Income Tax Appellate Tribunal - Pune
Yashwant Co-Op. Processors Ltd. vs Income-Tax Officer on 3 January, 1996
Equivalent citations: [1996]57ITD393(PUNE)
ORDER
Shri G. K. Israni, Judicial Member
1. These four appeals by the assessee are directed against the orders of the learned CIT(A) and the CIT in relation to the assessment years 1984-85, 1986-87, 1987-88 and 1988-89. The appeal for the assessment year 1984-85 is against the order passed by the learned CIT(A), whereas the other three appeals are against the consolidated order of the C. I. T. passed u/s 263 in relation to the other three years. Since all the 4 appeals raise a common issue, they were heard together and are being disposed of by this consolidated order.
2. The solitary and common issue raised in these 4 appeals relates to the deduction in respect of the interest income of the assessee u/s 80P(2)(a)(i) of the income-tax Act.
3. The facts relevant to all the 4 years are common. The assessee a co-operative society registered under the Maharashtra State Co-operative Societies Act has been carrying on its business of processing of grey cloth from years earlier to the assessment year 1984-85. It also provided credit facility to its members. Initially, the society was doing the business of processing of grey cloth only. Later on, by an amendment in the bye-laws of the society the following object was incorporated :
"3(1)(a) : To make temporary advances to members against their grey goods."
After this amendment, the assessee started making temporary advances to its members against hypothecation of their goods. The assessee received interest on such temporary deposits. This interest amounted to Rs 1,33,285 (A. Y 84-85), Rs 3,40,814 (86-87), Rs 2,22,597 (87-88) and Rs. 2,02,099 (88-89). The assessee claimed deduction of the interest income in the computation of its total income u/s 80P(2)(a)(i). For the assessment year 1984-85, the claim of deduction was rejected by the Assessing Officer mainly on the ground that the main source of income of the assessee was processing of cloth was only an activity incidental to the carrying on of the main business. For this view, the Assessing Officer placed reliance upon the decision of the Allahabad High Court in the case of Addl. CIT v. U. P. Co-operative Cane Union [1978] 114 ITR 70. In the other three years, formed a prima facie opinion to the effect that the said orders were erroneous insofar as they were prejudicial to the interest of revenue. He accordingly initiated proceedings u/s 263, and, after having heard the assessee, directed the Assessing Officer to withdraw the deduction earlier allowed to the assessee. In so doing, he also relied upon the same decision of the Allahabad High Court reported in U. P. Co-operative Cane Union's case (supra). The assessee's appeal against the order of Assessing Officer for the assessment year 1984-85 on this issue has failed. Hence the assessee is before us for all the 4 years.
4. It was submitted before us by the learned counsel for the assessee that the assessee's activity was twofold. The first activity consisted of processing of grey cloth. The second consisted of providing credit facilities to the members who brought grey cloth for processing. The credit facility was extended on the hypothecation of grey cloth. According to the learned counsel, the activity of providing credit facilities was not incidental to the other activity and was independent one. The learned counsel felt that the provision of sec. 80P which has been enacted with a view to provide relief to the co-operative sector should be liberally construed and, therefore, the activity of providing credit facilities by the assessee should be treated as one falling under sub-clause (i) of clause (a) of sub-sec. (2) of sec. 80P. In support of his contention, the learned counsel relied upon the decision of the Supreme Court in the case of CIT v. South Arcot Dist. Co-operative Marketing Society Ltd. [1989] 176 ITR 117 and of the Madras High Court in the case of CIT v. Pondicherry Co-operative Housing Society Ltd. [1991] 188 ITR 671.
5. As against above, it was submitted by the learned departmental representative that the chief activity of the assessee consisted of processing of grey cloth. Even though a new object has been incorporated in the bye-laws of the society, yet that did not alter the position with regard to the admissibility of the claim u/s 80P(2)(a)(i). The credit facility is provided only to the members of the society who bring grey cloth for processing. The facility is further confined to the cases where grey cloth is hypothecated to the society. According to the learned departmental representative, the second part of the expression "providing credit facilities to its members" takes its colour from the first part reading "carrying on of the business of banking". Since the assessee's activity of providing credit facilities to its members is only incidental to its main activity of processing of grey cloth, such activity cannot fall within sub-clause (i) of clause (a) of sub-section (2) of section 80P. It is only when an assessee carries on the business of banking and as a part of that business provides credit facilities to its members that the assessee can claim such deduction. Reliance for this purpose was placed upon the decision of the Allahabad High Court in the case of U. P. Co-operative Cane Union (supra) and of the Kerala High Court in Kerala Co-operative consumers 'Federation Ltd. v. CIT [1988] 170 ITR 455. The learned departmental representative further made reference to the commentary of Sampath Iyengar, 8th Edn. at page 3422.
6. We have considered the facts and circumstances of the case and have studied the various decisions cited before us. We have also gone through the two decisions reported in Surat Vankar Sahakari Sangh Ltd. v. CIT [1971] 79 ITR 722 (Guj.) and U. P. Co-operative Bank Ltd. v. CIT [1966] 61 ITR 563 (All.) which were relied upon by the assessee before the CIT. After a careful consideration of these pronouncements, we find no hesitation in coming to the conclusion that the assessee's claim of deduction cannot succeed. It has been very clearly laid down by the Allahabad High Court in its decision in U. P. Co-operative Cane Union's case (supra) that the expression "providing credit facilities" in sec. 81(i)(a) takes its colour from the preceding expression, namely, "business of banking". That provision of sec. 81 is in pari materia with sec. 80P. In the present case, the assessee does not provide credit facility independently of its chief activity of processing grey cloth. In other words, the credit facility is provided only to such persons as bring for processing their grey cloth and hypothecate the same with the assessee. Till the processing is completed, the members are provided credit facilities on interest. The advances are essentially temporary in nature and are incidental to the main activity of processing of cloth. This part of advancing of temporary loans can, by no stretch of imagination, be regarded as carrying on the business of banking. So far as the case law cited by the assessee is concerned, we find that it findly offers any assistance to the assessee's case. In the case before the Madras High Court reported in Pondicherry Co-operative Housing Society Ltd.'s case (supra), the activity of the assessee consisted in providing credit facilities for building houses. That activity was not incidental or ancillary to any other main activity. The decision of the Supreme Court in South Arcot Dist. Co-operative Marketing Society Ltd.'s case (supra), in our opinion, lays down a principal which is contrary to the contention of the assessee before us. In that case, the main activity of the assessee was to provide godown facilities. In these circumstances, the ancillary activities were held to be part and parcel of the main activity and, therefore, it was held that the income arising out of all the activities was entitled to exemption. In the income arising out of all the activities was entitled to exemption. In the present case also, the activity of providing credit facility is ancillary and incidental to the main activity of processing of grey cloth, and, therefore, such ancillary or incidental activity cannot validly be treated as one of carrying on of banking business. The two decisions reported in Surat Vankar Sahakari Sangh Ltd.'s case (supra) and U. P. Co-operative Bank Ltd.'s case (supra), which were cited before the CIT in proceedings u/s 263 also do not offer any material assistance to the assessee, inasmuch as they also lay down a principle which is contrary to the interest of the assessee before us.
7. In view of the above discussion, we hold that the assessee in providing credit facilities to its members was not carrying on any business of banking and that it was, therefore, not entitled to any deduction u/s 80P(2)(a)(i). These appeals thus have no force and the same are, therefore, dismissed.