1. The appellant is a registered cooperative society registered under the provisions of Gujarat Co-operative Society's Act. It came into existence in view of the office memorandum dated 29th April, 1985 of Oil & Natural Gas Commission, Dehradun. The society was formed by the members, who were employees of the O.N.G.C. All the 13 members of the said society are employees (Sr. Class-1 Officers) of O.N.G.C, who are having a lien on their jobs with O.N.G.C. for a period of three years.
The first accounting year of the society ended on 30th June, 1986. The assessee filed its return of income showing the total income at Rs. nil. In the return of income, the said society claimed a deduction of Rs. 14,11,813 under Section 80P of the Income-tax Act, 1961. It claimed that the entire income derived by the said society is exempt under Section 80P(2)(a)(vi) as the entire income is attributable to the activity of collective disposal of the labour of its members to O.N.G.C. The appellant society entered into a contract with O.N.G.C. to carry out seismic shot hole drilling in the area allotted to the co-oprative society. The appellant society received drilling charges of Rs. 48,73,718 during the year under consideration for such contract work from O.N.G.C.1.1 The ITO observed that as per the terms of contract executed by the appellant society with O.N.G.C, only employees of O.N.G.C. and no one else can be made members of this society. The society had employed 40 to 60 labourers per day on daily wage basis. A total amount of Rs. 6.37 lakhs was paid towards labour expenses to daily wage labourers. It also paid a total salary of Rs. 8.71 lakhs to its members. None of the daily wages labourers who have done the actual physical labour has been made a member of the co-operative society. Hence, the condition prescribed in the proviso to Section 80P(2)(a)(vi) is not fulfilled. He also emphasized the fact that actual labour work is done by these 40 to 60 daily wages labourers employed by the assessee society, who are not the members nor they have any voting right in the said society. He also elaborately discussed the contents of Circular No. 72 dated 6th January, 1972 issued by the Board explaining the aforesaid provision.
In the said circular, it has inter alia been clarified that this provision was introduced with a view to promoting self-help among persons of small means who form co-operative societies for the collective disposal of their labour so as to exempt from tax the business income of such labour co-operative societies. The ITO observed that the present co-operative society is one of professionals and technocrats who have developed technical expertise in drilling technology with O.N.G.C. They cannot be treated as persons of a small means and cannot be treated as labour force contemplated in the said provision. The society is having six Drilling Rigs, which are very heavy and cumbersome mechanical apparatus requiring at least 6-7 persons to operate the same. Hence, the assessee cannot take shelter in the argument that the technical members of the co-operative society themselves operated the drilling rigs without the aid of daily wages labourers. He, therefore, rejected the assessee's claim for grant of total exemption under Section 80P(2)(a)(vi). However, he granted deduction of Rs. 20,000 under the provision namely, 80P(2)(c)(ii) of the Income-tax Act, 1961. This order was passed by the ITO after obtaining directions under Section 144A from the Dy. CIT(A), Baroda.
1.2 On further appeal, the CIT(A) for the detailed reasons recorded in his order dated 11-12-1990 confirmed the finding of the ITO rejecting the assessee's claim for grant of total exemption under Section 80P(2)(a)(vi) of the Act.
1.3 In the present appeal, the assessee has raised as many as 12 grounds. All these grounds relate to assessee's claim for grant of total exemption under Section 80P(2)(a)(vi) and the assessee has challenged the various findings given by the CIT(A) in these 12 grounds.
1.4 Before us, the learned counsel for the assessee vehemently argued that the departmental authorities have erred in rejecting the assessee's claim for total exemption in respect of the income derived by the appellant society under Section 80P(2)(a)(vi). It was submitted that the entire income derived by the society is solely attributable to the activity of collective disposal of the labour of its members. The 13 members of the society are drillers. All these members of the society started at the last rung of the drilling work and over a period of time, they became labourers with experience but nonetheless a labourer only, though a better labourer, and rejection by the CIT(A) on the ground that when these labourers became a better labourers or a skilled labourers, they will not get the benefit of this clause is an uncalled for refinement of law and is clearly contrary to the interpretation of the said provision based on the plain reading of the provisions of law. The income was earned by the society from the collective disposal of the labour of its members. There cannot be any doubt or debate about this factual aspect, according to the learned counsel for the assessee. He submitted that the concept of "small man" introduced by the ITO as well as by the. CIT(A) while denying desired exemption is contrary to the said provision of law which nowhere provides that collective supply of labour only by the small man or poor man would alone be qualifying for grant of exemption under this section. He gave an example of a co-operative society, whose members are diamond cutters. Since the business of the diamonds is a lucrative trade, the members of the said society, who are diamond cutters, get handsome payment of such collective disposal of labour of these diamond cutters (members). Exemption cannot be denied to such a society whose entire income is attributable to the activity of collective disposal of the labour. It was contended that the learned departmental authorities have been influenced by the extraneous and irrelevant considerations by introducing the concept of small man or poor man while interpreting the aforesaid provision. He also invited our attention towards the bye laws of the said co-operative society as well as towards various clauses of the contract executed between the society and the O.N.G.C. It was strongly argued that the ITO has erred in placing reliance on the circular issued by the Board while interpreting the aforesaid provision provided for grant of exemption in relation to the profits attributable to certain specified activities undertaken by the co-operative societies. When the provisions of law are clear and there is no ambiguity, the literal interpretation based on plain language of the section should be made, which clearly supports the assessee's prayer for grant of exemption. He invited our attention towards judgment of Hon'ble Gujarat High Court in the case of Gora Vibhag Jungle Kamdar Mandali v. CIT [1986] 161 ITR 658 to support his contention. He also invited our attention towards a judgment of Hon'ble Supreme Court in the case of CIT v. U.P. Co-operative Federation Ltd. [1989] 176 ITR 435 to strengthen his argument that these deductions provided in Section 80P are meant for providing incentives to the co-operative movement.
Therefore, these provisions should be liberally construed. Our attention was also invited towards one more judgment of Hon'ble Supreme Court in the case of Govind Saran Ganga Saran v. Commissioner of Sales-tax [1985] 155 ITR 144 to further stress the point that when the language of the statute is clear and admits of no ambiguity recourse to the statement of objects and reasons for the purpose of construing a statutory provision is not permissible. Our attention was also drawn towards a recent judgment of Hon'ble Supreme Court in the case of Keshavji Ravji & Co. v. CIT [1990] 183ITR 1 to support his contention that the departmental authorities could not resort to so called equitable construction of the aforesaid taxing statute by introducing irrelevant and extraneous consideration of a "small man" or a "poor man" theory in the said provision of 80P(2)(a)(vi) although the language of the said section does not contain any such rider for grant of exemption under that section. He invited our attention towards the report of the auditor of the said society to highlight the fact that the members of the society are doing hard-work with perfect sincerity.
The income is attributable to such collective disposal of the labour of its members by the society to O.N.G.C. The CIT(A) ought to have accepted the assessee's claim for grant of total exemption under the aforesaid section.
2. The learned Sr. D.R. contended that ONGC wanted to develop an ancillary unit and for that purpose, the said society was formed. All the 13 members of the society are Clause-I Officers of ONGC. They are highly technical persons and possess rich experience in the work of drilling. All of them have been paid handsome salary by the appellant society. They cannot be treated as labourers. They are expert technicians possessing rich experience, technical qualification and knowledge in the job of drilling. In order to properly interpret the aforesaid provisions, it will be necessary to read the provisions of Section 80P as a whole. It may be true that the circular of the Board is not binding on the appellate authorities but the contents thereof can be perused by the appellate authorities to properly understand the true legislative intention of introducing these provisions. The said provision is meant for grant of exemption to labour-oriented co-operative societies constituted by the actual labour force. The stress is on the profit attributable solely to the activity of collective disposal of labour of its members and it is not meant for technocrats or professionals or highly paid Class-I Officers like in the present case. It is an admitted position that the said society had employed 40 to 60 persons on daily-wage basis. In the present case, the 13 members of the society, who are expert technocrats are the brain and the 40 to 60 labourers employed on daily wages are the actual labourers. The 13 members of the society have only provided their technical know-how, while the actual physical labour has been done by 40 to 60 daily wages labourers who have operated those rigs and carried out other physical labour in the performance of the said contract by the society. Our attention was also invited to the balance sheet of the said society. It was pointed out that the society owns fixed assets excluding depreciation valued at Rs. 22,66,328. The members have been paid handsome salary aggregating to Rs. 8,71,360. They have also got reimbursement of travelling and conveyance expenses amounting to Rs. 6,10,506. All such handsome amount of salary, travelling and conveyance allowances paid to these 13 technocrats clearly establish that they are managing the activities of the ancillary unit of ONGC while the hard and physical labour work involved in the process of drilling is done by those 40 to 60 daily wage labourers. Those daily wages labourers are neither entitled to become members of the society nor in fact they are entitled to any share in the income received by the said society by performing the said contract executed with ONGC. It was further argued that the profit derived by the society is attributable to the technical know-how process applied by these 13 members by way of using plant and machinery including 6 sophisticated rigs and is also attributable to various other obligations undertaken by the society in the contract executed with ONGC. It cannot be said that the income of the society was derived by the collective disposal of labour of these 13 members of the society. The learned Sr. D.R. further contended that the reliance placed by the counsel of the assessee on the certificate granted under Section 194C does not in any manner support the assessee's contention that such a certificate was granted after considering the assessee's eligibility for grant of total exemption under Section 80P(2)(a)(vi).
Any person who furnishes an application in the prescribed Form No. 13-C to the Assessing authority and gives a declaration that its total income computed in accordance with the provisions of the Income-tax Act is likely to be less than the minimum liable to Income-tax may be allowed to receive the contract money from the a warder of the contract without deduction of tax on issue of such a certificate under Section 194C. The said certificate cannot amount to acceptance of assessee's claim for grant of exemption under Section 80P(2)(a)(vi). The learned Sr. D.R. further argued that if such a society whose members are highly technical persons and who have employed several labourers on daily wages basis are covered by the aforesaid provisions, then all highly skilled professionals like architects, lawyers or engineers would be eligible to form a co-operative society and by providing the collective disposal of their labour (including their professional or technical skill and know-how) would be receiving tax-free income from such a business of providing collective disposal of labour of its members in the form of rendering highly technical and skilled professional services to any person. This will lead to absurd interpretation of the said provision. The CIT(A) has also rightly observed that he does not agree with the finding given by the Dy. CIT(A) in assessee' s case for assessment year 1988-89 who had granted exemption to the said society under Section 80P(2)(a)(vi) for assessment year 1988-89. He also relied upon the detailed reasons given in the order of the learned CIT(A) and the detailed reasons given in the assessment order. He, therefore, urged that the order of the CIT(A) should be confirmed.
3. We have carefully considered the rival submissions made by the learned representatives and have also gone through the orders of the learned departmental authorities as well as the various other documents to which our attention was drawn during the course of hearing. It is apparent from a perusal of the bye-laws of the appellant-society that the said society was formed with the object of undertaking and carrying out shot hole drilling work of the ONGC as on contract basis. The agreement executed by the appellant society with ONGC also reveals this fact that this contract was awarded by ONGC to the said society with a view to develop its ancillary unit for shot hole drilling work. The certified auditor, co-operative society, Baroda in his report for the period from 1-4-1989 to 31st March, 1990 placed by the assessee at pages 58 to 61 of the paper-book also clarifies that the appellant society is working as an ancillary unit of the ONGC. It is carrying on shot hole drilling activities in the area allotted by the ONGC. During the year under consideration, the ONGC has accepted the shot hole drilled meterage of 1,29,214 mts. @ Rs. 38.50 and the gross receipts of such job work done by the society credited in the profit and loss account is Rs. 48,73,718. All the 13 members of the said society are admittedly Class-I Officers of ONGC who have joined the society as its members without resigning from the services of ONGC on deputation. The total amount of remuneration paid to them during the year under consideration was Rs. 8,71,360. A perusal of the auditor report given by the Special Auditor No. 4 Co-operative Society, Baroda (page 72 of the paper-book) reveals that salary and allowances payable to these members was Rs. 5,000 + Rs. 5,000 each. In addition to this, they were paid travelling allowances of Rs. 100 and facility of field establishment and canteen was also made available. The society also provides for entertainment to these members. A deduction of a small amount of Rs. 200 from T.A. Bill is being made for such facilities provided to the members. The society also pays to every member a sum of Rs. 1,500 for local conveyance every month. It is also admitted fact that the said society employed 40 to 60 labourers on daily wages basis and an aggregate amount of Rs. 6.37 lakhs has been paid to these daily wages labourers who are neither members of the said society nor they have voting rights in the said society.
3.1 In the contract executed by the society with ONGC the society has undertaken the shot hole drilling work to be performed in accordance with the terms and conditions of this agreement on consideration of job charges payable by the ONGC to the society @ Rs. 38.50 per metre of accepted meterage of clear shot holes as per technical specifications mentioned in this agreement. The society also acquired plant & machinery from ONGC under the terms of the said agreement and the sale value of the plant & machinery was payable by the society to the ONGC as per terms contained in this agreement. The society inter alia undertook, as per the terms of this contract executed with the ONGC that it will clear dues payable to the labourers employed by it for the performance of this agreement. The society will also be responsible for payment of compensation in case of fatal accident/serious accident, wages for the disability period and compensation under the Workmen Compensation Act, 1923 for the expenses arising out and in the course of employment of those labourers.
3.2 The balance-sheet of the society as on 30th day of June 1986 shows that it owned total assets amounting to Rs. 32,41,663 including the value of fixed assets (excluding depreciation amounting to Rs. 22,66,328).
3.3 The assessee contends that the entire income derived by the society is attributable to the activity of collective disposal of labour of its members and it should, therefore, be granted total exemption under Section 80P(2)(a)(vi). The said provisions under which the assessee claims total exemption are reproduced hereunder:- 80P(I) 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 :- the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under Sub-clause (vi), or Sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of the members, namely :- (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities.
3.4 The learned counsel for the assessee submitted gist of definition of "labour" given in various dictionaries, Law of Lexicon etc. However, it will be worthwhile to reproduce the meaning of term "labour" given in the Webster's new Twentieth Century Dictionary Unabridged second edition at page 1010 - 3. All wage-earning workers; distinguished from capital or management. All manual workers whose work is characterised largely by physical exertion; distinguished from white-collar or professional workers.
3.5 On perusal of Section 80P of the Act, it is clear that the co-operative society is entitled to grant of general exemption of Rs. 20,000. Sub-clause (vi) of Section 80P(2)(a) was introduced by the Finance (No. 2) Act of 1971 w.e.f. April 1,1972. By introducing the said Sub-clause (vi) along with the proviso, it is clear that the Legislature intended to give additional benefit of exemption for the sums specified in Sub-section (2), i.e., whole of the amounts of profits and gains of business attributable to any one or more of such activities on the conditions mentioned in the proviso being complied with. It is clear from the plain reading of Section 80P(2)(a)(vi) that such additional benefit is allowable to the co-operative societies engaged in the collective disposal of the labour of its members on the fulfilment of the conditions embodied in the proviso.
3.6 The language of the proviso clearly lays down that rules and regulations and bye-laws of the society falling under Sub-clauses (vi) and (vii) must restrict the voting right to the members specified therein and not to others. This benefit is meant for societies engaged in collective disposal of the labour of its members subject to the condition that the rules and bye-laws of the society restrict the voting rights to the members who contribute their labour, or carry on the fishing or allied activities [for Sub-clause (vii)], the co-operative societies which provide financial assistance to the society and the State Government. The said proviso has clearly expressed the intention of the Legislature to carry out the object of eradicating any evil from any outside member from its root by providing that the right to vote be restricted only to three categories of members mentioned in the proviso in the rules and bye-laws of the co-operative society. The object of amending the provisions of Section 80P by the Finance (No. 2) Act, 1971 [as explained in the notes on clauses published in 1971] 80 ITR at page 151 is to secure that labour co-operative societies will be eligible for exemption from income-tax in respect of whole of their business income from such activity of "disposal of collective labour of its members" subject to the condition that the rules any bye-laws of the society restrict the voting rights to its members who contribute their labour.
3.7 Let us now examine the facts of the present case in the light of aforesaid clear interpretation of provisions of Section 80P(2)(a)(vi) of the Act. The appellant society was formed and was awarded the contract of shot hole drilling work by the ONGC with a view to develop ancillary unit for shot-hole drilling work. All the 13 members of the society are admittedly Class-I Officers of the ONGC possessing rich technical experience, knowledge and qualifications required for performing the job work of shot hole drilling. These members were paid handsome salaries and allowances aggregating to Rs. 8.71 lakhs besides reimbursement of their Travelling & Conveyance expenses of Rs. 6,10,506 during the year under consideration. The society also employed 40 to 60 labourers on daily wages basis to whom wages payments aggregating to Rs. 6.37 lakhs was paid. The appellant society owned plant and machinery costing Rs. 18,81,800 in addition to other fixed assets as shown in the audited balance-sheet. This includes 6 drilling rigs, which are very heavy and cumbersome mechanical apparatus requiring at least 6/7 persons to operate those rigs. The technical members of the society have not themselves operated these drilling rigs without the aid of daily wage labourers. The technical experts may be supervising and controlling the operation of these rigs but the actual physical and hard work of operating these rigs was impossible without the aid of the daily wage labourers who were admittedly employed by the society, 3.8 The audited statements pertaining to the year under consideration reveals that the society received job-charges of Rs. 48,73,718 from the ONGC pursuant to the contract executed with ONGC. After deducting various expenses, depreciation and other items shown in the Profits & Loss A/c, it disclosed net profit of Rs. 14,12,136/ 26. In the report of the Special Auditor No. 4 Co. Op. Society, Baroda pertaining to the year under consideration, it is mentioned that ONGC accepted the shot-hole drilling meterage of 1,29,214 mts. @ Rs. 38.50 per accepted meterage of drilling done by the society and the gross receipt is made of Rs. 48,74,768 by the society. The net income derived by the society after deducting expenses, depreciation etc., is attributable out of such job charges received by the society from ONGC pursuant to an agreement executed between them. Clause V of the said agreement specifies the scope of work required to be performed by the society. It inter alia requires the society to carry out the shot-hole drilling according to the technical specifications mentioned in the said agreement. Clause VI of the said agreement inter alia provides that the society shall execute the work described in Article V and for carrying out the said work, the society shall at its own cost provide all items, manpower and categories of material, equipment and services so that shot-holes of desired depth, quantities and technical specifications described in Article V are made available to Geophysical party of ONGC.Society shall also arrange for transportation of its own material. It shall undertake to provide for efficient supervision of the shot-holes at its own cost. Society shall also provide and be responsible for payment of wages, salaries, bonus, social charges, insurance, accommodation etc., to its employees and manpower according to the provisions of law. Clause VIII 2(f) further provides that the society shall be responsible for payment of compensation in case of fatal accident/serious accident etc., payable to the workers as per the provisions of the Workmen's Compensation Act, 1923. Clause VIII 2(g) further provides that society will be solely responsible for payment to the employees employed or engaged by them as per the provisions of Co-operative Act. The society also acquired plant & machinery from ONGC as per Clause IV-2 for use in execution of this contract work. It also undertook to arrange at its own cost all the spares and accessories required for the plant & machinery required for carrying out the work specified in the contract. There are several other obligations undertaken by the society under the agreement executed with the ONGC.3.9 The income which is exempt under Section 80P(2)(a)(vi) is in respect of business income derived by the labour co-operative society from the activity of disposal of collective labour of its members. This provision, as rightly pointed out in ground No. 1, was introduced with a view to avoid the exploitation of labour and to encourage those actual workers/labourers to form co-operative society for the collective disposal of labour of its members. The meaning of term "labour" or "labourers" in a welfare society is well-known. It is meant for those actual workmen/labourers, who form a co-operative society and derives income from collective disposal of labour of its members and not meant for those ancillary industrial units constituted by highly paid technical experts and skilled persons, who regularly employ large number of daily wage-earning labourers for carrying out the technical job work of drilling of oil wells with the aid of sophisticated machineries like drilling rigs etc. In order to be eligible for grant of this exemption, the "activity of the collective disposal of labour of its members" should be the sole or the main profit-making apparatus, as distinguished from the income derived by the appellant society from the composite and indivisible activities of (i) providing the highly technical knowledge and experience, the technical know-how, the technical expertise and specialised professional skill of its members, who are Class-I Officers of ONGC, (ii) providing the services of 40 to 60 daily wage labourers employed by the society, (iii) use of sophisticated drilling rigs and arranging its proper operating, maintenance at its own cost, (iv) managing & supervising the highly technical activity of carrying out the skilled and precision job of shot-hole drilling according to the technical specifications, (v) undertaking the responsibility of arranging the required funds and plant and machinery for carrying out such a precision and technical job work. The 40 to 60 daily wage-earning workers, who were regularly employed by the society, are neither the members of the society nor they have any control or share in profits of the society nor they have any voting rights in the said society. They in fact had actually and largely done the hard physical exertion under the supervision and control of the highly technical, professional and skilled 13 members, who are Class-I Officers of the ONGC.3.10 The income derived by the society is an income derived by an ancillary unit like any well managed industrial undertaking by carrying out the job work of a highly precision and technical nature with the aid of sophisticated plant & machinery (drilling rigs) and with the aid of regular employment of 40 to 60 daily wage-earning labourers, who are not the members of the society. Such income cannot be regarded as income derived by a labour co-operative society from the activity of collective disposal of labour of its members.
3.11 The contention of the learned counsel of the assessee that CIT(A) failed to appreciate that the Dy. CIT(A) decided this point in favour of the assessee in assessment year 1988-89 and on that basis this point should be treated as capable of two equally good interpretations, has also no merit and cannot be accepted. We have already examined and discussed this point and we are of the considered opinion that the view taken by the CIT(A) in the year under consideration confirming the denial of grant of exemption under Section 80P(2)(a)(vi) is the correct view.
3.12 The contention of the learned counsel for the assessee that by granting a certificate for non-deduction of tax at source, it should be presumed that the department accepted the assessee's contention regarding exemption under Section 80P(2)(a)(vi) also has no merit. The assessee has not pointed out whether such a point was specially raised, examined and decided at that stage. Such authorisation for non-deduction of tax at source is issued by the ITO on the basis of a declaration given by any assessee in the prescribed Form No. 13-C declaring that its income is likely to be below the taxable limits. The assessing authority is not required to adjudicate upon the issue of eligibility of grant of exemption under any of the provisions of Income-tax Act, 1961. The assessee has not even submitted a copy of the application submitted to the ITO for such purpose nor it has submitted copies of any correspondence in relation to obtaining of such an authorisation from the ITO. In any event, the issue of an authorisation by the ITO on the basis of a declaration submitted by the assessee in the prescribed form is of no relevance or consequence for determining the point in issue. This contention of the assessee has also no merit and is rejected.
3.13 We have also gone through all the cases relied upon by the learned counsel of the assessee and they do not in any manner support the assessee's contention, as in our view, on a perusal of language of Section 80P and on the basis of clear interpretation based on the plain language of the relevant provisions, the appellant society is not entitled to grant of any exemption under Section 80P(2)(a)(vi). Any other interpretation of this exemption clause will lead to manifestly absurd or anomalous results which could not have been intended by the Legislature. The interpretation of these provisions made by the learned departmental authorities and the findings given by the CIT(A) on the basis of facts and evidence existing on records confirming the denial of exemption to the appellant society in fact, correctly implement the real object behind the insertion of these exemption provisions, otherwise any group of professional and technical experts will form co-operative society and will get the unintended benefit under this provision in respect of income derived by supplying collective professional and technical expertised skill and services under the garb of collective disposal of labour of its members.
3.14 In the light of our above discussions and aforesaid reasons, we are of the considered view that the learned CIT(A) has rightly confirmed the disallowance of assessee's claim for grant of exemption/deduction under Section 80P(2)(a)(vi) of the Income-tax Act, 1961.
3.15 Before we conclude, we will like to express our feelings that Shri K.K. Boliya, the learned Sr. D.R. presented his case in a very candid and splendid manner.