BROACH DISTT. CO-OPERATIVE COTTON SALES GINNING & PRESSING SOCIETY LTD. versus COMMISSIONER OF INCOME TAX, AHMEDABAD.

Citation: [1989] 2 S.C.R. 720 · Decided: 26-04-1989 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Appeal(s) allowed

Judgment (excerpt)

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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. 
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. 
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 
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 
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 
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would not' come Within the category of exempted activities in view of the 
proviso to the section. 
Allowing the appeals, this Court, 
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HELD: (1) Ginning and pressing was part of the integral process 
of marketing. It was an activity incidental or ancillary to marketing, 
720 
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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. 
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-
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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 
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722 
SUPREME COURT REPORTS 
(1989] 2 S.C.R. 
answering the following question in favour of the Revenue and against 
A the assessee: 
B 
"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, 
1961, as it .stood prior to its amendment on 1st April, 
1968?" 

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