1971 (9) TMI 60 - HC - Income Tax

Carrying On Business Credit Facilities To Members Interest On Securities Providing Credit Facilities

Summary

Issues Involved:
1. Applicability of Section 81(i)(a) of the Income-tax Act, 1961.
2. Applicability of Section 81(v) of the Income-tax Act, 1961.
3. Classification of income from interest on securities as business income or otherwise.
4. Determination of whether the investment of funds other than debenture redemption (sinking) fund qualifies for tax exemption.

Detailed Analysis:

1. Applicability of Section 81(i)(a) of the Income-tax Act, 1961:
The primary issue was whether the income earned by the assessee from interest on securities, excluding the debenture redemption (sinking) fund, was exempt from tax under Section 81(i)(a). Section 81(i)(a) exempts the profits and gains of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members.

The court emphasized that to qualify for this exemption, the co-operative society must prove that the income sought to be exempted was earned in the course of carrying on its business of banking or providing credit facilities to its members. The Tribunal found that the debenture redemption (sinking) fund was part of the business activity, and thus, the interest income from this fund was exempt. However, the investment of other funds in Government securities was not considered a business activity necessary for carrying on the assessee's business. Consequently, the interest income from these other funds was not exempt under Section 81(i)(a).

2. Applicability of Section 81(v) of the Income-tax Act, 1961:
Section 81(v) exempts interest on securities chargeable under Section 18 or income from property chargeable under Section 22, provided the total income of the co-operative society does not exceed Rs. 20,000 and the society is not a housing society, an urban consumers' society, a society carrying on transport business, or a society engaged in manufacturing operations with the aid of power.

The court found that the assessee did not meet these criteria, as its total income exceeded Rs. 20,000. Therefore, the assessee was not entitled to the exemption under Section 81(v).

3. Classification of Income from Interest on Securities:
The court examined whether the interest income from securities could be classified as business income. The Tribunal had bifurcated the interest income, granting exemption for the debenture redemption (sinking) fund but not for other funds. The court agreed with this bifurcation, stating that the investment of funds other than the debenture redemption (sinking) fund did not have a direct or proximate connection with the business activity of the assessee.

The court affirmed that the interest income from these other funds was chargeable to tax under Section 18 and did not qualify as business income under Section 81(i)(a).

4. Investment of Funds Other than Debenture Redemption (Sinking) Fund:
The court analyzed whether the investment of funds other than the debenture redemption (sinking) fund in Government securities was necessary for carrying on the assessee's business. It was found that these investments were not directly connected to the business activity of the assessee. The interest income from these investments was considered income from securities, chargeable to tax under Section 18, and not exempt under Section 81(i)(a).

Conclusion:
The court concluded that the assessee was not entitled to claim a refund of the tax deducted at source for the total income earned by way of interest on securities, except for the interest income from the debenture redemption (sinking) fund, which was exempt under Section 81(i)(a). The assessee's claim for exemption under Section 81(v) was also rejected as the total income exceeded Rs. 20,000. The court's answer to the referred question was in the negative, against the assessee, and costs were awarded to the Commissioner of Income-tax.