Holding

Ginning and pressing of cotton is an ancillary activity integral to marketing and therefore falls within the exemption of Section 81(i)(c) of the Income‑Tax Act, 1961.

Summary

The Cotton Sales Co-operative Society, a cooperative engaged in ginning, pressing and marketing of raw cotton supplied by its members, claimed exemption of the receipts from these activities under Section 81(i)(c) of the Income‑Tax Act, 1961 (as it stood before the 1968 amendment). The Assessing Officer rejected the claim on the ground that the ginning and pressing were carried out with the aid of power, and the High Court upheld that view, holding that the proviso to Section 81(i) excluded the activity. The Supreme Court held that ginning and pressing is an integral, ancillary part of the marketing process, falls within the meaning of "marketing" in clause (c), and therefore the proviso does not apply. Consequently, the entire business of ginning, pressing and marketing is exempt under Section 81(i)(c). The Court allowed the appeals and awarded costs to the appellant.

Issues considered

Whether income from the ginning and pressing activities of a co‑operative society is exempt under Section 81(i)(c) of the Income‑Tax Act, 1961 (pre‑1968 amendment).
Whether the proviso to Section 81(i) excludes such activities because they are carried out with the aid of power and are not part of marketing.

Legislation cited

Income Tax Act, 1961s. 81(i), s. 81(i)(c)

Subjects

Income taxCo‑operative societySection 81 exemptionGinning and pressingMarketing of agricultural produceAncillary activityProviso

Judgment

A BROACH DISTI. CO-OPERATIVE COTION SALES
GINNING & PRESSING SOCIETY L'IJ).
v.
COMMISSIONER OF INCOME TAX, AHMEDABAD.

APRIL 26, 1989

[R.S. PATHAK CJ. AND M.H. KANIA, J.)
~ •
Income Tax Act, 1961: Section 81(i)(c)-Assessee-Co-opera-
tive Society-Income from ginning and pressing-Whether exempt from
tax.
..
c
The assessee, a co-operative _society, was rendering the service of
ginning and pressing raw cotton received from its members and
marketing the finished product on their behalf. The assessee charged
the members a certain amount6y way of ginning and pressing charges
ana further charged commission for the sale of the finished product.
D
For the assessment years 1961-62 to 1963-64, the assessee claimed that
the receipts from the ginning and pressing activities were exempt under
section 81(i)(c) of the Income Tax Act, 1961 (as it stood then) which
provided that income-tax shall not be payable by a co-operative society
in respect of the profits and gains of business carried on by it, if it was a
society engaged in the marketing of the agricultural produce of its
E
members.

The Income Tax Officer declined to accept the claim on the
ground that the assessee had been carrying out the process of ginning
and pressing with the aid of power. The Appellate Assistant Commis-
sioner confirmed the orders of the Income Tax OffiCilr. The Appellate
F
Tribunal allowed the second appeal of the assessee holding that the
ginning and pressing activities were to be regarded as an integral part
of the marketing activity. The High Court, while deciding the reference
in favour of the Revenue, observed that the assessee carried on ginning
and pressing of cotton with the aid of power, and even if those activities
were regarded as ancillary or incident.ii to its market!ng:actjvIT1;·they
G would not' come Within the category of exempted activities in view of the
proviso to the section.

Allowing the appeals, this Court,

H HELD: (1) Ginning and pressing was part of the integral process
of marketing. It was an activity incidental or ancillary to marketing,

720
COITON SALES SOCIETY ·v. C.I.T. 721

which included the ginning and pressing of raw cotton and was not A
confined to selling activity alone. The members did not take back the
cotton after it was ginned and pressed. All the raw cotton so treated was
marketed by the assessee on behalf of its members to the outside world
and not to its members. [723G-H; 724A]

Addi. Commissioner of Income-Tax, Karnataka v. Ryots B
Agricultural Produce Co-operative Society Ltd., [1978] 115 ITR 709;
Commissioner of Income-Tax, Gujarat IV v. Karjan Co-op. Cotton

- Sale, Ginning & Pressing Society Ltd., [1981] 129 ITR 821, referred to.

(2) The object of s. 8l(i) of the Income Tax Act, 1961 was to
encourage and promote the growth of co-operative societies, and conse-
quently a liberal construction must be given to the operation of that C
provision. [724A-B]

(3) The proviso to s. 81(i)operates to exclude from the exemption
those activities which can be regarded as separate and distinct from the
activities enumerated in cla~es (a) to (I) of s. 8l(i). If the activity in D
question is incidental or ancillary to one of the activities mentioned in
those clauses, the proviso will not apply. [724B]

(4) The assessee is 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 by virtue of cl. (c) of s. 81(i) of the Income- E
tax Act, and the High Court erred in holding to the contrary. [724F-GI
•
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 513-
515 (NT) of 1975.
y
From the Judgment and Order dated 24.9.1973 of the Gujarat F
High Court in Income Tax Reference· No. 31of1971.

T.A. Ramachandran, Mrs. A.K. Verma and D.N. Mishra for the·
Appellant.

C.M. Lodha, K.C. Dua and Ms. A. Subhashini for the Res- G
pondent.

lbe Judgment of the Court was delivered by

PATHAK, <;J. These appeals by certificate_ granted _by th,e. High
Court of Gujarat are directed against the judgment of the Hi_gh Court H
722 SUPREME COURT REPORTS (1989] 2 S.C.R.

answering the following question in favour of the Revenue and against
A the assessee:

"Whether, on the facts and in the circumstances of the
case, the income q,f'the Society from ginning and pressing
was exempt under section 81(i)(c) of the Income-Tax Act,
B 1961, as it .stood prior to its amendment on 1st April,
1968?" '

The assessee is a co-operative society constituted under the Co-
operative Societies Act. The objects of the society intend that it should ..
press cotton and pac~ the bundles for its individual members as well as
other customers, to i\se its machinery for any useful work of its
C members, and to se11 raw cotton, cotton seeds and other agricultural
products. The assessee possesses a ginning and pressing factory to -~ -
cater to the needs :of its members. It gets raw cotton from the mem-
bers, and ginns and presses the cotton for f!!arketing on behalf of its
members. For rendering the services of ginning and pressing before
D selling the goods, the assessee charges the members a certain amount
by way of ginning and pressing charges. It also charges commission for
the sale of the finished product.

In the course of assessment for the assessment years 1961-62 to
1963-64, the assessee claimed that the receipts from the ginning and
E pressing activities were exempt under s. 81(i)(c) of the Income Tax (as
it stood then). The Income-Tax Officer, however, declined to accept
the claim on the ground that the assessee had been carrying out the
process of ginning and pressing with the aid of power. The Appellate
Assistant Commissioner confirmed orders of the Income Tax Officer.
In second appeal the Income Tax Appellate Tribunal held that having
F regard to the circumstance that the receipts were from members only,
that there was a general market for ginning and pressing cotton only
and no evidence appeared of any dealing in raw cotton, the ginning
and pressing activities were to be regarded as an integral part of the
marketing activity, and therefore the receipts from those activities
were not liable to tax by virtue of s. 81(i)(c). At the instance of the
G Revenue the Appellate Tribunal referred the ·question of law set out
earlier to the High Court of Gujarat for its opinion.

For the purpose of conterition raised before the Higl\ Court, and
~

again before us the following provisions of s. 81 seem rel,evant:

H "81. Income of Co-operative societies I11come-tax shall
COITON SALES SOCIETY v. C.I.T. [PATHAK, CJ] 723

not be payable by a co-operative society-
A
(i) in respect of the profits and gains of business car-
ried on by it, if it is-
(a)

(b) B

(c) a society engaged in the marketing of the agricul-

-- tural produce of its members; or
(d) ....

(e) a society engaged in the processing without the C
-)' aid of power of the agricultural produce of its
members;or

• (f)

Provided that, in the case of a co-operative D
,,,,,..
society which is also engaged in activities other
than those mentioned in this clause, nothing con-
tained hetein shall apply to that part of its profits
'~ and gains as is attributable to such activities and
as exceeds fifteen thousands.rupees."
E

- The High Court proceeded on the view that if a Society carries
on certain activities which are exempted activities according to els. (a)
to (f) of s. 81(i) and certain other activities which are not exempted,
__ the profits and gains attributable to such non-exempted activities
must necessarily be taxed. The High Court observed that the assessee
carried on ginning and pressing of cotton with the aid of power, and F
even if those activities are regarded as ancillary or incidental to its
marketing activity they would not coine within the category of exemp-
ted activities in view of the proviso, and therefore they would have to
be taxed. We find ourselves unable to accept the view taken by the
High Court. It is apparent that the ginning_ and pressing was part of the
integral process of marketing. It was an activity incidental or ancillary G
to the marketing of the produce of its members. The ginning and
pressing of the raw cotton was never regarded as a distinct process.
When they delivered the raw cotton to the assessee for marketing,
ginning and pressing was regarded as part of that process. The mem-
bers did not take back the cotton after it was ginned and pressed. They
paid only the costs of ginning and pressing. All the raw cotton so H
724 SUPREME COURT REPORTS [1989] 2 S.C.R.

A treated by the assessee was received from its members, and it was only
such· cotton of its members which was marketed by the assessee. The
sale of the cotton was effected by the assessee to the outside world and
not to its members. The object of s. Sl(i). was to encourage and pro-
mote the growth of cooperative societies, and consequently a liberal
construction must be given to the operation of that provision. The
B proviso to s. Sl(i) operates to exclude from the exemption those \
activities which can be regarded as separate and distinct from the
activities enumerated in clauses (a) to (f} of s. 81(i). If the activity in ii,
question is incidental or ancillary to one of the activities mentioned in
those clauses, the proviso, in our opinion, will not apply. We may refer
in this connection to the observations of the Kamataka High Court in
Addi. Commissioner of Income-Tax, Karnataka v. Ryots Agricultural
c Produce Co-operative Marketing Society Ltd., [1978] 115 ITR 709
where reference has been made to the broad meaning of the expres-
sion 'marketing' appearing in cl. (c) of s. 81(i), and it has been
explained that in order to make agricultural produce fit for marketing
the activities involved in enabling that to be done must be regarded as
D involved in the activity of marketing itself. Reference may also be
made ·to Commissioner of Income-tax, Gujarat IV v. Karjan Co-op.
Cotton Sale, Ginning & Pressing Society Ltd., [1981] 129 ITR 821
where the concept of 'marketing' was given a meaning which included
the ginning and pressing of raw cotton and was not confined to the >--·
selling activity alone.
E
An attempt was made by learned counsel for the Revenue to
raise the point that ginning and pressing into cotton bales changed the
character of the cotton and therefore, what was marketed was not the
-
agricultural produce of the members of the assessee. This point was
not raised at any earlier stage by the Revenue and cannot be permitted
F to be taken now.

We are of opinion that the assessee is 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 by virtue of cl. (c) of
--
s. 8l(i) of the Income-tax Act, and that the High Court erred in hold-
G ing to the contrary.

In the result the appeals are allowed and the question referred by
the Income-tax Appellate Tribunal to the High Court must be
answered in the affirmative, in favour of the assessee and against the
Revenue. The assessee is entitled to its costs.
H
R.S.S. Appeals allowed.