M/S The
Totgar's Co-Op. Sale Sty. Ltd. Vs. Income-Tax Officer, Karnataka [2010] INSC 92
(8 February 2010)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.1622 OF
2010 (Arising out of S.L.P. (C) No.7572 of 2009) M/s. The Totgars' Cooperative
Sale Society Limited ...Appellant(s) Versus Income Tax Officer, Karnataka
...Respondent(s) W I T H Civil Appeal No.1623/2010 @ S.L.P. (C) No.10489 of
2009 Civil Appeal No.1624/2010 @ S.L.P. (C) No.10490 of 2009 Civil Appeal
No.1625/2010 @ S.L.P. (C) No.10491 of 2009 Civil Appeal No.1626/2010 @ S.L.P.
(C) No.10492 of 2009 Civil Appeal No.1627/2010 @ S.L.P. (C) No.10494 of 2009
Civil Appeal No.1628/2010 @ S.L.P. (C) No.10497 of 2009 Civil Appeal
No.1629/2010 @ S.L.P. (C) No.10498 of 2009
S.H.
KAPADIA,J.
Heard
learned counsel on both sides.
Leave
granted.
Assessee(s)
is a cooperative credit society. During the relevant assessment years in
question, it had surplus funds which the assessee(s) invested in short-term
deposits with the Banks and in Government securities. On such investments,
interests accrued to the assessee(s).
Assessee(s)
provides credit facilities to its members and also markets the agricultural
produce of its members. The substantial question of law which arises in this
batch of civil appeals is - Whether such interest income would qualify for
deduction as business income under Section 80P(2)(a)(i) of the Income Tax Act,
1961? According to the impugned judgement, which affirms the decision of the
Income Tax Appellate Tribunal [`Tribunal', for short], such interest income
would fall under the Head "Income from other sources" under Section
56 and not under Section 28 of the Income Tax Act, 1961 [`Act', for short],
and, consequently, the assessee- Society would not be entitled to deduction
under Section 80P(2)(a)(i) of the Act.
The bunch
of civil appeals filed by the assessee-Society concerns Assessment Years
1991-1992 to 1999-2000 [excluding Assessment Year 1995-1996]; however, the lead
matter is civil appeal arising out of S.L.P. (C) No.7572 of 2009 which relates
to Assessment Year 1991- 1992.
The
assessee-Society was assessed to tax as a cooperative society. The assessee is
the appellant in all eight civil appeals. For all the above Assessment Years
1991-1992 to 1999-2000 [except Assessment Year 1995- 1996], assessee(s) filed
its Returns disclosing income from business, i.e., marketing of agricultural
produce of its members and providing credit facilities to them.
Assessee(s)
also filed its Profits and Loss Accounts and its balance-sheets along with its
Returns. In respect of above-mentioned interest income, assessee(s) claimed
deduction under Section 80P(2)(a)(i) of the Act. The assessment(s) for the
afore-stated period stood re-opened by issue of notice(s) under Section 148 of
the Act. In this case, we are only concerned with interest income on short-term
Bank deposits and securities. On the basis of the balance-sheets for the
relevant assessment years, under instructions from the Assessing Officer, assessee(s)
submitted a chart to the Assessing Officer giving break-up of assets and
liabilities. We re-produce hereinbelow the said chart [See Annexure `B' under
the caption `Liabilities']:
LIABILITIES
Asstt. Capital Asami A/c + Deposits, Other Total (3), (4) &
Year
Reserve Fund + Purchasers A/c Loans, Interest Liabilities & (5) Other Funds
+ Payable Expenditure Profits 1 2 3 4 5 6 1991-92 79,200,553.00 39,341,647.00
45,772,398.00 3,948,442.00 89,176,115.00 1992-93 97,769,923.00 41,684,890.00
59,071,490.00 902,856.00 101,659,132.00 1993-94 116,354,655.00 37,674,924.00
68,927,247.00 2,893,519.00 109,494,694.00 1994-95 133,817,620.00 42,882,786.00
86,462,118.00 1,440,446.00 142,886,414.00 1995-96 156,948,290.00 46,898,160.00
107,201,490.00 4,189,923.00 158,289,580.00 1996-97 180,468,526.00 53,274,684.00
125,289,995.00 3,568,644.00 182,133,326.00 1997-98 211,686,266.00 52,510,175.00
142,529,130.00 46,694,814.00 241,734,125.00 1998-99 253,295,055.00
66,074,107.00 175,757,230.00 17,342,956.00 259,174,281.00 1999-00
269,520,510.00 124,571,325.00 209,202,203.00 25,199,555.00 358,973,088.00 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
80P(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).
It was
the case of the assessee(s) before us that the assessee(s) is a cooperative
credit society.
It's
business is to provide credit facilities to its members and to market the
agricultural produce of its members. According to the assessee(s), it's
activity constituted "eligible activity" under Section 80P(2)(a)(i)
of the Act, hence, it was entitled to the benefit of deduction from its gross
total income. In this connection, it was urged that, under Section 80P(2) of
the Act, the whole of the amount of "business profits"
attributable
to any one of the enumerated activities is entitled to deduction. According to
the assessee(s), one need not go by the source/head of such interest income
because no sooner interest income accrued to the assessee(s) on above-
mentioned specified deposits/securities, it became business income attributable
to the activity carried on by the assessee(s) by providing credit facilities to
its members or marketing of agricultural produce of its members and no sooner
such interest income falls under the head "business profits"
attributable to one or more of such eligible activities, such interest income
became eligible for deduction under the said section. The assessee(s) further
contended, before us, that, under Regulations 23 and 28 read with Sections 57 and
58 of the Karnataka Cooperative Societies Act, 1959, a statutory obligation was
imposed on cooperative credit societies to invest its surplus funds in
specified securities and, in view of such statutory obligation, the
above-mentioned interest income derived from short-term deposits and securities
must be considered as income derived by the assessee(s) from its business
activities. In the alternative, it was submitted that, even assuming for the
sake of argument that such interest income is held to be covered by Section 56
of the Act under the head "Income from other sources", even then the
assessee-Society was entitled to the benefit of Section 80P(2)(a)(i) of the
Act. In this connection, learned counsel for the assessee(s) submitted, placing
reliance on numerous judgements, that the source or head of income was
irrelevant for deciding the question as to whether a given item is eligible for
deduction under Section 80P of the Act. According to the assessee(s), once
interest income accrues on specified investments, particularly when a local
enactment makes it statutorily incumbent on the society to invest in specified
investments, the interest income is automatically eligible for deduction
irrespective of the source or head under which such income would fall. In this
connection, learned counsel for the assessee(s) submitted that one needs to
compare the language of Section 80P(2)(a)(i) and (iii) of the Act with
Explanation (baa) to Section 80HHC, the language used in Section 80HHD(3) and
the words used in Section 80HHE(5) of the Act. In this connection, it was urged
that there is a wide contrast in the language between Section 80P(2)(a) on one
hand and the language used in Section 80HHC read with Explanation (baa),
Section 80HHD(3) and Section 80HHE(5) as also the language used in Sections 72
and 32AB of the Act. According to the assessee(s), if one keeps this contrast
in mind, it is clear that the concept of head of income or source of income
will not apply to the provisions of Section 80P(2) of the Act because wherever
Parliament intended to emphasise the applicability of such concept, it has
expressly so stated in the relevant section. According to the assessee(s), by
way of illustration, under Explanation (baa) to Section 80HHC or under Section
80HHD(3) or under Section 80HHE(5), etc., the words used are, "`profits of
the business' means the profits of the business as computed under the head
"Profits and gains of business". Therefore, according to the
assessee(s), when such words do not find place in Section 80P(2) of the Act, it
is clear that the concept of source of income or head of income is not inbuilt
in Section 80P(2) of the Act and, consequently, such a concept cannot be read
into the said section. As stated above, according to the assessee(s), no sooner
surplus funds are invested in specified securities, interest income from such
investment is automatically eligible for deduction under Section 80P(2)of the
Act.
In order
to determine the issue involved in these civil appeals, we need to re-produce
hereinbelow the relevant provision of Section 80P of the Act, as it stood at
the material time. It reads thus:
"Deduction
in respect of income of co- operative societies.
80P.(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
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 [ii] a cottage
industry, or [iii] the marketing of the agricultural produce of its members, or
[iv] the purchase of agricultural implements, seeds, livestock or other
articles intended for agriculture for the purpose of supplying them to its
members, or [v] the processing, without the aid of power, of the agricultural
produce of its members, or [vi] the collective disposal of the labour of its
members, or [vii] fishing or allied activities, that is to say, the catching,
curing, processing, preserving, storing or marketing of fish or the purchase of
materials and equipment in connection therewith for the purpose of supplying
them to its members, the whole of the amount of profits and gains of business
attributable to any one or more of such activities."
At the
outset, an important circumstance needs to be highlighted. In the present case,
the interest held not eligible for deduction under Section 80P(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. Assessee(s)
markets the produce of its members whose sale 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 analyze Section 80P 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 80P indicates that
the said section deals with deductions in respect of income of cooperative
Societies.
Section
80P(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 80P(2) of the 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. The 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 80P(2) of the Act. In the present case, as stated above, 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 80P(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, 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 80P(2)(a)(i) of the Act or in Section
80P(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 income, indicated above, under Section 56 of the Act.
An
alternative submission was advanced by the assessee(s) stating that, if
interest income in question is held to be covered by Section 56 of the Act,
even then, the assessee-Society is entitled to the benefit of Section
80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in
this submission.
Section
80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to
Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of the Act. Each of the
said sections has to be interpreted in the context of its subject-matter. For
example, Section 80HHC of the Act, at the relevant time, dealt with deduction
in respect of profits retained for export business. The scope of Section 80HHC
is, therefore, different from the scope of Section 80P of the Act, which deals
with deduction in respect of income of cooperative Societies. Even Explanation
(baa) to Section 80HHC was added to restrict the deduction in respect of
profits retained for export business. The words used in Explanation (baa) to
Section 80HHC, therefore, cannot be compared with the words used in Section 80P
of the Act which grants deduction in respect of "the whole of the amount
of profits and gains of business". A number of judgements were cited on
behalf of the assessee(s) in support of its contention that the source was
irrelevant while construing the provisions of Section 80P of the Act. We find
no merit because all the judgements cited were cases relating to Cooperative
Banks and assessee-Society is not carrying on Banking business.
We are
confining this judgement to the facts of the present case. To say that the
source of income is not relevant for deciding the applicability of Section 80P
of the Act would not be correct because we need to give weightage to the words
"the whole of the amount of profits and gains of business"
attributable to one of the activities specified in Section 80P(2)(a) of the
Act. An important point needs to be mentioned. The words "the whole of the
amount of profits and gains of business"
emphasise
that the income in respect of which deduction is sought must constitute the
operational income and not the other income which accrues to the Society. In
this particular case, the evidence shows that the assessee- Society earns
interest on funds which are not required for business purposes at the given
point of time. Therefore, on the facts and circumstances of this case, in our
view, such interest income falls in the category of "Other Income"
which has been rightly taxed by the Department under Section 56 of the Act.
Apart
from the substantial question of law which we have answered, assessee-Society
has challenged the re-opening of assessment under Section 148 of the Act.
In this
connection, it was urged on behalf of the assessee(s) that, for the relevant
assessment years in question, the Assessing Officer was required to obtain
prior approval of the Joint Commissioner of Income Tax before issuance of
notice under Section 148 of the Act.
According
to the assessee(s), the proposal for re-opening was made on 31st May, 2001, it
was not sent through fax to the office of the Additional Commissioner of Income
Tax, Panaji, and the fax report indicates the time of 5.18 p.m., which
establishes the fact that service of notice on 31st May, 2001, on the
assessee(s) was done prior to the sending of fax for approval. According to the
assessee(s), the approval was given by the Additional Commissioner of Income
Tax on 8th June, 2001. The notice under Section 148 of the Act was served on 31st
May, 2001, i.e., prior to the approval of the Additional Commissioner of Income
Tax. In the circumstances, it was urged that the notice under Section 148 of
the Act was invalid and consequential re-assessment under Section 147 read with
Section 144A of the Act was bad in law. We find no merit in this argument. At
the outset, we may state that the point raised on validity of the notice under
Section 148 of the Act essentially concerns factual aspect. The Tribunal is the
final fact finding Authority under the Income Tax Act. It has given a finding
of fact that, though the written communication of the sanction, which has no
prescribed format, was received by the Assessing Officer on 8th June, 2001,
yet, it cannot be said that sanction was not accorded prior to 31st May, 2001.
The
Tribunal has recorded a finding of fact that there was a detailed
correspondence between the concerned officers prior to 31st May, 2001, in the
context of re-opening of assessment. It may also be mentioned that there is a
vital difference between grant of sanction and communication of such sanction.
As stated by the Tribunal, no particular form has been prescribed in the matter
of grant of sanction. For the afore-stated reason, the Tribunal came to the
conclusion that approval/sanction for re-opening of assessment in terms of
Section 148 of the Act read with Section 151 existed even prior to 31st May,
2001. We see no reason to interfere with this finding of fact given by the
Tribunal.
In this
matter, one question advanced by the assessee(s) before the Authorities below
has remained un-answered. That question is as follows:
"Whether,
on the facts and in the circumstances of the case, the Tribunal was right in
law in holding that the income by way of interest on deposits held with
scheduled banks, bonds and other securities was chargeable to tax under section
56 under the head `Income from other sources' without allowing any deduction in
respect of cost of funds and proportionate administrative and other expenses
under section 57?"
The above
question requires an answer. It involves interpretation of Section 56 and
Section 57 of the Act. It also involves applicability of the said sections to
the facts of the present case. We, accordingly, remit the said question to the
High Court for consideration in accordance with law.
Subject
to what is stated above, these civil appeals filed by the assessee(s) are
dismissed with no order as to costs.
......................J.
[S.H. KAPADIA]
......................J.[AFTAB
ALAM]
New Delhi,
February
08, 2010.
REPORTABLE
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.
1622 OF 2010 (Arising out of S.L.P. (C) No.7572 of 2009) M/s. The Totgars'
Cooperative Sale Society Limited ...Appellant(s) Versus Income Tax Officer,
Karnataka ...Respondent(s) W I T H Civil Appeal No.1623/2010 @ S.L.P. (C)
No.10489 of 2009 Civil Appeal No.1624/2010 @ S.L.P. (C) No.10490 of 2009 Civil
Appeal No.1625/2010 @ S.L.P. (C) No.10491 of 2009 Civil Appeal No.1626/2010 @
S.L.P. (C) No.10492 of 2009 Civil Appeal No.1627/2010 @ S.L.P. (C) No.10494 of
2009 Civil Appeal No.1628/2010 @ S.L.P. (C) No.10497 of 2009 Civil Appeal
No.1629/2010 @ S.L.P. (C) No.10498 of 2009
S.H.
KAPADIA,J.
Heard
learned counsel on both sides.
Leave
granted.
Assessee(s)
is a cooperative credit society.
During
the relevant assessment years in question, it had surplus funds which the
assessee(s) invested in short-term deposits with the Banks and in Government
securities. On such investments, interests accrued to the assessee(s).
Assessee(s)
provides credit facilities to its members and also markets the agricultural
produce of its members. The substantial question of law which arises in this
batch of civil appeals is - Whether such interest income would qualify for
deduction as business under Section 80P(2)(a)(i) of the Income Tax Act, 1961?
According to the impugned judgement, which affirms the decision of the Income
Tax Appellate Tribunal [`Tribunal', for short], such interest income would fall
under the Head "Income from other sources" under Section 56 and not
under Section 28 of the Income Tax Act, 1961 [`Act', for short], and,
consequently, the assessee- Society would not be entitled to deduction under
Section 80P(2)(a)(i) of the Act.
The bunch
of civil appeals filed by the assessee- Society concerns Assessment Years
1991-1992 to 1999-2000 [excluding Assessment Year 1995-1996]; however, the lead
matter is civil appeal arising out of S.L.P. (C) No.7572 of 2009 which relates
to Assessment Year 1991-1992.
The assessee-Society
was assessed to tax as a cooperative society. The assessee is the appellant in
all eight civil appeals. For all the above Assessment Years 1991-1992 to
1999-2000 [except Assessment Year 1995-1996], assessee(s) filed its Returns
disclosing income from business, i.e., marketing of agricultural produce of its
members and providing credit facilities to them.
Assessee(s)
also filed its Profits and Loss Accounts and its balance-sheets along with its
Returns. In respect of above-mentioned interest income, assessee(s) claimed
deduction under Section 80P(2)(a)(i) of the Act. The assessment(s) for the
afore-stated period stood re-opened by issue of notice(s) under Section 148 of
the Act. In this case, we are only concerned with interest income on short-term
Bank deposits and securities. On the basis of the balance-sheets for the
relevant assessment years, under instructions from the Assessing Officer,
assessee(s) submitted a chart to the Assessing Officer giving break-up of
assets and liabilities. We re-produce hereinbelow the said chart [See Annexure
`B' under the caption `Liabilities']:
LIABILITIES
Asstt. Capital Asami A/c + Deposits, Other Total (3), (4) & Year Reserve
Fund + Purchasers A/c Loans, Interest Liabilities & (5) Other Funds + Payable
Expenditure Profits 1 2 3 4 5 6 1991-92 79,200,553.00 39,341,647.00
45,772,398.00 3,948,442.00 89,176,115.00 1992-93 97,769,923.00 41,684,890.00
59,071,490.00 902,856.00 101,659,132.00 1993-94 116,354,655.00 37,674,924.00
68,927,247.00 2,893,519.00 109,494,694.00 1994-95 133,817,620.00 42,882,786.00
86,462,118.00 1,440,446.00 142,886,414.00 1995-96 156,948,290.00 46,898,160.00
107,201,490.00 4,189,923.00 158,289,580.00 1996-97 180,468,526.00 53,274,684.00
125,289,995.00 3,568,644.00 182,133,326.00 1997-98 211,686,266.00 52,510,175.00
142,529,130.00 46,694,814.00 241,734,125.00 1998-99 253,295,055.00
66,074,107.00 175,757,230.00 17,342,956.00 259,174,281.00 1999-00
269,520,510.00 124,571,325.00 209,202,203.00 25,199,555.00 358,973,088.00 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
80P(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).
It was
the case of the assessee(s) before us that the assessee(s) is a cooperative
credit society. It's business is to provide credit facilities to its members
and to market the agricultural produce of its members.
According
to the assessee(s), it's activity constituted "eligible activity"
under Section 80P (2) (a) (i) of the Act, hence, it was entitled to the benefit
of deduction from its gross total income. In this connection, it was urged
that, under Section 80P(2) of the Act, the whole of the amount of
"business profits" attributable to any one of the enumerated
activities is entitled to deduction.
According
to the assessee(s), one need not go by the source/head of such interest income
because no sooner interest income accrued to the assessee(s) on above-
mentioned specified deposits/securities, it became business income attributable
to the activity carried on by the assessee(s) by providing credit facilities to
its members or marketing of agricultural produce of its members and no sooner
such interest income falls under the head "business profits"
attributable to one or more of such eligible activities, such interest income
became eligible for deduction under the said section. The assessee(s) further
contended, before us, that, under Regulations 23 and 28 read with Sections 57
and 58 of the Karnataka Cooperative Societies Act, 1959, a statutory obligation
was imposed on cooperative credit societies to invest its surplus funds in
specified securities and, in view of such statutory obligation, the
above-mentioned interest income derived from short-term deposits and securities
must be considered as income derived by the assessee(s) from its business
activities. In the alternative, it was submitted that, even assuming for the
sake of argument that such interest income is held to be covered by Section 56
of the Act under the head "Income from other sources", even then the
assessee-Society was entitled to the benefit of Section 80P(2)(a)(i) of the
Act. In this connection, learned counsel for the assessee(s) submitted, placing
reliance on numerous judgements, that the source or head of income was
irrelevant for deciding the question as to whether a given item is eligible for
deduction under Section 80P of the Act. According to the assessee(s), once
interest income accrues on specified investments, particularly when a local
enactment makes it statutorily incumbent on the society to invest in specified
investments, the interest income is automatically eligible for deduction
irrespective of the source or head under which such income would fall. In this
connection, learned counsel for the assessee(s) submitted that one needs to
compare the language of Section 80P(2)(a)(i) and (iii) of the Act with
Explanation (baa) to Section 80HHC, the language used in Section 80HHD(3) and
the words used in Section 80HHE(5) of the Act. In this connection, it was urged
that there is a wide contrast in the language between Section 80P(2)(a) on one
hand and the language used in Section 80HHC read with Explanation (baa),
Section 80HHD(3) and Section 80HHE(5) as also the language used in Sections 72
and 32AB of the Act. According to the assessee(s), if one keeps this contrast
in mind, it is clear that the concept of head of income or source of income
will not apply to the provisions of Section 80P(2) of the Act because wherever
Parliament intended to emphasise the applicability of such concept, it has
expressly so stated in the relevant section. According to the assessee(s), by
way of illustration, under Explanation (baa) to Section 80HHC or under Section
80HHD(3) or under Section 80HHE(5), etc., the words used are, "`profits of
the business' means the profits of the business as computed under the head
"Profits and gains of business". Therefore, according to the
assessee(s), when such words do not find place in Section 80P(2) of the Act, it
is clear that the concept of source of income or head of income is not inbuilt
in Section 80P(2) of the Act and, consequently, such a concept cannot be read
into the said section. As stated above, according to the assessee(s), no sooner
surplus funds are invested in specified securities, interest income from such
investment is automatically eligible for deduction under Section 80P(2)of the
Act.
In order
to determine the issue involved in these civil appeals, we need to re-produce
hereinbelow the relevant provision of Section 80P of the Act, as it stood at
the material time. It reads thus:
"Deduction
in respect of income of co- operative societies.
80P.(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
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 [ii] a cottage
industry, or [iii] the marketing of the agricultural produce of its members, or
[iv] the purchase of agricultural implements, seeds, livestock or other
articles intended for agriculture for the purpose of supplying them to its
members, or [v] the processing, without the aid of power, of the agricultural
produce of its members, or [vi] the collective disposal of the labour of its
members, or [vii] fishing or allied activities, that is to say, the catching,
curing, processing, preserving, storing or marketing of fish or the purchase of
materials and equipment in connection therewith for the purpose of supplying
them to its members, the whole of the amount of profits and gains of business
attributable to any one or more of such activities."
At the
outset, an important circumstance needs to be highlighted. In the present case,
the interest held not eligible for deduction under Section 80P(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. Assessee(s)
markets the produce of its members whose sale 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 analyze Section 80P 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 80P indicates that
the said section deals with deductions in respect of income of cooperative
Societies.
Section
80P(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 80P(2) of the 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. The 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 80P(2) of the Act. In the present case, as stated above, 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 80P(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, 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 80P(2)(a)(i) of the Act or in Section
80P(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 income, indicated above, under Section 56 of the Act.
An
alternative submission was advanced by the assessee(s) stating that, if
interest income in question is held to be covered by Section 56 of the Act,
even then, the assessee-Society is entitled to the benefit of Section
80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in
this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with
Explanation (baa) to Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of
the Act. Each of the said sections has to be interpreted in the context of its
subject- matter. For example, Section 80HHC of the Act, at the relevant time,
dealt with deduction in respect of profits retained for export business. The
scope of Section 80HHC is, therefore, different from the scope of Section 80P
of the Act, which deals with deduction in respect of income of cooperative
Societies. Even Explanation (baa) to Section 80HHC was added to restrict the deduction
in respect of profits retained for export business. The words used in
Explanation (baa) to Section 80HHC, therefore, cannot be compared with the
words used in Section 80P of the Act which grants deduction in respect of
"the whole of the amount of profits and gains of business". A number
of judgements were cited on behalf of the assessee(s) in support of its
contention that the source was irrelevant while construing the provisions of
Section 80P of the Act. We find no merit because all the judgements cited were
cases relating to Cooperative Banks - 12 - and assessee-Society is not
carrying on Banking business.
We are
confining this judgement to the facts of the present case. To say that the
source of income is not relevant for deciding the applicability of Section 80P
of the Act would not be correct because we need to give weightage to the words
"the whole of the amount of profits and gains of business"
attributable to one of the activities specified in Section 80P(2)(a) of the Act.
An important point needs to be mentioned. The words "the whole of the
amount of profits and gains of business"
emphasise
that the income in respect of which deduction is sought must constitute the
operational income and not the other income which accrues to the Society. In
this particular case, the evidence shows that the assessee- Society earns
interest on funds which are not required for business purposes at the given
point of time. Therefore, on the facts and circumstances of this case, in our
view, such interest income falls in the category of "Other Income"
which has been rightly taxed by the Department under Section 56 of the Act.
Apart
from the substantial question of law which we have answered, assessee-Society
has challenged the re- opening of assessment under Section 148 of the Act.
In this
connection, it was urged on behalf of the assessee(s) that, for the relevant
assessment years in question, the Assessing Officer was required to obtain
prior approval of the Joint Commissioner of Income Tax before issuance of
notice under Section 148 of the Act.
According
to the assessee(s), the proposal for re-opening was made on 31st May, 2001, it
was not sent through fax to the office of the Additional Commissioner of Income
Tax, Panaji, and the fax report indicates the time of 5.18 p.m., which
establishes the fact that service of notice on 31st May, 2001, on the
assessee(s) was done prior to the sending of fax for approval. According to the
assessee(s), the approval was given by the Additional Commissioner of Income
Tax on 8th June, 2001. The notice under Section 148 of the Act was served on
31st May, 2001, i.e., prior to the approval of the Additional Commissioner of
Income Tax. In the circumstances, it was urged that the notice under Section
148 of the Act was invalid and consequential re-assessment under Section 147
read with Section 144A of the Act was bad in law. We find no merit in this
argument. At the outset, we may state that the point raised on validity of the
notice under Section 148 of the Act essentially concerns factual aspect. The
Tribunal is the final fact finding Authority under the Income Tax Act. It has
given a finding of fact that, though the written communication of the sanction,
which has no prescribed format, was received by the Assessing Officer on 8th
June, 2001, yet, it cannot be said that sanction was not accorded prior to 31st
May, 2001.
The
Tribunal has recorded a finding of fact that there was a detailed
correspondence between the concerned officers prior to 31st May, 2001, in the
context of re-opening of assessment. It may also be mentioned that there is a
vital difference between grant of sanction and communication of such sanction.
As stated by the Tribunal, no particular form has been prescribed in the matter
of grant of sanction. For the afore-stated reason, the Tribunal came to the
conclusion that approval/sanction for re-opening of assessment in terms of
Section 148 of the Act read with Section 151 existed even prior to 31st May,
2001. We see no reason to interfere with this finding of fact given by the
Tribunal.
In this
matter, one question advanced by the assessee(s) before the Authorities below
has remained un- answered. That question is as follows:
"Whether,
on the facts and in the circumstances of the case, the Tribunal was right in
law in holding that the income by way of interest on deposits held with
scheduled banks, bonds and other securities was chargeable to tax under section
56 under the head `Income from other sources' without allowing any deduction in
respect of cost of funds and proportionate administrative and other expenses
under section 57?"
The above
question requires an answer. It involves interpretation of Section 56 and
Section 57 of the Act.
It also
involves applicability of the said sections to the facts of the present case.
We, accordingly, remit the said question to the High Court for consideration in
accordance with law.
Subject
to what is stated above, these civil appeals filed by the assessee(s) are
dismissed with no order as to costs.
......................J.[S.H. KAPADIA]
......................J.[AFTAB ALAM]
New Delhi,
February 08, 2010.
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