2. The assessee is a Co-operative Society. It derives income from various activities. Income from some of these activities is exempt Under Section 80P of the Income-tax Act, 1961. Against rejection of claim for exemption Under Section 80P(2)(a)(iii) of the Act by the ITO, the assessee had filed appeal before the CIT(A). Under the said provision, the whole of the amount of profits and gains of business attributable to the marketing of the agricultural produce of its members were deductible from gross total income. The submission before the CIT(A) was that the agricultural produce, comprised of groundnuts of the members, were brought to the assessee and in course of marketing this produce, the assessee first converted the groundnut into oil and subsequently, the de-cake was converted into de-oil cake and oil was extracted by solvent extraction plant and these products were ultimately sold. The assessee collected charges from the members for the said processing. It was submitted that the entire process was that of marketing of the agricultural produce of the members and as such the income derived from this process was exempt Under Section 80P(2)(a)(iii) of the Act. The CIT(A) held that since extraction of oil from the agricultural produce of the members and sale thereof could not be said to be part of the marketing of the agricultural produce of the members of the society, exemption Under Section 80P(2)(a)(iii) was not available. He accordingly, rejected the ground raised by the assessee.
The assessee is now in further appeal before the Tribunal.
3. The learned counsel for the assessee submitted that the objection of Section 80P was to encourage and promote the growth of co-operative societies and consequently a liberal construction had to be given to the operation of that provision. For this proposition he placed reliance on the decisions of the Supreme Court in CIT v. U.P.Cooperative Federation Ltd. [1989] 176 ITR 435 : 43 Taxman 20 and in Broach District Cooperative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 418 : 44 Taxman 439. According to him the groundnuts of the members could not fetch economic price if they were sold in the same condition as they were brought by the members.
Consequently processing was required to be done in order to obtain fair price for those agricultural products. It was for this purpose that oil was extracted from the agricultural products brought by the members and then the same was sold for and on behalf of the members and the entire process was process of marketing of agricultural produce of the members. He placed strong reliance on two decisions - one of which was of Gujarat High Court reported in CIT v. Karjan Co-operative Cotton Sale Ginning & Pressing Society Ltd. [1981] 129 ITR 821 and the other was that of Karnataka High Court in Addl. CIT v. Ryots Agricultural Produce Co-operative Marketing Society Ltd. [1978] 115 ITR 709, both of which were approved in the case of Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd. (supra).
4. The submission of the departmental representative, on the other hand was that provisions of sec. 80P should be literally and strictly construed. For this proportion reliance was placed on the decision of the Bombay High Court in Vidharbha Cooperative Marketing Society Ltd. v. CIT [1985] 156 ITR 422. It was also submitted that the activity of extracting oil and then selling the same could not be regarded as activity of marketing of the agricultural produce of the members.
Reliance was placed on the decision of the M.P. High Court in Keshkal Co-operative Marketing Society Ltd. v. CIT [1987] 165 ITR 437. It was submitted that Special Leave Petition had been refused by Supreme Court against the said decision.
5. We have considered the rival submissions and the facts brought on record. We do not accept the submission of department to the effect that provisions of Section SOP should be literally and strictly construed. It is true that such observation has been made in the decision of the Bombay High Court in Vidharbha Co-operative Marketing Society Ltd.' s case (supra). However, we are bound by the observations of Supreme Court in the two cases referred to above. In both the cases the Supreme Court has observed that the object of the relevant provision was to encourage and promote the growth of co-operative societies and consequently a liberal construction had to be given to the operation of the said provisions. The activity with which we are concerned is the activity of "marketing of agricultural produce of the members". The expression "marketing" has not been defined in the Act.
The said expression would include all activities connected with the process of taking over from agricultural producer member and handing over marketable commodities to the purchaser and all the intermediate process connected with the marketing of the agricultural produce of the members. The expression 'marketing' cannot be confined to the activity of buying and selling only. The expression 'marketing' is of wide import and includes performance of all business activities involves 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 processed and the said activity of processing would be part of the activity of marketing and not independent activity. The marketing functions may involve all such functions such as buying and selling, physical functions such as storage, transportation, processing etc. and other commercial functions such as standardisation, financing, market intelligence etc. We are supported in this view of the matter by the decisions in Karjan Co-operative Society Ltd.'s case (supra) and Addl.
CIT v. Ryots Agricultural Produce Co-operative Marketing Society Ltd.'s case (supra). In the present case, the groundnuts could not have fetched proper price if they themselves had been sold in the market.
Consequently processing was required to be done in order to fetch advantageous consideration. It is by subjecting the groundnuts to the process of extraction of oil and oil cake that the fair price could have obtained. Consequently when the assessee undertook the activity of extracting oil from the groundnuts of the members and then selling the same, the said activity was part of the activity of marketing of the agricultural produce of the members. The provision does not lay down that the agricultural produce should be sold in the same condition as they were brought by the members to the assessee-society. If that had been the intention, the expression "marketing", which was an expression of wide import would not have been used. In the case of Ryots Agricultural Produce Cooperative Marketing Society Ltd. (supra), oil was extracted from the groundnuts and then sold and it was held that the said processing was part of marketing. It was observed that the fact that the goods which were ultimately marketed had been earlier processed would be of no consequence insofar as exemption under the relevant provision was concerned. As already stated the ratio of this decision has been approved by the Suprem Court in the case of Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd. (supra). Consequently it must be held in the present case that as far as the activity of the assessee of extracting oil from the groundnuts of its members and selling the same was concerned, it was the activity of marketing of the agricultural produce of the assessee society and as such the whole of profits and gains arising out of such activity was exempt Under Section 80P(2)(a)(iii) of the Act.
6. The decision of the M.P. High Court in Keshkal Co-operative Marketing Society Ltd.'s case (supra), on which the learned D.R. has relied upon, is not applicable to the facts of the present case because in that case the assessee-society was purchasing paddy from the members and after milling the same was selling as its own account. On these facts it was held that the activity does not amount to marketing of agricultural produce of the members. In the present case we have confined our decision to the sale of oil etc. extracted from the groundnuts brought by the members of the assessee society and sold for and on behalf of those members. Our decision does not apply to any independent activity of purchasing groundnuts and selling the oil extracted from purchased groundnuts.
7. For the reasons given above, we set aside the order of the CIT(A) and direct the ITO to verify the facts and then allow deduction to the extent mentioned above.