TMI Blog1971 (9) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... o the question. The assessee-society, registered under section 10 of the Andhra Pradesh (Andhra area) Co-operative Societies Act (VI of 1932) (hereinafter called the " Co-operative Societies Act "), as a co-operative society came into existence on March 4, 1962, by an Act of the State legislature, viz., Act No. 44 of 1961, as a result of amalgamation of the Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. and the Hyderabad Central Co-operative Land Mortgage Bank Ltd. For the assessment years 1962-63 and 1963-64, the relevant accounting years ended on June 30, 1961, and June 30, 1962, respectively, the assessee has been assessed in the status of an association of persons determining its total income at Rs. 6,70,609 and Rs. 11,09,767, respectively. Out of the aforesaid total income the income earned by the assessee by way of interest on securities was Rs. 4,67,852 and Rs. 4,37,144 on which a tax of Rs. 1,40,181 and Rs. 1,30,971, respectively, had been deducted at source by the Income-tax Officer. The claim of the assessee for the refund of the aforesaid amounts of tax deducted at source on the ground that it was entitled to exemption from tax in respect of interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment of the other funds, in respect of which interest earned has not been exempted by the Tribunal, is necessary and in any event has a nexus or connection with or is ancillary to the object and purpose of the assessee's business. He, therefore, contends that the balance of Rs. 1,03,528 and 1,03,440 in respect of which the claim of the assessee was rejected on the application of the provisions of sections 81(i)(a) and 81(v) of the Act must be exempted. The claim of the assessee is resisted by Mr. P. Rama Rao, the learned counsel appearing for the revenue, contending, inter alia, that the funds other than debentures redemption (sinking) fund are not trading or business assets of the assessee and they have been simply invested in securities and, therefore, the interest earned thereon is rightly chargeable under section 18 and they do not come within the purview of section 81(i)(a) or 81(v) of the Income-tax Act. The answer to the question turns upon the scope of the provisions of section 81(i)(a) and (v) of the Income-tax Act and their application to the facts and circumstances of the instant case. Sections 81 to 86 comprised in Chapter VIII deal with incomes forming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion sought to be provided under section 81(i)(a) is undoubtedly in respect of the profits and gains of business carried on by a co-operative society. Where the co-operative society has earned any profits or gains not pertaining to its business but by mere investment in Government securities or in any other manner, such categories of income except the business income are not exempt from income-tax under section 81(i). The business of the assessee must have a direct or proximate connection with or nexus to the earnings in question so as to attract the provisions of section 81(i). A close reading of the provisions of section 81(i)(a) reveals that unless and until the assessee establishes that the income sought to be exempted was earned in carrying on the business of banking or providing credit facilities to its members, its claim must be rejected. For a proper appreciation of the respective contentions of the parties with regard to the applicability or otherwise of the provisions of section 81(i)(a) of the Income-tax Act, we may usefully refer to the material provisions of the Societies Act and the relevant bye-laws of the assessee-bank which have a bearing upon its governance and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credits to the member mortgage banks, it has to obtain or raise the requisite funds either by debenture deposits or by borrowing by the issuance of debentures as prescribed by the Co-operative Societies Act and the trust deed as disclosed from clause (ii) of bye-law No. 6. It can also take short-term loans either from the Government or the State Bank of India or any other bank and they have to be repaid with interest. Incidentally, clause (ii) also provides for the constitution of a debenture redemption (sinking) fund and to invest the same in Government securities for interest instead of keeping the same idle. Clause (v) of the bye-law No. 6 states that one of the objects of the bank is to buy, sell or deal in securities or bonds, scrips or other forms of securities on behalf of the mortgage banks, on behalf of the bank or other co-operative institutions. Bye-law No. 28 deals with debentures whereas bye-laws Nos. 36 and 37 refer to constitution of debenture redemption funds to facilitate repayment of debentures. In other words, it is obligatory on the part of the assessee-bank to constitute debenture redemption fund to facilitate the repayment of the debentures which form the mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading of the objects of the assessee-bank and its other material bye-laws, that it was not engaged in carrying on the business of banking. Hence, the first limb of clause (a) of sub-section (i) of section 81 must be held to be not applicable to the present case. We shall now advert to the applicability or otherwise of the second limb of clause (a) of sub-section (i) to section 81 on which strong reliance has been placed by Mr. A. Siva Rao. The assessee's claim in this regard also will have to be rejected unless if it proved that it was engaged in carrying on the business of providing credit facilities to its members. The expression " facilities " used in section 81(i)(a) is an inclusive term of wide import embracing anything which aids or makes easier the performance of a duty. (Section 35, Corpus Juris Secundum, page 383). On a perusal of the objects embodied in bye-law No. 6 of the assessee-bank it is clear that its prime intendment and object is undoubtedly to provide long-term credit facilities to member mortgage banks which, in their turn, have to advance loans to their members for the purpose specified in section 85 of the Co-operative Societies Act. The learned standing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y repayments made by the agriculturists would be credited. The Tribunal found that the debenture redemption (sinking) fund was created for the purpose of facilitating payments to the agriculturists as and when the debentures mature. The assessee-bank, instead of keeping idle the amounts repaid by the agriculturists, has invested the same in Government securities capable of being disposed of on short notice and thereby earned interest on such securities. The investment of debenture redemption fund is a part of the business activity of the assessee-bank and hence the interest income on such securities forms part of the business income of the assessee-bank as the entire thing is an integrated scheme of the business activity. The amount of interest in respect of which the claim of the assessee for exemption under section 81(i)(a) has been rejected must be held to have been earned in an activity having no direct or proximate connection with or nexus to the business activity of the assessee, i.e., floating debentures, advancing loans to agriculturists, collection of the loan instalment from the agriculturists, creation of debenture redemption funds for the purpose of redeeming debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the opinion of this court. True, as ruled by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., the High Court has ample jurisdiction to entertain all the aspects of a question though not urged before the Tribunal, if the question is comprehensive enough to take in all the aspects. In the instant case a specific question was also raised by the assessee in this regard in the application under section 256(1) but, however, it was not referred by the Tribunal. In Mrs. Sarojini Rajah v. Commissioner of Income-tax it was held by the Madras High Court that whether a given transaction is an investment or trading activity is a mixed question of fact and law and whether a particular receipt is capital or income has been held by the Supreme Court in Karamchand Thapar and Brothers (P.) Ltd. v. Commissioner of Income-tax to be a mixed question of law and fact. In the instant case the specific question, though raised by the assessee, was not referred for our opinion by the Tribunal. However, the assessee should have preferred an application under section 256(2) requiring the Tribunal to submit a statement of case on that question if it had considered it to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -operative society should not exceed Rs. 20,000 ; (iii) the co-operative society must not be a housing society or an urban consumers' society or one carrying on transport business or a society engaged in the performance of manufacturing operations with the aid of power. In respect of a co-operative housing society or an urban consumers' co-operative society or others specified in sub-section (v) of section 81, no exemption can be claimed even though the profits relate to the interest on securities or income from property. It is only the co-operative societies other than a housing society or an urban consumers' society or any other society specified therein, whose total income does not exceed Rs. 20,000 in the year of account but not others that are entitled to the exemption under section 81(v). The very intendment and object of this provision appears to be to give relief and exemption only to co-operative societies other than a housing society or an urban consumers' society and others specified therein whose total income is less than Rs. 20,000. The exemption is intended only to encourage small co-operative societies having a total income of less than Rs. 20,000 and the other so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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