Udaipur
Sahkari Upbokta Thok Bhander Ld. Vs. Commr. of Income Tax. [2009] INSC 1235 (16
July 2009)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4399 OF
2009 (Arising out of S.L.P.(C) No.23889 of 2007) Udaipur Sahkari Upbhokta Thok
Bhandar Ltd. ... Appellant (s) Versus Commissioner of Income-tax ...
Respondent(s)
S. H. KAPADIA,
J.
1.
Leave granted.
2.
The short question which arises for consideration in this civil
appeal turns on the interpretation of Section 80P(2)(e) of the Income-tax Act,
1961 whose predecessor was Section 14(3)(iv) of the Income-tax Act, 1922.
FACTS
3.
The facts giving rise to this civil appeal are few and undisputed
and may be briefly stated as follows. Appellant-society is a co-operative
society registered under Rajasthan Co-operative Societies Act, 1965. Appellant
is running a consumer co-operative 2 store at Udaipur since 1963. It has 30
branches. Appellant is dealing in non-controlled commodities through its
branches. In addition, appellant is also doing the work of distribution of
controlled commodities such as wheat, sugar, rice and cloth on behalf of the
Government under the Public Distribution Scheme (PDS) for which it is getting
commission. The distribution of the controlled commodities is regulated by the
District Supply Officer (DSO-Authoriesed Officer) under Rajasthan Foodgrains
& Other Essential Articles (Regulation of Distribution) Order, 1976 (for
short, "1976 Order"). Appellant claims to be stockist/distributor of
controlled commodities. It takes delivery from Food Corporation of India (FCI)
and Rajasthan Rajya Upbhokta Sangh as per the directives of the State
Government. The price, quantity and the person from whom the delivery is to be
taken is fixed by the State Government under the said 1976 Order. After taking
the delivery, appellant stores these goods in its godowns, both owned and
rented. The storage godowns are open to checking by the concerned officers of
the State Government. The stocks stored by the appellant are delivered to the
Fair Price Shops (FPS-retailers) as per the directions of the State Government.
The quantity, price and the FPS to whom the delivery is to be given is fixed by
the State 3 Government. According to the appellant, therefore, the above modus
operandi indicates that the State Government exercises total control over the
stock of controlled commodities stored in the godowns of the appellant-society.
On 28.2.1977 appellant was granted licence for purchase/sale/storage for sale
of goodgrains under Rajasthan Foodgrains Dealers Licensing Order, 1964.
4.
It exercises the powers conferred by Section 3 of Essential
Commodities Act, 1955, the Government of Rajasthan issued the 1976 Order.
Following are the relevant provisions, reproduced from the 1976 Order, which
read as under:
"Clause
2. Definitions. - In this Order, unless the context otherwise requires :- (b)
"Authorisation" means an authorization issued under clause 3 of this
Order;
(c)
"Authorised Fair Price Shop Keeper" means a retail dealer incharge of
a shop authorized under clause 3 and shall include a person incharge of a shop
where foodgrains and other essential articles are sold and is under the control
of the State Government;
(d)
"Authorisation Holder" means an authorized wholesaler or an
authorized Fair price shopkeeper;
(e)
"Authorised Officer" means District Supply Officer for the District
Headquarter Municipal area, Executive Officer of Municipal Board for rest
municipal area and Vikas Adhikari for rural area and any other officer
authorized as such by the State Government;
4 (f)
"Authorised Wholesaler" means a person, a firm, an association of persons
or a co-operative society or any other institution authorized appointed as an
agent under clause 3 of this Order by the State Government or the Collector.
Clause 3.
Issue of Authorisation. - (1) The Collector or any other officer authorized by
the State Government may issue an authorization to any person being an
authorized wholesaler/fair price shopkeeper to obtain and supply foodgrains and
other Essential Articles in the area specified therein.
(2) No
person other than an authorization holder shall sell any of the foodgrains or
any other essential articles supplied by the Government for distribution under
this Order or any other Order.
Clause 20
- Power to issue directions regarding purchase/sale/distribution of foodgrains
and other essential articles. - Every authorisation holder shall comply with
all general or special directions given in writing, from time to time by the
State Government or the Collector in regard to purchase, sale, storage for
sale, distribution and disposal of foodgrains and other essential articles on
permits or ration cards or otherwise and the manner in which the accounts
thereof shall be maintained and returns submitted.
4. We
also quote hereinbelow the Terms and Conditions annexed to the said 1976 Order
which read as under:
"Terms
& Conditions - General Clause (1) No authorization holder shall store
Foodgrains & other essential articles at any place other than those
specified in this authorization without prior permission in writing of the
Collector.
5 Clause
(2) No authorization holder shall refuse to sell Foodgrains and other essential
articles during business hours on the presentation to him of a valid
permit/indent/ration card to the extent of the amount of Foodgrains or other
essential articles due on the permit/indent/ration card.
Clause
(3) No authorization holder shall sell Foodgrains at a price in excess of that
fixed by the State Government or the Collector or shall sell any other
essential articles at a price in excess of that fixed by the Central Government
or the State Government or any authority or Officer of such Government or the
manufacturer, as the case maybe, in that behalf.
Clause
(5) The authorization holder shall maintain a stock register in Form `C'
showing correctly, the daily receipt and sale of the each Foodgrains and other
essential articles. A daily sale register shall also be maintained in Form `D'
by the authorized wholesaler and in Form `E' by the authorized fair price
shopkeeper.
All books
of accounts, permits, voucher etc. shall be kept at the business premises
specified in the authorization and shall be made available for inspection
whenever required.
Clause
(6) Every authorization holder shall submit a true monthly stock and sale
return in Form `F' to the Collector so as to reach him within five days after
the close of the month to which it relates.
Clause
(8) The authorization holder shall display the opening balance and prices of
each variety of Foodgrains and other essential articles at a conspicuous place
at his business premises in bold letters."
5.
On 31.8.1990, appellant filed its returns for assessment year
1989-90 claiming deduction under Section 80P(2)(e) of the 1961 Act 6 on the
income of commission received by it from the Government for storage of
controlled commodities. On 31.10.1990 appellant filed its returns of income for
subsequent assessment years 1990- 91, 1991-92, 1992-93, 1993-94, 1994-95,
1995-96 inter alia claiming deduction on the income of commission received by
it from the State Government for storage of controlled commodities.
Vide
Order dated 26.3.92, the A.O. disallowed the claim on the ground that the
appellant-society is a wholesaler of foodgrains and it is not a mere stockist
as claimed and consequently it was not entitled to deduction under Section
80P(2)(e) of the 1961 Act. This order was applied for assessment years in
question. Aggrieved by the assessment order(s), appellant filed appeals before
CIT (A), on 18.4.92. By order dated 28.10.93, CIT(A) held that the appellant
was entitled to deduction under Section 80P(2)(e) of the 1961 Act on the income
of commission received from the State Government for stocking and storing the
above foodgrains. This decision was affirmed by the Tribunal vide its decision
dated 20.10.2000 dismissing the Department's appeal by a common order holding
that the appellant was entitled to deduction under the said Section.
This view
of the Tribunal, however, was overruled by the impugned decision dated 2.11.06
by the Rajasthan High Court which took the 7 view that the appellant-society
was storing the said controlled commodities in its godowns as part of its own
trading stocks; that the appellant acted as a trader in the essential
commodities in question and consequently the appellant was not entitled to
deduction under Section 80P(2)(e) of the 1961 Act. Against the impugned
decision, appellant has come to this Court by way of petition for special
leave.
6.
The issue which arises for determination in this civil appeal is:
whether, on the facts and the circumstances of this case,
"commission" received by the appellant from the State Government was
really in the nature of payment for the letting of the godowns maintained by
the appellant for storage?
7.
At the outset it needs to be noted that appellant has composite
business. Appellant is a dealer in non-controlled commodities and it is an
Authorisation Holder in respect of controlled commodities under the 1976 Order.
It owns godowns and it also hires godowns on rent. It earns commission during
the relevant assessment years at the rate of 2.25 per quintal (e.g. for rice).
As stated above, under clause 20 of 1976 Order every authorization holder has
to comply with general or special 8 directions given in writing, from time to
time by the Collector in regard to purchase, sale, storage for sale, distribution
and disposal of controlled commodities. At this stage, one important aspect
needs to be noted. Appellant earns commission on the principle of
"netting". In other words, appeallant sets-off "issue
price" against "sale price" and retains commission fixed at
Rs.2.25 per quintal.
We quote
hereinbelow the rate-fixation mechanism indicated by one of the orders issued
on 12.3.87 w.e.f.1.5.87 under clause (20) of the 1976 Order:
"S.No./F1:2:1/Rice/Rate/85
Dated 12.5.87 To, Subdivisional officer/Tehsildar Sub.: Regarding rate fixation
of rice to be distributed in general areas As a result of change in the
distribution rate and surcharge of rice by the State Government, the new rates
for rice is fixed in the following manner. Order to be operative from 1.5.87.
A. if the
godown of the Food Corporation and wholesale dealer is in the same city:
Common
Fine Superfine
1. Issue
rate of food corporation 239.00 251.00 266.00
2. Octroi
0.20 0.20 0.20
--------------------------------------------------------------------------------------------------------
239.20 252.20 266.20
3. Sales
tax @ 3% 7.18 7.54 7.99
4.
Surcharge on sale tax @20% 1.44 1.50 1.60
--------------------------------------------------------------------------------------------------------
5. Amount
payable to food 247.82 260.24 275.79 corporation [issue price]
6.
Commission/transportation of 2.25 2.25 2.25 wholesale dealer 9
7. For
upto 10km from godowns 1.00 1.00 1.00 of Food Corporation
--------------------------------------------------------------------------------------------------------
Sale Price charged from FPS 251.07 263.49 279.04
8.
Commission of retail dealer 2.50 2.50 2.50
9.
Transportation of retail dealer 2.00 2.00 2.00
--------------------------------------------------------------------------------------------------------
255.57 267.99 283.54
10.
Equalisation amount 6.43 7.01 6.46
--------------------------------------------------------------------------------------------------------
262.00 275.00 280.00 B. if the godowns of the Food Corporation and the
wholesale dealer are in different cities:
Common
Fine Superfin e
1. Issue
rate of food 239.00 251.00 266.00 corporation
2. Octroi
0.20 0.20 0.20
--------------------------------------------------------------------------------------------------------
239.20 252.20 266.20
3. Sales
tax @ 3% 7.18 7.54 7.99
4.
Surcharge on sale tax @20% 1.44 1.50 1.60
--------------------------------------------------------------------------------------------------------
5. Amount
payable to food 247.82 260.24 275.79 corporation
6.
Commission of wholesale 2.25 2.25 2.25 dealer
--------------------------------------------------------------------------------------------------------
250.07 262.49 278.04"
8.
The above working indicates that Rs.247.82 (issue price) is
treated by the appellant as expense and it is set-off against the sale price of
Rs.251.07. In other words, the working indicates cost plus mechanism i.e.
Rs.247.82 is the cost plus profit margin which includes Rs.2.25 as commission.
Therefore, Rs.2.25 is part of the profit margin. One aspect needs to be
highlighted. According to the written submissions, filed by the appellant, it
had taken into its 1 0 books of accounts the consolidated value of the closing
stock. This circumstance reinforces the finding of the High Court in its
impugned judgment that the appellant was storing the commodities in its godowns
as a part of its own trading stock.
9.
The question before us is : whether appellant was entitled to
claim special deduction under Section 80P(2)(e) of the 1961 Act by claiming
that the amount received under the head "commission" is really in the
nature of payment for the user of its godowns?
10.
To answer the above question, we quote hereinbelow Section
14(3)(iv) of the Income-tax Act, 1922, Section 81(iv) and Section 80P(2)(e) of
the 1961 Act which read as under:
"Income-tax
Act, 1922 Section 14. Exemption of a general nature (3) The tax shall not be
payable by a co-operative society -- (iv) in respect of any income derived from
the letting of godowns or warehouses for storage, processing or facilitating
the marketing of commodities;
"Income-tax
Act, 1961 Section 81. Income of co-operative societies. - Income- tax shall not
be payable by a co-operative society - (iv) in respect of any income derived
from the letting of godowns or warehouses for storage, processing or
facilitating the marketing of commodities;"
1 1
"Income-tax Act, 1961 Deduction in respect of income of co-operative
societies.- 80P. (1) Where, in the case of an assessee being a co- operative
society, the gross total income includes any income referred to in sub-section
(2), there shall be deducted, in accordance with and subject to the provisions
of this section, the sums specified in sub- section (2) in computing the total
income of the assessee.
(2) The
sums referred to in sub-section (1) shall be the following, namely: - (e) in
respect of any income derived by the co-operative society from the letting of
godowns or warehouses for storage, processing or facilitating the marketing of
commodities, the whole of such income;"
11.
At the outset it may be noted that Sections 81(iv), followed by
Section 14(3)(iv) in the 1922 Act, as amended, was a predecessor to Section
80P(2)(e) of the 1961 Act, and it came for consideration before the Gujarat
High Court in the case of Surat Vankar Sahakari Sangh Ltd. v. Commissioner of
Income-tax, Gujarat II - (1971) 79 ITR 722 (Guj.), in which it was held:
"This
section is obviously enacted with a view to encouraging and promoting growth of
co-operative sector in the economic life of the country in pursuance of the
declared policy of the Government. There are five different heads of exemption
enumerated in the section. Each is a 1 2 distinct and independent head of
exemption. Whenever a question arises whether a particular category of income
of a co-operative society is exempt from tax, it will have to be seen whether
such income falls within any of the several heads of exemption : if it falls
within any one head of exemption, it would be free from tax notwithstanding
that the conditions of another head of exemption are not satisfied and such
income is, therefore, not free from tax under that head of exemption : vide U.
P. Co- operative Bank Ltd. v. Commissioner of Income-tax.- (1966) 61 ITR 563
(All). The ambit and coverage of clause (iv) of section 81 must, therefore,
depend on the true interpretation of the language used by the legislature in that
clause assisted only by such external aids of construction as are permissible
according to well-recognised principles of interpretation.
Turning
first to the language of section 81(iv), it exempts a co- operative society
from tax in respect of income derived from the letting of godowns or warehouses
for storage, processing or facilitating the marketing of commodities. Two
possible constructions of this provision were suggested before us in the course
of the argument, one by the assessee and the other by the revenue. The
construction put forward by the assessee was that the words "letting of
godowns and warehouses for storage", "processing" and
"facilitating the marketing of commodities"
constituted
different alternatives and income derived from three different sources was,
therefore, sought to be exempted under section 81(iv), namely, (1) income
derived from the letting of godowns and warehouses for storage; (2) income
derived from processing; and (3) income derived from facilitating the marketing
of commodities. The revenue on the other hand urged that income which was
sought to be exempted was only income derived from the letting of godowns or
warehouses if they were let for any of the three purposes, namely, storage,
processing or facilitating the marketing of commodities. The words
"storage, processing or facilitating the marketing of commodities",
according to the revenue, were governed by the preposition "for" and
they denoted the purposes for which godowns or warehouses should be let in
order that the income derived from such letting should be exempt from tax. Now,
on the plain grammatical construction of the language used by the legislature,
it appears that the construction suggested on behalf of the revenue is more
commendable than that canvassed on behalf of the assessee. As we read the words
of the clause, it is apparent that there is no break in the continuity of idea
after the word "storage"; the idea flows on into the words
"processing or facilitating the marketing of commodities". As a
matter of fact, if we read the clause as a whole, there is no doubt that the
words "storage, processing or facilitating the marketing commodities"
constitute one single composite clause governed by the preposition
"for" signifying that the letting of godowns or warehouses
contemplated by the section is letting for any of the three purposes, namely,
storage, processing 1 3 or facilitating the marketing of commodities. If the
intention of the legislature was that "letting of godowns or warehouses
for storage", "processing" and "facilitating the marketing
of commodities" should be read distinctively as constituting different
alternative sources of income, the legislature would have, according to the
dictates of plain grammar, used the words "income derived from letting of
godowns or warehouses for storage or from processing or from facilitating the
marketing of commodities." The introduction of the words "or
from" before "processing" and "facilitating the marketing
of commodities" would have brought about the disjunctive effect so as to
relate the three alternatives to the words "income derived from." But
the legislature instead used words which clearly go of to suggest that the
words "storage, processing or facilitating the marketing of commodities"
are merely purposes for which godowns or warehouses should be let to attract
the exemption under section 81(iv). The presence of the definite article
"the" before letting and its absence before the words
"processing" and "facilitating the marketing of
commodities" considerably reinforces this conclusion. It is again
difficult to see why the legislature should have indiscriminately mixed up in
section 81(iv) widely different sources of income such as "letting of
godowns or warehouses for storage, processing and facilitating the marketing of
commodities". The conclusion appears to be clear on a plain natural
construction of the language used in section 81(iv) that what is exempted under
that section is income derived from the letting of godowns or warehouse
provided the letting is for any of the three purposes, namely,
"storage", "processing" or "facilitating the marketing
of commodities".
12.
On interpretation of Section 14(3)(iv) of the 1922 Act it was held
by the High Court:
"There
is also one other circumstance which is, in our opinion, quite decisive of the
question. Section 81(iv), as we have already pointed out above, is in identical
terms as section 14(3) and section 14(3) was originally introduced in the
Income-tax Act, 1922, by section 10 of the Finance Act, 1955. Section 14(3)
when originally introduced was, however, in a different form and it read as
follows :
"14.
(3) The tax shall not be payable by a co-operative society, including a
co-operative society carrying on the business of banking - (i) in respect of
profits and gains of business carried on by it;...
14 (iii)
in respect of any income derived from the letting of godowns or warehouses for
storage, processing or facilitating the marketing of commodities;..."
Clause
(i) of this unamended section exempted from tax profits and gains of business
carried on by a co-operative society. If, therefore, a co- operative society
carried on the activity of processing, profits and gains arising from such
activity would be exempt under clause (i). If that be so, why was it necessary
to enact in clause (iii) that income derived from processing shall be exempt
from tax ? If the construction contended for on behalf of the assessee were
correct, the word "processing" in clause (iii) would be rendered
totally superfluous for income derived from processing would be covered by
clause (i). The only way in which full meaning and effect can be given to the
word "processing" in clause (iii) is by reading that clause in the
manner suggested on behalf of the revenue, namely, that the words
"storage", "processing" and "facilitating the
marketing of commodities" denoted different alternative purposes of
letting of godowns or warehouses. We are, therefore, of the view that on a
proper interpretation of section 14(3) (iv) and section 81(iv), separate
exemption is not granted in respect of income from the letting of godowns or
warehouses for storage, income from processing and income from facilitating the
marketing of commodities. But the exemption is available only in respect of
income derived from letting of godowns or warehouses where the purpose of
letting is storage, processing or facilitating the marketing of
commodities."
13.
We approve the reasoning given by the High Court on interpretation
of Section 81(iv) and Section 14(3)(iv) of the 1922 Act. On reading the above
judgment it becomes clear that under Section 80P(2)(e) of the 1961 Act, an
assessee is entitled to claim special deduction from its gross total income to
arrive at total taxable income. It is a special deduction which is provided for
in that Section. It is not a charging section. The burden is on the assessee to
establish that the income comes within the four corners of Section 80P(2)(e) of
the 1961 Act. The burden is on the assessee 1 5 to establish that exemption is
available in respect of income derived from the letting of godowns or
warehouses, only where the purpose of letting is storage, processing or
facilitating the marketing of commodities. If the godown is let out (including
user) for any purpose besides storing, processing or facilitating the marketing
of commodities, then, the assessee is not entitled to such exemption.
[See: Law
and Practice of Income-tax by Kanga & Palkhivala, Eighth Edition, page 995]
14.
Coming to the case law on the distinction between contract of sale
and contract of agency, we may state that there is no strait- jacket formula.
However, some important circumstances do bring out the effect of the
transaction. In the case of Ramchandra Rathore and Bros. v. Commissioner of
Sales Tax, Madhya Pradesh, Nagur - (1957) 8 STC 845 (MP), the terms of the
agreement between the assessee, a dealer in bidis, and his agent who was
required to sell the goods, under the agreement, at prices fixed by the
assessee, indicated that the assessee would not be responsible for any shortage
in transit and that the assessee would not be liable to receive any unsold
stock if the agreement stood terminated. The accounts of the assessee-dealer
also indicated that when despatches were made, the price was debited to the 1 6
agent and credited to him when the money was received. These circumstances were
taken into account by the High Court in judging the real effect of the
transactions. Accordingly, it was held that the impugned transaction was a
"sale" liable to sales tax under Section 2(g) of C.P. and Berar Sales
Tax Act, 1947. In the case of Udupi Taluk Agricultural Produce Co-operative
Marketing Society Ltd. v. Commissioner of Income-tax - (1987) 166 ITR
365(Kar.), the assessee, a co-operative society, claimed exemption under
Section 80P(2)(e) of the 1961 Act in respect of its income derived by way of
commission from Karnataka Food and Civil Supplies Corporation for procurement
of paddy and rice and reimbursement of transport charges. Following the
judgment of the Gujarat High Court in Surat Vankar Sahakari Sangh Ltd. (supra),
the Karnataka High Court held that under Section 80P(2)(e) of the 1961 Act,
exemption is available in respect of income derived only from letting out of
godowns or warhouses. The income derived by the co-operative society for the
purpose of exemption under clause (e) must be relatable to the letting out or
the use of its godowns for any of the three purposes mentioned in clause (e).
Any income derived by the society unconnected with such letting or use of the
godowns would not fall under clause (e). In the case of M/s.
1 7
Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial Tax Officer and others - AIR
1978 SC 449, a seven-judge Bench of this Court held that transction between the
rice-millers on one hand and the wholesalers on the other hand constituted
"sales" within the meaning of Bengal Finance (Sales Tax) Act, 1941
and sales tax was leviable on the turnover. In that case Vishnu Agencies was a
licensed stockist of cement who was permitted to stock cement in its godown, to
be supplied to persons in whose favour allotment orders are issued, at the
price stipulated and in accordance with the conditions of permit issued by the
authorities concerned. In that case Vishnu Agencies supplied cement to various
allottees from time to time in pursuance of the allotment orders issued by
Appropriate Authorities and in accordance with the terms of the licence
obtained by it for dealing in cement. It was assessed to sales tax by CTO in
respect of the said transactions. The main contention of Vishnu Agencies was
the measures adopted to control the supply of cement left no option to parties
to bargain; that, the transaction in question constituted a "compulsory
sale"; that, by virtue of the provisions of the Cement Control Act and
Cement Licensing Order no volition or bargaining power was left to the assessee
and since there was no element of mutual consent 1 8 between the stockist and
the allottee, the transaction was not a "sale" within the meaning of
the Sales Tax Act. This argument was rejected by this Court observing that the
limitations placed on the normal rights of the dealer and consumers to supply
and obtain the goods by the Cement Control Order do not militate against the
position that eventually, the parties must be deemed to have completed the
transactions under an agreement by which one party bound itself to supply the
stated quantity of goods to the other at a price not higher than the notified
price and the other party consented to accept the goods on the terms and
conditions mentioned in the order of allotment issued in its favour by the
competent authority. It was held that offer and acceptance need not always be
in an elementary form, nor does the Law of Contract or Sale of Goods Act
require that the consent to a contract must be express. It is commonplace that
offer and acceptance can be spelt out from the conduct of the parties. This is
because law does not require offer and acceptance to conform to any set pattern
or formula.
15.
As can be seen from the discussion hereinabove, two points arise
for determination, namely, whether appellant acted as an agent of the
Government in the subject transaction and the real 1 9 nature of payment
received by the said Society under the Head "commission". Both the
points stand covered by the judgment of the Supreme Court in A. Venkata
Subbarao, etc. v. The State of Andhra Pradesh, etc. - AIR 1965 SC 1773. In that
case, appellants were owners of rice mills in the Districts of West Godavari,
East Godavari and Krishna. Appellant was in the business of purchasing paddy
from producers, milling their purchase in their mills and selling the rice so
milled to wholesale dealers in rice. This was prior to 1946-47 when severe
restrictions were imposed in the State of Madras on the trade in foodgrains in
order to maintain their supplies and ensure proper and equitable distribution
of foodgrains to the community. Accordingly, in 1946, pursuant to the power
vested in the State Government under Essential Supplies (Temporary Powers) Act,
1946, two Orders came to be issued, namely, Foodgrains procurement Order, 1946
and Foodgrains Licensing Order, 1946 which prohibited all trades in foodgrains
including rice except by those who held licences and subject only to the terms
and conditions of the licence. A. Venkata Subbarao was one such licensee who
was authorized to deal in rice under the Licensing Order, 1946. It may be
mentioned that the prices at which paddy could be procured as well as the
prices at 2 0 which the rice could be sold by the licensed dealers, were fixed
by Orders, notifications issued under the Essential Supplies Act.
While A.
Venkata Subbarao (appellant) was carrying on his business subject to the
provisions of the above two Orders, the prices at which he could sell rice
which he milled out of the paddy procured by him stood enhanced on three
different occasions - July 1947, December 1947 and November 1948, and on each
occasion he was directed to submit a statement indicating the stock of paddy
and rice held by him on the day just prior to the date on which the increased
prices came into effect and on that basis the Government directed A. Venkata
Subbarao to pay a "surcharge" on the amount representing the increase
on the stock held by him. This levy of "surcharge" became the point
of challenge in the suit filed by A.
Venkata
Subbarao in the trial court. The principal point in controversy between the
parties related to the precise legal relationship between the procuring agent
and the Government. It was found by the Supreme Court that the procuring agent
had to buy the grain from the producers with their own money. The grain
purchased was transported to the godowns at their cost and stored by them at
their own risk. The rent of the godown(s) was also paid by the procuring agent.
If there was any depreciation in the quality 2 1 or there was any shortfall
owing to driage, action of rodents, insects, moisture, theft, etc. the loss
would of the procuring agent.
It was
also further found by the Court that the procuring agent could pledge his goods
to raise loans from banks and lastly the procuring agent had a right to sell
the grain to the person authorized by and at the price not exceeding the price
fixed under the notification and Orders issued from time to time. In other
words, sales at free-market rate were prohibited. On the basis of the
aforestated circumstances, this Court held that the property in the goods
purchased by the procuring agents vested in them.
However,
it was urged on behalf of the State that the purchase and sale of commodities
by the procuring agent/dealer was on behalf of the Government. In this
connection, reliance was placed on the agreement, executed by the procuring
agent, in which he undertook to purchase paddy from the areas allotted by the
Government; he undertook to store the paddy or rice in a proper godown for
which he was responsible for the safe custody of the grain and that the
procuring agent further undertook to sell the stock of rice to persons
nominated by the Government. On these considerations it was urged on behalf of
the Government that A. Venkata Subbarao was an "agent" of the
Government to buy paddy, to store the grain 2 2 purchased on behalf of the
Government in secure godowns and to sell the goods purchased on behalf of the
Government to such persons nominated by the Government. It was, therefore,
submitted that A. Venkata Subbarao was an "agent" who on one hand
indemnified the Government from any loss in the business of agency of purchase
and storage and sale on behalf of the Government and on the other hand he was
bound to make over to the Government such profits that he might obtain out of
the business of the agency. It was the further case of the Government that the
difference between the procurement price and the price which was fixed for sale
constituted "commission" or "remuneration" which would
belong to the agent. In other words, two questions arose for determination
before this Court, namely, the precise legal relationship between the procuring
agent/dealer on one hand and the Government on the other hand as also real
nature of payment received by A. Venkata Subbarao. It is interesting to note
one more argument advanced on behalf of the Government. It was urged that the
margin between the procurement price and the price at which the rice could be
sold constituted "remuneration". This argument found favour with the
High Court. However, it was rejected by this Court and while doing 2 3 so this
Court observed as follows:
"29.
Before proceeding further, it is necessary to clarify two matters.
First,
though Mr. Agarwala referred to the margin between the procurement price and
the price at which the procured paddy or rice could be sold as
"remuneration", a contention which found favour with the High Court,
we do not find it possible to accept the submission. There was a similar margin
between the price at which a wholesaler could buy rice and that at which he
could sell and similarly, it was the case of the retail dealer, but it is
hardly possible to call these as "remuneration". This margin or
difference in the purchase and sale price was necessary in order to induce any
one to engage in this business and was of the essence of a control over
procurement and distribution which utilised normal trade channels. It would,
therefore, be a misnomer to call it "remuneration" or
"commission" allowed to an agent and so really no argument can be
built on it in favour of the relationship being that of principal and
agent."
(emphasis
supplied)
16.
Coming to the question of agency, this Court in the case of A.
Venkata Subbarao (supra) held that the Government can derive no advantage from
the works of "Procurement agent" mentioned in the Procuring Order,
1946 whether from the agreement executed by such procuring agent. This Court
specifically vide paras 32 to 35 dismissed the argument advanced on behalf of
the Government that A. Venkata Subbarao (appellant) had acted as an
"agent" on behalf of the Government. We quote hereinbelow paras 32 to
35 which read as under:
"32.
No doubt, the description in the Procurement Order and the agreement as
"agent" is of some value, but is not decisive and one has to gather
the real relationship by reference to the entire facts and circumstances. To
start with, it is clear that as the purchases were made by 2 4 the procuring
agents out of their own funds, stored at their own cost, the risk of any
deterioration, driage or shortfall fell on them, they were the full owners of
the paddy procured and they pledged the goods for raising funds. This aspect of
their full ownership of the grain purchased is highlighted by the fact that
they entered into agreements with the Government itself to sell the rice with
them to District Supply Officers at the controlled market prices. Any
contention that the procuring agents were not full owners of paddy or rice
procured by them must manifestly fail as being inconsistent with the basis upon
which this agreement by them to sell Government was entered into. If further
confirmation were needed it is provided by the fact that on the sales by
procuring agents to Government under their Supply agreement sales-tax was
payable which on the terms of the Madras General Sales Tax Act in force at the
relevant time would not have been payable if the paddy and rice were that of
Government and which they were holding merely as commission agents on behalf of
the Government.
33. Next,
it may be pointed out that these plaintiffs held licences under the Licensing
Order under the Madras Foodgrains Control Order, 1947 in order that they might
deal in the rice in their possession. In the licence which was granted to the
plaintiffs which was in statutory form the foodgrains in their possession were
referred to as their stocks. It may be pointed out that the form of the licence
granted to procuring agents, wholesalers and retailers was the same.
34.
Learned Counsel urged that even assuming that the property in the goods
purchased passed to the procuring agents that would not by itself negative the
relationship of principal and agent. For this purpose reliance was placed on
Article 76 of Bowstead on Agency which runs :
"Where
an agent, by contracting personally, renders himself personally liable for the
price of goods bought on behalf of his principal, the property in the goods, as
between the principal and agent, vests in the agent, and does not pass to the
principal until he pays for the goods, or the agent intends that it shall
pass."
He also
referred us to certain decisions of the Madras and Punjab High Courts in which
the principle laid down in this passage had been applied.
We do not
consider it necessary to examine this question in its fulness because we are
satisfied that the procuring agent, when he bought the goods, was purchasing it
for himself and not on behalf of the Government.
The
acceptance of the argument addressed on this aspect would mean that if the
procurement agent so desired he might contract in the name of the principal,
namely, the Government and thus establish privity between the Government and
the purchaser and make the Government liable to pay for 2 5 the price of the
goods at which he had purchased. This situation would, in our opinion, be
unthinkable on the scheme of the Procurement Orders and generally of the Food
Control Orders under which the procurement and distribution of foodgrains was
placed under statutory control. What the Government desired and what was
implemented by these several orders was merely the regulation and control of
the trade in foodgrains by rendering every activity connected with it subject
to licensing and to the directions to be issued in pursuance thereof and not
directly to engage in the trade in foodgrains.
35. The
respondent can derive no advantage from the obligation on the part of the
procuring agents to store the paddy or rice properly - a stipulation on which
Mr. Agarwala laid considerable stress - and this for two reasons : (1) The
purpose of the clause was to ensure that there was no loss of foodgrains which
were then a scarce commodity. That this is so would be apparent from the terms
of section 3(2)(d) of the Essential Supplies Act which was effectuated by
clause 9 of the licence granted under the Madras Foodgrains Control Order, 1947
which applied to all dealers in foodgrains, be they procuring agents (who also,
as stated earlier, had to obtain and obtained these licences), wholesalers or
retailers. This clause reads :
"9.
The licensee shall comply with any directions that may be given to him by the
Government or by the officer issuing this licence in regard to the purchase
sale or storage for sale of any of the foodgrains mentioned in paragraph
(1).............."
The
second reason is that the agreement executed by the procuring agents in which
this clause as regards storage in proper godowns and undertaking responsibility
for the safe-custody of the grain occurs, is one which was a form intended for
execution not merely by procuring agents but also authorised wholesale
distributors i.e., those who purchased their requirements from procuring agents;
admittedly the authorised wholesale dealers were not "agents" and the
fact that this condition was insisted on even in their case is clear proof that
it has no relevance to the question now under discussion. If therefore, appears
to us that the expression "agent" was used in the Intensive
Procurement Order as well as in the agreements merely as a convenient
expression to designate this class of dealers."
17.
Applying the judgment of this Court in the case of A. Venkata
Subbarao (supra) we hold that the High Court was right in coming 2 6 to the
conclusion that the assessee was storing the commodities in question in its
godowns as part of its own trading stock, hence it was not entitled to claim
deduction for such margin under Section 80P(2)(e) of the 1961 Act.
18.
Before concluding, we may refer to the judgment of this Court in
the case of Commissioner of Income-tax, Madras v. South Arcot District
Co-operative Marketing Society Ltd. - (1989) 176 ITR 117 (SC). This judgment is
heavily relied upon by the counsel appearing on behalf of the appellant. In
that case the facts were as follows. Assessee was a co-operative society under
Madras Co- operative Societies Act. In the previous year ending June 30, 1960,
the Society entered into an agreement with the Government of Madras under which
it agreed to hold ammonium sulphate stock of the Government of Madras and it
agreed to store the stock on behalf of the Government of Madras and to maintain
a true and full account for the stocks received and returned every month for a
commission of Rs.5 per ton on the quantity of fertilizer issued by the assessee
from the stock. The assessee received Rs.31,316 on this account. The said sum
of Rs.31,316 was originally included in its turnover, in the case of assessment
proceedings, the assessee claimed exemption under Section 14(3)(iv) of the
Income-tax Act, 2 7 1922. The ITO held that the assessee was not entitled to
exemption on the ground that the said amount of Rs.31,316 had been received for
services rendered. The assessee appealed to CIT(A) who agreed with the ITO
stating that the said amount received was for services rendered and as such the
assessee was not entitled to exemption. Before the Tribunal the assessee
contended that the receipt was for letting out its godown for storage, and,
therefore, the said receipts came directly under Section 14(3)(iv) of the 1922
Act. The Revenue contended that the receipts from letting of godowns, etc, to
members alone were exempt and the receipts in the present case being on a
commercial basis will not fall within the scope of the exemption. The Tribunal,
however, held that the assessee was entitled to exemption under Section
14(3)(iv) by observing that the agreement with the Government of Madras clearly
indicated that the receipts were for letting of the godowns. The Tribunal
further observed that some service element was there which constituted part of
the receipts but it was an insignificant part of the whole amount of Rs.31,316.
Hence,
the Society was entitled to exemption. The Madras High Court analysed the
agreement between the parties and came to the conclusion that the assessee was
a stock-holder who had agreed to 2 8 hold ammonium sulphate stock of the
Government of Madras and safely store the same on their behalf and to issue the
same on certain terms and conditions. Under the Agreement, the fertilizers bags
had to be stocked in a manner as directed by the officers of the Government.
The stocking and storage of the bags had to be done in the manner indicated by
the Government. The assessee had to maintain particulars of fertilizers
received, released and held in stock. The assessee had to engage at its own
cost, godown- keepers and clerks to properly and efficiently carry on its
duties under the agreement. The assessee was to get a commission of Rs.5 per
ton of the quantity of fertilizers issued from the stocks on the instructions
of the Government. On the analysis of the agreement, the High Court came to the
conclusion that the assessee was a mere stock-holder and that the sum of Rs.5
per ton shown as commission from the Government was only for letting of godowns
and though some services provided to were incidental to such storage, the
service element and payment thereof constituted an insignificant portion of the
amount received. In the circumstances, the High Court upheld the view of the
Tribunal that the receipt of Rs.31,316 was exempt under Section 14(3)(iv) of
the 1922 Act. This view was upheld by this Court.
19.
In our view the judgment of this Court in South Arcot (supra) has
no application to the facts of the present case. Firstly, in every case of this
nature one has to examine the contract between the parties. One has also to
examine the conduct of the parties. In the case before us we are concerned with
Rajasthan Foodgrains & Other Essential Articles (Regulation of
Distribution) Order, 1976. In the present case we are concerned with statutory
or compulsory sales. Each contract has to be interpreted on its own terms. In
the case of South Arcot (supra) statutory or compulsory sale was not in issue.
Secondly, in the case before us we have a situation in which there are two
sales. The first sale is between the Government (through FCI) and the
appellant-society, and the second sale is between the appellant-society and
Fair Price Shop. The former is the condition precedent to the latter. That
situation was not there in the case of South Arcot (supra).
Thirdly,
in the case before us issue price is set-off against the sale price which
clearly indicates that the netting/difference between the two prices
constituted receipt on a commercial basis or net profit. Lastly
netting/difference also indicated that the appellant had treated the stock as
its own trading stock as correctly held by 3 0 the impugned judgment.
Therefore, in our view the judgment of this Court in the case of South Arcot
(supra) will not apply to the facts of the present case and consequently the
appellant is not entitled to exemption/special deduction under Section
80P(2)(e) of the 1961 Act.
20.
For the aforestated reasons, we find no infirmity in the impugned
judgment, and, accordingly we hereby dismiss the civil appeal of the
appellant-assessee with no order as to costs.
.................................J. (S.H. Kapadia)
................................J. (Aftab Alam)
New Delhi;
July 16, 2009.
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