1. At the instance of M/s. Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd., Hyderabad (hereinafter referred to as ' the assessee '), under Section 256(1) of the Income-tax Act, 1961 (hereinafter called ' the Income-tax Act '), the following question has been referred by the Income-tax Appellate Tribunal, Hyderabad Bench, for the opinion of this court:
' Whether, on the facts and in the circumstances of the case, the assessee's income from interest on securities earned by the investment of funds other than the debenture redemption (sinking) funds was exempt from tax in terms of Section 81(i)(a) or Section 81(v) of the Income-tax Act, 1961?'
2. In order to appreciate the scope of the reference it is necessary to state briefly the material facts that gave rise to 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 ' Cooperative 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 from securities as it formed part of its business income exempt from assessment under Section 81(i)(a) or under Section 81(v) of the Income-tax Act was negatived by the Income-tax Officer. Aggrieved by the decision of the Income-tax Officer, the assessee preferred appeals to the Appellate Assistant Commissioner who agreed with the submission of the assessee to the extent of the interest earned by the assessee on the investment of debentures redemption (sinking) fund in Government securities as the same was found to be necessary for carrying on the assessee's business and allowed exemption in respect of Rs. 3,64,324 and Rs. 3,31,704 for the assessment years 1962-63 and 1963-64, respectively, and disallowed the claim of the assessee in respect of the remaining amounts on the ground that investment of the other funds in Government securities was not necessary for the carrying on of the assessee's business. Both the assessee and the department, aggrieved by the orders of the Appellate Assistant Commissioner, preferred appeals to the Income-tax Appellate Tribunal. The assessee sought for exemption from tax in respect of the entire total income by way of interest on securities whereas the department took the stand that no part of the total income earned by way of interest on securities is exempt either under Section 81(i)(a) or 81(v) of the Income-tax Act. However, the Income-tax Appellate Tribunal affirmed the orders of the Appellate Assistant Commissioner holding that the interest incomes of Rs. 3,64,324 and Rs. 3,31,704 had arisen to the assessee out of its business activity and, therefore, they are exempt from tax under Section 81(i)(a) of the Income-tax Act but the remaining amounts are not liable to be exempted from tax as sought for. Hence this reference.
3. The principal contention of Sri A. Siva Rao, the learned counsel for the assessee, was that the Appellate Assistant Commissioner and the Tribunal were not justified in bifurcating the total income earned by his client by way of interest on securities on the ground that the investment of the debentures redemption (sinking) fund in Government securities alone amounted to business activity and not the rest. According to his submission no such distinction in the instant case could be drawn between the debentures redemption (sinking) fund and the other funds invested by the assessee in securities to earn, as 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.
4. 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 redumption (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.
5. 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 - 86 comprised in Chapter VIII deal with incomes forming part of total income on which no income-tax is payable. It is well settled that if any income received or accrued to an assessee during the relevant accounting year is claimed to be exempted from assessment under the provisions of the Act, the onus is on the assessee to establish the same. In the present case the assessee in order to successfully claim refund of the tax deducted at source in respect of the incomes in question has to bring its case within the four corners of Section 81(i)(a) or 81(v) of the Act.
6. We shall first deal with the applicability or otherwise of the provisions of Section 81(i)(a), which reads thus :
'81. Income-tax shall not be payable by a co-operative society--
(i) In respect of the profits and gains of business carried on by it, if it is-- (a) a society engaged in carrying on the business of banking or providing credit facilities to its members.'
7. Section 81(v) exempts some categories of income of co-operative societies. It is pertinent to notice that it is not every co-operative society that is exempted from tax, but only certain categories of income of a co-operative society specified in Section 81 are exempt. Though the profits earned from businesses specified in Clauses (a) to (f) of Sub-section (i) of Section 81 are totally exempt from tax, the profits derived from businesses other than those specified therein are exempt to a maximum of Rs. 15,000 as stated in the proviso to Sub-section (i). The categories of income that should fall within the ambit of Section 81(i)(a) must undoubtedly be profits and gains of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. To put it differently, in order to earn exemption contemplated under Section 81(i)(a), a co-operative society must prove that it has engaged itself in carrying on the business of banking or providing credit facilities to its members and that the profits and gains sought to be exempted are earned or made in the business carried on by it, otherwise not. Any interest earned on securities is chargeable under Section 18 ; but, however, if the interest on securities has been derived by a co-operative society in the course of carrying on its business of banking or providing credit facilities to its members, such income shall be exempt from the income-tax. The heart of the matter is that the exemption 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(v). 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.
8. 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 working. Section 7 of the Societies Act requires the Registrar to register any society seeking registration and its proposed bye-laws if he is satisfied that the objects of the society are in accordance with Section 4 and the proposed bye-laws are not contrary to the provisions of the Act and the Rules made thereunder. Sections 44, 45, 46, to which reference has been made by Mr. Siva Rao, deal with the disposal of the profits earned by a society. Under Section 44, except the net profits, no other profits of the society can be divided amongst the members. Section 45 provides for the disposal of the net profits. Section 46 empowers the society to invest or deposit its funds in the postal saving banks, in any of the securities specified in Section 20 of the Indian Trusts Act, 1882, in the shares or securities of any other society, with any approved bank or in any other prescribed manner. Therefore,sections 44, 45 and 46 refer to the scheme of the Act relating to the division of profits and investment of funds of co-operative societies. Section 47 imposes restrictions on the society in respect of its borrowings and loans. Section 85 makes the provisions of Chapter XIII of the Act applicable to the mortgage banks advancing loans for the purposes specified therein, whereas Section 86 states that the Registrar or any person appointed by the Government shall be the trustee for the purpose of securing the fulfilment of the obligations of the central mortgage-bank to the holders of debentures. The powers and functions of such trustee are circumscribed and governed by the provisions of the Act and the trust deed.
9. We may now notice the bye-laws Nos. 1, 6(i), (ii), (v), 28, 36, 37, 52 and 80 of the assessee-bank which are relevant and material for the present controversy. Under bye-law No. 1, though the headquarters of the assessee-bank is located in the city of Hyderabad, the area of its operation is extended to the whole of the State of Andhra Pradesh. Clauses (i) to (v) of bye-law No. 6 indicate the objects of the assessee-bank. The prime intendment and object of the assessee-bank is to provide finance on long-term credit to member mortgage-banks defined under Clause (d) of bye-law No. 2 to enable them to advance loans to their members for the purposes enumerated in Section 85 of the Co-operative Societies Act. In order to carry out its scheme to provide long-term 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 main source of its business or trading assets. Bye-law No. 37 prescribes the procedure for the issuance of debentures and the requisite particulars thereof. Bye-law No. 52 specifies the powers and duties of the executive committee as to how it should deal with the loan obligations. Bye-law No. 80 provides for the disposal of net profits of the assessee-bank earned by it and declared by theRegistrar every year. Clause (i) of bye-law No. 80 makes it obligatory for the assessee-bank to credit not less than half of the net profits to a fund called the reserve fund until the total of the said fund equals the paid up share capital and thereafter not less than 25% of the profits. According to Clause (ii), 15% or more of the net profits has to be credited to the agricultural credit stabilisation fund constituted under bye-law No. 82. Under Clause (iii) the general body on the advice of the Registrar is empowered to carry such sum as may be decided by it to the agricultural credit (stabilisation) fund. Clause (iv) provides for the subsidy fund. Clause (v) deals with the disposal of the balance of net profits for the funds specified therein. Sub-clauses (a) to (e), which are material for our purpose, read as follows:
(a) building fund;
(b) bad debts reserve fund ;
(c) depreciation reserve ;
(d) debenture redemption reserve ;
(e) dividend equalisation fund ;
10. Before adverting to the point whether the assessee is engaged in the carrying on of the business of banking or providing credit facilities to its members, we may notice what ' business ' means. Clause (13) of Section 2 of the Income-tax Act defines ' business ' as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The definition is an inclusive one. The Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. was of the view that, though the words used in the definition of ' business ' are of very wide import, there must, in order to constitute business, exist continuous exercise of an activity. According to the learned judge, S.R. Das J. (as he then was), who spoke for the court in Naratn Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, : 26ITR765(SC) :
'The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose.'
11. We are satisfied, on a reading 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(v) must be held to be not applicable to the present case.
12. 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 counsel contended that the members of the assessee-bank are not the shareholders of the bank who take long-term credits, but the finance is provided by the assessee to member mortgage banks and, therefore, the second limb of Clause (a) also is not attracted. As pointed out earlier, the members of the assessee-bank are mortgage banks defined under Clause (d) of bye-law No. 2. They are primary co-operative land mortgage banks and primary land mortgage co-operative societies registered or deemed to have been registered under the Co-operative Societies Act. ' Member ' is defined under Clause (c) of by-law No. 2 as the shareholder of the assessee-bank. The primary co-operative land mortgage bank and primary land mortgage co-operative societies are also members to whom credit facilities have to be provided by the assessee to enable them in their turn to advance loans to their members. Hence, we are unable to agree with this plea of the learned counsel for the revenue.
13. The real question that falls for decision is whether the amounts sought to be exempted in this reference pertain to the business activity of the assessee-bank. In other words, the crux of the whole problem is whether the investment in Government securities of funds other than debenture redemption (sinking) fund by the assessee for earning interest thereon is or is not the normal business activity of the assessee-bank ; or, in any event, whether such investment is an activity or transaction having a direct and proximate connection with or nexus to the assessee's business activity. If such investments are really necessary for the purpose of carrying on its business, the assessee-bank must be held to be entitled for the exemption sought for. It's claim must be granted if it is found, on a consideration of the facts and circumstances, that such investments are incidentally necessary or having proximate connection with or nexus to the assessee's activity. We may refer in this context to what has been found by the Tribunal relating to the material facts. The assessee has to resort to issuance from time to time of debentures which form the main source of funds to advance monies on long-term basis to the member mortgage banks and through them to the agriculturists. Such debentures have to be redeemed as and when they mature. Hence, it was necessary to create debenture redemption (sinking) fund to which any 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. Theassessee-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 when they mature and earning income by investment of that fund in Government securities during the intervening period, that is, before the debentures are to be redeemed. That apart, as seen from the provisions of bye-law No. 80, investment of funds referred to therein relate to a stage after the assessee-bank had in fact earned its profits. It can by no stretch of reasoning be held that they relate to the earlier stage when the assessee was in the process of actually earning profits. The interest income from securities purchased from and out of such funds which are not profits earned in prior years connot be treated as business income of the assessee. True, as submitted by Mr. Siva Rao, the expression used is 'in respect of' but not 'in the course of ' in Section 81(i)(a). In our judgment the aforesaid expression 'in respect of' relates to the profits and gains of business carried on by the co-operative society. The use of the words 'in respect of' will not advance the case of the assessee unless it is proved that the profits earned by investment in Government securities have been derived in its business of providing credit facilities to its members. The assessee in the instant case failed to prove the same. The Tribunal, therefore, was justified in bifurcating the amounts pertaining to the income earned from the investment of the debenture redemption (sinking) fund and the other funds in Government securities, while applying the provisions of Section 81(i)(a). We are, therefore, in entire agreement with the finding of the Tribunal that the amounts in dispute are income from securities pure and simple, chargeable to tax under Section 18 and not entitled to be exempted under Section 81(i)(a) of the Income-tax Act.
14. It was urged by the learned standing counsel that the finding arrived at by the Tribunal that the investment of the funds in question is not directly connected with the business activity of the assessee and the interest income earned by such investment is an income from securities pure and simple, chargeable under Section 18, is a finding of fact. Sri A. Siva Raocontends that the finding is not one of pure fact but it is a mixed question of fact and law and the same can be urged by him in this reference as it is one of the aspects that could be contended in this reference although no specified question on this aspect has been referred for the opinion of this court. True, as ruled by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., : 42ITR589(SC) 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, : 71ITR504(Mad) 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, : 80ITR167(SC) 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(1) requiring the Tribunal to submit a statement of case on that question if it had considered it to be a mixed question of fact and law, as the Tribunal thought that the only question that arises for the opinion of this court is the one now referred to us. Even assuming that it is open to the assessee to argue that aspect of the case, we are satisfied on the facts and in the circumstances that the Tribunal was perfectly justified in upholding the finding of the Appellate Assistant Commissioner that the funds other than the debenture redemption (sinking) fund do not amount to the trading or business assets and the income earned therefrom by the investment in Government securities is not business income entitled to be exempted under Section 81(i)(a). We may add that the Supreme Court in Commissioner of Income-fax v. Cocanada Radhaswami Bank Ltd., : 57ITR306(SC) has held that the income earned by the bank by way of interest from securities does not cease to be part of income from business if the securities are part of the trading assets and whether a particular income is or is not part of the income from a business depends upon the application of commercial principles but not on the provisions of Section 6 of the Indian Income-tax Act, 1922.
15. For all the reasons stated we are in entire agreement with the Tribunal that the assessee is not entitled to claim refund of the tax deducted at source in respect of the total income earned by the assessee but only the income received on the investment of the funds other than debenture redemption (sinking) fund in Government securities under Section 81(i)(a) of the Income-tax Act.
16. This brings us to examine whether the assessee is entitled to have the benefit of Section 81(v) of the Income-tax Act. Section 81(v) reads thus :
'(v) in respect of any interest on securities chargeable under Section 18 or any income from property chargeable under Section 22, where the total income of the co-operative society does not exceed twenty thousand rupees and the society is not a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power.'
17. In order to attract the provisions of Section 81(v), the following ingredients must be established : (i) the profits and gains must relate to interest on securities chargeable under Section 18 or any income from property chargeable under Section 22 ; (ii) the total income of the co-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).
18. 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 societies mentioned specifically in that provision are not entitled for any exemption even if their total income is less than Rs. 20,000. The proviso to Section 81(v) makes it clear that a cooperative society carrying on insurance business is not entitled for the benefits of this section. The profits and gains of such co-operative society carrying on insurance business have to be computed in accordance with Section 44. It appears there is no direct case dealing with Section 81(v). We may notice that in Madras Co-operative Central Land Mortgage Bank Ltd. v. Commissioner of Income-tax, : 51ITR152(Mad) it was observed by a Division Bench of the Madras High Court while dealing with the analogous provisions of Sub-clause (v) of Section 14(3) of the Indian Income-tax Act, 1922, thus:
' Sub-clause (v) of Section 14(3) cannot apply as the amount of income from securities exceeds Rs. 20,000 in this case.' '
19. Therein the assessee was the Madras Co-operative Central Land Mortgage Bank Ltd., just as the assessee herein. The assessee's plea that it was entitled to the deduction of the interest on securities from the income earned by it on the basis of departmental instructions was repelled by the Madras High Court. On appeal the Supreme Court in Madras Co-operative Central Land Mortgage Bank Ltd. v. Commissioner of Income-tax, : 67ITR89(SC) reversed the above decision of the Madras High Court on a different point. Therein, it was held that the income from securities attributable to the assets utilised in the business was to be exempted and the balance attributable to the non-trading purposes or assets was held liable to tax. See also the decision of the Allahabad High Court in U.P. Co-operative Bank Ltd. v. Commissioner of Income-tax : 61ITR563(All) . In Mysore Co-operative Society Ltd. v. Commissioner of Income-tax, : 75ITR445(KAR) it was held that an urban consumers' co-operative society, notwithstanding it carried on banking operations was not entitled to the exemption under the provisions of Section 81(v). For all the reasons stated we are satisfied that the Tribunal is justified in refusing to grant exemption from tax in respect of the interest income earned by the assessee from Government securities under Section 81(v) of the Income-tax Act.
20. In the result our answer to the question is in the negative and against the assessee who shall pay the costs of this reference to the Commissioner of Income-tax. Advocate's fee is fixed at Rs. 300.