Madras High Court
Commissioner Of Income-Tax vs Pondicherry Co-Operative Housing ... on 20 November, 1990
Equivalent citations: (1991)90CTR(MAD)61, [1991]188ITR671(MAD), [1991]56TAXMAN92(MAD)
JUDGMENT
RATNAM J.-At the instance of the Revenue, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as"the Act") the following common questions of law have been referred to this court for its opinion in respect of the assessment years 1964-65 and 1972-73 to 1974-75.
"1. Whether, on the facts and in the circumstances of the case, the interest income earned by the assessee on advances made by it to its members for constructing houses would be exempt under section 80-P of the Income-tax Act?
2. Whether, on the facts and in the circumstances of the case, it could be held that the assessee co-operative society was carrying on the business of providing credit facilities to its members, although it was functioning as a co-operative housing society?"
The assessee is a co-operative housing society. having been registered some time in 1957 under the Tamil Nadu Co-operative Societies Act and later under the provisions of the Pondicherry Co-operative Societies Act, 1965. The objects of the assessee-society, as could be gathered from the bye-laws in annexure-D to the stated case are eleven, out of which, what is to the effect that the object of the society shall be to lend money to members of the society for the purposes of building houses. The other objects deal with acquisition of land, laying-out the land as house-sites to suit the requirements of the society in the shape of roads, parks, playgrounds, schools, hospitals, water works, etc., to construct or cause to be constructed building or other works of common utility, to build or cause to be built residential houses or other buildings for the members, to dispose of land, houses, etc., to establish and maintain social, recreative, educational, public health or medical institutions for the benefit of the members, to raise funds required for the business of the society, to repair, alter or otherwise deal with he buildings of the society and to do all things necessary and expedient for the accomplishment of the aforesaid objects. Consistent with one of its objects, viz., to raise funds required for the business of the society, the assessee borrowed money from the Government and paid interest on the amounts so borrowed. Likewise, with reference to the moneys lent by the society to its members for purposes of building houses, the society had released interest from the members. In the assessment years in question, there was an excess of receipt of interest by the society from its members over the payment of interest by the assessee-society to the government and that represented the income from interest on the loans advanced by the society to its members. With reference to these amounts of Rs. 21,443, Rs. 25,566, Rs. 1,29,862 and Rs. 1,35,985 for the assessment years 1964-65 and 1972-73 to 1974-75, the assessee-society claimed in the course of the assessment proceedings that as it is a co-operative society engaged in providing credit facilities to its members, the interest income as aforesaid attributable to its activity of providing credit facilities should be deducted under section 80P(1) and (2) (a) (i) of the Act. The Income-tax Officer took the view that the advances made by the assessee-society to its members for purposes of construction of houses cannot be regarded as provision of credit facilities to its members in its business and, therefore, the claim for deduction under section 80P(1) and (2) (a) (i) of the Act was not in order and subjected those amounts also to tax treatment. Aggrieved by that, the assessee preferred appeals before the Appellate Assistant Commissioner. He took the view that section 10(20A) of the Act would be applicable and held the assessee-society was the four assessments years in question. On further appeals by the Revenue before the Tribunal, it held that the Appellate Assistant Commissioner wrongly applied section 10(20A) of the Act, but that one of the principal objects of the assessee-society was lending of moneys to its members for purposes of building houses and the assessee-society was carrying on the business of providing credit facilities to its members and was engaged in that activity during the relevant assessment years. Ultimately, the Tribunal concluded that the assessee-society was entitled to the benefit of deduction under section 80P(1) and (2) (a) (i) of the Act for all the assessment years in question. That is how the two common questions of law set out earlier have been referred to this court for its opinion.
We may take up for consideration the second question first. There is no dispute that the assessee-society is a co-operative housing society and it had been providing credit facilities to its members. Learned counsel for the Revenue, however, contended that the predominant object of the society was house building and the extension of credit facilities to its members for that purpose was only in the nature of a means to achieve that end. On the other hand, learned counsel for the assessee submitted that even if the society is registered for purposes of house building, it need not necessarily be engaged in an activity of providing credit facilities to its members and in this case one of the objects of the society itself, besides house building, is to lend money to the members of the society, though for purposes of house building, and that would be sufficient to make it an independent and organised business activity of the assessee-society carried on systematically.
We find on a perusal of the objects of the society in annexure-D that the objects set out are independent and distinct objects of the society. Clause 2(j) of the bye-laws says that one of the objects of the society is lending moneys to its members. The carrying on of the activity of lending moneys to its members by the assessee-society has to be regarded as an activity relating to the provisions of credit facilities by the society to its members, as one of those objects. The availability of credit facilities provided by the assessee-society is not restricted only to such members as have secured a site from the assessee-society. Even other members, who had their own sites, had been given the benefit of credit facilities by the assessee-society and that activity had been carried on by the assessee-society purely as a business activity pursuant to the object set out in clause 2(j) of the bye-laws of the society. Further, it is seen that to secure a loan from the assessee-society, it is not necessary that the member should either have the house constructed through the efforts of the society or under its supervision. Our attention has also not been drawn to any bye-laws to this effect.
The restriction imposed on the user of the credit facilities extended by the assessee-society for house building cannot be construed as a means intended to secure the object of the society, viz., house building. at best, it can be regarded only as the imposition of a condition for obtaining credit facilities and would not in any manner affect the character of the activity or detract from the activity being one of providing credit facilities. The need for taking a security over the house property in the form of a mortgage from the member to whom credit facilities had been extended establishes that it is only for the purpose of ensuring prompt repayment of the loan advanced and this does not also in any manner alter the character of the assessee-society as an institution giving financial aid or providing credit facilities. The activity of the assessee-society in making available funds to a credit facilities to its members. We have carefully considered the entire bye-laws of the society and we are of the view that the object of the assessee-society as set out in clause 2(j) of the bye-laws in annexure-D is not one intended to serve as a means to secure a principal object, viz., house building. We hold that the object set out in clause 2(j) of the bye-laws of the society is a separate, distinct and independent activity of the assessee-society.
We may now make a brief reference to two decisions strongly relied on by learned counsel for the Revenue in Rodier Mill Employees Co-operative Stores Ltd. v. CIT [1982] 135 ITR 355 (Mad) and CIT v. Madras Autorickshaw Drivers Co-operative Society Ltd. [1983] 143 ITR 981 (Mad). In the first case, a co-operative society sold consumer goods on credit to its members and claimed that its entire profits were exempt under section 80P(2) (a) (i) of the Act. That claim was negative by the Income-tax Officer, but accepted on appeal by the Appellate Assistant Commissioner, whose conclusion was reversed by the Tribunal. On further reference to this court, it was pointed out that there is a well-merited distinction between credited societies and consumer societies and the reference section 80P(2) (a) (i) of the Act is to a co-operative society whose primary object is the provision of loans or other credit facilities to its members and not to a society whose primary object is something other than the provision of loans and that the provision of credit facilities would not includes sale of goods on credit by an out and out consumer co-operative society, as the assessee was in that case. We have earlier referred to the objects of the assessee-society and its objects are not confined to the activity of house building only, but extends to other spheres of activity as well, like maintenance of social, recreative, educational, public health or medical institutions, etc., and other activities as well. Under those circumstances, the decision in rodier Mill Employees Co-operative Stores ltd. v. CIT [1982] 135 ITR 355 (Mad), which related to a co-operative society dealing in consumer goods only, cannot have any application here. Similarly, the reliance placed upon CIT v. Madras Autorickshaw Drivers Co-operative Society Ltd. [1983] 143 ITR 981 (Mad) is of no avail to the Revenue. The object of the assessee-society in that case was purchase and sale of Autorickshaw and the sociry had come into being only for that purpose. It was under those circumstances, it was held that the entering into of a hire-purchase agreement for the purpose of the sale of Autorickshaw cannot be regarded as providing credit facilities, but only to further the sole object of the society, viz., purchase of Autorickshaw by the society initially in its own name and re-selling them to its members on hire purchase terms ad that would not enable the society to claim the benefit of exemption under section 80P(2) (a) (i) of the Act. We are of the view that that decision also does not assist to Revenue on the state of the object clause of the assessee-society in this case relating to different and distinct objects of the society. We may observe in passing that, in Kerala co-operative Consumers Federation Ltd. v. CIT [1988] 170 ITR 455 (Ker), also credit sales by a consumer co-operative society whose business was purchase and sale of consumer goods were held not to fall within the meaning of the expression "providing credit facility by way of loans", but only sale of goods on credit. In arriving at this conclusion, the decision in Rodier Mill Employees Co-operative Stores Ltd. v. CIT [1982] 135 ITR 355 (Mad), referred to earlier, was relied upon and we have already held that that decision has no application to this case and, therefore, the decision in Kerala Co-operative Consumers Federation Ltd. v. CIT [1988] 170 ITR 455 (Ker), also does not help the Revenue in any manner. We have, therefore, no hesitation in answering the second question referred to us in the affirmative and against the Revenue.
We now proceed to a consideration of the first question. Under section 80P(2) (a) (i) of the Act, in order to claim the benefit of deduction under section 80P(1) of the Act, the co-operative society should be engaged in carrying on the business of banking or providing credit facilities to its members. The nature of the credit facilities provided by the assessee-society to its members in furtherance of its object clause 2(j) has already been referred to. We have earlier pointed out that that activity is a distinct and separate activity of the assessee-society and that activity carried on by the assessee-society would make it a society engaged, among others, in carrying on the business of providing credit facilities to its members,, attracting section 80P(2) (a) (i) of the Act. We may, in this connection, refer to the nature of construction to be put upon section 80P(2) (a) (i) of the Act. The corresponding provision in the Indian Income-tax Act, the Supreme Court, in CIT v. South Arcot District co-operative Marketing Society Ltd. [1989] 176 ITR 117, laid down that, as the provision for exemption was intended to encourage co-operative societies, a liberal construction should be given to the language employed in the provision. To similar effect is another decision of the Supreme Court reported in Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT [1989] 177 ITR 418, though the reference was to section 81(i) (c) of the Act. It was reiterated that section 81(i) of the Act was intended to encourage and promote the growth of co-operative societies and, consequently, a liberal construction must be given to the operation of that provision. Construing section 80P of the Act in the manner indicated by the decision of the Supreme Court referred to above, we are of the view that if the co-operative society is engaged in carrying on the business of providing credit facilities to its members as we have found in this case, that would suffice to attract the benefit of deduction under section 80P(1) and (2) (a) (i) of the Act. We have earlier found the the assessee-society in this case had been engaged in carrying on the business of providing credit facilities to its members, amongst its other activities. In the case of a co-operative society have several objects, as the assessee-society in this case, if it is established that the co-operative society is engaged in any one of the activities falling under section 80P(1) and (2) (a) of the Act, that would suffice to enable the society to claim the benefit of deduction, subject, of course, to such other provisions as may be applicable as enumerated in the other parts of section 80P92) of the Act. We, therefore, answer the first question referred to us in the affirmative and against the Revenue. The assessee will be entitled to the costs of these references. Counsels fee Rs. 500. One set.