TMI Blog2006 (11) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... s marketing activities. If that is the right conclusion, which we think so, the additional amount received by the assessee over and above price paid by him is his gross profit. He is allowed to retain the difference between the purchase price and sale price not by way of commission but as his own surplus. It is misnomer to call it commission received from the Government. He receives nothing from the Government. Whatever he receives from the retailer are his business receipts and is received on account of sale of the essential commodities and not for use of his godown or for any services rendered to facilitate marketing of that commodity. The respondent co-operative society was storing its own trading stocks in its godowns, whether owned by him or acquired on hire for the purpose of safe custody of its stock-in-trade. No commission could be received by him for storing the essential commodities as part of its own stock-in-trade at its godown. He could not render service to himself to refer any part of receipts to letting out godown for storage or for use or lending incidental services to facilitate marketing of the commodities for someone else. The Bombay High Court in CIT v. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under section 80P(2)(e) of the Act ? 2. The respondent assessee is a co-operative society and engaged in running a consumer co-operative store and having 30 branches in the city of Udaipur itself. It is dealing in non-controlled commodities as well as in controlled commodities. In the present case, we are concerned with the amount included in the computation of taxable income arising from commission earned by the assessee-society as wholesale dealer of the controlled commodities, viz., wheat, rice and sugar. The commodities in question were declared as essential commodities and became part of regulated trade through public distribution system in terms of orders issued by the appropriate Government under the Essential Commodities Act. 3. The assessee has its own godowns as well as hired godowns for the purpose of his business including dealing in the essential commodities. The food grains, wheat and rice, are included in Schedule I of the Rajasthan Food Grains and Other Essential Articles (Regulation of Distribution) Order, 1976, and the other commodity, viz., sugar is also included in Schedule II to the said order. 4. The assessee held the licence of authorized who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee for facilitating the marketing, processing and distribution of the essential commodities for the public. Therefore, the entire commission must be considered as income of society from letting out godowns or warehouses for the purpose of storage of the essential commodities in question for facilitating the public distribution of such essential commodities by the State Government. 7. Buttressing the contention, it was urged on behalf of the assessee that the stocks of the essential commodities which were supplied to the assessee by the Food Corporation of India was only as its agent for carrying it to the public distribution system had remained throughout the property of the Food Corporation of India/State and whatever was allowed to be retained by the assessee was only for the purpose of storing of such essential commodities during transition period and providing incidental services of transportation to retailer for its distribution to the consumer at the fixed price as determined from time to time by the competent authority under the Order of 1976 and other relevant orders. In support of this contention, reliance was placed on the decision of the Bombay High Court in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld properly be the gross profit of such transaction and nothing else. In this connection, storage of the essential commodities by the assessee from the date of receipt of supplies to the date of disposal was not as a recipient of the commodities for the storage on behalf of the State but as a part of its own stock-in-trade. Merely because the stock-in-trade is in storage at a godown, which is integral feature of any trading activity in the commodities, the assessee cannot be said to be rendering services of leasing out godown/warehouses for storing of essential commodities and receiving consideration for leasing one godown on rent or for use for incidental activities. 10. That being the case, the nature of income embedded in the price at which the assessee was required to sell the essential commodities to the retailer was not a remuneration received from the lessee for use of godown for the purpose of storing and facilitating marketing of that commodities. 11. Learned counsel for the appellant places reliance on the decision of the Karnataka High Court in Udupi Taluk Agrl. Produce Co-op. Marketing Society Ltd. v. CIT [1987] 166 ITR 365. 12. In that case, the Tribunal recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the co-operative credit societies which provide financial assist ance to the society ; (3) the State Government ; (b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be ; or (ii) the Government or a local authority ; or (iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public), the whole of the amount of profits and gains of such business ; (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed, (i) where such co-operative society is a consumers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of other co-operative societies, which do not fall within the purview of clauses (a) and (b) of sub-section (2) of section 80P becomes taxable. The limit during the relevant period up to which any co-operative society would not become taxable was Rs.20,000, and thereafter it has been enhanced to Rs. 1,00,000. 17. It is significant to notice the Explanation to clause (e) of sub-section (2) of section 80(P), which defines, the consumer co-operative society. While clauses (a) (b) and (c) deal with the case of the co-operative society for the purpose of granting certain tax exemption in respect of the total income, clauses (d), (e) and (f) of section 80P(2) deal with the types of income earned by such co-operative society to be deducted from its total income for the purpose of computing its taxable income. Clause (d) deals with income derived by way of interest and clause (e) deals with the income derived by the co-operative society from letting out the godowns or ware- houses and clause (f) deals with the income earned as interest on securities or income from use of warehouse in respect of specific co-operative society whose gross total income comes to Rs. 20,000. 18. It is with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-operative society would have been deductible. 21. Without keeping stocks, wherever stored, the trading activity by a trader cannot be conceived. Use of different phraseology for facilitating the marketing of commodities under clause (e) can only mean storage of the commodities either for the purpose of processing of the commodities stored therein making them marketable or for providing such other services before its marketing. But where any commodity is stored there only as traders stock-in-trade , whether in godowns or warehouses owned by it or at such premises hired by it, It cannot be considered as activity of storage for facilitating and marketing. In other words, the activity for which remuneration is charged by the assessee-co-operative society for use of the warehouses and godowns is for the user, which must relate to a period anterior to its coming to marketable stage. Wholesaler as well as retailer both are traders engaged in sale and purchase of the commodities in which they trade. 22. Taking any other view will mean that every wholesaler who passes on commodities to a retailer, before the commodities reach the end consumer, will only be treated as provider of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me in respect of the commodities in question. 27. The preface of the Order of 1976 says that this is necessary so to do for maintaining supplies of the foodgrains in essential commodities and securing its equitable distribution and availability of fair price shops . 28. With this aim in view, if we look at sub clause (c) of clause 2 of the Order defining authorized fair price shop keeper it means a retail dealer, in charge of a shop, authorised under clause 3 and it includes a person in charge of the shop where foodgrains and other essential articles are sold under the control of the State Government. This definition shows that the distribution of the essential commodities may be directly by the State Government through a shop maintained under its control or it may be done through a private retailer/dealer who is duly authorized to sell such essential commodities under clause 3. 29. Similarly authorized wholesaler is defined in sub-clause (f) of clause 2 to mean a person, a firm, an association of persons or a co-operative society or any other institution authorised or appointed as an agent under clause 3 of this Order by the State Government or the Collector. 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly so as to make control over the trade of the essential commodities, namely, food grains or other articles, within the effective control of the State Government. 36. The purpose for which the order was made was that there may be equitable distribution of the essential commodities, which may otherwise be in short supply, at fair price shops. It aims on controlling the distribution of the short supply of the essential commodities by keeping a control on the quantity of the stocks that can be held by the individual or the wholesaler on the one hand to keep a check on hoarding and on the other hand selling commodities at all levels at a price fixed by the State Government controlling the margin of profit of middleman trading in the essential commodities within the specific limits. The object of the order is to maintain the continued supply of the essential commodities in equitable manner and to limit the profit margins in the essential commodities trade and vouch against creating supply scarcity by unethical hoarding of essential commodities. However, all these conditions do not disclose any intention on the part of the legislation, primary or delegated, to exclude the trading in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the Food Corporation of India to the authorised holder on payment of sales consideration which is an essential ingredients of activity of sale. The passing of the property in the goods to the buyer is essential ingredient of sale of goods to attract sales tax. 40. Without the transaction being a sale, charging of sales tax cannot be permitted on principle enunciated by the Supreme Court in a catena of decisions. It is well established that before levy of sales tax, it must fulfil all ingredients essential for constituently a transaction to be a sale under the Sale of Goods Act. One of the essential ingredients of the sale is that property in goods must pass on to the buyer for consideration fixed under the agreement. The contention that any regulated commodity excludes the voluntary nature of transaction of the assessee to be considered as sale, was negatived. 41. In this connection, we may refer to the earliest decision of the Supreme Court in Sales Tax Officer v. Budh Prakash Jai Prakash 5 STC 193 (SC) ; AIR 1954 SC 459, which arose under the U.P. Sales tax Act, 1948. In this case the question had arisen about levy of tax by the assessing authority in respect of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court referring to the settled principle that subject of tax is a contract of sale of goods, held that so long as mutual consent is not totally excluded in any dealing in law it is a contract. 45. The court approved the opinion of hon'ble Hidayatulla J., as his Lordships then was, who delivered a dissenting opinion in New India Sugar Mills Ltd. v. CST 14 STC 316 (SC) ; AIR 1963 SC 1207, and quoted with approval the following : though it was true that consent makes a contract of sale, such consent 'may be express or implied' and it cannot be said that unless the offer and acceptance are there in an elementary form, there can be no taxable sale. The court further said that the learned judge thus summed up pithily so long as the parties trade under the controls at fixed price and accept these as any other law of the realm because they must, the contract is at the fixed price both sides having or deemed to have agreed to such a price. Consent under the law of contract need not be expressed, it can be implied. 46. In Madhya Pradesh Ration Vikreta Sangh Society v. State of M. P., AIR 1981 SC 2001, the contention was raised before the Supreme Court in a slightly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Collector under clause 3 of the Control Order, is essentially a matter of policy with which the court is not concerned. However, by the expression co-operative societies , and if by mistake there was a wrong allotment made to a cooperative society which was not a consumers' co-operative society , the Government would take steps to cancel the allotment. In other words, in respect of the essential commodities the order issued by the M. P. Food- stuffs (Distribution) Control Order did not exclude the element of trading by the authorisation issued in favour of any person under the Control Order. 49. Thus, the apex court affirmed the position of licence holders under the Food Stuff Control Order as a traders and not mere stockholders on behalf of the State. 50. A five-judge Bench of the Calcutta High Court in Ghasiram Agarwalla v. State, AIR 1967 Cal 568, considered the question whether the property in stock of wheat received by the appellant under agreement pass in him, and if so when. It also considered whether authorisation resulting in 'Agreement for the distribution of the wheat through fair price shops' had agreed to sell wheat during shop-hours to consumer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which include fixed profit on his purchase price plus transportation charges as per scale. By a parity of reason the conclusion is discernible that the authorised holder is not an agent of the Government to hold stocks on behalf of the Government at its godowns but he is a trader who receives commodities under a transaction of sale and purchase, on payment of price and property in goods passes on to him. He holds goods on his own behalf as his stock-in-trade. 57. As a part of its business activity of trading in the consumer goods like any other businessmen the assessee had to store or keep stocks whether of controlled or non-controlled commodities. The assessee was also to maintain storage for his trading stocks. Since the trading in essential commodities became regulated as per orders issued under the Essential Commodities Act, the quantity of stock of essential commodity concerned which could be kept at a time was fixed through orders issued by the competent authority. So also place of keeping stocks was also required to be disclosed in authorisation. 58. At this stage we may also notice gamut of price fixation regulated under the orders issued by the competent authority fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of which supplies of the essential commodities as authorised wholesaler on payment of price reaches him, the property in goods passes on to the authorised holder as under a completed sale and thereafter subsequent transactions by the assessee in the ordinary course are his marketing activities. If that is the right conclusion, which we think so, the additional amount received by the assessee over and above price paid by him is his gross profit. He is allowed to retain the difference between the purchase price and sale price not by way of commission but as his own surplus. It is misnomer to call it commission received from the Government. He receives nothing from the Government. Whatever he receives from the retailer are his business receipts and is received on account of sale of the essential commodities and not for use of his godown or for any services rendered to facilitate marketing of that commodity. The respondent co-operative society was storing its own trading stocks in its godowns, whether owned by him or acquired on hire for the purpose of safe custody of its stock-in-trade. No commission could be received by him for storing the essential commodities as part of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods at godowns no exemption is permissible. The court said that the term facilitating marketing of commodities as used in section 10(29) excludes an activity done by the assessee for its own benefit, because it refers to income from letting of godowns or warehouses for purposes, inter alia, of facilitating the marketing of commodities. Obviously, if the owner of the warehouse does the activity for facilitating for his own benefit, he will not get any income from letting of the warehouse. In the last clause, the term marketing clearly excludes the idea of an activity done for one\qs own self. The word marketing has been used in the wider sense to include the various activities which generally go to form the trade of marketing. It was stated (page 134) : The expression 'for facilitating the marketing of commodities' cannot possibly refer to the functions of buyers and selling on one's own behalf because when a person buys or sells ; he, according to the definition propounded by the Revenue indulges in marketing. He cannot be said to facilitate marketing. The use of the word 'facilitating' seems to refer to functions like gradation or standardisation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 117 (SC) it was contended that payment of the price of the commodities received by the assessee and subsequently receipt of the price from the authorised retailer was only a part of facilitating the trade of public distribution system. In other words, it was for facilitating the marketing of essential commodities so as to reach the public at large. 74. The facts noticed by the Supreme Court in the aforesaid decision reveals that it was a case of co-operative society, which had entered into an agreement with the State Government during the previous year ending on June 30, 1960, relevant to the assessment year 1961-62, whereby the assessee agreed to hold a stock of ammonium sulphate belonging to, and on behalf of, the State Government, and to store it in godowns which, admittedly, belonged to the assessee. Under the agreement, the assessee was required further to take all necessary steps to enable such stocking and storage of the fertiliser, including taking delivery of the stock at the rail-head and transporting it to the godown. For this reason, the entire amount received by the respondent co-operative society was held to be entitled to exemption under section 14(3)(iv) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80P(2)(e). The Appellate Assistant Commissioner and the Tribunal allowed the full deduction applying the ratio of the decision of the Madras High Court in the case of CIT v. South Arcot District Co-operative Marketing Society Ltd. [1973] 92 ITR 371. 79. On a reference, the High Court held that the entire income received by the assessee-society under the fertilizer agreement fell within the ambit of section 80P(2)(e). 80. The court said (page 129 of 212 ITR) : It relates to wholesale distribution of fertilisers under the Fertiliser (Control) Order, 1957, and the Inorganic Fertiliser (Movement and Control) Order, 1960. The assessee was to hold the stocks, store the goods in godowns, preserve them, maintain accounts and sell the goods as per directions of the Government. For all this it was to get commission at varying rates ranging between Rs. 35 and Rs. 50 per tonne of goods actually sold. It is thus apparent that there is no difference whatsoever between the essential nature of this agreement and the essential nature of the agreement considered in the case of CIT v. South Arcot Dist. Co-op. Marketing Society Ltd. [1989] 176 ITR 117 (SC). The ratio of that decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from the letting of godowns. The assessee also did not dispute the obvious position that the entire income from commission of Rs.4.80 per quintal was not entitled to exemption under section 80P(2)(e). 84. In these circumstances, the Bombay High Court came to the conclusion that the entire amount received by the assessee under different heads was not to be excluded from taxable income but only what was properly referable to the letting of godown and for facilitating marketing of the commodities could be deducted and for that matter was restored to the Tribunal for determining the receipts for different and specific purpose were to be computed while reserving the exclusive trading rights. Thus, the paddy contract also did not result in passing of property in the goods to the assessee. Yet the deduction was restricted to income properly referable to section 80P(2)(e). That being the position, the Bombay High Court decision is based on its own facts and is distinguishable. 85. As a result of the aforesaid discussion, we are of the opinion that since the assessee was storing the commodities in question in godown as a part of its own trading stock, it being trader in the essen ..... 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