Income Tax Appellate Tribunal - Ahmedabad
Ito vs Surat Art Silk Cloth Producers Co-Op. ... on 1 January, 1800
ORDER
I.P. Bansal, J.M.
1. These income-tax appeals except ITA No. 1091/Ahd./2002 are cross-appeals in respect of assessment years 1993-94 to 1995-96. These are directed against three separate orders of CIT(A) evenly dated as 15-2-2002.
2. ITA No. 1091/Ahd./2002 is appeal filed by the assessee which is directed against the order of Commissioner (Appeals) dated 15-2-2002 f or assessment year 1996-97.
3. In the appeals filed by the revenue only one ground which is common has been raised and reads as under:
1. On the facts and circumstances of the case, the Id. Commissioner (Appeals)-V, Surat, has erred in law in allowing deduction under Section 80P(2)(d) of the Income Tax Act as interest of Rs. 2,35,846 received by the assessee from other Co-op. Society without taking into account a sum of Rs. 1,22,377 was paid by the assessee as interest to other Co-op. Societies.
4. In the appeals filed by the assessee the grounds are identical. The first ground of assessees appeals for all the four years is regarding addition made on account of transfer to reserve fund and this ground is No. 1. This ground for all the four years was not pressed by the Id. AR, therefore, the same is dismissed.
5. The third ground in all the appeals filed by the assessee relates to levy of interest under Section 234B of the Income Tax Act, 1961, which was admitted by the Id - AR of the assessee to be consequential. Accordingly it is held that interest under Section 234B is leviable in accordance with finally assessed income and this ground is dismissed.
6. Ground No. 11 of assessees appeals raises a common issue except difference in figures. For the sake of convenience ground of appeal raised in assessment year 1993-94 is reproduced below.
II. Interest received from Members - Rs. 4,49,225 (1) The Id. Commissioner (Appeals) erred in confirming & not granting deduction under Section 801?(2)(a)(i) of the Act, in respect of interest received from members for credit facilities extended to them.
(2) On the facts and circumstances of the case and as per law it should have been allowed.
The above figure is substituted for other years under appeal, which are as under:
Asst. Year Amount (Rs.) 1994-95 7,72,364 1995-96 15,03,499 1996-97 13,36,012
7. Revenues appeals - We will discuss the f acts relating to assessment year 1993-94 because for other years facts are identical, except difference in figures. The assessee claimed deduction of Rs. 2,35,846 as interest received from District Co-op. Bank. The deduction was claimed under the provisions of Section 8OP(2)(a), the relevant portion of which read as under:
80P(2) The sums referred to in Sub-section (1) shall be the following, namely:
(a) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other cooperative society, the whole of such income;"
However, the assessing officer found that assessee had paid a sum of Rs. 1,22,377 to the same bank. The assessing officer required the assessee to explain as to why the gross amount was claimed as deduction as according to the assessing officer only the net interest received from said Co-op. Bank should have been claimed as deduction. In absence of any explanation, the assessing officer reduced the claim of deduction by a sum of Rs. 1,22,377. Aggrieved, assessee filed an appeal before Commissioner (Appeals) before whom reliance was mainly placed on the decision of Honble Punjab & Haryana High Court in the case of CIT v. Doaba Co-operative Sugar Mills Ltd. (1998) 230 ITR 774, wherein it has been held that Section 80P(2)(d) allows whole deduction of income by way of interest or dividend derived by the Co-op. Society from its investment with any other Co-op. Society. This provision does not make any distinction in accordance with the source of investment because this section envisages deduction in respect of any income derived by the Co-op. Society from any investment with Co-op. Society. It is immaterial whether any interest paid to the Coop. Society exists, the interest received from the bank on investment. The revenue is not required to look to the nature of investment whether it was from its surplus fund or other-wise. The Act does not speak of any adjustment as sought to be made out by the counsel of the revenue. The provision does not indicate any such adjustment in regard to interest derived from the Co-op. Societies from its investment in any other Co-op, Society. Therefore, it was not possible to agree with the argument advanced by the counsel of the revenue that the assessee has paid interest to other bank and has also received interest from the said bank, thereby showing that the assessee has on the aggregate paid interest to the bank and, therefore, no deduction under Section 80P(2)(d) can be allowed. It was held that the Tribunal was right in law in allowing deduction under Section 80P(2)(d) in respect of interest of Rs. 4,90,990 on account of interest received from Co-op. Bank without adjusting interest paid to the bank. Relying on the said decision ld. Commissioner (Appeals) has allowed the claim of the assessee. With these findings of Commissioner (Appeals) the revenue is aggrieved, hence in appeal.
8. Before us, Id. DR relied on the order of assessing officer and a reference was also made to Section 14A which has been brought on the statute with retrospective effect from 1-4-1962 which reads as under:
14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assesseein relationto income which does not form part of the total income under this Act:
(Provided that nothing contained in this section shall empower the assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducinga refund already made orotherwise 1hcreasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1-4-2001.)."
9. We have heard both the parties and their contentions have carefully been considered. According to the aforementioned decision of Honble Punjab & Haryana High Court in the case of Doaba Co-op. Sugar Mills Ltd. (supra), the assessee is eligible for deduction under Section 80P(2)(d) on the gross interest income earned by it from the Surat District Co-op. Bank Ltd. No contrary decision was brought to our notice. Therefore, following the aforementioned decision of Honble Punjab & Haryana High Court we hold that assessee is entitled to get deduction on gross interest received by it from Surat District Co-op. Bank. However, reference was made to Section 141A of the Act, the applicability or otherwise of the same was not examined by the assessing officer probably for the reasons that the same was not on statute on the date when the assessment order was passed. There is no reference of Section 14A in the order of Commissioner (Appeals) as well. In this view of the situation, we consider it just and proper to restore this issue to the file of assessing officer only for limited purpose to examine the applicability or otherwise of Section 14A on the issue. We direct accordingly. Needless to observe the assessing officer will give reasonable and sufficient opportunity to assessee in this regard and thereafter, the issue will be decided in accordance with law.
10. For statistical purposes, the appeals filed by the revenue are considered partly allowed.
11. Assessees appeals - as pointed out earlier, we will discuss the facts for assessment year 1993-94 as for rest of the years the facts are identical. The assessee claimed deduction under Section 80P(2)(a) in respect of interest received from its Members on the credit facilities provided by it to its members, The same has beefi disallowed by the assessing officer as per following observations:
It is seen that assessee has clairned deduction under Section 90P(2)(a) of the amount of Rs. 4,49,225 as interest received from members of the society. The Section 80P(2)(a)(i) deals with the case of co-op. society which are entitled to this deduction. The assessee has considered itself the society failing under the category of 80P(2)(a)(i) i.e., Co-op. Society engaged in carrying on the business of banking or providing credit facilities to its members. In the case of Kerala Co-op. Consumers Federation Ltd. v. CIT 170 ITR 456 (1988) Kerala - the High Court field that providing credit facilities occurring in Section 80P(2)(a)(i) should be construed similar to carrying on the business of banking. The words providing credit facilities to its members means providing credit by way of loans and not selling goods on credit. In the case of the assessee, yarn has beer) purchased and then sold to the members. The amount of interest, shown is received from the members on account of late payment of the amount due from the members. Hence, there is no evidence of credit facilities provided to the members by the assessee. In the case of Addl. CIT v. UP. Co-op. Cane Union, 114 ITR 70 (1978) (Allahabad), it was held that the expression providing credit facilities takes its colour from the preceding expression viz., business of banking. In order that banking or providing credit facilities or providing of credit facilities may constitute a business, it is necessary that these activities must be the chief source ofinconie.To hold that a co-op. society which sells goods on credit, to its members is engaged in the business of providing credit facilities would amount to extending the exemption to business other than those mentioned......A person who sells goods on credit cannot be said to be carrying on business of providing credit facilities. This business will be the bush iess of purchase and sale of goods which he supplies. Selling goods on credit is only a made ~of carrying on his business. It does not become a business of providing credit facilities.
3. In the case of CIT v. Coral Mills Workers Co-op. Stores Ltd. 106 ITR 868 (1977) (Madras) - Here the High Court held that a credit society could only mean a society which provides credit by way of loans of inoney to its members and not a society which sells goods on credit. Another case on the subject is CIT v. UP. Co-op. Cane Union Federation Ltd. 122 ITR 913 (Allahabad).
4. The assessee has cited the case of Pondichery Co-op. Housing Society Ltd. insupport of its claim. This case is not applicable here as a facts are different. In the case cited by the assessee, loans were actually advanced to the members. This was case where the society gave loan to its members and one of the requirement was that the loan would be used for building house. In the present case of the assessee, interest received from the members isin delay in receiptof payments for goods supplied to members.
Hence, the deduction claimed in respect of interest received from the members is disallowed and added back to the total income."
Commissioner (Appeals) has upheld the action of assessing officer as per paras 5.4 to 5.9 of his order which are also reproduced as below:
5.4 In his written submission, the appellant has commented on these decisions and has further relied on the decision of Madras High Court in the case of Pondicherry Co-op. Housing Society Ltd. 188 ITR 671. It has been further stated that the SLP filed by the department has been dismissed by the Supreme Court in 209 ITR 87(St.) 5.5 assessing officer has clarified that the facts of this case are not comparable with the case of the appellant. In the case of Pondicherry Coop. Housing Society Ltd, loans were actually advanced to the members. In this cited case, society actually gave loans to its members and one of the requirements was that the loan would be used for building a house.
5.6 Sometimes the members had purchased goods directly and the appellant society paid the amount to the supplier on behalf of the members. This activity will not amount to extending credit facility but W" libnly as credit sale.
5.7 In the case of the appellant, the appellant is selling goods on credit receiving payments along with interest for delay and the whole series of transaction is being labelled as providing credit facilities to its members. Certain observations made in the decision CIT v. Co-operative for Supply and Commission 204 ITR 713 (Raj.) arc also relevant-
The words "providing credit facilities" would, therefore, have to be interpreted to comprehend the business of lending services of credit f acilities in connection with the business of banking. In order to constitute the business of banking, it is necessary that these activities must be the main source of income of the society. The facility of selling the goods on credit to the members is an activity of business of selling of goods of which the facility is only an incidence and it will not amount to providing credit facilities in the nature of the business of banking so as to amount to carrying on the business of banking or providing credit facilities to its members. As a matter or fact this clause is meant to cover societies which are carrying on the business of banking and in the course of their business are providing credit facilities to its members CIT v. Co-operative Supply and Commission ( 1993) 204 ITR 713 (Raj.).
5.8 Besides this, the observation made by the Supreme Court in the decision 208 ITR 649 in the case of CWS(I) v. CIT are also relevant in the context of the appellants case.
To quote;
In taxing statutes literal interpretation is not to be adopted if it leads to discriminatory or incongruous results. Language can be modified to accord with the intention of the Parliament and to avoid absurdity."
5.9 Thus in view of the aforesaid reasons and the decisions relied upon by the assessing officer, it is held that appellants business of providing goods to the appellant on credit does not amount to extending credit facilities as envisaged in Section 80P(2)(a) of the Income Tax Act. Assessing Officer has rightly disallowed the claim of deduction under Section 8OP(2)(a). Appellants this ground of appeal is thus dismissed."
After narrating the facts, it was pleaded by the Id. AR of the assessee that the case law relied upon by the assessing officer is distinguishable on facts. He contended that the decision in the case of CIT v. Coral Mills Workers Co-operative Stores Ltd. (1977) 106 ITR 868 (Mad.) relates to Section 81(t) which has been omitted from the statute from 1967 in which it has been held that Co-op. Society within the meaning of Section 81(i)(a) similar to Section 80P(2)(a)(i) can only mean a society which provides credit by way of loans to its members and not a society who sells goods on credit.
12. In the case of Addl, CIT v. UP. Co-operative Cane Union (1978) 114 ITR 70 (All.), the decision relates to deduction under Section 80(i)(a) in which it was held that the section its colour from business of banking and it was held that in order that a banking or providing of credit facility may constitute a business, it is necessary that these activities must be the chief source of income. Selling goods on credit is only the mode of carrying on of a business. It does not become a business of providing credit facilities. According to the Id. Counsel this was a case where the assessee purchased the goods and sold the same to the members on credit. It was pleaded that this case was later on considered in the latter decision in the case of CIT v. Krishak Sahkari Ganna Samiti Ltd. (2002) 258 ITR 591 (All.) on which the assessee placed reliance to contend that interest earned by it on credit facilities provided to its members, is deductible under Section 80P(2)(a)(1)
13. Further, the decision in the case of Kerala Co-operative Consumers Federation Ltd. v. CIT (1988) 170 ITR 455 2 (Ker.) was also distinguished on the ground that in the said case the society was selling goods to its members which was not considered as providing credit facilities. It was held that assesseeeffected credit sales to its members and thus was not entitled to get deduction under Section 80P(2)(a)(i).
14. The next decision in the case of CIT v. UP. Co-operative Cane Union Federation Ltd. (1980) 122 ITR 913 (All.) was also pleaded to be distinguishable on the ground that in that case, the credit facilities were also provided to non-members as well.
15. The decision in the case of CIT v. Madras Autorikshaw Drivers Cooperative Society Ltd. (1983) 143 ITR 981 (Mad.) was pleaded to be distinguishable on the ground that there was no object in that case in the memorandum of the society to provide credit facilities. In absence of such a mention in the object, was pleaded to be a distinguishable feature.
16. It was further pleaded that the decision in the case of CIT v. Cooperative Supply& Commission Shop Ltd. (1993) 204 ITR 713 (Raj.) is also pleaded to be not applicable as the same related to interest earned by society on the outstanding balance in respect of supply of goods.
17. As against above decisions, relied upon by the assessing officer and the Commissioner (Appeals), Id. AR placed reliance on the following decisions:
(1) Krishak Sahkari Ganna Samiti Ltd. (supra). In the said case, the society had given loan or arranged finance to its members to enable them to purchase goods seeds or sugarcane, fertilizer etc. and it was held that the society was engaged in carrying on the business of providing credit facilities to its members.
(2) In the case of CIT v. Pondicherry Co-operative Housing Society Ltd. (1991) 188 ITR 67 12 (Mad.) where the society advanced loans to its members for purchase /construction of houses and it was held that the assessee society was providing credit facilities to its members. It was pleaded that the said decision has been affirmed by the Supreme Court as SLP filed against the said decision has been dismissed by the Supreme Court in 209 ITR (St.) 87.
18. It was pleaded that distinguishing feature between the decisions relied upon by the assessing officer and the Commissioner (Appeals) and the decision being relied upon by the assessee is that where goods have been sold on credit or where credit facilities has been extended to non-members, or where there is no object clause, only in those cases, deduction will not be available and where the credit facilities are extended to members by giving them loans or by extending credit facilities to buy goods and interest is earned on such activity, the interest so earned will be deductible under Section 80P(2)(a)(i). It was pleaded that in the object clause there is clause which authorizes the society to extent such credit facilities to the members. The assessce society has done extensive business of purchase and sale of yarn but no yarn is given on credit to members. However, members do approach the society when they want to buy yam from yam suppliers like Petrofil and at that time the society extends credit facility to this purchase. The society pays directly to Petrofil, who supplies goods to the concerned members and the concerned member pays money to the assessee society af ter some time for which he pays interest. Thus it was pleaded that assessces case will fall under the category of the decisions relied upon by him. It was pleaded that credit facility is a term which encompasses activity of giving loans discounting bills etc. and shown in the prescribed Profit and Loss account in the form of interest and discount. Thus it was pleaded that. providing credit facilities does not confine itself to giving loans but any mode by which credit is extended to the concerned persons. Thus it was pleaded that deduction has wrongly been denied to the assessee and it should be allowed.
19. On the other hand, Id. DR relied on the orders of assessing officer and the CIT (A) and pleaded that deduction has rightly been denied to the assessee.
20. We have carefully considered the rival submissions in the light of material placed before us. It is stated before us that assessee society provides credit facilities to its members for purchase of yarn when its members approach the society whenever they want to buy yarn. On such credit facilities the assessee society has earned interest which has been claimed as deduction under Section 80P(2)(a)(i). Relevant portion of Section 80P(2)(a)(i) is reproduced below for the sake of convenience:
80P. (1) ......
(2) The sums referred to in Sub-section (1) shall be the following, namely:-
(a) in the case of a co-operative society engaged in-
(i) carrying on the business of banking or providing credit facilities to its members, or A copy of object clause, has been produced before us. As per object clause one of the main object mentioned at S1. No. 7 is as under:-
(7) For development of industry and for the requirement of the members to start testing and research laboratory and to give benefit to members and non-members of testing and research by taking appropriate fees. To satisfy the requirement of industry to run institutions givingtechnical and other education or training or to give appropriate financial and other assistance to institutions which follow the above system.
Further under Clause 12, it has been provided as under:-
(12) To give loans on trade bills of raw materials, finished goods against machinery equipments and against railway receipt and to arrange for warehousing of the goods.
Refer-ring to these clauses, it was pleaded that to give loans on trade bill.-of raw material is one of the main object. Working for development of industries, these credit facilities have been provided by the assessee to its members. It was stated that the assessee society has provided such credit facilities to its members only as non-members have not been provided with such facilities. Under these facts, relying on the decision in the case of Krishak Sahkari Ganna SamitiLtd. (supra), it was pleaded that assessee is entitled to get deduction on interest earned in respect of such credit facilities. We have carefully gone through the referred decision. In the said case assessee societv was formed with the main object of organising increase in sugarcane cultivation and purchase and sale of sugarcane crops at profitable price, expeditious supply of sugarcene to mills and ensuring prompt payment to the farmers from the mills. One of its object was to arrange for funds for the fulfilment of these objects. The interest earned by assessee on such advances was held to be deductible under Section 80P(2)(a)(i) as the said interest earned was not found to realize on account of goods sold on credits. It is in this way the earlier decision rendered by Honble Allahabad High Court was found distinguishable.
21. In the other case law relied upon by the Id. AR Le., in the case of Pondicherry Co-operative Housing Society Ltd. (supra) the activity of lending money by the society to its members for construction of houses was considered to be an activity relating to provisions of credit facilities by the society to its members. In the said case availability of credit facilities provided by the assessee society was not restricted only to such members and it was provided to other members also. Providing such credit facilities to other members, was considered to have no effect on the character of activity or detract from the activity being one of the providing credit facilities to members. It was found that object of providing such credit facilities was a separate distinguished and independent activity of the. Assessee society. It was held that provisions of Section 80P were intended to encourage co-operative society and taking a liberal construction, it was to hold that if co-operative society is engaged in carrying on the busil less of providing credit facilities to its members, that would suffice to attract the benefit of deduction under Section 80P(1) and (2)(a)(i) of the Act and in the case of a co-operative society having 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 80P(2) of the Act. This decision of Honble Madras High Court is stated to be confirmed as the SLP against the said decision has been dismissed by Honble Supreme court in the case 209 ITR (st.) 87. Applying the ratio of this decision, if the income is actually earned by the society from its members on provisions of credit facilities for purchase of raw material, then deduction under Section 80P(2)(a)(t) has to be given to the assessee. However, it is found that from the object clause, the provision of credit facilities by the assessee society is not restricted only to its members but here the case of assessee is that it has provided credit facilities only to its member and no credit facilities have been provided to non-members. This fact has not been verified either by assessing officer or by the Commissioner (Appeals). In such a position, we are of the opinion that the matter should be restored back to the file of assessing officer to verify that whether entire interest earned by the assessee is from its members. If it is so, the assessee has to be considered to be entitled for deduction under Section 80P(2)(a)(t) as perratio of above decision of Honble Madras High Court and that of Allahabad High Court in the case of Pondicherry Co-op. Housing Society Ltd. (supra) and Krishak Sahkari Ganna Sarniti Ltd. (supra) respectively. We direct accordingly. For statistical purposes, this ground of assessees appeals is considered to be allowed.
22. In the result, the appeals of revenue and the appeals of assessee are considered to be allowed for statistical purposes.