Holding

The appellant was storing the controlled commodities as part of its own trading stock, not letting its godowns for storage, processing or marketing, and therefore is not entitled to deduction under Section 80P(2)(e).

Summary

Udaipur Sahakari Upbhokta Thok Bhandar Ltd., a cooperative society dealing in both non‑controlled and government‑authorised controlled commodities, claimed a deduction under Section 80P(2)(e) of the Income‑Tax Act for commissions received for storing foodgrains under the Rajasthan Foodgrains Order. The Assessing Officer disallowed the claim; the CIT (A) and the Tribunal allowed it, but the Rajasthan High Court reversed, holding the society stored the grains as its own trading stock and thus was not letting its godowns for storage, processing or marketing. The Supreme Court affirmed the High Court, interpreting Section 80P(2)(e) (and its predecessor provisions) to require that the income arise from letting godowns for the specified purposes, which was not the case here. Consequently, the society was not entitled to the special deduction. The appeal was dismissed.

Issues considered

The nature of the commission received: whether it constitutes income from letting godowns for storage, processing or facilitating marketing of commodities under Section 80P(2)(e).
Whether the cooperative society acted as an agent of the Government or as a trader, i.e., whether the stored commodities formed part of its own trading stock.
The proper interpretation of Section 80P(2)(e) of the Income‑Tax Act, 1961 and its predecessor provisions (Section 81(iv) and Section 14(3)(iv) of the 1922 Act).
The applicability of the High Court's conclusion in light of earlier precedents such as South Arcot and Venkata Subbarao.
Whether the burden of proof lies on the assessee to establish that the income falls within the four corners of the exemption provision.

Legislation cited

Essential Commodities Act, 1955s. 3
Income Tax Act, 1922s. 14(3)(iv)
Income Tax Act, 1961s. 80P(2)(e), s. 81(iv)

Subjects

Income taxSection 80PCooperative societyExemptionLetting of godownsControlled commoditiesPublic distribution systemCommissionAgency vs traderEssential commodities

Judgment

[2009] 11 S.CR. 90

•f

A UOAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD.
v.
COMMISSIONER Of INQOM!;=TAX
{Q!vi! ApP-§81 NP, 4~~9 gf 4QOa)
JULY 16, 2Q09
8
[S.H. KAPADIA ANO AFTA6 Al-AM, JJ.]

Income Tax Act, 1961 - s.80P(2)(e) - Exemption from
income tax - On the income of commission for storage of
C controlled commodities under Rajasthan Foodgrains and
Other Essential Articles (Regulation of Distribution) Order,
1976- Held: The assessee was not entitled to the exf3.mptfgn
as the assessee was storing the commodities as p~rt of it$ own
trading stock.
D
Appellant a Cooperative society was dealing in a
composite business. It was a dealer in non-controlled
commodities and it was also an authorised holder in
respect of controlled commodities under Rajasthan
E Foodgrains and Other Essential Articles (Re91:Jlqt,iQ!1 gf
Distribution) Order, 1976. It owned godowns as well i~
hired godowns for storing the goods. Appellant e~rned.
commission on the principle of 'netting' i.e. it set off 'issue
price' against 'sale price' and retained fixed commission.

F Appellant filed its return for the relevant assessment
years claiming deduction on the income of commission
for storage of the controlled commodities uls. 80P(2)(e)
of Income Tax Act, 1961. Assessing Officer disallowed the
claim. Appellate Authority as well as the Tribunal held the
G appellant entitled to the deduction, High Court took the
vi"ew that the appellant was storing the CQritrolled
commodities as part of its own trading stocks; and that
the appellant acted as a trader In the essential
commodities in question. Therefore, he was not entitled
H 90
l:JPAlfJW~ ~AHf\KARI UPBHOKTA THOK BHANDAR LTD. 91
V: ~QMMNR. qf
INCOM~-TAX •.
to dQdY~tign~ Ht!n§~ th@ p,r@§@n! app~CJI. A

Dismissing the appe~I, the Court

HELD! 1~ Migh Court was right jn ~pming tq th~
concl1..1sion that the assessee was storing· the
commodities in qu~st!g11 jn its godown~ as part of its own 8
trading stock, hence it w~s not entitled to claim deduction
for such margin under Section 80P(2){e) of the Income Tax
Act,1961. [Para 17] [114-E-F]

2. Under Section 80P(2)(e) of Income Tax Act, 1961, c
an assessee is entitled to claim special deduction from
Its gross total income to arrive at total taxable income. It
i~ a §f}C~i~I ~ecjµction. It is not a charging. section. The
burden is on the assessee to establish that the income
comes within the four corners of Section 80P(2)(e) of the 0
Act. The burden is on the assessee to establish that
exemption is available in respect of income derived from
the letting of godowns or warehouses, only where the
purpose of letting is storage, processing or facilitating the·
fTl~rt<eting of commodities. If the godown is let out E
(hrnh.1~inQ user) for any purpose besides storing,
proee:ifiing or fflcilit~ting tht:!' marketing of commodities,
then, the a$SQS&ee i~ not entitled to such exemption.
[Para 13] [106·E . .H]

A. Venkata Subbarao, etc. v. The State of Andhra F
Pradesh, etc. AIR 1965 SC 1773, relied on.

Commissioner of Income-tax, Madras v. South Arcot
District Co-operative Marketing Society Ltd. (1989) 176 ITR
117 (SC),-distinguish~d. G

i Surat Vankar Sahakari Sangh Ltd. vs. Commissioner of
Income Tax, Gujarat II (1971) 79 ITR 722 (Guj); Ramchandra
Rathore and Bros. v. Commissioner of Sales Tax, Madhya
Pradesh, Nagur (1957) 8 STC 845 (MP); Udupi Taluk
H
92 SUPREME COURT REPORTS [2009] 11 S.C.R.

i
A Agricultural Produce Co-operativeMarketing Society Ltd. v.
Commissioner of Income-tax (1987) 166 ITR 365 (Kar.); Ml
s. Vishnu Agencies (Pvt.) Ltd. etc. v. CommercialTax Officer
and Ors. AIR 1978 SC 449, referred to.

Law and Practice of Income-tax by Kanga & Palkhivala,
B
Eighth Edition, referred to.

Case Law Reference:

(1971) 79 ITR 722 (Guj) referred to. Para 11
c (1957) 8 STC 845 (MP) referred to. Para 14
(1987) 166 ITR 365(Kar.) referred to. Para 14
AIR 1978 SC 449 referred to. Para 14

D AIR 1965 SC 1773 relied on. Para 15
~

(1989) 176 ITR 117 ,(SC) distinguished. Para 1·3

CIVIL APPELLATE JURISDICTION : Civil Appeal No.
4399 of 2009.
E
From the Judgment & Order dated 02.11.2006 of the High
Court of Rajasthan at Jodhpur in DB Income Tax Appeal No.
53 of 2002.
...
N.M. Ranka, J.K. Ranka, Sushil Kumar Jain, Puneet Jain
F and.Archana Tiwari for the Appellants.

K. Radhakrishnan, Raghavendra Rao, Y.P. Mahajan and
B.V. Balaram Das for the Respondents.

The Judgment of the Court was delivered by
G
S. H. KAPADIA, J. 1. Leave granted. ,,
).

2. The short question which arises for consideration in this
civil appeal turns on the interpretation of Section 80P(2)(e) of
H
,_
'
UDAIPUR SAHAKARI UPBHOKTA THOK BHANDAR LTD. 93
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]

the Income-tax Act, 1961 whose predecessor was Section A
14(3)(iv) of the Income-tax Act, 1922.

FACTS

3. The facts giving rise to this civil appeal are few and
undisputed .and may be briefly stated as follows. Appellant-
·s
society is a co-operative society registered under Rajasthan
Co-operative Societies Act, 1965. Appellant is running a .
consumer co-operative store at Udaipur since 1963. It has 30
branches. Appellant is dealing in non-controlled commodities
through its branches. In addition, appellant is also doing the c
work of distribution of controlled commodities such as wheat,
sugar, rice and cloth on behalf of the Government under the
Public Distribution Scheme (PDS) for which it is getting
commission. The distribution of the controlled commodities is
regulated by the District Supply Officer (DSO-Authoriesed D
-.,.(
Officer) under Rajasthan Foodgrains & Other Essential Articles
(Reguiation of Distribution) Order, 1976 (for short, "1976
Order"). Appellant claims to be stockist/distributor of controlled
commodities. It takes delivery from Food Corporation of India
(FCI) and Rajasthan Rajya Upbhokta Sangh as per the E
directives of the State Government. The price, quantity and the
person from whom the delivery is to be taken is fixed by the
State Government under the said 1976 Order. After taking the
l:: delivery, appellant stores _these goods in its godowns, both
owned and rented. The storage godowns are open to checking F
by the concerned officers of the State Government. The stocks
stored by the appellant are delivered to the Fair Price Shops
(FPS-retailers) as per the directions of the State Government.
The quantity, price and the FPS to whom the delivery is to be
given is fixed by the State Government. According to the G
appellant, therefore, the above modus operandi indicates that
the State Government exercises total control over the stock of
·(. i.
controlled commodities stored in the godowns of the appellant- ,
society. On 28.2.1977 appellant was granted licence for
purchase/sale/storage for sale of goodgrains under Rajasthan
H
94 SUPREME COURT REPORTS [2009] 11 S.C.R.

A Foodgrains Dealers Licensing Order, 1964.

4. It exercises the powers conferred by Section 3 of
Essential Commodities Actj 1955, the Government of
Rajasthan issued the 1976 Order. Following are the relevant
provisions, reproduced from the 1916 Order, whleh read as
8
under:
"Clause 2. Definitions. - In this Order, unless the context
otherwise requires :·

c (b) "Authorisation" means an authorization issued under
clause 3 of this Order;

(c) "Authorised Fair Price Shop Keeper" means a retail
.dealer incharge of a shop authorized under clause 3 and
shall include a person incharge of a shop where foodgrains
o' and other essential articles are sold and is under the
control of the State Government;

(d) "Authorisation Holder" means an authorized wholesaler
or an authorized Fair price shopkeeper;
E
(e) "Authorised Officer" means District Supply Officer for
the District Headquarter Municipal area, Executive Officer
of Municipal Board for rest municipal area and Vikas
Adhikari for rural area and any other officer authorized as
such by the State Government;
F
(f) "Authorised Wholesaler" means a person, a firm, an
association of persons or a co·operative society or any
other institution authorized appointed as an agent under
clause 3 of this Order by the State Government or the
G Collector.

Clause 3. Issue of Authorisation. -

(1) Tne Collector or any other officer authorized by the
) .
'

State Government may issue an authorization to any
H
UDAIPU~ SAHAKARI UPBHOKTA THOK BHAJ"'DAR LTD. 95
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
person being an authorized wholesaler/fair price A
shopkeeper to obtain and supply foodgrains and other
Essentiai Articles In the area specified therein.

(2) No person other than an authorization holder shall sell
any of the foodgrains or any other essential articles B
supplied by the Government for distribution under this
Order or any other Order.

Clause 20 - Power to issue directions regarding
purchase/sale/distribution of foodgrains and other
essential articles. - Every authorisation holder shall comply C
with all general or special directions given in writing, from
time to time by the State Government or the Collector in
regard to purchase, sale, storage for sale, distribution and
disposal of foodgrains and other essential articles on
permits or ration cards or otherwise and the manner in D
which the accounts thereof shall be maintained and returns
submitted.

4. We also quote hereinbelow the Terms and Conditions
annexed to the said 1976 Order which read as under:
E
"Terms & Conditions - General

Clause (1) No authorization holder shall store Foodgrains
& other essential articles at any place other than those
specified in this authorization without prior permission in F
writing of the Collector.

=I.
Clause (2) No authorization holder shall refuse to sell
Foodgrains and other essential articles during business
hours on the presentation to him of a valid permit/indent/
ration card to the extent of the amount of Foodgrains or G
other essential articles due on the permit/indent/ration card.

Clause (3) No authorization holder shall sell Foodgrains
at a price in excess of that fixed by the State Government
or the Collector or shall sell any other essenttal articles at H
96 SUPREME COURT REPORTS [2009] 11 S.C.R.

A a price in excess of that fixed by the Central Government ..,
or the State Government or any authority or Officer of such
Government or the manufacturer, as the case maybe, in
that behalf.

Clause (5) The authorization holder shall maintain a stock
B
register in Form 'C' showing correctly, the daily receipt and
sale of the each Foodgrains and other essential articles.
A daily sale register shall also be maintained in Form 'D' "
by the authorized wholesaler and in Form 'E' by the
authorized fair price shopkeeper. All books of accounts,
c permits, voucher etc. shall be kept_ at the business
premises specified in the authorization and shall be made
available for inspection whenever required.

Clause (6) Every authorization holder shall submit a true
D monthly stock and sale return in Form 'F' to the Collector
:• so as to reach him within five days aft~r the close of the ;.,..

month to which it relates.
t•
Clause (8) The authorization holder shall display the
opening balance and prices of each variety of Foodgrains
E
and other essential articles at a conspicuous ·place at his
business premises in bold letters."

5. On 31.8.1990, appellant filed its returns for assessment
year 1989-90 claiming deduction under Section 80P(2)(e) of ~

F the 1961 Act on the income of commission received by it from
the Government for storage of controlled commodities. On
31.10.1990 appellant filed its returns of income for subsequent
assessment years 1990-91, 1991-92, 1992-93, 1993-94,
1994-95, 1995-96 inter alia claiming deduction on the income
G of commission received by it from the State Government for
storage of controlled commodities. Vide Order dated 26.3.92,
the A.O. disallowed the claim on the ground that the appellant- )
)
society is a wholesaler of foodgrains and it is not a mere
stockist as claimed and consequently it was not entitled to
H dediiction under Section 80P.(2)(e) of the 1961 Act. This order
UDAIPUR SAHAKARI UPBHOKTA THOK BHANDAR LTD. 97
.
I
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]

.- was applied for assessment years in question. Aggrieved by A
the.assessment order(s), appellant filed appeals before CIT (A),
on 18.4.92. By order dated 28.10.93, CIT(A) held that the
appellant was entitled to deduction under Section 80P(2)(e) of
the 1961 Act on the income of commission received from the
State Government for stocking and storing the above B
foodgrains. This decision was affirmed by the Tribunal vide its
decision dated 20.10.2000 dismissing the Department's
appeal by a common order holding that the appellant was
entitled to deduction under the said Section. This view of the
Tribunal, however, was overruled by the impugned decision c
dated 2.11.06 by the Rajasthan High Court which took the view
that the appellant-society was storing the said controlled
commodities in its godowns as part of its own trading stocks;
that the appellant acted as a trader in the essential commodities
in question and consequently the appellant was not entitled to 0
deduction under Section 80P(2)(e) of the 1961 Act. Against the
impugned decision, appellant has come to this Court by way
of petition for special leave.

6. The issue which arises for determination in this civil
appeal is: whether, on the facts and the circumstances of this E
case, "commission" received by the appellant from the State
Government was really in the nature of payment for the letting
of the godowns maintained by the appellant for storage?

7. At the outset it needs to be noted that appellant has F
composite business. Appellant is a dealer in non-controlled
commodities and it is an Authorisation Holder in respect of
controlled commodities under the 1976 Order. It owns
godowns and it also hires godowns on rent. It earns
commission during the relevant assessment years at the rate G
of 2.25 per quintal (e.g. for rice). As stated above, under clause
20 of 1976 Order every authorization holder has to comply with
general or special directions given in writing, from time to time
by the Collector in regard to purchase, sale, storage for sale,
distribution and disposal of controlled commodities. At this
H
98 SUPREME COURT RE;PORTS [2009] 11 S.C.R.
'
A stage, one important aspect needs to be noted. Appellant earns ~

commission on the principle of "netting". In other words,
appellant sets-off "issue price" against "sale price" and retains
.~
commission fixed at Rs.2.25 per quintal. We quote hereinbelow
the rate-fixation mechanism indicated by one of the orders
B issued on 12.3.87 w.e. f.1.5.87 under clause (20) of the 1976
Order: r
J

"S.No./F1 :2:1/Rice/Rate/85 Dated 12.5.87 \

To,
c
Subdivisional officer/Tehsildar

Sub.: Regarding rate fixation of rice to be distributed in
general areas
D As a result of change in the distribution rate and
~
surcharge of rice by the State Government, the new rates
for rice is fixed in the following manner. Order to be
operative from 1.5.87. 1=
t-
)--
E A. if the godown of the Food Corporation and wholesale
dealer is in the same city: '"'
Common Fine Superfine
1. Issue rate of food 239.00 251.00 266.00
corporation '}

F 2. Octroi 0.20 0.20 0.20
~

239.20 252.20 266.20
3. Sales tax @ 3% 7.18 7.54 7.99 ')--<

4. Surcharge on sale tax @20% 1.44 1.50 1.60
G -----------------
5. Amount payable to food 247.82 260.24 275.79
corporation [issue price] ).

6. Commission/transportation 2.25 2.25 2.25
of wholesale dealer
7. For upto 1Okm from god owns 1.00 1.00 1.00
H
UDAIPUR SAHAKARI UPBHOKTA THOK BHANDAR LTD. 99
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
of Food Corporation --------------------------------------- A
Sale Price charged 251.07 263.49 279.04
from FPS
8. Commission of retail dealer 2.50 2.50 2.50
9. Transportation of retail dealer 2.00 2.00 2.00
--------------~-~-~----~--- (3
255.57 267.99 283.54
10. Equalisation amount 6.43 7.01 6.46

262.00 275.00 80.00
c
B. if the godowns of the Food Corporation and the
wholesale dealer are in different cities:

Common Fine Superfine
1. Issue rate of food 239.00 251.00 266.00
corporation D
2. Octroi 0.20 0.20 0.20
·---·----
239.20 252.20 266.20
3. Sales tax@ 3% 7.18 7.54 7.99
4. Surcharge on sale tax @20% 1.44 1.50 1.60 E

5. Amount payable to food 247.82 260.24 275.79
corporation
6. Commission of wholesale 2.25 2.25 2.25
dealer -------------~-~------------------ F
250.07 262.49 278.04"

8. The above working indicates that Rs.247.82 (issue
price) is treated by the appellant as expense and it is set-:off
against the sale price of Rs.251.07. In other words, the working G
indicates cost plus mechanism i.e. Rs.247.82 is the cost plus
profit margin which includes Rs.2.25 as commission. Therefore,
Rs.2.25 is part of the profit margin. One aspect needs to be
highlighted. According to the written submissions, filed by the
appellant, it had taken into its bqoks of accounts the H
100 SUPREME COURT REPORTS [2009] 11 S.C.R. .
...

consolidated value of the closing stock. This circumstance
"'
A
reinforces the finding of the High Court in its impugned
judgment that the appellant was storing the commodities in its
t:
godowns as a part of its own trading stock.

9. The question before us is : whether appellant was
B
entitled to claim special deduction under Section 80P(2)(e) of
the 1961 Act by claiming that the amount received under the
head "commission" is really in the nature of payment for the
user of its godowns?

c 10. To answer the above question, we quote hereinbelow
Section 14(3)(iv) of the Income-tax Act, 1922, Section 81(iv)
and Section 80P(2)(e) of the 1961 Act which read as under:
)
"lncome-t~x Act, 1922
D Section 14. Exemption of a general nature +-

(3) The tax shall not be payable by a co-operative society

E (iv) in respect of any income derived from the letting of
godowns or warehouses for storage, processing or
facilitating the marketing of commodities;

"Income-tax Act, 1961

F Section 81. Income of co-operative societies. - Income-
tax shall not be payable by a co-operative society-

(iv) in respect of any income derived from the letting of
godowns or warehouses for storage, processing or
facilitating the marketing of commodities;"
G
"Income-tax Act, 1961

Deduction in respect of income of co-operative societies.-

BOP. (1) Where, in the case of an assessee being a co-
H
UDAIPUR SAHAKARI UPBHOKTA THOK BHANDAR LTD. 101
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
operative society, the gross total income includes any A
lo'
income referred to in sub-section (2), there shall be
deducted, in accordance with and subject to the provisions
of this section, the sums specified in sub-section (2) in
computing the total income of the assessee.
8
(2) The sums referred to in sub-section (1) shall be the
following, namely: -

(e) in respect of any income derived by the co-operative
society from the letting of godowns or warehouses for
storage, processing or facilitating the marketing of c
cemmodities, the whole of such income;"

11. At the outset it may be noted that Sections 81 (iv),
followed by Section 14(3)(iv) in the 1922 Act, as amended, was
a predecessor to Section 80P(2)(e) of the 1961 Act, and it D
came for consideration before the Gujarat High Court in the
" case of Surat Vankar Sahakari Sangh Ltd. v. Commissioner
of Income-tax, Gujarat II - (1971) 79 ITR 722 (Guj.), in which
it was held:

"This section is obviously enacted with a view to E
encouraging and promoting growth of co-operative sector
in the economic life of the country in pursuance of the
declared policy of the Government. There are five different
~
heads of exemption enumerated in the section. Each is a
distinct and independent head of exemption. Whenever a F
question arises whether a particular category of income
of a co-operative ·society is exempt from tax, it will have
to be seen whether such income falls within any of the
several heads of exemption : if it falls withi11 any one head
of exemption, it would be free from tax notwithstanding that G
the conditions of another head of exemption are not
satisfied and such income is, therefore, not free from tax
• ~
under that head of exemption : vide U. P. Co-operative
Bank Ltd. v. Commissioner of Income-tax.- (1966) 61 ITR
563 (All). The ambit and coverage of clause (iv) of section H
102 SUPREME COURT REPORTS [2009] 11 S.C.R.

A 81 must, therefore, depend on the true interpretation of the
language used by the legislature in that clause assisted
only by such external aids of construction as are
permissible according to well-recognised principles of
interpretation.
B
Turning first to the language of section 81 (iv), it
exempts a co-operative society from tax in respect of
income derived from the letting of godowns or warehouses
for storage, processing or facilitating the marketing of
commodjties. Two possible constructions of this provision
c were suggested before us in the course of the argument,
one by the assessee and the other by the revenue. The
construction put forward by the assessee was that the
words "letting of godowns and warehouses for storage",
"processing" and "facilitating the marketing of
D commodities" constituted different alternatives and income
derived from three different sources was, therefore, sought
to be exempted under section 81(iv), namely, (1) income
derived from the letting of ge::>downs and warehouses for
storage; (2) income derived from processing; and (3)
E income derived from facilitating the marketing of
commodities. The revenue on the other hand urged that
income which was sought to be exempted was only
income derived from the letting of godowns or warehouses
if they were let for any of the three purposes, namely,
F storage, processing or facilitating the marketing of
commodities. The words "storage, processing or
facilitating the marketing of commodities", according to the
revenue, were governed
I
by the preposition "for'' and they
denoted the purposes for which godowns or warehouses
G should be let in order that the income derived from such
letting should be exempt from tax. Now, on the plain
grammatical construction of the language used by the
legislature, it appears that the construction suggested on
behalf of the revenue is more commendable than that
canvassed on behalf df the assessee. As we read the
H
UDAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD. 103
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
r words of the clause, it is apparent that there is no break A
in the continuity of idea after the word "storage"; the idea
flows on into the words "processing or facilitating the
marketing of commodities". As a matter of fact, if we read
the clause as a whole, there is no doubt that the words
"storage, processing or facilitating the marketing B
commodities" constitute one single composite clause
governed by the preposition "for" signifying that the letting
of godowns or warehouses contemplated by the section
is letting for any of the three purposes, namely, storage,
processing or facilitating the marketing of commodities. If c
the intention of the legislature was that "letting of godowns
or warehouses for storage", "processing" and "facilitating
the marketing of commodities" should be read distinctively
as constituting different alternative sources of income, the
legislature would have, according to the dictates of plain
0
grammar, used the words "income derived from letting of
godowns or warehouses for storage or from processing
or from facilitating the marketing of commodities." The
introdu<;tion of the word's "or from" before "processing"
and "facilitating the marketing of commodities" would have E
brought about the disjl,lnctive effect so as to relate the
three ~lternatives to the words "income derived from." But
the legislature instead used words which clearly go of to
suggest that the words "storage, processing or facilitating
the marketing of commodities" are merely purposes for
which godowns or warehouses should be let to attract the F
exemption under section 81 (iv). The presence of the
definite article "the" before letting and its absence before
the words "processing" and."facilitating the marketing of
commodities" considerably reinforces this conclusion. It is
again difficult to see why the legislature should have G
indiscriminately mixed up in section 81 (iv) widely different
~ sources of income such as· "letting of godo.wns or
warehouses for stqrage, processing and facilitating the
marKeting of comm~dities". The conclusion appears to be
H .
104 SUPREME COURT REPORTS [2009] 11 S.C.R.

clear on a plain natural construction of the language used ~
A
in section 81 (iv) that what is exempted under that section
is income derived from the letting of godowns or
warehouse provided the letting is for a~y of the three
purposes, namely, "storage", "processing" or "facilitating
B the marketing of commodities".

12. On interpretation of Section 14(3)(iv) of the 1922 Act
it was held by the High Court:

'There is also one other circumstance which is, in our
c opinion, quite decisive of the question. Section 81 (iv), as
we have already pointed out above, is in identical terms
as section 14(3) and section 14(3) was originally
introduced in the Income-tax Act, 1922, by section 10 of
the Finance Act, 1955. Section'.' 14(3) when originally
D introduced was, however, in a different form and it read
as foliows:

"14. (3) The tax shall not be payable by a co-
operative society, including a co-operative society
carrying on the business of banking -
E
(i) in respect of profits and gains of business
carried on by it; ...

(iii) in respect of any income derived from the letting
F of godowns or warehouses for storage, processing
or facilitating the marketing of commodities; ... "

Clause (i) of this unamended section exempted from
tax profits and gains of business carried on by a co-
operative society~ If, therefore, a co-operative society
G carried on the activity of processing, profits and gains
arising from such activity would be exempt under clause
).
(i). If that be so, why was it necessary to enact in clause
(iii) that income derived from processing shall be exempt
from tax ? If the construction contended for on behalf of the
H
UDAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD. 105
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
assessee were correct, the word "processing" in clause A
(iii) would be rendered totally superfluous for income
derived from processing would be covered by clause (i).
The onlyway in which full meaning and effect can be given
to the word "processing" in clause (iii) is by reading that
clause in the manner suggested on behalf of the revenue, B
namely, that the words "storage", "processing" and
"facilitating the marketing of commodities" denoted
different alternative purposes of letting of godowns or
warehouses. We are, therefore, of the view that on a
proper interpretation of section 14(3) (iv) and section c
81(iv), separate exemption is not granted in respect of
income from the letting of godowns or warehouses for
storage, income from processing and income from
facilitating the marketing of commoditi.es. But the
exemption is available only in respect of income derived 0
from letting of godowns or warehouses where the purpose
of letting is storage, processing or facilitating the marketing
of commodities."

13. We approve the reasoning given by the High Court on
interpretation of Section 81 (iv) and Section 14(3)(iv) of the E
1922 Act. On reading the above judgment it becomes clear that
under Section 80P(2)(e) of the 1961 Act, an assessee is
entitled to claim special deduction from its gross total income
to arrive at total taxable income. It is a special deduction which
is provided for in that Section. It is not a charging section. The F
burden is on the assessee to establish that the income comes
within the four corners of Section 80P(2)(e) of the 1961 Act.
.The burden is on the assessee to establish that exemption is
available in respect of income derived from the letting of
godowns or warehouses, only where the purpose of letting is G ,
storage, processing or facilitating the marketing of
commodities. If the godown is let out (including user) for any
'
purpose besides storing, processing or facilitating the
' marketing of commodities, then, the assessee is not entitled
to such exemption. [See: Law and Practice of Income-tax by H
106 SUPREME COURf REPORTS (2009) 11 S.C.R.

A Kanga & Palkhivala, Eighth Edition, page 995)
"
14. Coming to the case law on the distinction between
contract of sale and contract of agency, we may state that there
is no straight-jacket formula. However, some important
circumstances do bring out the effect of the transaction. In the
B
case of Ramchandra Rathore and Bros. v. Commissioner of
Sales Tax, Madhya Pradesh, Nagur - (1957) 8 STC 845
(MP), the terms of the agreement between the assessee, a ~

dealer in bidis, and his agent who was required to sell the
goods, under: the agreement, at prices fixed by the assessee,
c indicated that the assessee would not be responsible for any
shortage in transit and that the assessee would not be liable
to receive any unsold stock if the agreement stood terminated.
The accounts of the. assessee-dealer also indicated that when
despatches were made, the price was debited to the agent and
D credited to him when the money was received. These
'!>-
circumstances were taken into account by the High Court in
judging the real effect of the transactio~. Accordingly, it was
held that the impugned transaction was "sale" liable to sales
tax under Section 2(g) of C.P. and Berar Sales Tax Act, 1947.
E '(r the case of Udupi Taluk Agricultural Produce Co-operative
Marketing Society Ltd. v. Commissioner of Income-tax -
(1987) 166 ITR 365(Kar.), the assessee, a co-operative
society, claimed exemption under Section 80P(2)(e) of the
1961 Act in respect of its income derived by way of commission :1

F from Karnataka Food and Civil Supplies Corporation for
procurement of paddy and rice and reimbursement of transport
charges. Following the judgment of the Gujarat High Court in
Surat Vankar Sahakari Sangh Ltd. (supra), the Karnataka
High Court held that under Section 80P(2)(e) of the 1961 Act,
G exemption is available in respect of income derived only from
letting out of godowns or warhouses. The income derived by,
the co-operative society for the purpose of exemption under ~
clause (e) must be relatable to the letting out or the use of its
godowns for any of the three purposes mentioned in clause (e).
H
UDAIPUR SAHAKARI UFi>BHOKTA THOK BHAN DAR LTD. 107
v. COMMNR. OF INOOME-TAX [S.H. KAPADIA, J.]

.- Any income derived by the society unconnected with such letting A
or use of the godowns would not fall under clause (e). In the
case of Mis. Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial
Tax Officer and others - AIR 1978 SC 449, a seven-judge
Bench of this Court held that transaction between the rice-millers
on one hand and the wholesalers on the other hand constituted B
"sales" within the meaning of Bengal Finance (Sales Tax) Act,
1941 and sales tax was leviable on the turnover. In that case
;.. Vishnu Agencies was a licensed stockist of cement who was
permitted to stock cement in its godown, to be supplied to
persons in whose favour allotment orders are issued, at the C
price stipulated and in accordance with the conditions of permit
issued by the authorities concerned. In that case Vishnu
Agencies supplied cement to various allottees fro'm time to time
in pursuance of the allotment orders issued by Appropriate
Authorities and in accordance with the terms of the licence
D
obtained by it for dealing in cement. It was assessed to sales
tax by CTO in respect of the said transactions. The main
contention of Vishnu Agencies was the measures adopted to
control the supply of cement left no option to parties to bargain;
that, the transaction in question constituted a "compulsory sale";
that,- by virtue of the provisions of the Cement Control Act and E
Cement Licensing Order no volition or bargaining power was
left to the assessee and since there was no element of mutual
consent between the stockist and the allottee, the transaction
was not a "sale" within the meaning of the Sales Tax Act. This
argument was rejected by this Court observing that the F
limitations placed on the normal rights of the dealer and
consumers to supply and obtain the goods by the Cement
Control Order do not militate against the position that eventually,
the parties must be deemed to have completed the transactions
under an agreement by which one party bound itself to supply G
the stated quantity of goods to the other at a price not higher
than the notified price and the other party consented to accept
""
the goods on the terms and conditions mentioned in the order
of allotment issued in its favour by the competent authority. It
was held that offer and acceptance need not always be in an H
108 SUPREME COURT REPORTS [2009] 11 S.C.R.

A elementary form, nor does the Law of Contract or Sale of Goods
Act require that the consent to a contract must be express. It is
commonplace that offer and acceptance can be spelt out from
the conduct of the parties. This is because law does not require
offer and acceptance to conform to any set pattern or formula.
B 15. As can be seen from the discussion hereinabove, two
points arise for determination, namely, whether appellant acted
as an agent of the Government in the subject transaction and
the real nature of payment received by the said Society under
the Head "commission". Both ~he points stand covered by the
c judgment of the Supreme Court in A. Venkata Subbarao, etc.
v. The State of Andhra Pradesh, etc. -AIR 1965 SC 1773. In
that case, appellants were owners of rice mills in the Districts
of West Godavari, East Godavari and Krishna. Appellant was
in the business of purchasing paddy from producers, milling
D their purchase in their mills and selling the rice so milled to
wholesale dealers in rice. This was prior to 1946-47 when :,.-
severe restrictions were imposed in the State of Madras on the
trade in foodgrains in order to maintain their supplies and
ensure proper and equitable distribution of foodgrains to the
E community. Accordingly, in 1946, pursuant to the power vested
in the State Government under Essential Supplies (Temporary
Powers) Act, 1946, two Orders came to be issued, namely,
Foodgrains procurement Order, 1946 and Foodgrains )

Licensing Order, 1946 which prohibited all trades in foodgrains
j
F including rice except by those who held licences and subject
only to the terms and conditions of the licence. A. Venkata
Subbarao was one such licensee who was authorized to deal
in rice under the Licensing Order, 1946. It may be mentioned
that the prices at which paddy could be procured as well as
the prices at which the rice could be sold by the licensed ~-
G
dealers, were fixed by Orders, notifications issued under the
Essential Supplies Act. While A. Venkata Subbarao (appellant)
was carrying on his business subject to the provisions of the ~

above two Orders, the prices at which he could sell rice which

H
UDAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD. 109
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
t
he milled out of the paddy procured by him stood enhanced on A
three different occasions - July 1947, December 1947 and
November 1948, and on each occasion he was directed to
_submit a statement indicating the stock of paddy and rice held
by him on the day just prior to the date on which the_ increased
prices came into effect and on that basis the Government B
directed A. Venkata Subbarao to pay a "surcharge" on the
amount representing the increase on the stock held by him. This
levy of "surcharge" became the point of challenge in the suit
filed by A. Venkata Subbarao in the trial court. The principal
point in controversy between the parties related to the precise c
legal relationship b_etween the procuring agent .and the
Government. It was 'found by the Supreme Court that the
procuring agent had to buy the grain from the producers with
their own money. The grain purchased was transported to the
godowns at their cost and stored by them at their own risk. The 0
rent of the godown(s) was also paid by the procuring agent. If
there was any depreciation in the quality or there was any
shortfall owing to driage, action of rodents, insects, moisture,
theft, etc. the loss would of the procuring agent. It was also
further found by the Court that the procuring agent could pledge
his goods to raise loans from banks and'" lastly the procuring E
agent had a right to sell the grain to the person authorized by
and at the price not exceeding the price fixed under the
notification and Orders issued from time to time. In other words,
sales at free-market rate were prohibited. On the basis of the
aforestated circumstances, this Court held that the property in F
the goods purchased by the procuring agents vested in them.
However, it was urged on behalf of the State that the purchase
arlci sale of commodities by the procuring agent/dealer was on
behalf of the Government. In this connection, reliance was
placed on the agreement, executed by the procuring agent, in G
which he undertook to purchase paddy from the areas allotted
by the Government; he undertook to store the paddy or rice in
a proper godown for which he was responsible for the safe
custody of the grain and that the procuring agent further
H .
110 SUPREME COURT REPORTS [2009) 11 S.C.R.

A undertook to sell the stock of rice to persons nominated by the
Government. On these considerations it was urged on behalf
of the Government that A. Venkata Subbarao was an "agent"
of the Government to buy paddy, to store the grain purchased
on behalf of the Government in secure godowns and to sell the
B goods purchased on behalf of the Government to such persons
nominated by the Government. It was, therefore, submitted that
A. Venkata Subbarao was an "agent" who on one hand
indemnified the Government from any loss in the business of
agency of purchase and storage and sale on behalf of the
c Government and on the other hand he was bound to make over
to the Government such profits that he might obtain out of the
business of the agency. It was the furlp_er case of the
Government that the difference between the procurement
price· and the price which was fixed for sale constituted
"commission" or "remuneration" which would belong to the
0
agent. In other words, two questions arose for determination
before this Court, namely, the precise legal relationship
between the procuring agent/dealer on one hand and the
Government on the other hand as also real nature of payment
E received by A. Venkata Subbarao. ft is interesting to note one
more argument advanced on behalf of the Government. It was
urged that the margin between the procurement price and the
price at which the rice could be sold constituted "remuneration".
This argument found favour with the High Court. However, it was
rejected by this Court and while doing so this Court observed
F as follows:

"29. Before proceeding further, it is necessary to clarify two
matters. First, though Mr. Agarwala referred to the margin
between the procurement price and the price at which the
G procured paddy or rice could be sold as "remuneration",
a contention which found favour with the High Court, we
do not find it possible to accept the submission. There was
a similar margin between the price at which a wholesaler
could buy rice and that at which he could sell and similarly,
H it was the case of the retail dealer, but it is hardly possible

I.
UDAIPUR SAHAKARI UPBHOKTA THOK BHANDAR LTD. 111
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]

• to call the,se as "remuneration". This margin or difference
in the purchase ·and sale price was nece_ssary in order to
A

induce any one to engage in this business'8nd was of the
essence of a control over procurement and distribution
which utilised normal trade channels. It would, therefore,
be a misnomer to call it "remuneration" or "commission" 8
allowed to an agent .and so really no wgument can be
built on it in favour of the relationship being that of
principal and agent."

(emphasis supplied) C
.
16. Coming to the question of agency, this Court in the
case of A. Venkata Subbarao (supra) held that the
Government can derive no advantage from the works of
"Procurement agent" mentioned in the Procuring Order, 1946
whether from the agreement executed by such procuring agent. D
This Gourt specifically vide paras 32 to 35 dismissed the
argument advanced on behalf of the Government thai A.
Venkata Subbarao (appellant) had acted as an "agent" on
behalf of the Government. We quote hereinbelow paras 32 to
35 which read as under: E

"32. No doubt, the description in the Procurement Order
and the agreement as "agent" is of some value, but is not
decisive and one has to gather the real relationship by
reference to the entire facts and circumstances. To start
with, it is clear that as the purchases were made by the F
procuring agents out of their own funds, stored at their own
cost, the risk of any deterioration, driage or shortfall fell on
them, they were the full owners of the paddy procured and
they pledged the goods for raising funds. This aspect of
their full ownership of the grain purchased is highlighted G
by the fact that they entered into agreements with the
Government itself to sell the rice with them to District
Supply Officers at the controlled market prices. Any
contention that the procuring agents were not full owners
H
112 SUPREME COURT REPORTS [2009] 11 S.C.R.
?

A of paddy or rice procured by them must manifestly fail as +
being inconsistent with the basis upon which this
agreement by them to sell Government was entered into.
If further confirmation were needed it is provided by the fact
that on the sales by procuring agents tb Government
B under their Supply agreement sales-tax was payable
which on the terms of the Madras General Sales Tax Act
in force at the relevant time would not have been payable
~
if the paddy and rice were that of Government and which
they were holding merely as commission agents on behalf ..-
c of the Government.

33. Next, it may be pointed out that these plaintiffs held
licences under the Licensing Order under the Madras
Foodgrains Control Order, 1947 in order that they might
deal in the 'rice in their possession. In the licence which
b was granted to the plaintiffs which was in statutory form the
foodgrains in their possession were referred ta as their
stocks. It may be pointed out that the form of the licence
granted to procuring agents, wholesalers and retailers was
the same.
E
34. Learned Counsel urged that even assuming that the
property in the goods purchased passed to the procuring
agents that would not by itself negative the relationship
of principal and agent. For this purpose reliance was ...
placed on Article 76 of Bowstead on Agency which runs : .'-
F '

"Where an agent, by contracting persbnally, renders
himself personally liable for the price of goods
bought on behalf of his principal, the property in the
goods, as between the principal and agent, vests
G in the agent, and does not pass to the principal until
he pays for the goods, or the agent intends that it
i.
shall pass."

He also referred us to certain decisions of the Madras and
H Punjab High Courts in which the principle laid down in this
UDAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD. 113
....
I
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
;.
passage had been applied. We do not consider it A
necessary to examine this question in its fulness because
we are satisfied that the procuring agent, when he bought
the goods, was purchasing it for himself and not on behalf
of the Government. The acceptance of the argument
addressed on this aspect would mean that if the B
procurement agent so desired he might contract in the
name of the principal, namely, the Government and thus
establish privity between the Government and the
purchaser and make the Government liable to pay for the
price of the goods at which he had purchased. This c
situation would, in our opinion, be unthinkable on the
scheme of the Procurement Orders and generally of the
Food Control Orders under which the procurement and
distribution of foodgrains was placed under statutory
control. What the Government desired and what was
D
implemented by these several orders was merely the
regulation and control of the trade in foodgrains by
rendering every activity connected with it subject to
.licensing and to the directions to be issued in pursuance
thereof and not directly to engage in the trade in
foodgrains. E

35. The respondent can derive no advantage from the
obligation on the part of the procuring agents to store the
f
paddy or rice properly - a stipulation on which Mr. Agarwala
laid considerable stress - and this for two reasons : (1) The F
purpose of the clause was to ensure that there was no loss
of foodgrains which were then a scarce commodity. That
this is so would be apparent from the terms of section
3(2)(d) of the Essential Supplies Act which was effectuated
by clause 9 of the licence granted under the Madras G
Foodgrains Control Order, 1947 which applied to all
,. dealers in foodgrains, be they procuring agents (who also,
as stated earlier, had to obtain and obtained these
licences), wholesalers or retailers. This clause reads :
H
114 SUPREME COURT REPORTS [2009] 11 S.C.R.

"9. The licensee shall comply with any directions ~
..
'L

A
that may be given to him by the Government or by
the officer issuing this licence in regard to the
purchase sale or storage for sale of any of the
foodgrains mentioned in paragraph (1) .............. "
B
The second reason is that the agreement executed by the
procuring agents in which this clause as regards storage
~
in proper godowns and undertaking responsibility for the
safe-custody of the grain occurs, is one which was a form
intended for execution not merely by procuring agents but
c . also authorised wholesale distributors i.e., those who
purchased their requirements from procuring agents;
admittedly the authorised wholesale dealers were not
"agents" and the fact that this condition was insisted on
even in their case is clear proof that it has no relevance to
D ' the question now under discussion. If therefore, appears )<
to us that the expression "agent" was used in the Intensive
Procurement Order as well as in the agreements mere.ly
as a convenient expression to designate this class of
dealers."
E
17. Applying the judgment 'Of this Court in the case of A.
Venkata Subbarao (supra) we hold that the High Court was
right in coming to the conclusion that the assessee was storing
the commodities in question in its godowns· as part of its own i
trading stock, hence it was not entitled to claim deduction for
F
such margin under Section 80P(2)(e) of the 1961 Act.

18. Before concluding, we may refer to the judgment of this
Court in the case of Commissioner of Income-tax, Madras v.
South Arcot District Co-operative Marketing Society Ltd. -
G (1989) 176 ITR 117 (SC). This judgment is heavily relied upon
by the counsel appearing on behalf of the appellant. In that case
lo.
the facts were as follows. Assessee was a co-operative society
under Madras Co-operative Societies Act. In the previous year
ending June 30, 1960, the Society entered into an agreement
H
UDAIPUR SAHAKARI UPBHOKTA THOK BHANDAR LTD. 115
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
with the Government of Madras under which it agreed to hold A
ammonium sulphate stock of the Government of Madras and it
agreed to store the stock on behalf of the Government of
Madras and to maintain a true and full account for the stocks
received and returned every month for a commission of Rs.5
per ton on the quantity of fertilizer issued by the assessee from B
the stock. The assessee received Rs.31,316 on this account.
The said sum of Rs.31,316 was originally included in its
turnover, in the case of assessment proceedings, the assessee
claimed exemption under Section 14(3)(iv) of the Income-tax
Act, 1922. The ITO held that the assessee was not entitled to c
exemption on the ground that the said amount of Rs.31,316
had been received for services rendered. The assessee
appealed to CIT(A) who agreed with the ITO stating that the said
amount received was for services rendered and as such the
assessee was not entitled to exemption. Before the Tribunal the
0
assessee contended that the receipt was for letting out its
godown for storage, and, therefore, the said receipts came
directly under Section 14(3)(iv) of the 1922 Act. The Revenue
contended that the receipts from letting of godowns, etc, to
members alone were exempt and the receipts in the present
case being on a commercial basis will not fall within the scope E
of the exemption. The Tribunal, however, held that the assessee
was entitled to exemption under Section 14(3)(iv) by observing
that the agreement with the Government of Madras clearly
indicated that the receipts were for letting of the godowns. The
Tribunal further observed that some service. element was there F
which constituted part of the receipts but it Was an insignificant
part of the whole amount of Rs.31,316. Hence, the Society was
entitled to exemption. The Madras High Cburt analysed the
agreement between the \parties and came to the conclusion that
the assessee was a stock-holder who had agreed to hold G
ammonium sulphate stock of the Government of Madras and
safely store the same on th~ir behalf and to issue the same on
certain terms and conditibns. Under the Agreement, the
fertilizers bags had to be stocked in a manner as directed by
H
116 SUPREME COURT REPORTS [2009) 11 S.C.R.

A the officers of the Government. The stocking and storage of the
bags had to be done in the manner indicated by the
Government. The assessee had to maintain particulars of
fertilizers received, released and held in stock. The assessee
had to engage at its own cost, godown-keepers and clerks to
B properly and efficiently carry on its duties under the agreement.
The assessee was to get a commission of Rs.5 per ton of the
quantity of fertilizers issued from the stocks on the instructions
of the Government. On the analysis of the agreement, the High
Court came to the conclusion that the assessee was a mere
C stock-holder and that the sum of Rs.5 per ton shown as
commission from the Government was only for letting of
godowns and though some services provided to were incidental
to such storage, the service element and payment thereof
constituted an insignificant portion of the amount received. In
the circumstances, the High Court upheld the view of the
. D Tribunal that the receipt of Rs.31,316 was exempt under Section
14(3)(iv) of the 1922 Act. This view was upheld by this Court.

19. In our view the judgment of this Court in South Arcot
(supra) has no application to the facts of the present case.
E Firstly, in every case of this nature one has to examine the
contract between the parties. One has also to examine the
conduct of the parties. In the case before us we are concerned
with Rajasthan Foodgrains & Other Essential Articles
(Regulation of Distribution) Order, 1976. In the present case we
F are concerned with statutory or compulsory sales. Each contract
has to be interpreted on its own terms. In the case of South
Arcot (supra) statutory or compulsory sale was not in issue.
Secondly, in the case before us we have a situation in which
there are two sales. The first sale is between the Government
G (through FCI) and the appellant-society, and the second sale
is between the appellant-society and Fair Price Shop. The
former is the condition precedent to the latter. That situation was
not there in the case of South Arcot (supra). Thirdly, in the case
before us issue price is set-off against the sale price which
H
UDAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD. 117
v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.]
clearly indicates that the netting/difference between the two A
prices constituted receipt on a commercial basis or net profit.
Lastly netting/difference also indicated that·the appellant had
treated the stock as its own trading stock as correctly held by
the impugned judgment. Therefore, in our view the judgment of
this Court in the case of South Arcot (supra) will not apply to B
the facts of the present case and consequently the appellant is
not entitled to exemption/special deduction under Section
80P(2)(e) of the 1961 Act.

20. For the aforestated reasons, we find no infirmity in the
impugned judgment, and, accordingly we hereby dismiss the C
civil appeal of the appellant-assessee with no order as to costs.

K.K.T. Appeal dismissed.

f