Judgment

R. S. PATHAK

( 1 ) THESE appeals by certificate granted by the High Court of Gujarat are directed against the judgment of the High Court answering the following question in favour of the Revenue and against the assessee :-

"whether, on the facts and in the circumstances of the case, the income of 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 1/04/1968?"

( 2 ) 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 pack the bundles for its individual members as well as other customers, to use its machinery for any useful work of its members, and to sell 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 members, and gins and presses the cotton for marketing on behalf of its members. For rendering the services of ginning and pressing before 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.

( 3 ) IN the course of assessment for the assessment years 1961-62 to 1963-64, the assessee claimed that the receipts from the ginning and pressing activities were exempt under S. 81 (i) (c) of the Income-tax Act (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 the orders of the Income-tax Officer. In second appeal the Income-tax Appellate Tribunal held that having regard to the circumstance that the receipts were from members only, that there was a general market for ginnng 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 Revenue the Appellate Tribunal referred the question of law set out earlier to the High Court of Gujarat for its opinion.

( 4 ) FOR the purpose of contention raised before the High Court, and again before us the following provisions of S. 81 seem relevant :

"81. Income of Co-operative societies :-

INCOME-TAX shall not be payable by a co-operative society-

(I) in respect of the profits and gains of business carried on by it, if it is-

(A ). . .

(B ). . .

(C) a society engaged in the marketing of the agricultural produce of its members; or

( 5 ) THE High Court proceeded on the view that if a Society carries on certain activities which are exempted activities according to cls. (a) to (f) of S. 81 (i) and certain other acitivities 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 even if those activities are regarded as ancillary or incidental to its marketing activity they would not come within the category of exempted 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 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 members did not take back the cotton after it was ginned and pressed. They paid only the costs of ginning and pressing. Al