Commissioner of Income Tax vs Krishak Sahkari Ganna Samiti Ltd.

Opinion of this court is sought for by the Tribunal, Allahabad Bench, Allahabad through this reference u/s 256(1) of the Income Tax Act, 1961 in regard to the following question formulated by it :

"Whether on the facts and in the circumstances of the case and on a proper interpretation of the objects of the society and the provisions of section 80P of the Income Tax Act, 1961 the Appellate Tribunal was justified in holding that the interest earned by the assessee cooperative society from its members was covered by the provisions of section 80P(2)(a)(i) of the Income Tax Act, 1961 and, therefore, exempt from tax ?"

This reference relates to the assessment years 1975-76 and 1976-77 pertaining to Krishak Sahkari Ganna Samiti Ltd., Lakhimpur Kheri.

The statement of the case is as follows :

The assessee society was formed with the main object of organizing increase in sugarcane cultivation and purchase and sale of sugarcane crops at profitable price, expeditious supply of sugarcane to mills and ensuring prompt payment to the farmers from the mills. One of its object is to arrange for funds for the fulfilment of these objects which stands incorporated in Pratiman Upvidhiyan of Sahkari Ganna Vikas Samitiyan published by the Registrar, Sugarcane Cooperative Societies, which has been approved by the Government of Uttar Pradesh which has been marked as Annexure-A and directed to form part of the statement of the case. In the course of proceedings for assessment it was claimed before the Income Tax Officer that the interest received by the assessee society from its members was also entitled to exemption u/s 80P but the Income Tax Officer held that since the business of the society was not banking or providing credit facilities to its members exemption on interest received from them is not entitled to exemption. The assessee society went up in Appeal before the Commissioner (Appeals). The Appellate Authority agreed with the view of the Income Tax Officer, who observed that the Income Tax Officer has only considered the receipts and not the expenses for earning the income and thereby directed the Income Tax Officer to make assessments afresh. The assessee society went up before the Appellate Tribunal, which, however, held that the facts of the case had not been properly appreciated either by the Income Tax Officer or by the Income Tax Commissioner inasmuch as one of the main objects of the assessee co-operative society was to lend to its members as per Object No. 4 and even though it was carrying on money-lending business it was providing credit facilities to its members in the sense that it lent money to them and earned interest thereon and therefore sub-clause (i) of clause (a) of sub-section (2) of section 80P of the Income Tax Act, 1961 was applicable and the interest income earned by the assessee society from its members was liable to exemption.

Sri Prakash Krishna, learned Standing counsel of the revenue submitted as follows :

Section 14(3) was inserted in the Indian Income Tax Act, 1922 by Finance Act, 1955 providing that the tax shall not be payable by a cooperative society including such a cooperative society carrying on the business of banking in respect of profit and gains of business carried on by it in respect of interest and dividends derived from its investment with any cooperative society, etc. The old Income Tax Act, 1952, however, was repeated by Income Tax Act, 1961, section 81 of which provided income of cooperative society exempt on certain circumstances mentioned therein. By Act 2 of 1907 section 80P was inserted for the first time providing that a cooperative society shall be entitled for deduction in respect of sums specified in sub-section (1) or sub-section (2). Laying emphasis on the words "providing credit facilities to its members" it was submitted that the word "credit facilities" will draw its colour from the word "business of banking" mentioned in the earlier part meaning thereby that only those cooperative societies whose chief or main activity is to provide credit facilities to its members only would be entitled for deduction.

Reliance was placed on following decisions :

(i) Commissioner of Income Tax, Tamil Nadu-III Vs. Madras Autorickshaw Drivers'' Co-operative Society Ltd., wherein it was observed that for invoking or applying section 80P(2)(a)(i) it was not permissible to make a break-up of the income of the society as so much derived from the provisions of credit facilities and so much from other income, if the society itself in its true nature and object is not engaged in the business of providing credit facilities.

(ii) Additional Commissioner of Income Tax Vs. U.P. Co-operative Cane Union, in which it was held that the expression "providing credit facilities" takes it colour from the activity of banking and that it was not necessary that activities of the cooperative society from which it draws income must be the chief source of income.

(iii) H.E.H. Nizam''s Religious Endowment Trust, Hyderabad Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, wherein it was held to the effect that the burden lay upon the assessee to prove for granting deduction that the income falls within the four corners of the provision granting deduction under Chapter VI-A of the Income Tax Act containing section 80P.

(iv) Commissioner of Income Tax, Gujarat Vs. M/s. Cellulose Products of India Ltd., wherein it was held that only where there is genuine doubt about the interpretation of a fiscal statute or where two opinion is capable of being formed with the rule of interpretation that a provision granting deduction should be construed liberally so as to effectuate the object thereof may be taken recourse to.

(v) Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, holding that the liberal interpretation which advances the purpose and object of beneficent provisions cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. On facts, the standing counsel of the revenue contended that from the main object of the assessee society it is clear that it being not a credit cooperative society is not entitled for deduction of its interest income.

Sri Prakash Krishna also submitted arguments in writing which is on the record.

Sri V.K. Rastogi, learned counsel appearing on behalf of the assessee Co-operative Society, on the other hand, contended as follows :

Section 80P was obviously enacted with a view to encourage and prompt growth of cooperative sector in economic life of our country enumerating various heads of exemption each one of which is a distinct and independent head and thus whenever the question whether a particular category of income of a cooperative society is exempt from tax it has to be seen whether such income falls within any of the several heads of exemption. Where the gross total income of a cooperative society includes any income referred to in sub-section (2) such income has to be deducted to the extent specified therein. Sub-section enumerates the cooperative societies with reference to their activities. Sub-section (3) lays down priority of deduction. This section allows deduction of either whole of the income or part thereof as specified in various clauses of sub-section (2). Accordingly, the extent of deduction will be as follows :

(i) Total exemption - The whole of the amount of profits and gains of business attributable to anyone or more of the activities enumerated in 7 sub-clauses of clause (a) of sub-section (2) will be allowed as deduction. Similarly, the whole amount of profits and gains arising to a primary cooperative society from the supply of milk, oil-seed, fruits or vegetables raised or grown by its members to a federal co-operative society, the Government or a local authority, a Government Company or a corporation will also be allowed as deduction. Likewise, the whole of the following types of income will equally be allowed as deduction :

(i) Interest or dividends derived by a cooperative society from its investments with any other cooperative society.

(ii) Income derived b the cooperative society from the letting of godowns or warehouses for storage, processing of facilitating the marketing of commodities.

Attributable to such activities - The expression ''attributable to such activities'' has been used in clauses (a) and (c) of sub-section (2) of this section. This expression must be understood in a broad sense and it cannot be equated with the express ''derived from''.

Therefore, interest, from securities held by a cooperative bank as its liquid assets as required by the Banking Regulation Act and directions of the Reserve Bank of India and amounts received as subsidies from the government as inducement for opening branches and as compensation in the matter of grant of loans to the poorer sections at lower rates of interest would definitely be attributable to the banking business. Similarly, the income earned by a cooperative bank by way of commission and brokerage by dealing in bills of exchange, subsidy from government, admission fee from members, incidental charges and financial penalties are all attributable to the business of banking and, hence, eligible for deduction u/s 80P.

The expression ''attributable to'' is much wider than the expression ''derived from'' and it covers receipt from sources other than the actual conduct of the business of the assessee. Accordingly, where a cooperative society invested profits in accordance with statutory requirement for carrying on the business of supply of sugarcane, the interest earned thereon would be attributable to the carrying on of the business.

Credit co-operatives - A co-operative society engaged in providing credit facilities to its members is entitled to the deduction of the whole of income attributable to such activities. In order that banking or providing credit facilities may constitute a business, it is necessary that these activities must be the chief source of income.

The tax relief u/s 80P(2)(a)(i) is a grant by Parliament not to category of income but to category of assessees, namely, a cooperative society answering the description of a society engaged in carrying on the business of providing credit facilities to its members. If the society in question does not answer this description, it is not entitled to the relief. This has to be considered by reference to (i) the principal object of the cooperative society, and (ii) the character of the business actually carried on by the society in terms of the object. For invoking or applying this provision, it is not permissible to make a break up of the income of the society and so much derived from the provision of credit facilities and so much from other income, if the society itself, in its true nature and object, is not a society engaged in the business of providing credit facilities. He relied upon a Division Bench decision of our own High Court in CIT v. Co-operative Cane Development Union Ltd. (1979) UPTC 1023. He too submitted his arguments in writing which is on the record.

We have carefully perused the backdrop of the enactment and the decisions relied upon by both learned counsel and the booklet "Sahkari Ganna Vikas Samitiyon Ki Pratiman Upvidhiyan" approved by the Uttar Pradesh Government and published by the Registrar, Sugarcane Cooperative Societies, which is in Hindi.

Both learned counsels took us to the objects of such cooperative societies printed at Page 3 under Item No. 4.

7.1 Paragraph 4 of this booklet prescribes its main and subsidiary aims. Paragraph 4 narrates its seven main objects.

7.2 Paragraph 4-A 4 appears to be most relevant main object for settling the controversy which has cropped up between the parties, the English translation of which as agreed to by both learned counsels, is as follows :

"4. Providing better quality of seeds of Sugar Cane, maneuver and fertilizer, pesticides, agricultural implements irrigation equipments and arrangement of other articles for agricultural purposes and to provide or to arrange credit facilities for this purpose to its members."

7.3 Having given our most anxious thought to the aforementioned main object enumerated as above as also other six main objects and Chapter XIII which contains the heading "loan" which is at Pages 33 to 36 of the booklet it is clear to us that the assessee cooperative society would lend to its members or would arrange finance to its members through someone else''s agency to enable them to purchase good seeds of sugarcane, fertilizers, etc., and that loans will not be given to its non-members besides it will be given only in cash to enable its members to purchase seeds, fertilizers, etc., and interest is to be realized by the society from its members on such lendings and, therefore, we find substance in the contention of Mr. Rastogi that the main distinction is that the realization of interest was not on account of goods sold on credit and that the decisions relied upon by, the learned Standing counsel of the revenue are clearly distinguishable and not applicable.

7.4 In Co-operative Cane Development Union Ltd.''s case (supra), strongly relied upon by Mr. Rastogi, our own High Court has held as follows :

Clause (c) of section 80P(2) exempts income of cooperative societies to the extent mentioned in that section if the profits or gains are ''attributable'' to the activity in which the cooperative society is engaged. The findings are that under statutory provisions the cooperative society is bound to invest 25 per cent of its profits in government securities. The assessee complied with this provision. In the process, it earned interest on these investments. The question is whether such profits or gains are attributable to the activity of supplying sugarcane carried on by the assessee. In Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, the Supreme Court held that the expression ''attributable to'' suggests that the Legislature intended to cover receipts from sources other than the actual conduct of the business of the assessee. The investment of the statutory percentage of its profits in government securities was a condition of the carrying on the business. The profits or gains from such investments were connected with or incidental to the carrying on of the actual business. They were, in our opinion, rightly held by the Tribunal to be attributable to the activity carried on by the assessee within the meaning of clause (c) aforesaid. We, therefore, answer the question referred to us in the affirmative in favour of the assessee and against the department."

Following the aforementioned ratio laid down by the Division Bench which we consider binding on us, we too answer the question referred to us in the affirmative in favour of the assessee cooperative society and against the revenue.

In the peculiar facts and circumstances we make no order as to cost.