1988 PLP (Trib (PTD)

M.T. SIDDIQUI (PRESIDENT).-- These three appeals by a Cooperative Society, manufacturing agricultural implements, will be disposed of by the same order in view of the identical nature of objections which arise more or less from the same facts.

2. The appellant is admittedly a Cooperative Society which derives income from the manufacture of agricultural implements and also repairs etc. For the three years under appeal It. disclosed incomes of s.992, Rs.1,162, and Rs.1,229 and c)aimed the same to be exempt under the provisions of section 14 (,3) (a) or in the alternative under the provisions of section 14 (3) (b) (ii) and in any case under S.R.O. 25(K)/69, dated 20-11-1968 issued under section 60 of the Income Tax Act. The Income Tax Officer refused the exemption under all the three provisions and in view of the defective nature of accounts and the past history of the case, he estimated the net taxable income for the, first year at Rs.25,000 whereas for the last two years the tot,- incomes were estimated at Rs.16,000 and Rs.17,000, but the net taxable incomes were determined at Rs.10,000 and Ra.12,000, respectively. When the matter went to the Appellate Assistant commissioner he also negatived the claim on the three grounds but reduced the taxable income for the first year to Rs.15,000 while he maintained the I.T.O.'s estimates for the subsequent two years.

3. In these circumstances the learned counsel for the appellant contends before us that the decisions of the officers below are not justified. He places reliance on the provisions of section 14 (3) (a) to contend that no tax is payable by a Cooperative Society in respect of so much of its income, profits and gains as is derived by it as a result of its dealings with its members. It is contended that in view of the Notification No. R-Dis 291/11/25 dated the 25th August, 1925, exemption from tax with regard to the profits derived from business with non-members is also available, because in a case reported as Bihar State Cooperative Bank Limited v. C.I.T. Bihar and Orissa 1963 47 I.T.R. 607 the learned Judges have held while interpreting similar provisions, that the expression "the profits of a cooperative society" in the Notification, was wide enough in its scope to cover profits from any business and was not restricted to profits from business with members. It was argued that on the ratio of the decision, the exemption granted by this clause (a) of subsection (3) of section 14 must include the profits derived even from non-members. In the second place it was argued that under the provisions of section 14 (3) (b) (ii) the appellant's entire amount of profits, gains of the business would be exempt, as it was a society engaged in the business of a cottage industry. It was contended that although the term "cottage industry" has nowhere been defined in the Income Tax Act yet we can have a recourse to this definition from the Sales Tax Act which is also a Central Legislation and all the tests laid down therein, for availing of an exemption to a cottage industry, namely, a small capital, work by the members of the society themselves etc. etc. would be found to correspond in this case as well. Therefore income of the appellant would be exempt under this clause as well. Finally, reliance was placed on S.R.O. No.25 (K)/69 dated 20-11-1968 to contend that the appellant was manufacturing agricultural implements and was deriving income from repairs thereof. Therefore, the profits of the appellant were also, thus exempt. A chart was submitted to show that for the three years under consideration, the appellants sales of agricultural implements were in the ratio of 80: 75: 79, respectively to the overall sales. On this basis it was argued that at least to this extent the determined profits were not taxable.

4. The D.R. on the other hand maintains that section 14 (3) (a) which was enacted in 1960 clearly lays down that the tax shall not be payable by the cooperative society in respect of so much of its income, profits and gains as is derived by it, as a result of its dealings with its members. This, therefore, clearly means that only profits resulting from the dealings with members are exempt, while profits arising from dealings with non-members are not so exempt under the Pakistan I.T. Act. He then contends that the Notification relied upon by the appellant has not been produced nor is it available and, therefore the judicial interpretation of that Notification on the basis of the Indian Case relied upon cannot be accepted in face of the clear words of the Pakistan I.T. Act. So far the claim for cottage industry exemption is concerned the D.R. maintains that this claim was negatived both by the assessing officer as well as by the learned AAC as they found that the appellant was not carrying on cottage industry in any sense. The turnover and the capital employed also establish this fact and no analogy can be drawn from the provisions of Sales Tax Act. Even if it were to be so, the conditions laid down therein also cannot be fulfilled by the appellant for many reasons. Finally it is urged that so far as the exemption claimed under SRO 25 ( K ) /69, dated 20-11-1968 is concerned the same was repelled by the officers below as it was found that the appellant was a manufacturer of saw-gin machine mainly. These could not constitute agricultural implements to which the said notification grants an exemption. There fore, the officers below were fully justified in repelling all the contentions of the appellant. In any case it is argued that for the subsequent two years the I.T.O. had himself granted partial exemption to the incomes and whatever the income was, therefore, derived from such exempted sales of the agricultural implements, has already been exempted from the levy of income-tax.

5. We find that so far as the appellant's dependence on the Notification No.R.Dis 291 (II)/25, dated 25-8-1925 is concerned, no adjudication is possible in absence of that Notification. It is true that the case relied upon has been interpreted in a way the appellant contends and we quote below the relevant excerpt from that decision on which reliance has been placed:- "It was held by Hidayatullah, J. in that case that the expression the profits of any cooperative society in the notification was wide enough in its scope to cover profits from any business and was not restricted to profits from business with members. Once a cooperative society is allowed by the appropriate authority to extend its business operations to trading with persons other than its members and there is such an extension of the business of the society, the general words of the notification include the profits from the business with non-members within the exemption clause." We, however, find that in absence of the Notification, we cannot decide whether the appellant's case is fully covered by this Notification or not. We cannot even ascertain whether the said Notification still subsists or has been rescinded. No' decision can therefore, be expected from us on the basis of this Notification and its judicial interpretation. On the other hand we find force in the learned D.R.'s contention that in Pakistan the law in this behalf has been positively amended. Subsection (3) of section 14 in this behalf may be usefully quoted below:- (3) The tax shall be payable by a cooperative society including a co-operative society carrying on the business of banking, (a) in respect of so much of its income profits and gains as is derived by it as a result of its dealings with its members:" A reading of the above provisions clearly shows that profit of cooperative society derived by it as a result of dealing with non-members no more enjoy exemption under the Pakistan Income Tax A Act and the learned Counsel for the appellant has not been able to bring to our attention any other provision under which such profits can be exempted. As the learned Departmental Representative was contending it is quite possible that the present enactment has been brought about to undo the effect of the judicial pronouncements and the circular of the Indian Central Board of Revenue relied upon by the learned Counsel. In any case even if we were to hold that circular subsists it is patent that the same was issued as far back as 1925 whereafter the law in India and Pakistan has undergone lot of changes and in the presence of the clear words of subsection (3) of section 14 we cannot now hold that the profits earned by a Cooperative Society from its dealings with non-members can be exempted. Even if there was a conflict between the circular instructions apparently issued under the authority of section 60 of the Income Tax Act and the provisions of later pronouncements and this would again lead to the same result, namely, that now under the Pakistan Income Tax Law, only those profits of a Cooperative Society are not liable to tax as are derived by it as a result of its dealings with its members. We are therefore, clear in our minds that the appellant is not entitled to exemption which is claimed under section 14(3)(a). We also find that the appellant also cannot claim the benefit of exemption from tax on the basis of a cottage industry as admittedly this term has not been defined under the Income Tax Act and as the learned Appellate Assistant Commissioner has pointed out the term "cottage industry"' commonly understood would mean an industry on a small scale with meagre capital and where the members participate as workers or artisans. This analysis of the learned A.A.C. is in complete harmony 8 with that given by the Lahore High Court and relied upon by the learned Counsel for the appellant. If we test the appellant's case in the light of this definition we again find that the appellant's business is substantial, his total assets exceeds Rs.2,00,000 the deposits themselves exceed a lac of Rupees the share capital of the members alone exceed Rs.15,000, the members of the appellant society have not been working as workers and artisans and we find that the activities themselves are multifarious and substantial. In this view o the matter the exemption provided by section 14 (3) (b) (ii) also cannot be availed of by the appellant, the factual plain itself, we cannot hold that the appellant, is a cottage industry.

6. Coming to the appellant's claim under Notification exempting profits derived from dealing in agricultural implements we find that the appellant has a substantial case, as admittedly it manufactures agricultural implements and deals in them. The plea of the Departmental Representative that the appellant is a manufacturer of Sawgins, therefore cannot be pressed into service so far as the income derived from manufacture and sale of agricultural implements is concerned. The facts on the record establish conclusively that the appellant does manufacture agricultural implements and has furnished to the Income-tax Officer data contending that for the three years under review 80%, 75% and 79% of its profit making activities comprise of manufacturing goods "of this category. It 'appears that this claim has been inadvertently ignored by all the officers concerned. While, therefore, confirming the estimates elf the incomes we would direct the Income-tax Officer to scrutinise the appellant's contention regarding its exemption under this Notification and allocate the total income of Rs.15,000, Rs.16,000 and Rs.17,000 to taxable and non-taxable incomes on the basis of the ratio provided by the appellant, if the same are found to be correct, otherwise he should himself determine the extent of the exempted incomes under this notification.

7. All the three appeals will be disposed of accordingly. M.B.A.1522/T Order accordingly.