TMI Blog2003 (3) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... e members and thereafter manufacturing sugar and other by-products, which were different from sugarcane purchased from the members. The assessee claimed that its activities of manufacturing sugar and other by-products from the sugarcane amounted to marketing of agricultural produce of the members, and, therefore, the case was covered under s. 80P(2)(a)(iii). The AO considered the claim of the assessee and held that the activity of the assessee was not one of the marketing of agricultural produce of its members rather the assessee was engaged in the processing of sugarcane and manufacturing sugar and other by-products. The end product manufactured by the assessee was not the same as agricultural produce of the members and, therefore, the assessee was not eligible for deduction under s. 80P(2)(a)(iii). The various judgments relied upon by the assessee were also distinguished by the AO. Thus, the AO disallowed the claim of the assessee. 3. Aggrieved, the assessee impugned the disallowance in appeal before the CIT(A). The assessee raised various contentions before the CIT(A) and also submitted the process-flow chart of the various activities undertaken by the assessee right from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubjected to ginning and baling before being sold and the income came in the form of charges levied on the members as well as commission on sale of such cotton. In the present case the facts were entirely different. Sugarcane was being purchased outright from the members, converted into sugar and other by-products and the said by-products and sugar were being sold at the prevailing market price. Moreover, an attempt had also been made in the case before the Supreme Court to state that the ginning and pressing of cotton bales changed the character of cotton and, therefore, what was marketed was not the agricultural produce of the members of the assessee. This point was not permitted to be raised as it was stated that the Revenue should have raised it at an earlier stage. However, in the issue before me this point has been raised right from the start that the activities carried out by the appellant have changed the entire character of the agricultural produce. 5.3 The learned counsel for the appellant also stated before me that it was not possible to market sugarcane in any other manner than the one carried out by the appellant. This is entirely incorrect as even the learned AO had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. Relying on the judgment of Hon'ble Supreme Court in the case of Kerala State Co-operative Marketing Fed. Ltd. vs. CIT (1998) 147 CTR (SC) 29 : (1998) 231 ITR 814 (SC), learned counsel submitted that term 'marketing' includes search, transportation, processing and other commercial activities. Thereafter, he drew our attention to the process-flow chart placed at p. 8 of the paper book. He submitted that the assessee is purchasing sugarcane from its members. Thereafter, the assessee carries on various manufacturing operations resulting in end-product of sugar and molasses, etc. He submitted that the end-product of sugar and molasses realised by the assessee remains an agricultural produce and the various operations carried on by the assessee, are only to make sugarcane marketable. Therefore, he submitted that the case of the assessee is squarely covered by the provisions of s. 80P(2)(a)(iii). Drawing our attention to the judgment of jurisdictional High Court in the case of Karnal Co-operative Sugar Mills Ltd. vs. CIT, learned counsel submitted that the facts of the case are distinguishable from the facts of the present case. He submitted that in the case before the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcane from the members and then processing the same and manufacturing sugar and other by-products. Sec. 80P(2)(a)(iii) provides deduction in respect of income of co-operative society engaged in the business of marketing of agricultural produce grown by its members. Now, the question is whether the sugar and other by-products manufactured by the assessee are the agricultural produce grown by the members though the end-products being manufactured by the assessee are out of the agricultural produce grown by the members. This issue came up before the Hon'ble Punjab and Haryana High Court in the case of Karnal Co-operative Sugar Mills Ltd. vs. CIT where apart from taking the view that processing done by the assessee with the aid of power was not eligible for deduction under sub-cl. (v) of s. 80P(2)(a), Hon'ble High Court further held that the assessee manufactured and sold sugar which does not belong to the members. Sugar had not been described as an agricultural produce in the Act and, therefore, it cannot be said that the assessee was marketing agricultural produce grown by the members. The assessee was not held to be entitled to benefit of deduction under s. 80P(2)(a)(iii). This judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the hands of the ultimate consumer'. It has been further observed that 'in order to make agricultural produce fit for marketing, it may have to be transported or processed, but all the activities involved are understood as amounting to a single activity, namely, marketing, and not independent activities such as transporting, processing, selling, etc. The marketing functions may involve exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market intelligence, etc.' Learned counsel has further relied on the decision in (1998) 147 CTR (SC) 29 : (1998) 231 ITR 814 (SC), wherein the meaning given to the expression 'marketing' in (1978) 115 ITR 709 (Kar) has been reiterated. It has been observed that s. 80P was introduced with a view to encouraging and promoting the growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. It is observed that the main question before the apex Court was interpretation of the words 'produce of its members' as used in sub-cl. (iii) before its amendment in 1999 w.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the decision in (1978) 115 ITR 709 (Kar). It also referred to the decisions in CIT vs. Kisan Co-operative Rice Mills Ltd. 1975 CTR (MP) 64 : (1976) 103 ITR 264 (MP), CIT vs. Mahasamund Kissan Co-operative Rice Mill Marketing Society Ltd. (1976) 103 ITR 499 (MP), Keshkal Co-operative Marketing Society vs. CIT (1986) 55 CTR (MP) 229 : (1987) 165 ITR 437 (MP) and CIT vs. Indian Cared Clothing Co. (P) Ltd. 1977 CTR (Bom) : (1977) 110 ITR 103 (Bom), as relied upon by Revenue and observed that the concept of the term 'marketing' was not at all adverted to, which was fundamental to determination of issue raised. It thus answered the question in affirmative in favour of the assessee and against the Revenue. It is observed that HAFED had earned profit by sale of wheat, gram and other agricultural produce. Learned counsel has also referred to order dt. 15th March, 1997, in the case of Shahbad Co-op. Sugar Mills Ltd. for asst. yr. 1992-93, wherein CIT(A) examined the decisions reported in [(1978) 115 ITR 709 (Kar), Broach Distt. Co-operative Cotton Sale vs. CIT (1989) 77 CTR (SC) 70 : (1989) 177 ITR 418 (SC), Chowgule Co. (Hind) (P) Ltd. vs. CIT (1990) 81 CTR (Bom) 1 : (1990) 182 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial functions such as standardisation, financing, market intelligence, etc. The said decision has also been followed and approved in (1998) 231 ITR 814 (SC). We feel that while in the said decisions emphasis is on processing of agricultural produce so as to make it fit for marketing, the processing of agricultural produce cannot be further stretched to cover manufacture of an entirely different product. We feel that after manufacture of sugar, it ceases to retain the character of agricultural product, i.e., sugarcane grown by members of the society. We feel that the plea that sugarcane cannot be marketed except after conversion into sugar and, therefore, marketing should cover manufacture and sale of sugar, has no force. If so construed, then sub-cl. (iii) should perhaps have read as 'the marketing of any product manufactured or produced from agricultural produce grown by its members'. It is obvious that such an interpretation is not warranted on the plea of liberal interpretation. It may not be out of place to mention that sugarcane can be converted into a numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standardisation and grading, financing, risk taking and marketing research. The said activities in no way indicate that manufacturing activity like manufacture of sugar would be covered by the expression 'marketing of agricultural produce'. It may not be out of place to mention that HAFED was selling wheat, gram and other agricultural produce. Thus, on facts the said case is distinguishable. We may also mention that all the aforesaid decisions related to interpretation of words 'agricultural produce of its members' and it was held that the said words basically signify that agricultural produce belonged to members of the society and they may not have thus grown the said agricultural produce. The expression 'marketing' was thus interpreted in the light of said provisions, which have now undergone a qualitative change in the sense that agricultural produce must be grown by members of society and at the time of marketing thereof, the basic characteristics of agricultural produce ought to be present. Once agricultural produce grown by members of society ceases to be an agricultural produce and takes shape of commercial produce in the form of sugar, the co-operative society would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 32 of the paper book where the Tribunal has held that if the subsidy was given to recoup the revenue expenditure, it will take same colour and will be deemed to be revenue receipt in the hands of the assessee. It was the purpose for which such subsidy was given, will determine the character of the receipt. He further relied on the decision of Tribunal, Delhi Bench in the case of Modi Inds. Ltd. vs. ITO (2002) 120 Taxman 55 (Del)(Mag) where it has been held that realisation through sale on additional free sale sugar quota released under Sampat Incentive Scheme was in the nature of capital receipt and not liable to tax. He further relied on the judgment of Hon'ble Calcutta High Court in the case of CIT vs. Balrampur Chini Mill Ltd. (1999) 154 CTR (Cal) 323 : (1999) 238 ITR 445 (Cal) where it has been held that surplus funds to be used only to repay the loan taken from financial institutions for expansion of plant, i.e., capital asset would be in the nature of a capital receipt. He further submitted that even though this issue was not raised before the authorities below, the assessee should be allowed to raise this additional ground. He also relied on the judgment of Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any material on record in support thereof, and the mere fact that such claim had been allowed in subsequent years, it could not be assumed that the prescribed conditions justifying the claim for exemption under s. 84 were fulfilled. Therefore, the Tribunal was not competent to hold that the AAC should have entertained question of relief or to direct the ITO to allow the relief. He further relied on the judgment of Hon'ble Allahabad High Court in the case of CIT vs. G.S. Rice Mills (1982) 30 CTR (All) 276 : (1982) 136 ITR 761 (All) where the AAC had rejected the claim of the assessee for relief under s. 80J on the ground that no such claim was made either in the returns filed or in the assessment proceedings before the ITO nor was there any material on record supporting such a claim, the Tribunal was not justified in entertaining the claim of the assessee for relief under s. 80J and directing the ITO to examine the claim of the assessee on merits. Thus, he submitted that since such claim was not made before the authorities below and the material facts were not on record the assessee cannot be allowed to raise such plea before the Tribunal. Relying on the judgment of Hon'ble Delhi Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de a plea for exemption of such income on the ground that the same was a capital receipt. A copy of the scheme placed at pp. 9 to 14 and a copy of the certificate issued by the Central Government were also not submitted before the authorities below. In the case of Sahney Steel Works Ltd. vs. CIT (1997) 142 CTR (SC) 261 : (1997) 228 ITR 253 (SC), Hon'ble Supreme Court has held that it is not the source from which the amount is paid to the assessee, which is determinative of the question whether the subsidy payments are revenue or capital in nature. If the payments in the form of subsidy are made to the assessee to assist him in carrying on his trade or business, these are trade receipts and liable to tax. The character of the subsidy in the hands of the recipients whether the Revenue or capital will have to be determined by having regard to the purpose for which the subsidy is given. If the subsidy has been given for production or bringing into existence any new asset before setting up a new industry, the same would fall in the nature of capital receipt. Thus, that amount of subsidy received from the Government would automatically fall in the nature of capital receipt. The issue req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fixtures, kitchen articles, cannot be allowed as deduction. Therefore, the AO disallowed expenses of Rs. 50,838. On appeal, the CIT(A) upheld the disallowance. The assessee is aggrieved by the order of CIT(A). Hence, this appeal before us. 13. The attention of the learned counsel for the assessee was drawn to the recent decision of Special Bench of Tribunal, Delhi, in the case of Eicher Tractors Ltd. vs. Dy. CIT (2002) 77 TTJ (Del) 681 : (2003) 84 ITD 49 (Del) where the Tribunal by referring to the provisions of sub-ss. (4) and (5) of s. 37 relating to disallowance of guest house expenses, has held that ss. 30, 31 and 32 are general in nature and therefore, the provisions relating to disallowance of guest house expenses shall prevail. Thus, the Tribunal has held that the assessee would not be entitled to claim any deduction for the guest house expenses on account of rent, repairs, depreciation and maintenance. Learned counsel for the assessee submitted, while taking such view Special Bench of Tribunal, Delhi, has referred to legislative intent for curbing lavish expenditure on the maintenance of guest houses. However, he submitted that subsequently provisions of ss. 37(4) and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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