# A. Venkata Subbarao, etc v. The State of Andhra F - **Citation:** [2009] 11 S.C.R. 90 - **Court:** Supreme Court of India - **Decided:** 2006-11-02 - **Case number:** Civil Appeal No. 4399 of 2009 - **Bench:** S.H. KAPADIA ANO AFTA6 Al-AM - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/a-venkata-subbarao-etc-v-the-state-of-andhra-f-24970 - **Pages:** 28 ## Headnote 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 D trading stock. 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 •f i 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~rtdowns and warehouses for storage; (2) income derived from processing; and (3) 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, storage, processing or facilitating the marketing of commodities. The words "storage, processing or facilitating the marketing of commodities", according to the revenue, were governed by the preposition "for'' and they I denoted the purposes for which godowns or warehouses 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 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. A clear on a plain natural construction of the language used ~ 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 cooperative society, including a co-operative society E carrying on the business of banking - (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 coG operative society~ If, therefore, a co-operative society 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 B circumstances do bring out the effect of the transaction. In the 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 c goods, under: the agreement, at prices fixed by the assessee, 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 D despatches were made, the price was debited to the agent and 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 or use of the godowns would not fall under clause (e). In the case of Mis. Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial A 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 "sales" within the meaning of Bengal Finance (Sales Tax) Act, 1941 and sales tax was leviable on the turnover. In that case B ;.. 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 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 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 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, D E F 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 c the Head "commission". Both ~he points stand covered by the 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 G the prices at which the rice could be sold by the licensed ~- 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 t UDAIPUR SAHAKARI UPBHOKTA THOK BHAN DAR LTD. 109 v. COMMNR. OF INCOME-TAX [S.H. KAPADIA, J.] 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 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 B 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 0 "commission" or "remuneration" which would belong to the 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 A in the purchase ·and sale price was nece_ssary in order to 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.