Khedut Sahakari Ginning & Pressing
Society Ltd. Vs. State of Gujarat  INSC 244 (14 September 1971)
CITATION: 1972 AIR 1786 1972 SCR (1) 714 1971
SCC (3) 480
Bombay Cooperative Societies Act,
1925-Producers' Society pooling members goods consisting of cotton & cotton
seeds and selling them with or without ginning-Whether goods purchased from
members-Bye-laws of society showed that it way agent of members and did not
purchase goods of members for purpose of selling-Not liable to pay purchase tax
under Bombay Sales Tax Act, 1959.
The appellant was a cooperative society
registered under the Bombay Cooperative Societies Act, 1925. During the
assessment period November 1, 1960 to October 31, 1961 the Society received
large quantity of cotton from its members and the same was sold by it either
after ginning and pressing or without ginning and pressing. The Society was a
registered dealer under the Bombay Sales Tax Act, 1959. The Sales Tax Officer
accepted the return filed by the society and did not levy any purchase tax on
it. However the Assistant Commissioner issued a notice under s. 57 of the Act
on the basis that it had purchased cotton and cotton seeds from its members and
these purchases were liable to purchase tax. The Tribunal, relying on bye-laws
37(7), 37(18), 37(19), 48, 49, 52, 53 and 55 of the Society, upheld the view of
the Assistant Commissioner and dismissed theSociety's revision petition. It
rejected the contention of the Society that it was functioning merely as the
agent of its members. The High Court in reference also decided against the
Society. In appeal to this Court by special leave.
HELD : In considering whether a transaction
is a sale or not what the court has to consider is whether as a result of the
transaction, the property in the goods passed to the assessee 'for a price and
whether the assessee sold those goods as its own. [717 B-C] Being a producer's
society as defined in s. 3(h) of the Cooperative Societies Act the appellant Society
was evidently formed primarily with the object of selling the product of the
members as their collective produce. The preamble to the Act showed that two of
the objectives intended to be achieved by the Act were to provide for self help
by the members of the society and for mutual aid among them. The bye-laws of
the Act must be examined in the background of the preamble to the Act as well
as the definition of Producers' Society., So examined none of the bye-laws
including those relied on by the Tribunals showed that the society had
purchased either cotton or cotton seeds from its members. [717 E-H] From
bye-law 2 it was clear that the object of the society was not to purchase or
sell any cotton or cotton seeds on its own behalf. aauses (7), (14), (16) and
18 of bye-law 37 indicated that the Society was selling the product of others
and not its own goods. Bye-law 45(1) under which loans on interest could be
advanced to the members against the security of the goods clearly showed that
the goods were entrusted to the Society and not sold to it. The society could
not advance money on the security of its own goods.
If the transactions were sales in favour of
them 715 Society then the amounts to be paid by the society would be purchase
price. Such a payment cannot be made on the security of goods, nor can that
payment carry any interest.
[718 B720 A] Bye-law 48 refers to the goods
of the members of the society and not to the goods of the Society. Because of
that byelaw the members of the Society, who are bound by that byelaw must be
deemed to have authorised the Society to pool their goods, grade them if
necessary and sell them either after ginning or without ginning. That bye-law
also prescribed the mode in which the price fetched should be distributed amongst
the persons whose goods are sold. The society is the agent of all its members.
Its principals are many. Because of the various bye-laws, the several
principals must be deemed to have appointed a common agentthe So-ciety-for
disposing of their goods in the manner most advantageous to them. To achieve
that object they must be held to have empowered the Society to pool their
goods, grade them if necessary, and sell them either after ginning or without
ginning. Such an authority does not violate the laws of agency. A person can be
an agent for more than one principal and if all his principals jointly
authorise him to pool their goods and sell them and pay the sale price to them
in the manner prescribed by them,. he does not cease to be an agent. [720 G-721
B] Accordingly the appeal must be allowed and the judgment of the High Court
Rohtas Industries Ltd. v. State of Bihar, 12
S.T.C. 615 and Hafiz Din Mohd. Haji Abdulla v. State of Maharashtra, 12 S.T.C.
S. Kanaru, Mangalore & Anr., 14 S.T.C. 4,
Ramachandra Rathore & Bros. v.
Commissioner of Sales Tax, Madhya Pradesh, 8 S.T.C. 845 and Versova Koli
Sahakari Vahatuk Singh Ltd. v. Slate of Maharashtra, 22 S.T.C. 116, held
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 2418 of 1968.
Appeal by special leave from the judgment and
order dated July 1, 1968 of the Gujarat High Court in Sales-tax Reference No. 1
M. C. Chagla and I. N. Shroff, for the
Urmila Kapoor and B. D. Sharma, for the respondent.
S. T. Desai and P. H. Parekh, for the
The Judgment of the Court was delivered by
Hegde, J. This is an appeal by special appeal. It arises from the decision of
the High Court of Gujarat in a Reference under s. 61(1) of the Bombay Sales Tax
That Reference was made by the Gujarat Sales
Tax Tribunal at Ahmedabad. After stating the case, the Tribunal submitted the
question 716 "whether on the facts and in the circumstances of the case,
the transactions are purchases of cotton by the Society from its members"
to the High Court for its opinion.
The High Court has answered that question in
the affirmative. Aggrieved by that decision, the assessee has brought this
The material facts are these :The assessee is
a Co-operative society registered under the Bombay-Co-operative Societies Act,
1925 (to be hereinafter referred to as the Act. The assessee will hereinafter
be referred to as the 'Society'. It carries on the business of ginning and
pressing cotton brought by its members. During the assessment period viz.
November 1, 1960 to October 31, 1961, the assessee received large quantity of
cotton from its members and the same was sold by it either after ginning and
pressing or without ginning and pressing. The Society is a registered dealer
under the Bombay Sales Tax Act, 1959.
It filed its return for sales tax for the
year in question.
But therein it did not show any purchase
turnover. The Sales Tax Officer accepted the return submitted by it, ink
assessed it on the basis of that return, as per his order dated May ,31, 1963.
He did not levy any purchase tax on the Society. The Assistant Commissioner of
Sales 'Fax, Range 111, Baroda, however, issued a notice dated August 6, 1963
under s. 57 of ,the Bombay Sales Tax Act, 1959 proposing to revise the
assessment of the Society by levying purchase tax in respect of 200 bales of
cotton sent by the society to Bombay for sale and also in respect of cotton and
cotton seeds worth Rs. 3,56,105, sold after six months from the date on which
the cotton was received by the Society on the ground that the Society purchased
the said cotton from its members.
Aggrieved by that ordered the Society moved
the Gujarat Sales Tax Tribunal in revision. The Tribunal by its judgment dated
July 1, 1964, dismissed the revision petition. Relying on the bye-laws of the
Society particularly on bye-laws Nos. 37(7), 37(18) 37(19), 48, 49, 52, 53 and
55, the Tribunal came to the conclusion that the Society had purchased the cotton
and cotton seeds in question from its members. It rejected the contention of
the Society that it was merely functioning as the agent of its mebers while
selling the cotton and cotton seeds referred to earlier. At the instance of the
Society, the Tribunal submitted the question referred to earlier to the High
Court for its opinion.
Whether a particular agreement is an agency agreement
or an agreement of sale depends upon the terms of the agreement.
For deciding that question, the terms of the
agreement have got to be 717 examined. The true nature, of a transaction
evidenced by a written agreement has to be ascertained from the covenants and
not merely from what the parties choose to call it. The terms of the agreement
must be carefully scrutinised in the light of the surrounding circumstances-see
the decision of this Court in Rohtas Industries Ltd. v. State of Bihar(1).
In that decision, this Court further held
that for considering whether a particular transaction is a sale or not, what
the court has to consider is whether as a result of the transaction, the
property in the goods passed to the assessee in return for price and whether
the assessee sold those goods as its own. Bearing in mind these principles, we
shall now proceed to examine the provisions of the Act as well as the relevant
bye-laws which take the place of agreement between the parties. It is not the
case of the State that the Society had in any manner acted in contravention of
the bye-laws. Therefore all that we have to find out is the true effect of the
In this case we are dealing with a case of a
"producers society". "Producers Society" is defined in s. 3
(h) (2) of the Act. That definition reads:
"Producers' Society" means a
society formed with the object of producing and disposing of goods as 'the
collective property of its members and includes a society formed with the
object of the collective disposal of the labour of the members of such
society." The Society with which we are concerned in this case was
evidently formed primarily with the object of selling the produce of its
members as their collective Produce. The preamble to that Act says
"Whereas it is expedient further to facilitate the formation and working
of co-operative societies for the promotion of thrift, self-help and mutual aid
among agriculturists and other persons with common economic needs so as to
bring about better living, better business and better methods of production and
for that purpose to consolidate and amend the law relating to co-operative societies
in the Presidency of Bombay " Hence to of the objectives intended to be
achieved by the Act were to provide for self help by the members of the society
& for mutual aid amongst its members.
We must examine the bye-laws in this case in
the background of the preamble to the Act as well as the definition of
We shall now refer to the relevant bye-laws
of the Society.
Those bye-laws are in Gujarath. They had been
got translated (1) 12 S.T.C. 615.
718 into English by the High Court. But as
the appellant did not agree with that translation in respect of bye-laws 45 to
49, it got those bye-laws translated officially in this Court. Counsel for the
respondent has not challenged the correctness of that translation.
The Society is known as Khedut Sahakari
Ginning and Pressing Society Ltd., Etola. From this it is clear that the
Society is a co-operative Society of the farmers primarily constituted for the
purpose of Ginning and Pressing cotton.
The objects of the Society are mentioned in
bye-law 2. That bye-law reads:
"The objects of the Society are as under
1. To Gin and get Ginned unpinned cotton, to
press ,or get pressed cotton into bales within the area of work of the society
for the society and individual members and other customers and to use machinery
for any work useful to other members.
2. To advance money against goods come in the
possession of the society, to get unginned cotton, cotton and cotton seeds
sold, to supply goods and if possible to get other agricultural produce sold
and if required to make arrangements for storing other agricultural produce.
5. To make arrangement for advancing amounts
to its members for necessary capital, to raise agricultural produce to come for
sale through the society and I for manure and seeds etc.
6. To distribute profit to its members in
proportion to the amount paid by its members for ginning and pressing of their
goods according to the bye-laws and to use the whole portion or certain portion
of the profit for works of social interest according to conditions laid down in
From the above provisions, it is clear that
the object of the 'Society is not to purchase or sell any cotton or cotton
seeds on its ,own behalf. The membership of the Society is confined to farmers
of the villages mentioned in bye-law 7 (a) and to co-operative societies of the
Taluks mentioned therein. Bye-law 37 deals with the powers of the managing
committee. For our present purpose only cls. 7, 14, 16 and 18 of that bye-law
719 CI. (7) says:
"To fix the rates for ginning pressing
and for other work that may be carried out according to the regulations and
resolutions and to sell, purchase and get baled goods other than unginned
cotton according to the instructions that may be given and to give facilities
of every other kind." Cl. ( 14) reads:
"To lend money against the security of
goods come in possession of the society according to the convenience and if
possible subject to the rules." CI. (16) reads "To get goods managed
through the society and the machinery, building etc. of the society insured."
Cl. (18) says "To arrange to sell agricultural produce other than cotton
unginned cotton and cotton seeds of the members and produce of village
industries which may have been brought for sale through the society and to make
arrangements to purchase goods according to the requirements of the members on
a request being made by the members." These provisions clearly go to
indicate that the Society was selling the produce of others and not its own
goods. Its duty is to arrange to sell the agricultural produce of its members.
Bye-law 45(1) to the extent necessary for our
present purpose reads thus :
"An amount not more than 75 per cent of
the estimated value at the market rate from time to time of the goods insured
and entrusted to the society will be advanced against security of goods if it
will be convenient to do so.
Ile rate of interest on advance will be as
fixed by the managing committee from time to time...." This bye-law
clearly indicates that the members of the Society are merely entrusting their
goods to the Society and not selling them to the Society. That is made further
clear by the fact that the Society may advance loans upto 75 per cent of the
estimated value of the goods entrusted to it on the security of those goods and
those advances will carry interest. If those goods are sold to the Society then
there can be no question of any entrustment nor can the Society advance any
money on the security of its own goods. If the transactions are sales in favour
of the Society then 720 the amounts to be paid by the Society would be purchase
price. Such a payment cannot be made on the security of goods nor can that
payment carry any interest.
Some reliance was placed on behalf of the
State on bye-law 45(2) which says :
"This society shall have authority to
borrow money against the goods which come in its hands for sale or for its
management through the society by pledging them with a bank." We fail to
see how this bye-law can lend any assistance in support of the case pleaded by
the State. That bye-law makes it clear that the goods in question come into the
hands of the Society for sale or for their management through the Society. But
the person who entrusts those goods because of this bye-law is deemed to have
empowered the society to pledge the same. Now we come to bye-law 49 which
reads:-"The unginned cotton, cotton and cotton seeds to be sold through
the society shall be graded in the manner fixed by the general body and the
society will get the same insured." This bye-law refers to goods to be
sold through the Society and not to sale of Society's goods.
Bye-law 48 is extremely important. That
bye-law says "The goods of all the members will be gathered together
either by grading according to the grades fixed by the general body or without
grading and then sold either ginned or unginned. At the end of the season after
making up the accounts the society will pay in full to all the members
according to average, rates gradeor if grades are not made then generally after
deducting the dues of the society and the charges for ginning, pressing the
goods and expenses for sale etc." This bye-law refers to the goods of the
members of the Society and not to the goods of the Society. Because of that
bye-law the members of the Society, who are bound by that bye-law must be deemed
to have authorised the Society to pool their goods, grade them, if necessary
and sell them either after ginning or without ginning. That bye-law also
prescribes the mode in which the price fetched should be distributed amongst
the persons whose goods are sold. The Society is the agent of all its members.
Its principals are many. Because of the various bye-laws, the several
principals must be deemed to have appointed a common agentthe Society-for
disposing of their goods in the manner most 721 advantageous to them. To
achieve that object they must be held to have empowered the Society to pool
their goods, grade them if necessary, and sell them either after ginning or
without ginning. Such an authority in our opinion does not violate the law of
A person can be an agent for more than one
principal and if all his principals jointly authorise him to pool their goods
and sell them and pay the sale price to them in the manner prescribed by them,
he does not cease to be an agent. The question whether when an agent with the
authority of his principals pools together the goods of its principals grades
them and sells them, ceases to be an agent and becomes a purchaser was
considered by the Mysore High Court in Sherule Fazle and Co. v. Commercial Tax
Officer, Additional Circle, S. Kanara, Mangalore and anr.(1). Therein the High
Court held that he does not cease to be an agent. We agree with the ratio of
By-law 52 says:
"When it will be found proper to sell
goods in other market or at other places outside the local market the manager
will do the said work according to the order of the managing committee through
the agent selected by the society or the union. A regular writing to the effect
that the agent may get the possession of the goods thus sent for sale to other
markets or _at other places should be kept in the record of the society."
Because of this bye-law, authority is conferred on the Society by its members
to sell their goods in outside markets as well. Bye-law 54 empowers the society
to hedge goods by making forward sales against the balance goods that may have
remained to be sold out of the goods that may have come in its possession. This
power again must be deemed to have been conferred on the Society by its
members. The only other bye-laws to which reference has been made at the bar
are 72 and 73. Bye-law 72 prescribes :
"The gross profit made in the last year
will be declared in the annual meeting and the amounts as mentioned hereunder
will be deducted there from (1) Interest to be paid on borrowing and deposits.
(2) Expenses of the working of the society
including the amount of honorarium.
(3) The amounts not less than five per cent
of the total amount spent on building and not less than (1) 14 S.T.C. 4.
-L 3 Sup. C. I./72 722 ton per cent on machinery
and not less than five per cent on other depreciating Property will be carried
to depreciation fund.
(4) If there be no balance in profit fund
then the written off dues sanctioned by the managing committee.
The amount remaining over after deducting all
the above mentioned amounts will be considered as net profit.
Bye-law 73 provides for the distribution of
the net profits.
Both bye-laws 72 and 73 deal with the profits
of the Society and not any profits arising by the sale of goods entrusted to it
by its members. Society has got its own sources of income. It charges for
ginning and pressing. It has also other sources of income. It is that income
that is dealt with in bye-laws 72 and 73.
Our attention has not been drawn to any other
bye-law from which we could conclude that the Society had purchased either
cotton or cotton seeds from its members.
We have earlier seen that the Tribunal had
placed reliance on bye-laws 37(7), 37(18), 37(19) 48, 49, 52, 53 and 55 for
arriving at the conclusion that the society had purchased cotton ,and cotton
seeds from its members. We have already examined bye-laws 37(7), 37(18), 48,
and 52. We have not been able to see how those bye-laws lend any support to the
conclusion reached by the Tribunal and the High Court.
Bye-law 37(19) empowers the Society to levy
'Haksai' on unginned cotton received from members upto Rs. 2/per Bhar (Load).
This bye-law merely provides for the collection of ginning charges. Bye-law 49
authorises the Society to grade the unginned cotton and cotton seeds in the
manner specified by the general body. It also authorises the Society to get the
goods insured. This bye-law again does not in any manner indicate that the
cotton or cotton seeds had been purchased by the Society. Bye-law 53 says that
"If there may be some time for the
season to start the managing committee can estimate the produce and make
forward sale of the goods not more than I portion of it before the season
starts." This again is an authority given by the members to the Society.
723 Bye-law 55 provides "If it is found
necessary and beneficial to sell goods which may be in stock by only other
system which may be having connection with the forward market except the hedge
system described in the above clause the managing committee can sell goods by
the said system by making discussion with the officer of the union effecting
the sale." This is also an authority given to the Society by its members
to deal with their goods in a specified manner.
It must be remembered that by and large the
farmers are illiterate. They do not know the ways of business. The general
belief is that taking advantage of the ignorance and illiteracy of the farmers,
businessmen exploit them. To avoid such exploitation, the Act authorised the
formation of co-operative societies of the farmers through which they can sell
their goods. Those Societies merely function as agents for the farmers who are
their members. By becoming members of those Societies and subscribing to their
bye-laws, they had given large powers to their agents so that their produce may
be sold in the best possible manner. None of the byelaws of the Society goes to
show that the society had purchased the goods entrusted to it by its members.
The High Court has referred to a number of
decisions for coming to the conclusion that under the bye-laws of the Society,
the Society must be held to have purchased the cotton and cotton seeds sold by
it. We see no basis for that conclusion. The question whether a particular
agreement is an agreement of sale or an agreement of agency has to be decided
on the basis of the terms of that agreement. Decisions rendered on the basis of
other agreements may be useful for finding out the principles to be applied in
finding out the true character of an agreement but those decisions cannot
conclude the question before the court as no two agreements are likely to be
similar. The nature of each agreement has to be decided on its own terms.
The Tribunal, the High Court as well as the
Counsel for the State have placed great deal of reliance on the decision of
this Court in Rohtas Industries Ltd.'s case (supra).
Therein the assessee was a limited liability
company manufacturing cement. The assessee and some other cement manufacturing
companies entered into an agreement with the Cement Market* Company of India
Ltd., whereby the marketing company was appointed as the 'sole and exclusive
sales manager' for the sale of cement manufactured by the manufacturing
companies and the manufacturing 724 companies agreed not to sell directly or
indirectly any cement to any person save and except through the marketing
company. The manufacturing companies were entitled to be paid a certain sum per
ton of cement supplied by them or at such other rate as might be decided upon
by the directors of the marketing company. The marketing company was authorised
to sell cement at such price or prices andon such terms as it might in its sole
discretion think fit and it agreed to distribute to the manufacturing
companies, in proportion to the number of tons of cement of every variety and
kind supplied by the manufacturing companies, the whole of its net profit less
6 per cent, on its paid up capital. The question was whether the transactions
between the assessee and the marketing company were sales or their relationship
was that of agent and principal. The court held that the cement delivered,
despatched or consigned by the assessee to the marketing company or to its
orders or in accordance with its directions was sold by the assessee to the
marketing company and the same was therefore liable to be taxed under the Bihar
Sales Tax Act, 1944. This Court came to that conclusion on the basis of the
various clauses in the agreement. One of the clauses in the agreement relied on
by this Court for coming to the conclusion that the agreement in question was
an agreement of sale was that the marketing company had to pay certain price
for the cement supplied to it and that price was ordinarily required to be
fixed having regard to the cost of production. Further the marketing company
was entitled to fix price at which the cement was to be sold and such price
could be even less than the cost of manufacture. It is true that some of the
clauses in that agreement are similar to those we are considering in this case
yet no clause in that agreement mentioned that the cement manufacturing
companies were merely entrusting their cement to the marketing company nor was
there any provision in that agreement for the marketing company to advance
loans to the manufacturers on the security of the cement entrusted to it.
Further the manufacturing companies were not required to pay any interest on
the amount paid to them by the marketing company. Hence we are unable to agree
with the High Court and the Tribunal that the ratio of, the decision in Rohtas
Industries Ltd.'s case(1) governs the facts of this case. .
The decision of this Court in Hafiz Din Mohd.
Haji Abdulla v. State of Maharashtra(2), does not support the contention of the
State. Therein this Court on an examination of various clauses in the agreement
held that the relationship between the assessee and its representatives was
that of agent and principal and not of vendors and purchasers.
Therefore the State can seek no assistance
from that decision.
(1) 12 S.T.C. 615.
(2) 12 S.T.C. 292 725 Counsel for the State
relied on the decision of the High Court of Madhya Pradesh in Ramachandra
Rathore and Bros. v. Commissioner of Sales Tax, Madhya Pradesh(1) and the
decision of the Bombay High Court in Varsova Koli Sahakari Vahatuk Sangh Ltd.
v. State of Maharashtra(2) in support of the State's case. In our opinion the
agreements considered in those decisions are wholly different in nature than
the bye-laws with which we are concerned in this case.
For the reasons mentioned, above, we allow
this appeal, set aside the judgment of the High Court and discharge the answer
given by the High Court and answer the question referred to the High Court in
the negative and in favour of the assessee. The appellant-assessee is entitled
to its costs both in this Court as well as in the High Court.
G.C. Appeal allowed.