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2002 (10) TMI 89 - HC - Income TaxCo-operative Society Special Exemption - Whether on the facts and in the circumstances of the case and on a proper interpretation of the objects of the society and the provisions of section 80P of the Income-tax Act 1961 the Appellate Tribunal was justified in holding that the interest earned by the assessee-co-operative society from its members was covered by the provisions of section 80P(2)(a)(i) of the Income tax Act 1961 and therefore exempt from tax? we answer the question referred to us in the affirmative in favour of the assessee-co-operative society and against the Revenue.
The core legal question considered by the Court was whether the interest earned by the assessee-co-operative society from its members was exempt from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961. Specifically, the Court examined if the Appellate Tribunal was justified in interpreting the society's objects and the provisions of section 80P to hold that such interest income qualified for exemption.
The principal issue arose from the nature of the society's activities and whether it could be classified as a co-operative society "providing credit facilities to its members" within the meaning of section 80P(2)(a)(i). The Revenue contended that since the society's business was not banking or credit provision as its main activity, the interest income from members was not exempt. The assessee argued that the society's objects included lending or arranging credit to members for agricultural purposes, and thus the interest income fell within the exemption. Issue-wise Detailed Analysis: 1. Interpretation of Section 80P(2)(a)(i) and the Nature of the Society's Activities The relevant legal framework was section 80P of the Income-tax Act, 1961, which grants exemption to co-operative societies in respect of income "attributable" to certain activities, including "carrying on the business of banking or providing credit facilities to its members." The Court noted the legislative history, including the insertion of section 80P in 1967, and earlier provisions under the Income-tax Act, 1922, which exempted co-operative societies engaged in banking business from tax on such income. Precedents relied upon by the Revenue emphasized a restrictive interpretation of "providing credit facilities," contending that only societies whose main business was banking or credit provision qualified. For instance, the Court referred to the decision that forbids splitting income to segregate exempt and non-exempt portions if the society's true nature was not that of a credit provider. On the other hand, the assessee's counsel argued for a broader interpretation of "attributable to" within section 80P, relying on authoritative decisions that the phrase is wider than "derived from" and covers income connected with or incidental to the business. The assessee highlighted that the society's objects, as approved by the Government of Uttar Pradesh, expressly included arranging credit facilities to members for agricultural inputs such as seeds and fertilizers. The Court examined the society's "Pratiman Upvidhiyan" (model bye-laws), particularly object No. 4, which stated the provision or arrangement of credit facilities to members for agricultural purposes. The Court interpreted this object as authorizing the society to lend or arrange finance exclusively to its members to facilitate purchase of agricultural inputs, and to earn interest thereon. The Court distinguished this from mere sale of goods on credit, emphasizing that the interest was realized from loans advanced for agricultural purposes, not from credit sales. This distinction was critical in differentiating the society's activity from non-credit businesses. 2. Application of Precedents and Interpretation of "Attributable to" The Court relied heavily on a binding Division Bench decision which held that the expression "attributable to" is broader than "derived from" and includes income from investments or activities incidental to the main business. In that case, interest earned on mandatory government securities investments was held attributable to the business of supplying sugarcane. Applying this principle, the Court reasoned that the interest earned by the society from loans to its members was attributable to the carrying on of its business of providing credit facilities as per its objects. The lending activity was integral to the society's purpose of promoting sugarcane cultivation and ensuring agricultural inputs. The Court rejected the Revenue's argument that the society was not a credit co-operative because lending was not its chief activity. It held that the society's objects and actual business operations demonstrated that it did provide credit facilities to members, and thus the exemption under section 80P(2)(a)(i) applied. 3. Burden of Proof and Interpretation of Fiscal Statutes The Court noted the settled principle that the burden lies on the assessee to prove that the income falls within the exemption provisions. However, where the society's objects and business activities clearly encompass lending to members, this burden was satisfied. The Court also referred to the principle that fiscal statutes granting exemption must be construed liberally to effectuate their beneficial purpose, but without distorting the plain language. Here, the Court found no violation of the statutory language in granting exemption. 4. Treatment of Competing Arguments The Court carefully considered the Revenue's reliance on decisions emphasizing the restrictive scope of "credit facilities" and the necessity of the lending business being the main activity. It distinguished those cases on facts, noting that in the present case the lending was a main object and an actual business activity of the society. The Court also addressed the contention that interest income from members should not be exempt because the society was not a banking institution. It held that the statute does not require the society to be a bank, but only that it provides credit facilities to members, which the society did. Conclusions The Court concluded that the interest income earned by the assessee-co-operative society from its members was exempt from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Appellate Tribunal was justified in its interpretation and application of the law. The society's objects and actual lending activities brought the interest income within the scope of the exemption. Significant Holdings "Clause (c) of section 80P(2) exempts income of co-operative societies to the extent mentioned in that section if the profits or gains are 'attributable' to the activity in which the co-operative society is engaged... The expression 'attributable to' is much wider than the expression 'derived from'. The expression 'attributable to' suggests that the Legislature intended to cover receipts from sources other than the actual conduct of the business of the assessee." "The assessee-co-operative society would lend to its members or would arrange finance to its members through someone else's agency to enable them to purchase good seeds of sugarcane, fertilizers, etc., and that loans will not be given to its non-members besides it will be given only in cash to enable its members to purchase seeds, fertilizers, etc., and interest is to be realised by the society from its members on such lendings." "We too answer the question referred to us in the affirmative, in favour of the assessee-co-operative society and against the Revenue."
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