1. These two appeals by the assessee for the assessment year 1989-90 are combined for the sake of convenience.
2. We first take up the appeal in I.T.A No. 1749/PN/91. The first issue agitated in this appeal is regarding the deduction under Section 80P(2)(a)( iii) of the Income-tax Act. The assessee is a co-operative sugar factory producing sugar from sugarcane. The learned counsel of the assessee has contended that the assessee is marketing the agricultural produce in the form of sugar and is, therefore, entitled to the deduction under Section 80P(2)(a)(iii) of the Income-tax Act.
The learned counsel, Shri V.H. Patil, took us through the aims and objects of the appellant-society. He pointed out that the aims and objects of the society shall be to give maximum profits on the agricultural produce, on the latest techniques of the production and to promote agriculture, agricultural industries and supplementary business among the members on the co-operative principles. The assessee-society buys sugarcane from its members and from non-members and produces sugar after crushing the sugarcane. However, the sugarcane of the members of the co-operative sugar factory is not out rightly purchased. According to the Minimum Sugarcane Price Act, the complete price of the sugarcane will have to be paid within 14 days from the date of purchase of sugarcane. But the same is not the case with co-operative sugar factories, advances are paid to the members as directed by the Board of Directors and the State Government from time to time. The advances are to be paid three to four times during the season. The final cane price is paid to the members after the season is over, the final payment is made 14 to 15 months from the date of start of the season. It is, therefore, obvious that the sugarcane for the co-operative sugar factory is not an outright purchase of the factory. The final price is paid to the members after taking into consideration the results of that particular season.
3. The learned counsel also draws distinction between the co-operative sugar factory and a private sugar factory. In private sugar factory, the ownership does not vest with the sugar producing farmers, while in cooperative sugar factory, ownership lies in the sugar producing members. In private sector sugar factories, sugarcane is out rightly purchased from the suppliers/farmers. The same is processed and sugar is sold in the market keeping the profit with the owners of the factories. But in the case of co-operative sugar factories, profit-making is not the aim. Whatever they earn by processing the sugarcane, i.e., by way of sale of sugar, the entire surplus so earned is passed on to the common sugarcane producers as sugarcane price and the gain or loss due to the fluctuations of prices on selling the agricultural produce was to be received or incurred by the farmer members. In private sector sugar factories, sugarcane is purchased at a fixed price and payment is made to the cane suppliers within 14 days from the date of supply. However, in case of co-operative sugar factories, the final payment is made to the suppliers 14 to 15 months from the start of the season. This distinction, according to the learned counsel, clearly shows that the co-operative sugar factory processes the sugarcane and sells it as sugar in the market on behalf of the members. The process of converting sugarcane into sugar is done only with an objective of giving a fair price of the crop to the farmers. Hence, a cooperative sugar factory is a non-profit making institution which works only for the welfare of its members.
4. The learned counsel continued and argued that the exemption provided in Section 80P(2)(a)(iii) is the marketing of agricultural produce of its members and income from agricultural income and income from marketing of agricultural produce are different from each other. First part includes of agricultural operation and the latter part covers agricultural produce and its marketing. Also agricultural income is exempted under Section 2(1A) of the Income-tax Act and marketing of agricultural produce is exempted under Section 80P(2)(a)(iii) of the Income-tax Act. The marketing of agricultural produce generally means the performance of all business activities involved in the flow of goods and service from the point of initial agricultural production until they are in the hands of the ultimate consumer.
5. The learned counsel also pointed out that the agricultural income and the exemption under Section 80P(2)(a)(iii) should not be confused.
The claim of exemption under Section 80P(2)(a)(iii) is quite different from agricultural income under Section 2(1A) of the Income-tax Act.
Section 80P(2)(a)(iii) of the Act is only for the exemption of income from marketing of agricultural produce of members. The learned counsel reiterates that the appellant factory is not producer of sugarcane, the sugarcane supplied by the members is processed and sold in the market to get a higher price and the entire proceeds after deducting the expenses are given to the members. The returns of sugarcane supplied are given to the members after completion of the season. This requires 14 to 15 months to get the price of the sugarcane. The gain or loss due to the fluctuation of prices is to be borne by the supplier members.
Outright purchases are not made by the factory as the price of sugarcane is paid only after its marketing. Hence, the society is entitled to exemption under Section 80P(2)(a)(iii) of the Income-tax Act. He also pointed out that the words used in Section 80P are agricultural produce grown by its members and, therefore, so long as the commodity brought to the assessee-society was agricultural produce and the produce belonged to its members, it was the agricultural produce of its members.
6. It is further urged that the appellant sugar factory is marketing sugarcane on behalf of the members, conversion of sugarcane into sugar is, therefore, covered by the marketing activity to fetch higher price to the crop of the members. The provisions of the Income-tax Act do not lay down that the agricultural produce should be sold in the same condition as it was obtained from its members. The assessee collected sugarcane from its members only with a view to give them higher price after converting the sugarcane into sugar. The learned counsel is of the view that the conversion of sugarcane into sugar is a marketing activity. The learned counsel further argued that the appellant sugar factory is only the agent on behalf of its members for converting the sugarcane into sugar. Sale of sugar therefore is the activity of marketing the agricultural produce.
7. In this regard, the learned counsel drew our attention to the decision of the Bombay High Court in the case of CIT v. H.G. Date [1971] 82 ITR 71. He pointed out that in that case, the assessee, who cultivated sugarcane on its land and converted it into jaggery for sale in the market, claimed exemption for the income received as agricultural income. On the facts of the case, the Hon'ble High Court held that there was evidence before the Tribunal to justify its finding that there was no market for the sugarcane produced by the assessee in its natural condition. Hence, the income received by the assessee from sale of jaggery was exempt from Income Tax as agricultural income. The learned counsel pointed out that if jaggery converted from sugarcane could be held as agricultural produce, there is no reason why the sugar converted from sugarcane should not be held as such.
8. The learned counsel also placed reliance on the decision of the Supreme Court in the case of Broach Distt. Co.-op. Cotton Sales, Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 418. In the said case, the assessee, a co-operative society, possessed a ginning and pressing factory to cater to the needs of its members. It got raw cotton from its members and ginned and pressed the cotton for marketing on behalf of its members. For rendering the services of ginning and pressing before selling the goods, the assessee society charged the members a certain amount by way of ginning and pressing charges. It also charged commission for the sale of the finished product. On these facts, the Hon'ble Supreme Court held that the ginning and pressing was part of the integral process of marketing. It was an activity incidental or ancillary to the marketing of the produce of its members.
The ginning and processing of raw cotton was never regarded as a distinct process. The appellant was, therefore, entitled to the exemption of the profits and gains derived from the activity of the entire business of ginning and pressing of cotton and marketing it.
9. In addition to above, the learned counsel has also placed reliance on the following decisions : (1) Shree Rajkot Lodhika Purchase & Sales Union Ltd. v. /TO [1991] 38 ITD 562 (Ahd.) (2) Addl CIT v. Ryots Agricultural Produce Co-op. Marketing Society Ltd. [1978] 115 ITR 709 (Kar.) (3) CIT v. Karjan Co-op. Cotton Sale, Ginning & Pressing Society Ltd. [1981] 129 ITR 821 (Guj.), (4) CIT v. Haryana State Co-op. Supply & Marketing Federation Ltd. [1990] 182 ITR 53 (Punj. & Har.) (5) Keshkal Co-op. Marketing Society Ltd. v. CIT [1987] 165 ITR 437 (MP).
The learned counsel concluded that the ratio of these decisions clearly establishes that sale of sugar amounts to marketing of the agricultural produce of its members and, therefore, the assessee is entitled to the deduction under Section 80P(2)(a)(iii) of the Income-tax Act.
10. On the other hand, the learned Sr. departmental representative, Shri Sunil Pathak strongly opposed the contention of the learned counsel. He took us through the definition of the 'agricultural income'. He pointed out that 'agricultural income' means income derived from the land by agriculture or the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market, or the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (a) of sub-clause. In the case of the assessee, the sugarcane was purchased by the appellant-society from the farmers, some of whom were members and others non-members. Those farmers had grown the sugarcane on the land and therefore, as far as they were concerned, the production of sugarcane was the agricultural produce from the land. They sold their agricultural produce to the appellant society and after the sale, the appellant-society became the owner of the sugarcane so purchased from the members and non-members.
If the sugarcane as such was sold, the assessee perhaps could have justified in arguing that it has marketed the agricultural produce.
However, conversion of sugarcane into sugar disentitles the assessee to make such claim. In this regard, he draws our attention to the decision of the Patha High Court in the case of In re, Bhikanpur Sugar Concern in the Distt. of Mozuffarpur 1 ITC29.In the said decision, it was held that the Bhikanpur Sugar Concern was liable to pay Income-tax in respect of the portion of its profits derived from the sale of sugar manufactured from sugarcane grown by its own servants on its own land, as such income is not agricultural income exempt from taxation under the provisions of the Income-tax Act is concerned. He also argued that the appellant society carried on the business of sugar manufacturers producing refined sugar in factory equipped with modern machinery. This process used by the appellant-society is not ordinarily employed by cultivators for the purpose of rendering the produce fit to be taken to market. He has also taken us through the commentary on Income-tax by Shuklendra who, on pages 117 & 118 has observed: Gur - Where the sugarcane grown by a cultivator has no market as such, the conversion of sugarcane into jaggery or gur would be a process ordinarily employed by a cultivator. Where, however, there is a market for sugarcane as such on account of the existence of sugar factories which purchase sugarcane for running the factories conversion of sugarcane into gur or rab cannot be termed as a process ordinarily employed by a cultivator and income from sale of gur, in these circumstances, would not be agricultural income.
Similarly, manufacture of sugar from sugarcane would not constitute a process ordinarily employed by a cultivator.
In this regard, he draws our attention to the decision of the Bombay High Court in the case of Brihan Maharashtra Sugar Syndicate Ltd. v.CIT [ 1946] 14 ITR 611. In the said decision, the Hon'ble High Court had observed: that the conclusion of the Tribunal that the process employed by the assessee was a process ordinarily employed by a cultivator was one of fact and there was evidence to support it, but as there was a market for the sale of the sugarcane before it was turned into gur, the process employed was not a process ordinarily employed by a cultivator to render the produce fit to be taken to the market and the income derived from the sale of gur was not agricultural income.
In the case of the assessee before us, there was a market for the sugarcane and, the learned Sr. departmental representative pointed out, the method employed by the assessee was not the one which is ordinarily employed by a farmer.
11. The learned Sr. departmental representative continued and argued that it is clear from Section 80P(2)(a)(iii) that only the income derived by a co-operative society from marketing of the agricultural produce of its members earns exemption. In other words, the agricultural produce marketed by the society should belong, at all points of time, to the agriculturists. In this case, the sugarcane belongs to the agriculturists, but they are not the owner of the sugar produced by the assessee cooperative sugar factory. In this regard, the learned Sr. departmental representative, placed reliance on the decision of the Andhra Pradesh High Court in the case of CIT v.Mulkanoor Co-op. Rural BankLtd [1988] 173 ITR 629. In addition to the above, the learned Sr. departmental representative also placed reliance on the decision of the Supreme Court in the case of Assam Co-op. Apex Marketing Society Ltd. v. CIT[ 1993] 201 ITR 338 and of the Madhya Pradesh High Court in CIT v. Kisan Co-op. Rice Mills Ltd [1976] 103 ITR 264. The learned departmental representative, therefore, prayed that the order of the CI.T(A) being correct on facts and in law should be upheld.12. In rejoinder, the learned counsel of the assessee took us through the decision of the Supreme Court in the case of Assam Co-op. Apex Marketing Society Ltd (supra) and pointed out that the said decision is distinguishable. Regarding the decision of the Patna High Court in Bhikanpur Sugar Concern in the Distt. of Mozuffarpur's case (supra) the learned counsel pointed out that the said decision has been considered by the Bombay High Court in H. G. Date's case (supra). The learned counsel reiterates that the assessee is marketing an agricultural produce of its members and, therefore, is entitled to the deduction under Section 80P(2)(a)(iii) of the Income-tax Act.
13. We have heard the parties to the dispute and also have carefully gone through the facts of the case. The term "agricultural produce" has not been defined in the Act and, therefore, its meaning has to be understood in the ordinary sense of the term. After hearing the parties to the dispute, we find that there has been a difference of opinion among the High Courts on the question whether the agricultural produce should be marketed in the same form in which it has been obtained from the members. Thus, where the assessee-society purchases paddy from its members and sells the same as its own property and the fluctuations in prices are suffered or gained by it and not by the members, the society can be said to be engaged in the activity of marketing agricultural produce of its members. But where the society purchased paddy from its members and sells it in a new form of rice after milling the same for and on behalf of its members and appropriate to itself the loss or profit due to the rise or fall in the prices of the commodity, a view has been taken that the income earned by the sale would not be entitled to exemption. This denial of exemption had been raised on two grounds, namely, (1) that it is only paddy and not ripe that constitutes agricultural produce, and (2) that the income is derived from marketing not agricultural produce of its members, but from a business of its own account. We are here required to examine the issue before us in the light of the conflicting opinions expressed by various Courts.
14. For the reasons which we hereinafter discuss, we are of the view that the activity of marketing of agricultural produce of its members, referred to in Section 80P(2)(a)(iii), must be confined to the direct produce from agriculture and not to anything manufactured or processed out of it. A plain reading of the section shows that the idea and intention behind the provision was to encourage basic-level societies engaged in cottage industries, in marketing the agricultural produce of their members and those engaged in purchasing and supplying agricultural implements, seeds, etc., to their members and so on. The words "agricultural produce of its members" must be understood consistent with this object. If it is not so understood, even a co-operative society comprising traders dealing in agricultural produce would become entitled to the exemption which could never have been the intention of the Parliament. Agricultural produce produced by the agriculturists can legitimately be called agricultural produce in his hands, but in the hands of traders, it would not be appropriate to call it an agricultural commodity and it would not be their agricultural produce. The assessee-society has manufactured sugar out of sugarcane purchased from members and non-members. The activity of manufacturing sugar with the help of modern machinery, in our view, would not be incidental and ancillary to marketing the agricultural produce. The manufacture of sugar out of sugarcane is, therefore, not the integral process of marketing. The assessee-society out rightly purchased the sugarcane from the members and non-members and after such purchases the sugarcane became the property of the assessee-society. After such purchase the cultivator, whether a member or non-member, ceased to be the owner of the sugarcane. The sugarcane also purchased by the assessee-society was for the purpose of manufacturing the sugar as a trader. The manufacture of sugar and its sale thereafter became the business transaction of the assessee-society. The profit arising on the sale of sugar, therefore, cannot be termed as marketing the agricultural produce so as to entitle the assessee for the deduction under Section 80P(2)(a)(iii) of the Income-tax Act.
15. The process of manufacture of sugar done by the assessee was not such which is ordinarily employed by the cultivator. As already stated, the assessee had used modern machinery to manufacture the sugar of which the cultivator, whether member or non-member, is not the owner.
16. If the sale of sugar can be termed as marketing agricultural produce by the cultivator, then the said cultivator should share the loss and profit in the proportion in which the sugarcane has been supplied by him. It is trite to mention that most of the co-operative sugar factories are in constant loss and the said loss is never passed on to the members of the society. The members or non-members of the society collect the price of the sugarcane supplied by them and thereafter they are not concerned whether the sugar factory sustains a loss or makes a profit. In such circumstances, it cannot be said that the manufacture of sugar is the commodity belonging to the farmers and the sale of that sugar amounts to marketing of agricultural produce. In other words, there is no principle of mutuality involved in the transaction.
17. While dealing with the cases of sugar factories, we generally found that in case of loss, it is not distributed amongst the members, but is allowed to be carried forward in the hands of the co-operative sugar factory only. If the assessee was a mere agent on behalf of the members or non members, it could not have sustained any loss and it could not have carried forward such loss. This would go to show that the assessee is manufacturing and selling sugar as a trader and not on behalf of the farmers.
18. It is pertinent to mention that the assessee buys the sugarcane from non-members also. We were, however, not told the quantity of sugarcane purchased from non-members. However, our attention was invited to the fact that the assessee had made purchases from non-members also. To the extent of purchases of sugarcane from non-members, and its conversion into sugar, it cannot be said that the assessee is marketing the agricultural produce on behalf of its members. The words "agricultural produce" in the section are qualified by the words which follow it, i.e., "of its members". The language used in the provision clearly indicates that the exemption covers only such income which arises out of the activities of processing or marketing of the agricultural produce of its members and not income arising out of the purchase and sale of agricultural produce from non-members.
19. In our considered opinion, the words "agricultural produce of its members" in the section meant agricultural produce produced by the members and such agricultural produce in the case before us is sugarcane and not the sugar manufactured by the appellant society. The appellant-society has marketed the sugar which, in our view, was not the agricultural produce of its members. Sugar, in other words, was not produced by its members, but it was produced by the appellant society as a trader. Since the agricultural produce marketed by the appellant was not produced by its members, the appellant-society, in our view, was not entitled to deduction under Section 80P(2)(a)(iii) of the Income-tax Act.
20. We have very carefully gone through the various judicial authorities relied upon by the learned counsel for the assessee. We find that the decisions are distinguishable. Let us take the case of Bombay High Court in the case of H.G. Date (supra). In the said case, the Tribunal found that the quality of sugarcane cultivated by the assessee was such that it could not be used for chewing. Sugarcane cannot be stored as a crop as it starts losing its sugar content within 48 hours of being cut. The Income-tax department contended that there was a sugar mill near the lands belonging to the assessee which bought sugarcane in its natural condition.
But the Tribunal found on evidence that the mill bought sugarcane mainly from cultivators from the factory area and from Government farms and had refused in the past to buy from the assessee and concluded from this that the existence of single mill would not constitute a market for the assessee's sugarcane in its natural condition. On these facts, conversion of sugarcane into jaggery was held to be income from agriculture.
21. In this connection, we can take the case of standing crops of wheat, jawar, bajra, etc. If the crop is harvested by the farmer and after thrashing wheat, jawar, bajra, etc., are obtained and sold by the said farmer in the market, it would be a case of marketing the agricultural produce. However, conversely if the standing crop of wheat, jawar, bajra, etc., is sold by the cultivator to a trader who harvests it and sells in the market for profit, such a sale will not be termed as marketing the agricultural produce. So in the case of the assessee, it cannot be said that the sale of sugar was the activity of marketing the agricultural produce.
22. The other decisions relied upon and referred to above by us have also been perused by us. In those cases the societies concerned were charging processing charges and commission, etc. The cotton ginned or processed remained the property of the farmer. Those cases are, therefore, distinguishable on facts and, therefore, the ratio laid down by the Hon'ble High Courts cannot be applied mutatis mutandis to the case before us. To sum up, therefore, we are of the view that the activity of marketing of agricultural produce of its members referred to in Section 80P(2)(a)(iii) must be confined to the direct produce from agriculture and not to anything manufactured or processed out of it. In our view, therefore, the assessee is not entitled to the deduction under Section 80P(2)(a)(iii) of the Income-tax Act, 1961.
23 to 58. [These paras are not reproduced here as they involve minor issues]