IT - Sec 80P(2)(e) - cooperative society - assessee stores controlled and uncontrolled goods in godowns - treats stock as trading stock - Commission income not eligible for exemption; For claiming exemption, onus lies on assessee: Supreme Court

By TIOL News Service

NEW DELHI, JULY 20, 2009: TO give a boost to the cooperative movement in the country, Cooperative Societies have always been exempted from the income tax. However, the exemption is conditional and certainly not blanket in its effect. Only that income which is earned from storage, warehousing and facilitation of marketable commodities is exempted. And the relevant Section is Sec 80P(2)(e) of the 1961 Act. Its predecessor Section under the I-T Act, 1922 is Section 14(3)(iv) of the 1922 Act. However, storage of goods as part of trading activities is not exempted and this is what has been confirmed by the Apex Court in the instant decision. Setting at rest controversies the Bench has held that since the assessee was storing the controlled and non-controlled commodities in its own and rented godowns as part of its own trading stock, it is not entitled to claim deduction of 'commission' earned u/s 80P(2)(e).

The Bench has held that 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 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.

The Apex Court further notes that,

++ there is no straight jacket formula to decide such cases. 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 instant case what is involved are statutory or compulsory sales. Each contract has to be interpreted on its own terms.

++ In this case 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. And then the 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.

++ The netting/difference also indicated that the appellant had treated the stock as its own trading stock as correctly held by the HC judgment.

Therefore, the Bench held that the appellant is not entitled to exemption/special deduction under Section 80P(2)(e) of the 1961 Act.

Facts of the case

Appellant-society is a co-operative society registered under Rajasthan Co-operative Societies Act, 1965. Appellant is running a consumer co-operative 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. 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 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.

On 31.8.1990, appellant filed its returns for assessment year 1989-90 claiming deduction under Section 80P(2)(e) of the 1961 Act 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.

However, the AO disallows the deduction by treating it as income from trading activities. But CIT(A) and Tribunal agree with the assessee. Thus the matter went to the High Court which ruled in favour of the Revenue and the same has now been upheld by the Supreme Court.

(See 2009-TIOL-85-SC-IT in 'Income Tax')