Commissioner of Income Tax vs Co-operative Supply and Commission Shop Ltd.

V.K. Singhal, J.—The Income Tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question u/s 256(1) of the Income Tax Act, 1961, for decision of this court, in respect of the assessment year 1978-79 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest of Rs. 17,292 received by the co-operative society from 13 members and from bank on outstanding balances could qualify for exemption u/s 80P(2)(a)(i) of the Act ?"

The facts of the case are that during the course of examination of the books of account of the assessee, the Income Tax Officer found that the interest paid by the members on the closing balance as at the end of the accounting year was Rs. 15,167 and the assessee has also received interest from the bank of Rs. 2,125. The Income Tax Officer came to the conclusion that the said amount of Rs. 17,292 does not qualify for exemption as provided u/s 80P(2)(a)(i) of the Income Tax Act, 1961. According to the Income Tax Officer, interest from the members attributable to extending credit facilities by way of advancing loans or giving cash assistance or "guarantee" protecting them from the heavy rate of interest from other financial institutions, qualifies for exemption u/s 80P(2)(a)(i). Since this income is on the business transactions from "C" class members and is not attributable to extend credit facility, the amount was disallowed from exemption claim. The Commissioner of Income Tax (Appeals), following the judgment of the Tribunal for the immediately preceding year, allowed deduction and the second appeal preferred by the Revenue before the Income Tax Appellate Tribunal was also dismissed. The Income Tax Appellate Tribunal, in respect of the preceding assessment year (1977-78), has held that, where the primary object of a society is to provide credit facilities to its members whether as a loan or in any other way it will be entitled to deduction u/s 80P(2)(a)(i) of the Income Tax Act.

Reference was made in this judgment of the Tribunal to the decision of the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat-IV Vs. Karjan Co-op. Cotton Sale, Ginning and Pressing Society Ltd., and of the Karnataka High Court in Addl. Commissioner of Income Tax, Karnataka Vs. Ryots Agricultural, Produce Co-operative Marketing Society Ltd., , wherein the question was with regard to the interpretation of the provisions of Section 80P(2)(a)(iii), and it was held that the concept of marketing will include all activities connected with the process of taking over from the agricultural producer-members and handing over marketable commodities to the purchaser and all the intermediate processes connected with the marketing of the agricultural produce of the members. It was held that the term "marketing" cannot be restricted only to buying and selling activity. These judgments were approved by the Supreme Court in the case reported in Broach Distt. Co-operative Cotton Sales Ginning and Pressing Society Limited Vs. Commissioner of Income Tax, Ahmedabad,

From a bare perusal of the facts of this case, it would be evident that the dispute there was with regard to the interpretation of Section 80P(2)(a)(iii) and not of Section 80P(2)(a)(i) and, therefore, the interest charges, godown charges and insurance charges which were received by the assessee society as part of its marketing activity Or in the course of its marketing activity while marketing cotton of its members cannot be extended for the interpretation of Section 80P(2)(a)(i) of the Act.

Reliance was also placed by the Tribunal on the decision in U.P. State Warehousing Corporation Vs. Income Tax Officer, A-Ward and Another, where it was held that Section 10(29) of the Income Tax Act applies only to an authority constituted for the marketing of commodities and, evidently, such authority will specifically be a business enterprise. Ex hypothesi, the term "authority" there cannot possibly be construed as referring to an authority having quasi-Governmental powers. Any legal entity or juristic personality constituted by law for the purpose of marketing commodities would be an "authority" within the meaning of Section 10(29). It was further held that the corporation was entitled to exemption in respect Of income from letting of godowns and warehouses for the mentioned activities including facilitating of marketing of commodities. The judgment was also confirmed by the Supreme Court in Union of India v. U, P. State Warehousing Corporation [1991] 187 ITR 54.

Another judgment of the Gujarat High Court in Commissioner of Income Tax Vs. Gujarat State Warehousing Corporation, was also relied upon. From the facts of both these cases, it would be evident that there was no such dispute with regard to the interpretation of the provisions of Section 80P(2)(a)(i).

The provisions of Section 80P(2)(a)(j) are as under :

"Section 80P. Deduction in respect of income of co-operative societies.-- . . .

(2) The sums referred to in Sub-section (1) shall be the following, namely :--

(a) in the case of a co-operative society engaged in--

(i) carrying on the business of banking or providing credit facilities to its members, or ..."

The purpose of enactment of Section 80P was to encourage and promote growth of the co-operative sector in the economic life of the country. Construction with regard to exemption has to be taken separately when it has to be examined as to whether a particular income falls within one of the various heads of exemption as provided u/s 80P(2). The basic requirement of the above clause is that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. It is an admitted fact that the society is not engaged in the business of banking. The only point which has to be determined is as to whether providing credit facilities to its members would extend to supply of goods on credit ?

In Additional Commissioner of Income Tax Vs. U.P. Co-operative Cane Union, , the Allahabad High Court has interpreted this expression "providing credit facility" as taking its colour from the preceding expression, viz., "business of banking", In order that banking or providing of credit facilities may constitute a business, it is necessary that these activities must be the chief source of income. It was held that, where the goods are sold on credit, it is only a mode of carrying on of a business. It does not become a business pf providing credit facility and the society was held not entitled to exemption.

The Madhya Pradesh High Court in MALWA MILLS KARAMCHARI PARASPAR SAHAKARI SANSTHA Vs. COMMISSIONER OF Income Tax, M.P., has also held that since no part of the income of the assessee was attributable to the activity of selling goods on credit, the provisions of Section 80P(2)(a)(i) of the Act are not attracted.

The Madras High Court in Commissioner of Income Tax, Tamil Nadu-III Vs. Madras Autorickshaw Drivers'' Co-operative Society Ltd., has held that the object of the society was to purchase and sell autorickshaws, the payment by the members being effected in the form of hire purchase agreement, which could not be considered to be offering a credit facility by the society to the members concerned and, therefore, the same was held not entitled to exemption.

The Kerala High Court in Kerala Co-operative Consumers'' Federation Ltd. Vs. Commissioner of Income Tax, , has also interpreted the words "providing credit facilities" and it was held that it should be construed as similar to, or akin to "carrying on the business of banking", the preceding clause in the same Sub-section. It was held that every word in a statute should be construed in the context in which it occurs in order to discover its appropriate meaning.

The Madras High Court in Rodier Mill Employees'' Co-operative Stores Ltd. Vs. Commissioner of Income Tax, Tamil Nadu-V, , has held that even liberal construction of the expression "providing credit facilities" cannot include the mere sale of goods on credit by an out-and-out consumer co-operative society.

Section 5(b) of the Banking Regulation Act, 1949, defines "banking" as accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. The proper interpretation of the above clause, therefore, is that the exemption which had been contemplated by Section 80P(2)(a)(i) is in respect of banking as defined u/s 5(b) of the Banking Regulation Act, 1949. Admittedly, the assessee was not carrying on any of the businesses which may fall within this category. It is equally true that the words which are used in one particular clause have to be given the same colour and have to be understood as forming part of one genus of which they may be different species. The words "providing credit facilities" would, therefore, have to be interpreted to comprehend the business of lending services of credit facilities in connection with the business of banking. In order to constitute the business of banking, it is necessary that these activities must be the main source of income of the society. The facility of selling the goods on credit to the members is an activity of business of selling of goods of which the facility is only an incidence and it will not amount to providing credit facilities in the nature of the business of banking so as to amount to carrying on the business of banking or providing credit facilities to its members. As a matter of fact this clause is meant to cover societies which are carrying on the business of banking and in the course of their business are providing credit facilities to its members.

From a perusal of the various decisions and on the basis of the interpretation of the provisions of Section 80P(2)(a)(i) of the Act, we are of the view that the Income Tax Appellate Tribunal was not justified in coming to the conclusion that the interest on the outstanding balances in respect of supplies of goods would qualify for exemption u/s 80P(2)(a)(i) of the Act.

Accordingly, the reference is answered in favour of the Revenue and against the assessee.

No order as to costs.