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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 27th August, 2014.
+ INCOME TAX APPEAL 569/2013
MANTOLA CO-OPERATIVE THRIFT & CREDIT SOCIETY LTD.
..... Appellant
Through Mr. Sanjay Kumar, Jr. Standing
Counsel.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through Mr. Ajay Vohra, Ms. Kavita Jha and
Mr. Vaibhav Agnihotri, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL)
Heard the learned counsel for the parties in this appeal, which
relates to assessment 2008-09 and impugns order dated 28th September,
2012, by which it has been held that the interest income, earned by the
appellant-assessee, from the fixed deposits did not qualify for the
exemption under Section 80P(2)(a)(i) of the Income Tax Act, 1961
(,,Act, for short).
2. The appellant-assessee, a cooperative thrift and credit society,
was engaged in the activity of providing credit facilities to its
members. However, the finding recorded by the Assessing Officer and
the Income Tax Appellate Tribunal (Tribunal, for short) is that the
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appellant-assessee had surplus funds, which were not required for
carrying on the business of granting credit facilities to the members.
The said surplus funds were invested in fixed deposit receipts with
commercial banks, for an average maturity period of 500 days.
3. In fact, the argument raised before us is that as per the bye-laws
of the appellant cooperative society, only 50% of the thrift
mobilised/collected from the members could be given as credit to the
members, and the balance had to be kept in FDRs or other income
earning avenues. It was submitted that the alleged surplus in fact
formed the corpus and therefore interest earned was exempted.
4. Provisions of Sections 11 to 13 of the Act have no application
in determining exemption under Section 80P or in determining whether
interest income was taxable under the head "income from business" or
"income from other sources". Such differentiation between corpus or
non-corpus funds is not mandated and stipulated in Section 80P and for
determining the head of income; "income from business or profession"
or "income from other sources". There is a clear finding that the
interest of Rs.1,43,11,462/- was earned by way of investment of
surplus funds in FDRs with banks. The submission made by the
appellant assessee itself indicates and predicates that interest was
earned by investing surplus funds in fixed deposits.
5. The term or expression, "income" has been defined in Section
ITA 569/2013 Page 2 of 11
2(24) of the Act. By way of Finance Act, 2006, sub-section (viia) was
inserted to stipulate that profits and gains of business of banking,
including credit facilities, carried on by a cooperative society with its
members, is taxable and is included in the term, "income". The
aforesaid definition of term "income" is inclusive and a broad one.
Thus, the income of the appellant-assessee would be taxable under
Section 2(24), including the income earned by way of interest on the
FDRs with commercial banks. Section 80P provides partial
exemption, restricted to the specified "earning" or "incomes" in sub-
section (2), and not the entire income. For the purpose of the present
appeal, Section 80P(2) clause (a)(i) is material. Relevant part of the
said provision and clause (iii), for the sake of convenience, is
reproduced below:-
"80P. Deduction in respect of income of co-
operative societies.--(1) Where, in the case of an
assessee being a co-operative society, the gross
total income includes any income referred to in
sub-section (2), there shall be deducted, in
accordance with and subject to the provisions of
this section, the sums specified in sub-section (2),
in computing the total income of the assessee.
(2)The sum 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
(ii) x x x x x x x
ITA 569/2013 Page 3 of 11
(iii) the marketing of agricultural
produce grown by its members, or
xxxxxx
The whole of the amount of profits and gains of
business attributable to any one or more of such
activities."
6. No doubt, the term "attributable" is much wider than the term
"derived from", but the question still remains, whether the interest
income earned from the FDRs out of surplus funds, which were not to
be made available and given as credit to the members, can be treated as
income attributable to providing credit facilities to members. We need
not dilate on the said question as the issue was considered and stands
answered by the Supreme Court in the case of Totgars' Co-operative
Sale Society Ltd. Vs. Income Tax Officer, Karnataka , [2010] 322 ITR
283. In the said case, the assessee, a cooperative credit society, had
provided credit facilities to its members and was also marketing
agricultural produce of its members. It had surplus funds, which were
invested in short-term deposits and securities, like in the present case
where the surplus funds were invested in FDRs for an average period
of 500 days. The Supreme Court examined the issue whether the
interest income from the said surplus funds was eligible for exemption
under Section 80P(2)(a)(i) as income attributable to profit and gains of
business. It was observed that interest received from members for
providing credit facilities to them was exempt. Further, anything
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attributable to the said income would also be covered under Section
80P. It was highlighted that exemption is partial and not complete, i.e.
the whole income of the cooperative society does not get exemption.
In the facts of the said case, it was observed that the deduction being in
respect of certain incomes, the interest income earned out of surplus
fund, would not qualify for deduction as it was assessable under the
head "income from other sources".
7. Learned counsel for the appellant-assessee has submitted that the
aforesaid decision should not be applied to the facts of the present case,
for the assessee in Totgars' Cooperative Sale Society Ltd. (supra) was
not only functioning as a cooperative credit society, but was also
carrying on business of marketing of agricultural produce. Reference
was made to paragraph 10 of the said decision and it was submitted
that the surplus funds, which were generated, were out of marketing of
agricultural produce. The first distinction pointed out does not compel
and is unacceptable, as the assessee in the said case was a cooperative
credit society. Exemption on interest earned on investment of surplus
funds was the question, answered. How and why the assessee
generated the surplus funds, did not determined whether the interest
income was taxable under the head "income from business or
profession" or "income from other sources". Surplus funds did not
change their nature and character, depending on how they were
ITA 569/2013 Page 5 of 11
initially earned. Further in clause (iii), profits and gains attributable to
marketing of the agricultural produce of members stands exempt. The
issue specifically raised was, whether the interest income earned on
short-term deposits and securities out of surplus funds would be treated
as profit and gains of the business attributable to providing credit
facilities. It is in this context, the Supreme Court observed:-
" The assessing officer held, on the facts and
circumstances of these cases, that the interest
income which the assessee(s) had disclosed under
the head "Income from business" was liable to be
taxed under the head "Income from other sources".
In this connection, the assessing officer held that
the assessee Society had invested the surplus funds
as, and by way of, investment by an ordinary
investor, hence, interest on such investment has
got to be taxed under the head "Income from other
sources". Before the assessing officer, it was
argued by the assessee(s) that it had invested the
funds on short-term basis as the funds were not
required immediately for business purposes and,
consequently, such act of investment constituted a
business activity by a prudent businessman;
therefore, such interest income was liable to be
taxed under Section 28 and not under Section 56
of the Act, and, consequently, the assessee(s) was
entitled to deduction under Section 80-P(2)(a)(i) of
the Act. This argument was rejected by the
assessing officer as also by the Tribunal and the
High Court, hence, these civil appeals have been
filed by the assessee(s)."
ITA 569/2013 Page 6 of 11
" At the outset, an important circumstance needs to
be highlighted. In the present case, the interest
held not eligible for deduction under Section 80-
P(2)(a)(i) of the Act is not the interest received
from the members for providing credit facilities to
them. What is sought to be taxed under Section 56
of the Act is the interest income arising on the
surplus invested in short-term deposits and
securities which surplus was not required for
business purposes. The assessee(s) markets the
produce of its members and wholesale proceeds at
times were retained by it. In this case, we are
concerned with the tax treatment of such amount.
Since the fund created by such retention was not
required immediately for business purposes, it was
invested in specified securities. The question
before us is--whether interest on such
deposits/securities, which strictly speaking accrues
to the members' account, could be taxed as
business income under Section 28 of the Act? In
our view, such interest income would come in the
category of "Income from other sources", hence,
such interest income would be taxable under
Section 56 of the Act, as rightly held by the
assessing officer. In this connection, we may
analyse Section 80-P of the Act. This section
comes in Chapter VI-A, which, in turn, deals with
"Deductions in respect of certain incomes". The
headnote to Section 80-P indicates that the said
section deals with deductions in respect of income
of cooperative societies. Section 80-P(1), inter
alia, states that where the gross total income of a
cooperative society includes any income from one
or more specified activities, then such income shall
be deducted from the gross total income in
computing the total taxable income of the assessee
Society. An income, which is attributable to any of
the specified activities in Section 80-P(2) of the
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Act, would be eligible for deduction. The word
"income" has been defined under Section 2(24)(i)
of the Act to include profits and gains. This sub-
section is an inclusive provision. Parliament has
included specifically "business profits" into the
definition of the word "income". Therefore, we are
required to give a precise meaning to the words
"profits and gains of business" mentioned in
Section 80-P(2) of the Act. In the present case, as
stated above, the assessee Society regularly invests
funds not immediately required for business
purposes. Interest on such investments, therefore,
cannot fall within the meaning of the expression
"profits and gains of business". Such interest
income cannot be said also to be attributable to the
activities of the Society, namely, carrying on the
business of providing credit facilities to its
members or marketing of the agricultural produce
of its members. When the assessee Society
provides credit facilities to its members, it earns
interest income. As stated above, in this case,
interest held as ineligible for deduction under
Section 80-P(2)(a)(i) is not in respect of interest
received from members. In this case, we are only
concerned with interest which accrues on funds
not required immediately by the assessee(s) for its
business purposes and which have been only
invested in specified securities as "investment".
Further, as stated above, the assessee(s) markets
the agricultural produce of its members. It retains
the sale proceeds in many cases. It is this "retained
amount" which was payable to its members, from
whom produce was bought, which was invested in
short-term deposits/securities. Such an amount,
which was retained by the assessee Society, was a
liability and it was shown in the balance sheet on
the liability side. Therefore, to that extent, such
interest income cannot be said to be attributable
either to the activity mentioned in Section 80-
P(2)(a)(i) of the Act or in Section 80-P(2)(a)(iii) of
the Act. Therefore, looking to the facts and
circumstances of this case, we are of the view that
the assessing officer was right in taxing the interest
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income, indicated above, under Section 56 of the
Act."
8. The present case is of surplus funds, which were not required for
carrying on business of providing credit facilities to members. Half of
the funds mobilised/collected from the members could be used for
providing credit to the members. The balance amount had to be
retained and used for specified purpose, other than providing credit
facilities to members. This amount was deposited in FDRs for an
average period of 500 days. Bye-laws of the appellant cooperative
society prescribed that 50% of the amount mobilised/collected would
not be given on credit to the members. These constituted surplus funds
as has been held by the Assessing Officer and by the Tribunal. It is on
these funds that the interest was earned. The interest earned from the
aforesaid funds as held by the Supreme Court in Totgars' Cooperative
Sale Society Ltd. (supra), would fall under Section 56 and would be
taxable under the head "income from other sources".
9. Another contention raised by the appellant-assessee is that the
assessee was engaged or carrying on business of banking. He submits
that wide interpretation should be given to the "banking" and grant of
thrift and credit should be construed as banking. It is not possible to
accept the said contention and give this extended and broad meaning to
the term "banking". The appellant-assessee is a cooperative thrift
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society and not a banking company and the expression "business of
banking" cannot be given a spacious meaning to unrealistically expand
the term beyond acceptable limits. Business of banking connotes and is
different from activities undertaken by the appellant. The aforesaid
wide meaning, as suggested, would also be contrary to the dicta and
the ratio of the decision in Totgars' Cooperative Sale Society Ltd.
(supra).
10. As far as principle of mutuality is concerned, this would not
have any application in view of sub-section (24), sub-clause (viia) to
Section 2 of the Act. Thus, if we accept that the appellant-assessee
was a cooperative society and providing credit facilities to its
members, clause (viia) to sub-section (24) to Section 2 would be
applicable. Even otherwise on the principle of mutuality, the Supreme
Court in Bangalore Club Vs. CIT, (2013) 350 ITR 509 has held that
the interest earned on FDRs with banks would not be covered by the
principle of mutuality as the transactions were not between the
contributors and the beneficiary, but were between the assessee and a
third person.
11. At this stage, learned counsel for the appellant-assessee has
pointed out that the Commissioner of Income Tax (Appeals) had
decided the issue in their favour, and therefore other contentions raised
regarding expenses covered under Section 57(3) i.e. allowability of
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expenditure having nexus with earning of the said income was not
examined. This ground/argument was in alternative. Learned counsel
for the Revenue submits that this question may be remitted to the
Commissioner of Income Tax (Appeals) as he had not decided the said
question having allowed the appeal in entirety holding that the entire
interest was exempt under Section 80P. We appreciate the stand taken
by the learned counsel for the Revenue and accordingly the matter is
remitted on the said aspect to the Commissioner of Income Tax
(Appeals) for decision.
12. Similarly, with regard to the claim for deduction under Section
80P(2)(i), we find that there was no discussion or finding by the
Commissioner of Income Tax ( Appeals) , though this ground/issue
was raised. This has happened because the Commissioner of Income
Tax (Appeals), as noted above, had granted exemption to the entire
income earned by the appellant-assessee under Section 80P(2)(i)(a).
Learned counsel for the respondent-Revenue submits that this issue
could be examined by the Commissioner of Income Tax (Appeals) on
merits. We take the statement on record.
The appeal is disposed of. No Costs.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
AUGUST 27, 2014
NA
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