By TIOL News Service

COCHIN, AUG 27, 2016: THE issue is - Whether if toddy is tapped from coconut trees grown by members of a cooperative society and marketed for profit, such income is entitled to exemption u/s 80P. YES is the answer.

Facts of the case

A) The assessee co-operative Society engaged in marketing of agricultural produce(toddy) grown by its members had claimed deduction u/s. 80P2(a)(iii). The AO had held that in order to consider a produce to be agricultural, the various operations, such as filling of land, sowing of seeds, manuvering etc. are to be carried out and since The assessee had not carried out any such operations, the income from extraction and sale of toddy was not treated as from agricultural operations. The AO had held that toddy obtained by the assessee is not an agricultural produce and the marketing of which cannot be treated as marketing of agricultural produce and hence the claim u/s. 80P(2)(a)(iii) was denied. The CIT(A) had accepted the claim for deduction and allowed the assessee's appeals by holding that the assessee Society satisfied the requirement of sec. 80P2(a)(iii) as a Society engaged in marketing of agricultural produce grown by its members.

B) The assessee - Society which is engaged in marketing of Toddy tapped by the members of the Society which is claimed to be an agricultural produce has filed the returns of income for the A/ Ys 2008-09 to 2011-12 claiming deduction u/s. 80P(2)(a)(iii) for the income derived from the sale of toddy. The assessee claimed the main objective of the assessee -Society is to conduct toddy shops under the license obtained from the State Excise Department. It acquires the right to tap toddy from the coconut trees belonging to its members. The members of the Society are toddy tappers and do tapping work. The assessee is governed by the Kerala State Co-operative Societies Act and Rules. Accordingly, the assessee claimed that its income is eligible for deduction u/s. 80P(2) (a)(iii) since the Society is engaged in marketing of agricultural produce grown by its members. The AO had rejected assesses claim. Since out of the total toddy marketed by the assessee , 89%, 80%, 89% and 89% respectively for the A/ Ys 2008-09 to 2011-12 is tapped from coconut trees grown by the members on their own land, the CIT(A) directed the AO to allow deduction of 89%, 80%, 89% and 89% out of the total deduction claimed u/s 80P(2)(a)(iii) by the assessee respectively for the A/Ys 2008-09, 2009-10 2010-11 and 2011-12.

Having heard the parties, the Tribunal held that,

++ section 80P(2)(a)(iii) was retrospectively amended from 1st April, 1968 by IT Second Amendment Act, 1998 with a view to restrict the exemption to the profits and gains derived from the marketing of"agricultural produce grown by its members". The validity of the aforesaid amendment was upheld by the Apex Court in National Agricultural Co-operative Marketing Federation of India Ltd. and Another vs. Union of India and Others.The Apex Court while considering the reasons for amendment referred to clause (6) of the statement of objects and reasons and the intention behind amending the provision by the words"of its members" by the words"grown by its members". According to the statement of objects and reasons, the amendment was necessitated in order to restrict the deduction to the profits derived by a Co-operative society engaged in the marketing of agricultural produce grown by its members. T he Toddy is tapped from coconut trees grown by the members. According to the certificate issued by the Kerala Agricultural University , "toddy is a naturally fermented coconut palm sap and is an agricultural produce". Going by the object of section 80P(2)(a)(iii), profits of the Co-operative Society engaged in the marketing of agricultural produce which is grown by the members of the Society is exempted. It is necessary to take into account, the source from which toddy is produced. Toddy is tapped from the tree and trees are grown by the members. Such toddy is to be marketed, for which the Society is formed. As such, the income of the Society from marketing of toddy as in the present case, is eligible for exemption/deduction u/s. 80P(2)(a)(iii);

++ the provisions contained in sec. 80P(2)(a)(iii) came to be interpreted by different High Courts with reference to different kinds of agricultural produce, before and after the amendment of Sec. 80P by the Income Tax 2nd Amendment Act, 1998. While the exemption as per Cl . 80P(2)(a)(iii) was with respect to the profits and gains derived from marketing of agricultural produce of the members of the Society, before the aforesaid amendment, marketing of agricultural produce of its members was stipulated as the condition for granting exemption. After the amendment of 1998, the marketing activity was restricted to agricultural produce grown by its members. In other words, agricultural produce must be grown by members of the Society. Before the amendment, the emphasize was on the words ‘produce of its members'. The process necessary for marketing of agricultural produce was permissible. the High Court of Gujarat in CIT vs. Karjan Co-operative Cotton Sale Ginning & Pressing Society Ltd, held that a Cooperative Society engaged in ginning and pressing of cotton received from individual members and Society members and selling the same was held to be eligible for exemption u/s. 80P(2)(a)(iii) before the amendment of 1998. In CIT vs Haryana State Co-operative Supply & Marketing Federation Ltd., it was held that the only condition for claiming exemption u/s 80P(2)(a)(iii) was that the income should be derived from marketing of agricultural produce which should be owned by the members;

++ in Meenachil Rubber Marketing & Processing Co-operative Society, the High Court of Kerala has held that the object of the exemption u/s. 80P(2)(a)(iii) should be taken into account while deciding the claim for exemption u/s. 80P(2)(a)(iii). If a Co-operative Society earns income from the marketing of agricultural produce of its members, then the profits and gains of business attributable to that marketing activity, would be available as a deduction u/s. 80P(2)(a)(iii). The principles governing the claim for exemption u/s. 80P(2)(a)(iii) with reference to the provision as it stood before and after the amendments referred to herein would support the claim of the assessee for exemption u/s. 80P(2)(a)(iii) for the income derived from marketing of toddy, which is produced by its members by tapping coconut trees grown by them. The Tribunal have already held that the toddy is an agricultural produce obtained from coconut tree. Accordingly, the appeals filed by the revenue against the assessments for A/ Ys 2008-09, 2009-10 and 2011-12 are dismissed by confirming the order of the CIT(A). The appeal filed by the assessee for the A/Y 2010-11 against the order of the CIT(A) for the A/Y 2010-11 is allowed in favour of the assessee by reversing the order of the CIT(A).

(See 2016-TIOL-1550-ITAT-COCHIN)