ENGLISH AND SCOTTISH JOINT CO-OPERATIVE WHOLESALE SOCIETY, LIMITED vs COMMISSIONER OF AGRICULTURAL INCOME-TAX, ASSAM

Headnote Court Copy Facts Arguments Court observation Judicial Analysis Case Map Category Hierarchy Table of Content

1948 Supreme(SC) 43

PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD SIMONDS, LORD NORMAND, LORD MORTON OF HENRYTON, LORD MACDERMOTT, SIR MADHAVAN NAIR AND SIR JOHN BEAUMONT.
ENGLISH AND SCOTTISH JOINT CO-OPERATIVE WHOLESALE SOCIETY, LIMITED - Appellant
Versus
COMMISSIONER OF AGRICULTURAL INCOME-TAX, ASSAM - Respondents
On appeal from the High Court at Calcutta.
Decided On : Apr. 27. 1948.

Important Points

The doctrine of mutuality, applicable to mutual insurance where contributors and recipients are identical, does not exempt a society from income tax when it produces goods on its own land and sells them to members at a price exceeding production costs.

Subject

Tax Law - Agricultural Income Tax

Act Referred

ASSAM AGRICULTURAL INCOME TAX ACT: S.2, S.3

Headnote

(A) Agricultural Income-Tax Act - Sections 2, 3, 5 and 28 - Industrial and Provident Societies Act - Agricultural income - Mutuality - Sale of produce to members - Whether a society that cultivates produce on its own land and sells it exclusively to its members is exempt from income tax under the doctrine of mutuality - The doctrine of mutuality, typically applied to mutual insurance where contributors and participators are identical, does not apply to an association that grows produce on its own land or manufactures goods in its own factories and sells them to its members - If the sale price exceeds the cost of production and management, the resulting surplus constitutes taxable profit regardless of whether the purchasers are members of the society. (Paras 127-129)

(B) Mutual Trading - Distinction between mutual insurance and trading - In mutual insurance, the association is a mere agent for the members to share losses or provide indemnity, making profit impossible - In contrast, a society engaged in agricultural production and sale operates as a profit-making concern, and the distribution of surplus as dividends does not destroy the nature of the profit. (Paras 127-128)

Facts of the case:
A co-operative society grew and manufactured tea on its own estate. Members provided advances to cover costs, and the produce was sold to them at market rates, with the price debited against the advances. The resulting surplus was applied toward depreciation, interest on share capital, reserve funds, and dividends distributed to members proportionate to their purchases.

Findings of Court:
The society maintained a dual relationship with its members as both a creditor-debtor and a buyer-seller. The produce was grown on land owned by the society and sold at genuine market prices. The rules for applying net profits mirrored those of an ordinary profit-making concern.

Issues: Whether a society that cultivates produce on its own land and sells it exclusively to its members is exempt from agricultural income tax based on the principle of mutuality.

Ratio Decidendi: The principle of mutuality applies where there is complete identity between contributors to a common fund and the recipients of the surplus, such as in mutual insurance. It does not extend to entities that produce goods on their own land and sell them to members. If the sale price exceeds the cost of production, the society earns taxable profits, regardless of the motive to eliminate middlemen or the fact that sales are restricted to members.

Result: Appeal dismissed; the society is not exempt from liability to agricultural income tax in respect of profits from the sale to its members of tea cultivated or manufactured at its estate.

Legal Category Hierarchy

Advocates:
Solicitors for appellant : Coward, Chance & Co.
Solicitor for respondent: Solicitor, High Commissioner for India.

Judgement

Appeal (No. 75 of 1946) from a judgment of the High Court (April 24/ 1945) on a reference under s. 28, sub-s. 1, of the Assam Agricultural Income-Tax Act, 1939, by the Assam Board of Agricultural Income-Tax.

The appellant society was incorporated in the United Kingdom, under the Industrial and Provident Societies Act, 1893, and its objects, briefly, were to carry on business as planters, growers, producers and merchants of tea, coffee, cocoa and other foreign and colonial products. At all times the society had two members only, the Co-Operative Wholesale Society, Ld., and the Scottish Co-Operative Wholesale Society, Ld. The two member societies advanced moneys to the appellant society to meet the cost of growing tea, which was grown on its own estate in Assam and then distributed to the two members. That transaction was regarded as a sale to the two members by the appellant society at the current market price of the tea, and the price was debited against the advances which had already been made by the member societies. The surplus over costs was dealt with by the appellant as to part payment of interest on the share capital, carrying forward another part for various specified purposes, and distributing the balance moneys among the two member societies proportionately to their purchases of tea. The question referred to the High Court, in respect of the year of assessment 1939-40, was " Whether " the Society is chargeable to Assam agricultural income-tax " in respect of the cultivation and/or manufacture of tea at its " Deckiajuli Estate in the Province of Assam, and sold to its “members."

The High Court (Derbyshire C.J. and Gentle J.) answered the question of law in the affirmative.

1948. Mar. 16, 17. Donovan K.C. and S. C, Isaacs for the appellant. No profit arose from the transaction in question, the members merely put up money for a specific purpose and that part of it which was not required for the purpose was returned to them, and what was returned was not dividend, but merely the excess. In other words, it was an ordinary co-operative transaction. The very question in this case— whether the arrangement for the growing of tea by the appellant and the distribution to the two members in the manner indicated gave rise to agricultural income—was decided in India in 1929 when the income tax authorities contended that it did give rise to taxable income. In

Law. Rep. 75 Ind. App. 196 ( 1947- 1948) English and Scottish Joint C o-Op. Sc. V. C ommissioner of Agr 122

that case, however, English and Scottish Joint Co-operative Wholesale Society, Ld. v. Commissioner of Income-tax, Madras (( 1929) 3 I.T. Cas. 385.), the High Court in Madras decided that there was no income or profit arising to the appellant out of these transactions; that, in other words, they were purely mutual dealings, and accordingly no tax was payable because no income arose. There was, however, no appeal by the revenue authorities from that decision, which still stands in India. In the present case the High Court at Calcutta has declined to follow that decision. With regard to the authorities, Last v. London Assurance Corporation (( 1885) 10 App. Cas. 438, 444.) has only a very remote bearing on the present case. New York Life Insurance Company v. Styles (( 1889) 14 App. Cas. 381, 393, 407.) was the principal case relied on by the appellant society in the court below, and, it is submitted, rightly, for if the provision of tea is substituted for the provision of insurance there is no difference in principle between that case and this. If it is a case of purely mutual dealing, incorporation makes no difference. The transaction here leaves no profit at all in the true sense ; what is really being done is making a profit out of themselves ; the sum returned is merely the excess of the price which the customer has paid in the first instance—it does not destroy the mutuality of the transaction. What is said against the appellant here is that it is dealing with