of Income Tax, Lucknow Vs. U.P. Cooperative Federation
Ltd.  INSC 51 (10
Rangnath Misra Rangnath Pathak, R.S. (Cj)
1989 AIR 915 1989 SCR (1) 586 1989 SCC (1) 747 JT 1989 (1) 258 1989 SCALE
Tax Act, 1922: s. 14(3)(iii) Income Tax Act, 1961: S. 80P (2) (d) --Assessee--Apex
Cooperative Society--Cash security--Furnished to manufacturer Cooperative
Society under agency agreement--Loans advanced to member cooperative societies
for carrying on business--Whether investments-Interest earned thereon--Whether
entitled to exemption from tax.
and Phrases: 'Investment'--Meaning of--s. 14(3)(iii), Income Tax Act, 1922.
(iii) of Section 14(3) of the Income Tax Act, 1922 exempts interest and
dividends derived by a cooperative society from its investments with any other
cooperative society, from payment of tax.
respondent-assessee, an apex body having as its members various District
Co-operative Societies, District, Co-operative Banks and some Government and
other co-opera- tive Societies within the State of U.P., was appointed as one
of the wholesale dealers under clause (1) of the agency agreement entered into
with a co-operative sugar factory for distribution of sugar produced by the
latter during the crushing seasons 1958-59 and 1959-60. Simultaneously with the
execution of the agreement it furnished a cash security of Rs. Two lakhs to the
manufacturer under clause (20) of the said agreement for the period of two
years, which was to carry interest at the rate of 4 1/2 per cent per annum.
pursuance of a separate agreement entered into be- tween it and the State
Government the assessee undertook to arrange for lifting, handling, storing and
distributing to the retailers the stock of sugar released by the Government of
India. In an yet another agreement entered into between the assessee and member
societies the latter undertook to work as agents for the wholesale distribution
of sugar in their districts. Since they were not in a position to ar- range the
entire finance for the business the assessee agreed to arrange for the same.
The money thus invested in the business was to earn interest at the rate of 6
per cent per annum.
the accounting year in question the Income Tax Offi- cer rejected the claim of
the assessee for deduction, on ground of statutory exemption under s. 14(3) of
the Act, of the amounts of interest received respectively from the cooperative
Sugar factory on the cash security deposit and from member societies on
temporary loans advanced for fi- nancing business. The Assistant Appellate
Commissioner rejected assessee's contention. The Appellate Tribunal rejecting
the former claim took the view that the amount of interest received on cash
security furnished by the assessee for carrying on the sugar agency business
could not be said to be interest from securities or investments as understood
under s. 14(3)(iii) of the Act. Rejecting the latter claim it held that the
amount on which interest had been earned did not constitute investment and,
therefore, was not cov- ered by s. 14(3)(iii) of the Act. But the High Court accept-
ed the claim in regard to both the amounts.
of the appeal by the Revenue, the Court,
1.1 The Tribunal did not err in holding that the amount received as interest on
the cash security from the cooperative sugar factory was not covered under s.
of the Income Tax Act, 1922. [591B]
The High Court failed to take note of the fact that the sum of Rs. Two lakhs
had been given a security and the arrangement entered into between the assessee
and the coop- erative sugar factory stipulated payment of interest of 4 1/2 per
cent per annum. This sum was repayable to him on the expiry of the period fixed
in the agreement after adjustment of accounts. It could not, therefore, be said
to be an investment. The amount of interest earned thereon thus represented
only interest on the security deposit and could not be mixed up with the other
sums received by the assessee in course of carrying on its business. It was not
available to be exempted. [589G; 590F]
The amount of interest received by the assessee on advances to its members was
income from sugar business and was, therefore, exempt under s. 14(3)(iii) of
the Act. [595B]
The money provided by the assessee was by way of investment with other
cooperative societies. If this money had not been made available the business
as stipulated under the scheme could not have been carried out and perhaps
there would have been no business. This funding to other coopera- tive
societies was necessary to generate profits, and under the agreement interest
has been earned. The High Court was, 588 therefore, right in its conclusion
that no tax was payable on this income from sugar business. [594F-G]
APPELLATE JURISDICTION: Civil Appeal No. 1228(NT) of 1975.
the Judgment and Order dated 29.11.1973 of the Allahabad High Court in I.T.
Reference No. 842 of 1971.
Shankar, Ms. A. Subhashini, C.V.S. Rao, Mrs. Sushma Suri, P. Parmeshwaran and
M.K. Sashidharan for the Appellant.
N. Salve and Parveen Kumar for the Respondent.
Judgment of the Court was delivered by RANGANATH MISRA, J. This appeal at the
instance of the Revenue is by special leave. Two questions out of six re- ferred
by the Income Tax Appellate Tribunal, Allahabad, survive for consideration in this appeal and these are:
Whether on the facts and in the circumstances of the case, and on a true
interpretation of the agreement, the Tribunal erred in holding that the sum of
Rs.9,000 received as interest from Bazpur Cooperative Sugar Factory Ltd. is not
covered under Section 14(3) of the Income Tax Act?
Whether on the facts and in the circumstances of the case, and on a true and
correct interpretation of the various clauses of the agreement, the sum of
Rs.51,295 and Rs.58,937 received as interest on advances would not be assessee's
income from coal and sugar business and would thus be exempt under Section
14(3) of the Income Tax Act, 1922? At the hearing it has been clarified by
counsel for both parties that in the second question referred to above, the
dispute is confined to the sum of Rs.51,295 only.
relevant assessment year is 1961-62 corresponding to the accounting year ending
with 30th June, 1960. The asses- see is a cooperative
society registered under the Coopera- tive Societies Act, 1912. This being an
apex body, its members are various District Cooperative Societies, District
Cooperative Banks and some Govern- 589 ment and other cooperative societies
within the State of Uttar
principal object of the Society is to regulate the distribution and supply of
items like coal, sugar, cloth etc. through the member cooperative societies.
year in question, the assessee inter alia main- tained that the income earned
on the various advances made by it to the member societies was entitled to
exemption under Section 14(3) of the Income Tax Act, 1922. The Income Tax
Officer while rejecting the claim of deduction on the ground of exemption on
several heads included interest of Rs.9,000 received from Bazpur Cooperative
Sugar Factory Ltd. and a sum of Rs.51,295 received by way of interest from
various cooperative societies on temporary loans for financ- ing sugar business
at the rate of 6 per cent on the amount given as loan as taxable items. The two
questions which have survived for decision in this appeal relate to refusal of
these two deductions on the ground of statutory exemption.
stand of the assessee had not been accepted by the Appellate Assistant
Commissioner and the Income Tax Appel- late Tribunal but the High Court has
accepted the claim in regard to both the amounts.
High Court dealing with the amount of Rs.9,000 held:
Tribunal considered the claim for exemp- tion in respect of amount of Rs.9,000
received by the assessee from the Bazpur Cooperative Sugar Factory and held
that this represented the interest received on the cash security of Rs.2,00,000
which was furnished by the asses- see for carrying on the sugar agency
business, and as such it could not be said that it was interest from securities
or interest from investments and as such rejected the claim made in respect of
this amount under Section 14(3)(iii) of the Act." The High Court
considered the exigibility of the sum of Rs.9,000 to tax analogously with the
taxability of the other sum and did not pointedly take note of the fact that
the sum of Rs.2,00,000 had been given as security and the arrange- ment entered
into between the assessee and the Bazpur Coop- erative Sugar Factory stipulated
payment of interest of 4 1/2 per cent per annum.
refer here to clauses (1) and (20) of the agency agreement:
"1. That the manufacturer hereby appoints the Agent as one of their two
agents for the whole of the Indian Union for the sale of sugar produced by the
manufacturer during the crusing seasons 1958-59 and 1959-60 and the Agent
hereby agrees to act as such agent in the said area on the terms mentioned
here- in. The manufacturer hereby undertakes not to appoint more than two
agents as aforesaid. " "20. The Agent shall simultaneously with the
execution of this agreement furnish a cash security of Rs. Two lakhs to the manufac-
turer for a period of two years (irrespective of previous determination of the
agreement for any cause whatsoever) to ensure against due compliance by the
agent of the terms hereof;
security shall carry interest at the rate of 4 1/2 per annum. Such security
shall be repayable with interest to the agent within one month of the expiry of
the period fixed in the agreement after adjustment of accounts between the
parties. The manufacturer shall have the option to realise from the said
security money all losses suffered and/or expenses incurred and not paid by the
Agent in pursuance of the provisions of this agreement.
said security shall fall short of Rs. Two lakhs at any time, the deficiency
therein shall be made good by the Agent within 15 days of the notice in writing
from the manufactur- er." The amount of Rs.9,000 thus represented only
interest on the security deposit and could not be mixed-up with the other sums
received by the assessee in course of carrying on its business. We do not think
the High Court was fight in concluding that this amount of Rs.9,000 was
available to be exempted under any of the clauses of Section 14(3) of the Act.
the assessee's claim does not come under clause (i) of Section 14(3). Unless
this sum is covered by Section 14(3)(iii), there would be no exemption. The sum
of Rs. Two lakhs given as security in terms of the agreement was not an
investment and, therefore, the amount of Rs.9,000 received by way of interest
does not come within the purview of clause (iii). Mr. Salve for the assessee
respondent has fairly conceded that it would be difficult on his part to press
the claim of the assessee for exemption in respect of this sum. The conclusion
of the High Court in regard to this amount has, therefore, 591 tO be reversed
and the stand of the Revenue to the effect that this amount represents taxable
income has to be accept- ed.
answer to the first question, therefore, is that on the facts and in the
circumstances of the case and on a true interpretation of the agreement, the
Tribunal did not err in holding that the sum of Rs.9,000 received as interest
from Bazpur Cooperative Sugar Factory Ltd. was not covered under Section 14(3)
of the Income Tax Act.
shall now deal with the other question. Dealing with it the High Court stated:
facts relating to the case for exemption in respect of the two amounts of
Rs.51,295 and Rs .58,937 (the second amount is no more in dispute) covered by
question No. 3 may be stated. We shall begin by referring to facts relating to
advances made in relation to the sugar business. The assessee was appointed as
one of the wholesale dealers for distribu- tion of sugar in this State. It had,
in pursu- ance of an agreement entered into between it and the State
Government. to arrange for lifting, handling,. storing and distributing to the
retailers the stocks of sugar released by the Government of India. The District
Cooperative Development Federations of Deoria, Garhwal, Tehri Garhwal, Pilibhit,
Etawah and Allahabad, entered into agreements with the assessee
to work as agents for the whole sale distribution of sugar in their Districts.
A sample of the agreement entered into between the assessee and these various
District Coop- erative Development Federations .... The assessee was to make
necessary investments by way of payment of price of sugar to be pro- cured from
the factories and also to pay the administrative charges incurred for the dis- tribution
of sugar. This administrative charge was, however, recouped by the agents and
paid over to the assessee. The delivery of the sugar from the various factories
was to be taken by the various District Cooperative Development Federations
which had entered into agreements with the assessee on behalf of the assessee
as soon as the release orders were issued by the Government of India. The sugar
so received was to be stored in godowns and was to remain under the custody of Godownkeep-
ers of the assessee or the bankers of the assessee. The salaries of the Godown-keepers
and the Chowkidars 592 appointed for safe custody of the stocks of sugar were
to be paid by the agents ..... " "The sugar so stored was to be re-
leased to the agents as and when required by them on full payment of its price
at the rate fixed by the State Government or the District Magistrate concerned.
The stocks of sugar taken over by the agents was to be sold by them to
retailers, and permitholders who were to be nominated by the District
Magistrate or the officer authorised by him. The whole salers'. margin on the
sugar sold for the period beginning September 1959 onwards with which we are
concerned was Rs.2.06 Naya Paisa per bag. The share of the assessee and the
District Cooperative Development Federations in this amount is set out in
clause 18 of the agreement ..... " The High Court extracted the terms and
came to hold:
appear from a letter dated 30th September, 1959, that the various District
Cooperative Development Federations were not in a position to arrange the
entire finances for the busi- ness and accordingly the assessee agreed to
arrange for finances of the business on cer- tain terms and conditions. The
terms and conditions on which the finances were to be arranged may be
The money invested in the business will earn interest at 6 per cent per annum.
will be seen that money which the assessee made available to the District
Cooperative Development Federations was to be utilised for the purchase of the
stocks of sugar which the District Cooperative sold as agents of the asses- 593
see. In the accounting, year in question, the assessee realised the following
amounts of interest from the District Cooperative Devel- opment Federations
District Cooperative Development Federation Ltd., Deoria. 4,694.16
District Cooperative Development Federation Ltd., Garhwal. 15,797.60
District Cooperative Development Federation Ltd., Tehri Garhwal 5,557.50
District Cooperative Development Federation Ltd., Etawah. 2,984.24
District Cooperative Development Federation Ltd., Pilibhit. 2,616.21
District Cooperative Development Federation Ltd., Allahabad. 19,645.53
covered by the second question to be answered is over this amount. The Income
Tax Officer as also the two appellate authorities relying upon the decisions of
the Bombay High Court in Sir Chinu Bhai Madav Lal v. Commission- er of income
Tax, 37 I.T.R. 210 and Commissioner of Income Tax, Bombay City v. Bombay State
Cooperative Bank Ltd., 59 I.T.R. 31 held that the amount on which interest had
been earned under the agreement did not constitute investment and, therefore,
was not covered by Section 14(3)(iii) of the Act.
14(3) provides that tax shall not be payable by a cooperative society in
certain situations. Clause (i) under its six sub-clauses refers to specific
classes of cooperative societies in whose case there is total exemp- tion.
Clause (ii) exempts income in respect of profits and gains of business of
cooperative societies not covered by clause (i) upto Rs. 15,000. Clause (iii)
exempts interest. and dividends and income derived from investments with any
other cooperative society. Clause 594 (iv) exempts income derived from letting
of godowns or warehouses for storage, processing or facilitating the marketing
of commodities while Clause (v) exempts interest on securities chargeable under
Section 8 or any income from property chargeable under Section 9, where the
total income of the cooperative society of specific type mentioned there- in
does not exceed Rs.20,000.
can be no dispute on the conclusion reached by the High Court that the money provided
by the assessee was by way of investment. In fact, if this money had not been
made available the business as stipulated under the scheme could not have been
carried out and perhaps there would have been no business.
"Investment" has not been defined in the Act.
Aiyar's The Law Lexicon, (Reprint Edition 1987) states:
term invest is used in a sense broad enough to cover the loaning of the money
but is not restricted to that mode of invest- ment or loans made on commercial
paper. The word invest has been judicially defined as follows:
place property in business; to place so that it will be safe and yield a
profit. It is also commonly understood as giving money for some other property
(as) investing funds on lands and houses. Invest- ment means in common
parlance, putting out money on interest, either by the way of loan, or by the
purchase of income producing proper- ty ...' In the facts of the present case
the money provided by the assessee was necessary to run the business and generate
profits; under the agreement interest has been earned. In the peculiar
situation appearing in the case as found by the High Court the provision of
money by the assessee, the purpose for which the money was provided, the
stipulation for earning of interest, were relevant considerations to be taken
into account and it becomes difficult to take a view different from that of the
High Court that the funding was investment and under the agreement interest has
the finding was the cooperative societies. In our opinion, therefore, the
amount of Rs.51,295 squarely came within Section 14(3)(iii) of the Act. The
High Court, there- fore, was right in its conclusion that no tax was payable on
the said amount. We would like to point out that under Section 14(3) provision
has been made to extend certain advantages to the cooperative societies in
order that the legislative purpose of providing incentive to the coopera- tive
movement may be fulfilled. The High Court 595 was right in holding that the
provisions contained in Sec- tion 14(3) should be liberally construed.
answer to the second question, therefore, is on the facts and in the
circumstances .of the case and on a true and correct interpretation of the
various clauses of the agreement, the sum of Rs.51,295 received as interest on
advances in the assessee's income from sugar business was exempt under Section
14(3)of the Income Tax Act, 1922.
shall be no order for costs in this appeal as success is divided.
Appeal disposed of.