Commission on Sugarcane Marketing by Cooperative Society Constitutes Business Income Eligible for Section 80P Deduction.

ORDER

1. All these appeals have been filed by the Revenue against the orders passed by the ld. CIT(A)-1, Lucknow on various dates under section 250 of the Income Tax Act, 1961, partly allowing the appeals filed by the assessee against the orders of ld. AOs at Gonda, Basti and Bahraich. In all these appeals, the grounds of appeal are common and are reproduced as under:-

“1. Whether the Ld. CIT(A) was right, without giving a finding of facts, of efforts made in earning “commission” from sugar mills on sugarcane independently supplied by sugarcane growers in catchment area to sugar mills at rates determined by the state government, to conclude that such receipts were “business” receipts.

2. Whether the Ld. CIT(A) was right in directing deduction under section 80P in respect of such gross receipts from sugar mills, especially without giving finding of fact that such receipts were duly earned as business receipts.

3. That the appellant also craves to modify amend, change and revise the above grounds of appeal and add further grounds of appeal, if necessary.”

2. As all these appeals are on a common issue, these appeals are being taken up for disposal, vide a common order. Appeal in ITA No.243/Lkw/2020 in the case of M/s Cane Development Union, Balrampur for the Assessment Year 2014-15 is being taken as a lead case and our findings in the said case will apply mutatis mutandis to the other appeals.

2.1 It is also observed that there is a delay in the filing of some of the appeals by the Department mainly in ITA No. 34/Lkw/2021 (delay of 109 days), ITA No.30/Lkw/2021 (delay of 108 days) and ITA No.31/Lkw/2021 (delay of 149 days). However, the Department has filed a condonation petition, in which it has been pointed out that all these appeals pertained to orders that were passed by the ld. CIT(A) during the first phase of the Covid -19 Pandemic and drew our attention to the orders of the Hon’ble Supreme Court in Suo Moto Writ Petition (Civil) No. 3 of 2020/Cognizance for Extension of Limitation, In re, wherein the Hon’ble Apex Court having regard to the situation arising from difficulties being faced by litigants across the country in filing of petitions / applications / suits / appeals etc., had extended the period of limitation prescribed under any general or special laws w.e.f 15.03.2020 till further orders. This period of limitation was extended from time to time and the entire period of limitation involved in these appeals is seen to be covered by the orders of the Hon’ble Supreme Court. Therefore, in consideration of the same, the delay in filing of any of the appeals is condoned and all the appeals are being taken up for adjudication.

3. The facts of the case, in ITA No.243/Lkw/2020, are that the same was picked up for scrutiny on account of large deduction claimed under Chapter VI-A. During the course of assessment proceedings, the ld. AO noted that the assessee had declared income from commission and also interest earned from the bank on deposit of surplus funds available with the assessee as “profit and gains” of business, whereas in his opinion, the same ought to have been disclosed under the head, “income from other sources” as per the provisions of section 14(F) of the Income Tax Act, 1961. The ld. AO opined that as per the Income Tax Act, the assessee had no choice to divert income of one head to another head because each head of income had separate provisions for granting of exemption or deduction. Accordingly, the assessee was asked to show cause as to why the deduction under section 80P should not be denied on account of these incomes. The interest on deposits was observed to be of Rs.3,57,10,482/- and commission receipt from Chini Mills on supply of Cane by its members was seen to be Rs.4,06,81,322/- in the accounts of the assessee, but in the data base of the Income Tax Department and the ITR filed by the assessee, the amounts were seen to be Rs.4,27,820/- on account of interest and Rs.7,06,01,192/-on account of commission, which had been claimed as exempt under section 80P of the I.T. Act, 1961. From the same, the ld. AO maintained that the books were not reliable and correct. He also decided to initiate a penalty under section 271B for noncompliance of the provisions of section 44AB of the I.T. Act, 1961. On the issue of allowability of deduction under section 80P, the ld. AO rejected the claim of the assessee on account of the decision of Hon’ble High Court of Delhi in the case of Mantola Co-Operative Thrift & Credit Society Ltd. v. Commissioner of Income-tax in ITA No.569/2013/, wherein the Hon’ble High Court clarifying the position of applicability of exemption under section 80P(1) held that section 80P provides partial exemption restricted to the specified, “earning” or, “income” in sub section (2) and not the entire income. He quoted from the provisions of section 80P to point out that a cooperative society engaged in the marketing of agricultural produce grown by its members, shall qualify for deduction under this section with respect to the entire amount arising from profits and gains of its activities that are attributable to such work. On the other hand, income from other sources covered for income of every other kind which cannot be excluded from total income, if it is not chargeable to income tax under any of the heads specified in items A to E of section 14. Therefore, he held that, “commission received from sugar mills on the supply of sugar cane by the members of the society and the interest income earned out of surplus fund was assessable under the head, “income from other sources”. The ld. AO pointed out that the assessee had no income assessable under the head, “income from profits and gains of the business”. However, the assessee had earned income from commission and interest on deposits of surplus funds available with it. Thereafter, the ld. AO applying the case of the Hon’ble Supreme Court in the case of Totgars, Co-operative Sale Society Ltd. v. Income-tax Officer held that since the two incomes did not constitute the operational income but constituted other income which accrues to the society, the assessee’s claim of deduction under section 80P was fit to be rejected. An identical order was passed by the ld. AO in the case of Cane Development Council, Balrampur for the assessment year 2014-15 and similar additions were made in the other cases that are before us.

4. Aggrieved by the orders of the respective Assessing Officers’ in all these cases, the assessees’ went in appeal before the ld. CIT(A)-1, Lucknow on various dates. In the lead case, it was submitted that the assessment order was not justified or correct because the income of the assessee came from marketing of agricultural produce by the society which is totally covered under section 80P(2)(i)(a)(iii) of the Income Tax Act, 1961. It was submitted that the issue was covered by the decision of the Hon’ble Allahabad High Court in the case of CIT v. Co-operative Cane Development Union Ltd. (1973) U.P.T.C. 113 and ITO v. Cooperative Cane Development Union Ltd. [IT Appeal Nos. 124 to 129 (Lkw.) of 2007] and ITO v. Cooperative Cane Development Union Ltd. [IT Appeal No. 557 (Lkw.) of 2015, dated 9-10-2015]. It was also submitted that the issues was covered by the judgment of the ITAT Lucknow ‘A’ Bench in the case of ITO, Ward-2 Lakhimpur Kheri v. Cooperative Cane Development Union in ITA No. 85/1/2002 and in various other cases by CIT(appeals). The ld. CIT(A) considered the submissions made by the assessee and the case laws cited before him and after reproducing the provisions of section 80P, he upheld the addition in respect of interest income on FDRs received by Cooperative Societies in view of the judgment of the Hon’ble Supreme Court in the case of Totgars Cooperative Sale Society Limited (supra) as,in his opinion, it was evident that the interest income received on FDRs were not attributable to the business of the assessee, which was engaged in the marketing of sugarcane produce and providing fertilizer and seed on discount basis to the farmers which were its members. However, with regard to commission income, the ld. CIT(A) held that the said income was different from the interest income as this income had clearly been derived by the assessee society from the activity of marketing of agricultural produce of its members. He noted that the assessee society had received commission in lieu of sale of sugars made by the cane growers to the sugar mills and for carrying out the developmental activities as specified under U.P. Sugarcane (Regulation of Supply & Purchases) Act, 1953 read with the U.P. Sugarcane (Regulation of Supply & Purchases) Rules, 1954. He, therefore, held that the assessee society was eligible to claim deduction under section 80P on commissioned income which it had derived from the marketing of agricultural produce of its members.

5. The Revenue is aggrieved at this allowing of deduction under section 80P by the ld. CIT(A), on account of commission received by the Cane Development Council and the Cooperative Cane Development Unions. Accordingly, they have preferred these grounds of appeals in these cases. Arguing for the Revenue, Sh. Manu Chaurasia, ld. CIT DR and Sh. Sunil Kumar Rajwanshi, ld. Addl CIT DR, pointed out that the ld. CIT(A), before granting the deduction under section 80P had not given any finding of fact that the Cane Development Council or the Cooperative Cane Development Unions had made any efforts in earning the commission from sugar mills on sugarcane which was independently supplied by the sugarcane growers in their respective areas to the sugar mills, at rates determined by the State Government and therefore, these receipts could not be held to, “business receipts”. In view of the fact that the ld. CIT(A) had not given a finding that these were business receipts, whether he was justified in giving a deduction under section 80P. The ld. CIT DR also read out from the order of the Hon’ble ITAT in the case of ITO v. Sahkari Ganna Vikas Samiti (2022) (Allahabad-Trib) wherein the ld. CIT(A) had granted deduction under section 80P to that assessee without deciding whether the society was a cooperative society or not or whether without addressing the grievance of the ld. AO that no explanation had been furnished by the assessee as to the nature of commission income, the non-furnishing of audit report and the unreliability of the books – the matter had to be remanded back to the ld. AO for doing the same. The ld. CIT DR and the ld. AR argued that in view of the facts that these matters were similar matters, they should be remanded back to the ld. AO for such a finding.

6. On the other hand, Shri. Jagat Narayan Shukla, Advocate appearing on behalf of the assessee submitted that the matter was covered by previous decisions of the Tribunal in the assessee’s own case in ITO v. Co-operative Cane Development Union Ltd. [IT Appeal No. 352 (Lkw.) of 2011, dated 2-12-2011], in the case of Cooperative Cane Development Union Ltd. (supra), in the case of ITO v. Shakari Ganna Vikas Samiti Sitapur [IT Appeal No. 226 (Lkw.) of 2013, dated 25-6-2014] and in the case of ITO v. Roza Sahkari Ganna Ltd. [IT Appeal No.499 (Lkw.) of 2013]. He further submitted that the commission that was earned by the Cooperative Cane Development Council and the Cooperative Cane Development Unions was on account of the activities that they performed and therefore, they were business receipts which were eligible for deduction under section 80P of the Act. He also submitted that the ld. CIT(A) while granting the relief had referred to the U.P. (Regulation of Supply and Purchases) Act, 1953 and the U.P. Sugar Cane (Regulation of Supply and Purchase) Rules, 1954 and therefore, it could not be said that he had not given a finding that the commission that was received was as a result of the business activities of the assessees. He, therefore, prayed that the orders of the ld. CIT(A) on the subject may be upheld.

7. We have duly considered the facts and circumstances of the case. In the very first instance, we find that the judgments that had been placed by the ld. AR are not relevant to the facts of the present case because the issue in those cases was with regard to allowance of deduction under section 80P in respect of interest income. We notice that the allowability or disallowance of interest income is not before us as a ground of appeal by the Revenue and the assessee has not filed any appeal on the disallowance that has been sustained by the ld. CIT(A). Therefore, these judgments will have no relevance in the present matter. Similarly, the judgment cited by the Ld. DRs is also on the subject of whether that assessee was a cooperative society and whether they had clarified for what purposes they had received that commission. Neither of these two issue are relevant for us because the nature of the assessees has not been questioned by the AOs in the present cases and the assessees have submitted before the lower authorities that they received the commission on account of marketing of the produce of their members and farmers in their areas and activities under the UP Sugarcane (Regulation of Supply & Purchases) Act, 1953 read with the U.P. Sugarcane (Regulation of Supply & Purchases) Rules, 1954. Hence it too is inapplicable to the facts of the cases that are before us. The present matter relates to whether the commission that has been earned by the Cane Development Councils or Cooperative Cane Development Unions (Cane Growers Cooperative Society or Societies) are income arising from their business activities and thereby liable for deduction under section 80P, or whether they are income from other sources. We observe that both Cane Development Councils and the Cooperative Cane Development Union (Cane Growers Cooperative Society or Societies) function under the U.P. Sugar Cane (Regulation of Supply and Purchase) Act, 1953 and the U.P. Sugar Cane (Regulation of Supply and Purchase) Rules, 1954. The functions of the Cane Development Council are laid down in section 6 of the said act which specify that the Councils will consider and approve plans for the development of sugarcane production in a zone and devise ways and means for its execution. It has also been tasked with taking steps for development of irrigation and other agricultural facilities in the zone, to take steps for the prevention of disease and for pest control, to impart training and technical knowhow to farmers and support in the form of fertilizers, manures and seeds and other functions as may be prescribed. The functions of the Cane Growers Cooperative Society have been laid down in Rule 57 of the rules to be all arrangements in connection with the sowing, supply and sale of sugarcane by the members of those societies in accordance with the general or special instructions issued by the Cane Commissioner from time to time. Thus from a perusal of the Act and Rules, it is evident that the Cane Development Councils and the Cooperative Cane Development Unions play an important role in the Sugarcane production and supply within the areas that are assigned to them. The Act also lays down what payments are to be made to these bodies by the occupier of the factories. In section 18 of the said Act, it has been stated that the occupier of a factory or a Gud, Rab or Khandsari sugar manufacturing unit, shall make a contribution for every one maund of cane purchase by the factory or the Gud, Rub or Khandsari sugar manufacturing unit in the following manner;

7.1 In the rules, with regard to payments, it had been pointed out in Rule 45 that the payments for the cane shall be made only the cane grower or to his representative duly authorized by him in writing or to a Cane Grower Cooperative Society. With regard to commission, it has been laid down in Rule 49, that the occupier of a factory shall pay commission on cane purchase @ 3% of the minimum statutory cane price fixed by the Government of India of which 75% shall be payable to the Cane Grower Cooperative Society and 25% would be payable to the Council. Rule 50 lays down that in determining the proportion in which the payments of the commission shall be made to the Council and the Cane Growers Cooperative Society of an area, the State Government may take into consideration the, the financial resources and the working requirements of the Council and the Cane Growers Cooperative Society

7.2 A perusal of the Act and the rules shows that both the Cane Development Council and the Cooperative Cane Development Unions(or Cane Growers Cooperative Society) perform an important role in the cane production and marketing in a particular area or zone. While the unions are directly involved in the marketing of the sugar cane to the various factories, the Council performs a number of functions to facilitate the production and supply of sugarcane in the area assigned to it. Therefore, it is quite clear that the commission that is paid by the occupier of the factory or by Gud, Rub or Khandsari units is not on account of some investment that is made by these Councils or Unions with the factories but rather because of their role in production and marketing of sugar cane in that particular area. The payment of commission is therefore, attributable to the activity of production and marketing of sugarcane for which the Cane Development Councils and the Co-operative Cane Development Unions have been set up the under the Sugarcane Act and Rules. Since the Ld CIT(A) has made references to the functions performed under this Act and the Rules framed thereunder in his order, we hold that the Revenue is not justified in contending that he has not given a finding on the nature of the Commission received by the Assessees. We, therefore, uphold the decision of the ld. CIT(A) to allow the same to be deducted under section 80P as they are receipts from the business and not income from other sources. Accordingly, all the appeals of the Revenue, which do not seem to have taken cognizance of the assigned roles of the Cane Development Councils or Cooperative Cane Development Unions in the production of marketing of cane as per the U.P. Sugarcane (Regulation of Supply & Purchases) Act, 1953 read with the U.P. Sugarcane (Regulation of Supply & Purchases) Rules, 1954, are fit to be dismissed.

8. In the result, all the appeals of the Revenue in ITA Nos.243/Lkw/2020, 244/Lkw/2020, 245/Lkw/2020, 246/Lkw/2020, 247/Lkw/2020 and ITA Nos.34/Lkw/2021, 30/Lkw/2021 and 31/Lkw/2021 are dismissed.