred to decision of the Apex Court in the case of Broach District Co-operative Cotton Sates, Ginning & Pressing Society Ltd. v. CIT [1989] 177 1TR 418 as also the object of the assessee-society mentioned in the bye-laws. He observed that the objects were to promote the economic interest of its members and to carry on manufacture of sugar, sugar products and other ancillary products and to make arrangements for their sale and also to take necessary steps and measures for development of sugarcane and sugarbeet. He referred to para-29 of bye-laws, which deals with distribution of profits. In the ultimate analysis, Assessing Officer held that even after manufacturing of sugar from sugarcane, it continues to be an agricultural produce and as such the society was eligible for exemption under section SOP.

3. Ld. CIT found the order of Assessing Officer erroneous in so far as it was prejudicial to the interests of the revenue within the meaning of section 263. He observed that while framing assessment, Assessing Officer has wrongly held that income of Rs. 6,18,16,559 earned by the society was exempt under section 80P(2)(a)(iii) and the produce marketed by the society was agricultural produce of its members. Assessing Officer erred in holding that sugar produced from sugarcane supplied by agriculturists remains an agricultural produce, relying upon the decision in Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd. ‘s case (supra). He held that assessment has resulted in loss of revenue and, therefore, order of Assessing Officer was not only erroneous but also prejudicial to the interests of the revenue. Ld. CIT gave an opportunity lo the assessee vide notice dated 16-10-1996. The case was adjourned several times. Ultimately, ld. counsel appeared and filed written submissions. He contended that the assessee had only claimed deduction under section 80P(2)(a)(iii) for assessment year 1994-95. Assessing Officer was duly associated on this point and the decision made by CIT(A), Rohtak, dated 23-3-1995 in the case of Shahbad Co-op. Sugar Mills Ltd, and various other judgments mentioned in assessment order were placed before Assessing Officer. Assessing Officer has duly considered all the said judgments before coming to the conclusion that the assessee was entitled to exemption under section 80P(2)(a)(iii). He submitted that the said provisions allow deduction from income-tax to a co-operative society and not exemption. Since 100% income has to be allowed a deduction, it would amount to exemption. He stressed that the case is fully covered by the ratio of the aforesaid decision in 177 ITR 418, unless it is superseded by any other decision of the Apex Court. He also stressed that where cane grower whether by himself or through a co-op, society crushes the cane and produces gur, it cannot be said that the activity will not be covered by section 80P(2)(a)(iii). He referred to the decision in Assam Co-operative

Apex Marketing Society Ltd’s case (supra), wherein it was settled that the kapas was ginned and converted into cotton with cottonseed as its bye-product and then sold in the market. He pointed out that in the present case, the said ratio fully apply where sugarcane of the members is crushed and converted into sugar with molasses as its bye-products which are sold in the market on behalf of the members. He, therefore, urged that assessment order was in conformity with law and it was not prejudicial to the interests of the revenue or erroneous. Ld. CIT referred to the provisions of section 80P(2)(a)(iii) and observed that the same provided for deduction of income of co-op, society which is engaged in marketing of agricultural produce of its members. Nowhere, exemption or deduction has been claimed in return or during assessment proceedings. On the contrary, in letter dated 25-12-1995 in para-lit has been stated that – “We have claimed set off of business loss amounting to Rs. 1,85,89,348 relating to assessment years 1991-92 and 1992-93. During these years, we have not claimed our business income exempt under section 80P(2). Hence, the claim of Rs. 1,85,89,348 is allowable to us under the head ‘carrying forward of business losses’.” CIT observed that the aforesaid submission could not in any way be construed as having made a claim for deduction under section 80P(2)(a)(iii). He held that in fact the claim of the assessee was for carry forward of business loss. On merits, CIT observed that the assessee was engaged in elaborate industrial activities crushing and processing of sugarcane, its conversion into sugar molasses and other bye-products and all these are distinct commercial activities. The test laid down in judicial pronouncement to determine whether a new commodity has come into existence are based on common commercial perception and understanding. In the market, sugar is recognised as a distinct commercial commodity. It cannot be misconceived or misconstrued as sugarcane. He held that Assessing Officer has erred in applying ratio of decision in Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd.’s case (supra). He held that facts before Assessing Officer were totally different from those considered by the Apex Court. He referred to page 422 of the report, wherein it was observed as under :–

“An attempt was made by ld. counsel for the revenue to raise the point that ginning and pressing into cotton bales changed the character of the cotton and, therefore, what was marketed was not the agricultural produce of the members of the assessee. This point was not raised at any earlier stage by the revenue and cannot be permitted to be taken now.”

He observed that Assessing Officer has failed to take into account the aforesaid crucial observations. Separation of cotton seed from cotton and sale of cotton and cotton seed cannot be equated with production of sugar and its bye-products from sugarcane. The cotton as grown in field and its seeds as separated from cotton were sold in raw form by the society, whereas the assessee-society was engaged in elaborate industrial

and production activities. He, therefore, held that the produce marketed by the assessee-society was not agricultural produce of the members of the society. CIT thus cancelled assessment order passed by Assessing Officer on 31-1-1996 to be made de novo and directed that income may be computed after allowing a reasonable opportunity of being heard to the assessee.

4. Ld. counsel Shri S.S. Rikhy submitted that income of the co-op. society from sale of sugar is exempt under section 80P(2)(a)(iii). He referred to assessment order and submitted that DCIT had decided the issue in favour of the assessee after consideration of decisions of the Apex Court. He submitted that the amendment made in section 80P(2)(a)(iii) retrospectively w.e.f. 1-4-1968 is to cover cases of non-members. On a query, ld. counsel submitted that all sugarcane is grown by members of society. He referred to detailed reply dated 27-11-1996 filed before CIT, copy placed at pages 10-11 of paper book. He, therefore, urged assessment order was not erroneous or prejudicial to the interests of the revenue. In support, ld. counsel relied upon the following decisions :–

(i) Assam Co-operative Apex. Marketing Society Ltd.’s case (supra), wherein it was held that the words ‘agricultural produce of its members’ in section 81(2)(c) meant the agricultural produce produced by the members, and since the agricultural produce marketed by the appellant was not produced by its members, viz., the primary marketing societies, the appellant was not entitled to the exemption under section 81(i)(c). It also observed that the intention behind the provision was to encourage basic-level societies engaged in cottage industries, in marketing the agricultural produce of their members and those engaged in purchasing and supplying agricultural implements, seeds, etc. to their members;

(ii) Addl. CIT v. Ryots Agrl. Produce Co-op. Marketing Society Ltd [1978] 115 ITR 709 (Kar.), wherein it was held that the expression ‘marketing’ appearing in clause (c) of section 81(0 is of wide import and generally means ‘the performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer. In order to make agricultural produce fit for marketing, it may have to be transported or processed, but all the activities involved are understood as amounting to a single activity, namely, marketing, and not independent activities such as transporting, processing, selling, etc. The marketing functions may involve exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market, intelligence, etc.;

(iii) CIT v. Haryana State Co-op. Supply & Marketing Federation Ltd [1990] 182 ITR 53 (Punj. & Har.), wherein it was observed that section 80P must be interpreted liberally having regard to object of the provision, that is, to encourage co-op, societies. The words used in section 80P are not ‘agricultural produce grown by its members’ and, therefore, so long as the commodity brought to the assessee-society was agricultural produce and the produce belonged to its members, it was the agricultural produce. Under the provisions of section 80P(2)(a)(iii), a co-op, society would be entitled to exemption in respect of its activities of marketing of agricultural produce received, purchased or acquired from its members. The term ‘marketing’ cannot be restricted to the buying and selling activity. It includes all activities connected with the process of taking over the agricultural produce of its members and handing over the marketable commodities to the purchasers and all the intermediate process connected with the marketing of the agricultural produce of its members;

(iv) Kishan Lal v. State of Rajas than [1990] 183 ITR 433 (SC). In the said case. Legislative powers of Parliament and of State Legislatures were examined in the context of entry-52 of list-I of Schedule VII, entry-28 of list-II and entry-33 of list-III. The issue was power to levy market fee. The Apex Court observed that the definition of ‘agricultural produce’ in the Rajas than Agricultural Produce Marketing Act. 1961, was not exhaustive but inclusive and neither excludes any item produced in mills or factories nor confines its width only to produce from the soil. The switch over from the indigenous method of producing sugar to scientific or mechanical methods does not change its character as an agricultural produce. It is permissible for the State Government under section 40 to include ‘sugar’ in the Schedule of items on which market fee is leviable. It also observed that since the Act had received the assent of the President, it is fully protected by article 254(2) of the Constitution;

(v) Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd’s case (supra), in which the assessee co-operative society was engaged in marketing agricultural produce of its members. The society was ginning raw cotton received from members and was selling pressed cotton. It was held that ginning and pressing was an integral part of marketing activity and the society was exempt from tax on income from entire business;

(vi) Meenachil Rubber Marketing & Processing Co-operative Society Ltd v. CIT [1992] 193 ITR 108 (Ker.), wherein it was observed that the benevolent purpose of the exemption scheme under section 80P(2)(a)(iii) is to encourage a vital national activity in the

interest of rural economy, therefore, the term ‘marketing’ occurring in the section has to be construed in a manner which would achieve thin benevolent purpose of exemption rather than defeat the said purpose. It further observed that what is intended to be exempted is the amount of marketing profit. The expression ‘marketing’ is an expression of wide import and it generally means ‘the performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer”. The High Court noted that the assessee purchased raw latex from its members and processed the same by centrifugal method and sold the commodity. The ITO rejected the claim on the ground that when the assessee purchased latex from its members and effected sale after processing, what was sold by the assessee was its own commodity. CIT(A) held that the assessee was engaged in the marketing of the agricultural produce of its members and was entitled to the exemption. The Tribunal agreed with the order passed by the ITO and held that the assessee was not entitled to the exemption. On a reference, it was held that the term ‘marketing’ included both buying and selling and hence the assessee was entitled to exemption;

(vii) CIT v. Kerala State Co-operative Marketing Federation Ltd. [1992] 193 ITR 624 (Ken), in which the High Court held that in order to earn the exemption under section SOP(2)(a)(iii), it was sufficient if the agricultural produce belonged to the members of the society. The words used were not ‘agricultural produce grown by its members’ but ‘agricultural produce of its members’; and

(viii) Kerala Stale Co-operative Marketing Federation Ltd. v. CIT [1998] 231 ITR 814, wherein the Apex Court observed that the only condition required for qualifying the income for exemption under section 80P(2)(a)(iii) is that the assessee’s business must be that of marketing, the marketing must be of agricultural produce and that agricultural produce must have belonged to the members of the assessee-society before they came up for marketing by it, whether on its own account or on account of the members themselves. Section 80P does not in effect limit the scope of the exemption to agricultural produce raised by members alone but includes agricultural produce raised by others but belonging to co-operative societies. The contrast in the said provision is with reference to the marketing of agricultural produce of the members of the society against that purchased from non-members. It also observed that the expression ‘marketing’ is an expression of wide import. It involves exchange functions such as buying and selling.

physical functions such as storage, transportation, processing and other commercial activities such as standardisation, financing, marketing intelligence, etc. It further held that the expression ‘of acquires the meaning ‘belonging to’. The decision in CIT v. Kerala State Co-operative Marketing Federation Ltd [1994] 207 ITR 319′ (Ker.) was reversed. The decisions in Haryana State Co-operative Supply & Marketing Federation Ltd. ‘s case (supra), Karjan Co-op. Cotton Sale Ginning & Pressing Society’s case (supra), Kerala State Co-operative Marketing Federation Ltd’s case (supra) and Ryots Agrl. Produce Co-op, Marketing Society Ltd.’s case (supra) were approved.

4.1 At this stage, ld. counsel Shri M.L. Garg sought permission of the Bench to Act as an intervenor. He submitted that similar issue is pending before the Delhi Benches of the Tribunal and he would, therefore, like to advance his arguments. Ld. D.R, strongly opposed this request and submitted that it would open flood-gates for intervention in appeals before Chandigarh Bench by counsel for the assessees whose appeals might have been filed before other Benches and that this procedure would lead Ltd. to practical problems and chaos in hearing appeals. After hearing the parties, we reserved our order to allow Shri Garg to act as an intervenor. However, we permitted him to make his submissions. Shri Garg referred to the decisions of the Apex Court in Assam Co-operative Apex Marketing Society Ltd’s case (supra) and Kerala State Co-operative Marketing Federation Ltd.’s case (supra). He submitted that where agricultural produce, Le., sugarcane, was produced by members of society and the same was purchased from members then the assessee was eligible for exemption under section 80P(2)(a)(iii). If sugarcane was purchased from persons other than members, then the assessee was not entitled to exemption. Even after retrospective amendment in section 80P(2)(a)(iii), the assessee was within the purview of the amendment as the assessee has growers of sugarcane as its members. He referred to the meaning of the expression ‘marketing’, as interpreted in Kerala State Cooperative Marketing Federation Ltd.’s case (supra). He stressed that marketing would include all steps which made a commodity marketable. The sugarcane has to be converted into sugar before the same can be marketed and, therefore, the assessee is entitled to exemption. The Apex Court has directly dealt with this issue in Kerala State Co-operative Marketing Federation Ltd.’s case (supra). He referred to page 820 of report, where it is observed that ‘the only condition required for qualifying the assessee’s income for exemption was that the assessee’s business must be that of marketing, the marketing must be of agricultural produce and that agricultural produce must have belonged to the members of the assessee-society before they came up for marketing by it, whether on its own account or on account of the members themselves’. The Apex Court also observed that the language adopted in section 80P(2)(a)(iii) with

which we are concerned will admit of the interpretation that the society engaged in marketing of agricultural produce of its members, as agricultural produce ‘belonging to’ its members which is not necessarily raised by such member. Thus, when the provisions of section 80P of the Act admit of a wider exemption, there is no reason to cut down the scope of the provisions, as indicated in Assam Co-operative Apex Marketing Society Ltd’s case (supra). He also referred to decision in Haryana State Co-op. Supply & Marketing Federation Ltd. ‘s case (supra).

4.2 Ld. Departmental Representative Shri Y.R. Saini relied on order of CIT made under section 263. He submitted that the real issue is as to whether marketing of agricultural produce includes manufacture of sugar from sugarcane produced through members of society and whether after conversion into sugar it still remains agricultural produce. He referred to the provisions of section 80P(2)(a)(v), whereunder the exemption is w.r.t. the processing, without the aid of power, of the agricultural produce of members of the society. Ld. DR distinguished between amendment made in sub-section (2)(a)(iii), vis-a-vis language employed in sub-clause (v). The case of the assessee-society actually falls under section 80P(2)(e). Strict interpretation is required in cases of exemption. He relied on the following decisions :–

(a) Lahaul Potato Growers Co-op. Marketing Processing Society Ltd v. CIT [1998] 232 ITR 718 (HP), wherein it has been held that deduction under section 80P(2)(a)(iii) is to be allowed against the net income after setting off proportionate expenses for earning the exempt income where such expenses are mixed up with the remaining expenses;

(b) Novopan India Ltd. v. Collector of Central Excise 1994 (73) ELT 769 (SC), wherein it has been observed that exemption being in the nature of exception is to be construed strictly at the stage of determination whether assessee fails within its terms or not and in case of doubt or ambiguity benefit of it must go to the Slate;

(c) Dr. (Mrs.) Renuka Datla v. CRT [1999] 240 ITR 463 (AP), wherein it has been observed that the exemption provision or concession should not be stretched in favour of the assessee and that rule of strict interpretation should be applied; and

(d) CIT v. N.C. Budharuja & Co. [1993] 204 ITR 412 (SC), wherein it has been observed at page 434 that a statute cannot always be construed with the dictionary in one hand and the statute in the other and regard must also be had to the scheme, context and the legislative history of the provision.

In view of the foregoing, ld. DR submitted that the expression ‘marketing’ may include processing of agricultural produce but processing cannot

include manufacture of sugar. In the present case, there is clear activity of manufacturing sugar and molasses – a bye-product – which attracts Excise duty. He referred to the order dated 31 -3-1997 of CIT(A) in the case of Budhewal Co-op Sugar Mills Ltd, wherein at page 5 the scheme of old section 81 and new section 80P has been examined and it has been observed that there is a subtle difference in the said provisions. He referred to paragraph 4, where CIT(A) observed that section 80P is somewhat more specific as it states ‘where gross total income includes any income which is referred to in sub-section (2) then in accordance with the provision of the section the income specified in sub-section (2) would be allowed as a deduction and one of the sums specified in sub-section (2) was the profits and gains derived from marketing of agricultural produce of its members’. Ld. DR referred to page 2663 of Vol. 2, Income-tax Law, 5th Edn., by Chaturvedi and Pithisaria, where it is noted that term ‘manufacturing’ has been interpreted in several court decisions. It is observed that the said term generally refers to ‘production of an article for use from raw, semi-raw or prepared material by giving these materials new forms, qualities, properties or combinations, whether by hand labour or machinery’. It is further noted that the Apex Court observed that “It may be worthwhile to note that ‘manufacture’ implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation…..” – Collector of Central Excise v. Kutty Flush Doors & Furniture Co. (P.) Ltd. [1988] 17 ECC 37 (SC). It is also observed that there must be transformation – a new and different article must emerge having a distinct name, character or use – and thus manufacture implies bringing in something new. It is further noted that the term ‘processing’ has a wider meaning than the term ‘manufacture’. The broad distinction between ‘manufacture’ and ‘processing’ is that manufacture involves bringing into existence of a new product – a product which is of a different chemical composition or whose integral structure is different. Processing could be said to be doing specific acts to something for changing its shape or size. Ld. DR further relied on the following decisions in support of order of CIT –

(a) South Arcot District Co-op. Supply & Marketing Society Ltd. v. CIT [1974] 97 1TR 500 (Mad.), wherein it was held that the rice is not an agricultural produce as it does not continue to have the same original character as paddy after hulling and further it cannot be said that the agricultural produce of the members is what was being sold as it is only the paddy that belonged to the members;

(b) CIT v. Kisan Co-op. Rice Mills Ltd. [1976] 103 ITR 264 (MP), wherein it was held that the income arising to the society out of the business of purchase of paddy and sale of rice by it on its own account was not entitled to the exemption under section 81(0(c);

(c) CIT v. Mahasamund Kissan Co-op. Rice Mill & Marketing Society Ltd. [1976] 103 ITR 499 (MP), wherein the decision in Kisan Co-op. Rice Mills Ltd s case (supra) was followed :

(d) Keshkal Coop. Marketing Society Ltd v. CIT [1987] 165 ITR 437 (MP), wherein it was held that in case of society purchasing paddy from members, milling it and selling it on its own account, the same did not amount to marketing of agricultural produce of members and it was not entitled to exemption under section 80P(2)(a)(iii) Ld. DR pointed out that SLP filed against this decision has been rejected re 171 ITR 50 (statutes);

(e) CIT v. Kerala State Co-op. Marketing Federation Ltd’s case (supra), in order to show distinction between agricultural produce and agricultural commodity – (this decision now stands reversed in Kerala State Co-operative Marketing Federation Ltd.’s case (supra);

(f) Dudhganga Vedganga S.S.K. Ltd. v. Dy. CIT [1995] 54 ITD 97 (Pune), wherein it was held that the activity of marketing of agricultural produce, referred (o in section 80P(2)(a)(iii), must be confined to the direct produce from agriculture and not to anything manufactured or processed out of it and since the assessee-society marketed sugar which was not agrl. produce of its members, the assessee’s claim for deduction under that section was rightly rejected.

Ld. DR further submitted that the case law relied upon by ld. counsels is distinguishable on facts. In Meenachil Rubber Marketing & Processing Cooperative Society Ltd’s case (supra), the question was of extracting oil from oil seeds and there was no basic change in agrl. produce, as there was no chemical reaction. Similarly, he pointed out that the decision in Kishan Lal’s case (supra) related to market fee and was not relevant. He submitted that in retrospective amendment the emphasis is on the words ‘grown by the members’. In view of the foregoing, ld. DR urged that order of CIT ought to be upheld.

4.3 Ld. counsel submitted that the case law cited by ld. DR is irrelevant and the same has been rendered in different context. He submitted that every clause of section 80P(2) has to be read independently as the said clause constitute independent exemption. Reference to section 80P(2)(a)(v) was also not relevant. Stress in section 80P(2)(a)(iii) is on the words ‘marketing of agricultural produce’. Ld. counsel referred to the decision in Meenachil Rubber Marketing & Processing Co-operative Society Ltd. s case (supra) and submitted that extraction of oil is manufacture, while conversion of sugarcane into sugar retains the character of agrl. produce. Referring to the decision in Dudhganga Vedganga S.S.K. Ltd.’s case (supra), ld. counsel submitted that the Tribunal has not considered the decisions of Hon’ble Supreme Court and Punjab and Haryana High Court. After the decision of Apex Court in Kerala Slate Co-operative Marketing Federation Ltd’s case (supra), all other judgments are rendered futile. The principles regarding marketing of agrl. produce have been laid down by the Apex Court. Sugarcane cannot be stored and Coop. Societies have

been formed with an object to make sugarcane a marketable commodity and, therefore, the assessee is emitted to exemption under section 80P(2)(a)(iii).

5. We have carefully considered the submissions made by both the parties and have perused orders of Assessing Officer and CIT. We have also seen the case law relied upon by them. At the outset, we may deal with the question of permitting Shri M.L. Garg to act as an intervenor. We feel that the submissions made by ld. DR in this behalf have force. Normally, the procedure for permitting intervenor is in cases referred to Special Bench of the Tribunal. Since the issues referred to Special Bench are of wider import, notices are sent to the parties to act as intervenors. The said procedure cannot be adopted in Division Bench cases, where specific appeals within the jurisdiction of the Bench are listed for hearing. In the present case, it is obvious that Shri Garg is representing a case before Delhi Benches and his request to act as an intervenor here may have the effect of forestalling the decision of the Delhi Benches on the issue involved in this case and may lead to various practical difficulties which cannot be foreseen at this stage. Thus, we reject the request of Shri Garg to act as an intervenor in this case.

5.1 It is observed that the basic issue before us is as to whether the agrl. produce retains the character of agricultural produce at the time of marketing thereof. Sub-clause (iii) of clause (a) of sub-section (2) of section SOP reads as under :–

“(iii) the marketing of the agricultural produce grown by its members, or”

In the case before us, sugarcane is grown by members of the assessee-society and it purchases sugarcane and ultimately produces sugar. The crucial issue is whether at the time of marketing of sugar, the same could be treated to retain the character of agrl. produce grown by members of the society, or it represents a commercial commodity which no longer has the character of agrl. produce. Ld. counsel has stressed that the words ‘marketing of agrl. produce’, even in the amended provisions, remain the same. Ld. counsel has referred mainly to the decision in Ryots Agrl. Produce Co-op. Marketing Society Ltd.’s case (supra), wherein the expression ‘marketing’ has been interpreted to mean ‘the performance of all business activities involved in the flow of goods and services from the point of initial agrl. production until they are in the hands of the ultimate consumer’. It has been further observed that ‘in order to make agrl. produce fit for marketing, it may have to be transported or processed, but all the activities involved are understood as amounting to a single activity, namely, marketing, and not independent activities such as transporting, processing, selling, etc. The marketing functions may involve exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market intelligence, etc.’ Ld. counsel has

further relied on the decision in Kerala State Co-operative Marketing Federation Ltd. s case (supra), wherein the meaning given to the expression ‘marketing’ in Ryots Agrl Produce Co-op. Marketing Society Ltd. ‘s case (supra) has been reiterated. It has been observed that section 80P was introduced with a view to encouraging and promoting the growth of the cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. It is observed that the main question before the Apex Court was interpretation of the words ‘produce of its members’ as used in sub-clause (iii) before its amendment in 1999 w.e.f. 1-4-1968. It is observed at page 820 of the report that ‘so long as agricultural produce handled by the assessee belonged to its members, it was entitled to exemption in respect of the profits derived from the marketing of the same. Whether the members came by the produce because of their own agricultural activities or whether they acquired it by purchasing it from cultivators was of no consequence for the purpose of determining whether the assessee was entitled to the exemption. The only condition required for qualifying the assessee’s income for exemption was that the assessee s business must be that of marketing, the marketing must be of agricultural produce and that agricultural produce must have belonged to the members of the assessee-society before they came up for marketing by it, whether on its own account or on account of the members themselves’ (emphasis supplied). Thus, it is clear that the Apex Court has laid stress on the fact that marketing must be of agrl. produce. In the present case, it is not in dispute that sugarcane is grown by members of the assessee-society. We are only required to examine whether at the time of marketing of sugar whether the said commodity can be still treated as agrl. produce grown by members of the society. Ld. counsel has also relied on the decision in Haryana State Co-op. Supply & Marketing Federation Ltd. sense (supra), wherein it has been observed that the term ‘marketing’ cannot be restricted to the buying and selling activity. It includes all activities connected with the process of taking over the agrl. produce of its members and handling over marketable commodities to the purchasers and all the intermediate processes connected with the marketing of the agrl. produce of the members. The jurisdictional High Court relied on the decision in Karjan Co-op. Cotton Sale, Ginning & Pressing Society Lid’s case (supra). It referred to the Principle and Practice of marketing in India by Dr. C.B. Mamoria and B.L. Joshi and observed that classification of marketing functions were (1) activities involving transfer of ownership i.e. buying and selling; (2) activities involving physical supply, i.e. transportation and storage; and (3) activities facilitating the foregoing functions, i.e. standardisation and grading, financing, risk taking and market research. Reference was made to the decision reported in Karjan Co-op. Cotton Sale, Ginning & Pressing Society Ltd’s case (supra). It also referred to the decisions reported in Kisan Co-op. Rice Mills Ltd.’s case (supra), Mahasamund Kissan Co-op. Rice Mills & Marketing Society Ltd.’s case (supra), Keshkal Co-op. Market-

ing Society Ltd ‘s case (supra) and CIT v. Indian Card Clothing Co. (P.) Ltd [1977] 110 ITR 103 (Born.), as relied upon by revenue, and observed that the concept of the term ‘marketing’ was not at all adverted to, which was fundamental to determination of issue raised. It thus answered the question in affirmative in favour of the assessee and against the revenue. It is observed that HAFED had earned profit by sale of wheat, gram and other agrl. produce. Ld. counsel has also referred to order dated 15-3-1997 in the case of Shuhbad Co-op. Sugar Mills Ltd. for assessment year 1992-93, wherein CIT(A) examined the decisions in Ryots Agrl Produce Co-op. Marketing Society Ltd.’s case (supra), Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd’s case (supra), Chowgule & Co. (Hind) (P.) Ltd v. CIT [1990] 182 ITR 189 (Bom.) and held that in order to make sugarcane, which is an agrl. produce, fit for marketing it has to be converted into sugar like oil from oil seeds and rice from paddy. He held that the entire business income of the assessee from manufacture and sale of sugar was exempt under section 80P(2)(a)(iii). Ld. counsel also referred to the decision in the case of Kamal Co-op. Sugar Mills Ltd v. Dy. CIT [1998] 66 ITD 521 (Delhi), wherein the Tribunal observed that the assessee-society has not carried out the manufacture process of sugar out of sugarcane belonging to the members and selling sugar on their behalf in the open market and charging the members only the manufacturing charges thereby passing on the remunerative price of its agrl. produce to its members. It observed that what the assessee-society had done was that it purchased sugarcane from its members as well as non-members at the same price fixed by the Government and the profit earned from manufacturing of sugar had been appropriated by itself instead of passing of its benefit to its members as per objects of its bye-laws which provided that the sugar shall be sold by the society to the best advantage of its members. It held that the profit derived from sale of sugar was not on account of marketing of sugarcane of its members but it was on account of manufacturing of sugar out of sugarcane purchased on its own account and accordingly the deduction claimed under section 80P(2)(a)(iii) was not available to the assessee-society. Ld. counsel has tried to take a plea that the said decision recognises the facts that sugarcane belonging to members if converted into sugar and marketed would be covered for the purpose of exemption under section 80P(2)(a)(iii). After going through the aforesaid decisions, we feel that marketing of agrl. produce contemplated by section 80P(2)(a)(iii), as amended retrospectively, must relate to agrl. produce as grown by members of the society. The main emphasis of the argument of ld. counsel is on expression ‘marketing’. It is observed from the decision in Ryots Agrl Produce Co-op. Marketing Society Ltd. ‘s case (supra) that in order to make agrl. produce fit for marketing, it may have to be transported or processed. They have held that activities of transporting, processing, selling constitute a single activity. They have observed that marketing functions may involve exchange functions such as buying

and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market intelligence, etc. The said decision has ‘also been followed and approved in Kerala Slate Co-operative Marketing Federation Ltd.’s case (supra). We feel that while in the said decisions emphasis is on processing of agrl. produce so as to make it fit for marketing, the processing of agrl. produce cannot be further stretched to cover manufacture of a entirely different product. We feel that after manufacture of sugar, it ceases to retain the character of agrl. produce, i.e. sugarcane grown by members of the society. We feel that the plea that sugarcane cannot be marketed except after conversion into sugar and, therefore, marketing should cover manufacture and sale of sugar, has no force. If so construed, then sub-clause (III) should perhaps have read as ‘the marketing of any product manufactured or produced from agrl. produce grown by its members’. It is obvious that such an interpretation is not warranted on the plea of liberal interpretation. It may not be out of place to mention that sugarcane can be converted into a number of commodities, like gur, shakar, sugar, sugar candies and other bye-products in the form of molasses, which attract a separate Excise duty. The assessee has tried to rely upon the decisions where cotton seed was segregated and cotton in bales was treated as agrl. produce. We feel that in those cases the basic character of agrl. produce had been retained. It is also observed that the decision in Kishan Lal’s case (supra) relates to interpretation of various entries occurring in VIIth Schedule of the Constitution. The said case deals with principles of interpretation relating to legislative powers of the Parliament and of State Legislature and. therefore, a wider meaning has to be assigned to the expressions used in Lists I-III of VIIth Schedule. In that context, it has been held that agrl. produce would cover sugar manufactured in mills or factories and sugar so manufactured does not cease to be agrl. produce. We feel that the said principles of interpretation cannot be invoked in case of specific provisions dealing with exemption of income. In the case of Novopan India Ltd. (supra), it is observed that such provisions have to be construed strictly at the stage of determination whether the assessee falls within its term or not and in case of doubt or ambiguity benefit of it must go to the State. We feel that if provisions of section 80P(2)(a)(iii) were to be interpreted in a way pleaded by ld. counsel, then the words ‘marketing of agrl. produce’ would not only cover processing of agrl. produce to make it fit for marketing but all manufacturing activities even if they result in manufacturing/production of entirely a new item, vis-a-vis agrl. produce originally grown by members of the society. We feel that such an interpretation would amount to importing of meaning into the provision, which was never intended by the Legislature. We have, therefore, to strike a balance between adopting a liberal or strict interpretation, keeping in view the object of the provisions, so that no violation is done to the meaning of the words used in the provision. We may observe that in the decision in Haryana State Co-op. Supply & Marketing Federation Ltd.’s case (supra), it has been observed at

page 57 that certain functions are connected with marketing, for example, buying and selling, transportation and storage, standardisation and grading, financing, risk taking and marketing research. The said activities in no way indicate that manufacturing activity like manufacture of sugar would be covered by the expression ‘marketing of agrl. produce’. It may not be out of place to mention that HAFED was selling wheat, gram and other agrl. produce. Thus, on facts the said case is distinguishable. We may also mention that all the aforesaid decisions related to interpretation of words ‘agricultural produce of its members’ and it was held that the said words basically signify that agrl. produce belonged to members of the society and they may not have thus grown the said agrl. produce. The expression ‘marketing’ was thus interpreted in the light of said provisions, which have now undergone a qualitative change in the sense that agrl. produce must be grown by members of society and at the time of marketing thereof, the basic characteristics of agrl. produce ought to be present. Once agrl. produce grown by members of society ceases to be an agrl. produce and takes shape of commercial product in the form of sugar, the co-op society would not be eligible for exemption on the plea that sugar so manufactured/produced remains an agrl. produce grown by members. Thus, on facts and in the circumstances of the case we feel that assessment order made by Assessing Officer was erroneous and prejudicial to the interests of the revenue. Accordingly, we uphold order of CIT under section 263.

6. In the result, the appeal is dismissed.

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