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Commissioner of Income-tax Vs. U.P. Co-operative Cane Union Federation Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome Tax Reference No. 862 of 1975
Judge
Reported in(1979)9CTR(All)160; [1980]122ITR913(All)
ActsIncome Tax Act, 1961 - Sections 80P(2); U.P. Co-operative Societies Act, 1965 - Sections 2 and 17
AppellantCommissioner of Income-tax
RespondentU.P. Co-operative Cane Union Federation Ltd.
Appellant AdvocateA. Gupta, Adv.
Respondent AdvocateR.K. Gulati, Adv.
Excerpt:
- - act, 1961. the assessee's appeal to the aac proved unsuccessful. banking business is a wide term and includes many activities like discounting bills, hundis, cheques, accepting deposits and advancing loans, etc. we might add that it would as well comprehend the business of lending services on profit for guaranteeing payments. in that view, the conditions of section 80p(2)(a)(i) arenot fully satisfied in so far as the income from service charges is concerned......societies act, 1912. for the accounting period relevant to the assessment year 1971-72 the assessee-society was also having income from two sources :(i) printing press ; and (ii) service charges for the supply of pumping sets by m/s. southern engineering works to the cane growers. 2. the ito assessed to tax the income so derived by the assessee after repelling its contention that the same was exempt under section 80p(2)(a)(i) of the i.t. act, 1961. the assessee's appeal to the aac proved unsuccessful. on further appeal, the tribunal accepted the contention of the assessee and held that the aforesaid income was exempt from tax under section 80p(2)(a)(i) of the act. at the instance of the commissioner, the tribunal has referred the following question of law for our opinion.....
Judgment:

M.B. Farooqi, J.

1. The assessee is a co-operative society registered under the Co-operative Societies Act, 1912. For the accounting period relevant to the assessment year 1971-72 the assessee-society was also having income from two sources :

(i) printing press ; and

(ii) service charges for the supply of pumping sets by M/s. Southern Engineering Works to the cane growers.

2. The ITO assessed to tax the income so derived by the assessee after repelling its contention that the same was exempt under Section 80P(2)(a)(i) of the I.T. Act, 1961. The assessee's appeal to the AAC proved unsuccessful. On further appeal, the Tribunal accepted the contention of the assessee and held that the aforesaid income was exempt from tax under Section 80P(2)(a)(i) of the Act. At the instance of the Commissioner, the Tribunal has referred the following question of law for our opinion :

'Whether, on the facts and in the circumstances of the case, the assessee was entitled to exemption under Section 80P(2)(a)(i) of the Income-tax Act, 1961, for income from press and income from supply of pumping sets?'

3. Section 80P, in so far as is relevant, provides :

'(1) Where in the case of an assessee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in Sub-section (2), in computing the total income of the assessee.

(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 business of banking or providing credit facilities to its members, or... the whole of the amount of profits and gains of business attributable to any one or more of such activities.'

4. This section was inserted in place of Section 81, which was deleted by the Finance (No. 2) Act of 1967, with effect from the 1st April 1968. The deleted Section 81(i)(a) was the same as the present Section 80P(2)(a)(i). In the case of Addl. CIT v. U. P. Co-operative Cane Union : [1978]114ITR70(All) , which was inter partes, this court held that income from printing press business was not exempt from tax under Section 81(i)(a) of the Act. Following that decision, we hold that the above-mentioned income is not exempt from tax under the present Section 80P(2)(a)(i) either.

5. Dealing with the question whether income from service charges was exempt from tax, the Tribunal noticed the facts and observed :

'The pumping sets have been supplied to the cane-growers, who are members of the union which is one of the members of the assessee-Federation and the pumping sets have been supplied by M/s. Southern Engg. Works under an agreement with the Federation dated March 5, 1970. The pumping sets have been supplied against 75% loan granted by the banking institution to the growers. The applications were processed by the Federation and the Federation stood guarantee for the payment to the suppliers.'

6. After going through Clauses 13 to 17 of the aforesaid agreement, the Tribunal further observed:

'If these clauses are taken into consideration, it is absolutely clear that the Federation took the responsibility for the payment of the invoice price within 7 days from the date of the invoice. The Federation also is responsible for the payment. The Federation has undertaken the liability for making available the loans to the farmers either from its own resources or from the financing institutions. Thus, the Federation has provided credit facilities to the cane-growers who purchased pumping sets. The credit facility was either offered by the Federation itself or it was offered by procuring the facility from the banking institutions. But so far as the final payment was concerned, it was guaranteed by the Federation and, even in the case where the loans were provided by the banking institutions the liability under the guaranteeship remained with the Federation and the Federation was also liable to the supplier for the prices. This indicates that even otherwise the Federation has provided credit facilities to the members.'

7. The Tribunal also observed that it was a fact that the pumping sets were supplied to the cane-growers who were the members of the union and not the members of the Federation. But after going through an American authority quoted in Words and Phrases, Permanent Edn., 27th, the Tribunal concluded that the cane-growers were members of the Federation. In conclusion, the Tribunal agreeing with the assessee, held that income from service charges was exempt under Section 80P(2)(a)(i) of the Act on the ground that the assessee society had derived it from the business of providing credit facilities to its members.

8. The argument of the learned counsel for the revenue is that the view taken by the Tribunal is not correct. He urged that no credit facility was actually provided by the assessee to the cane-growers, nor the cane-growers were its members. In the case of Addl. CIT v. U. P. Co-operative Cane Union : [1978]114ITR70(All) , this court read Section 81(i)(a) and observed (pp. 72, 73):

'In our opinion the income which is exempt from tax is income arising from a business of providing credit facilities and not merely of selling goods on credit. A person who sells goods on credit cannot be said to be carrying on the business of providing credit facilities. His business will be the business of purchase and sale of goods which he supplies. Banking business is a wide term and includes many activities like discounting bills, hundis, cheques, accepting deposits and advancing loans, etc. Thus, it includes the providing of credit facility. A person or a society may not be a banker, in that wide sense, yet he may be providing credit facilities which is a part of a banking business. The expression 'providing credit facility' thus takes its colour from the activity of banking. 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, A person who advances loans or supplies goods on credit in connection with and in the course of some other business of manufacture or purchase or sale of goods, etc., cannot be said to be carrying on the business of banking or providing credit facilities. In order that a person may be engaged in the business of providing credit facilities, it must be shown that the providing of credit facility is his business in the sense that the interest earned by him is the main source of his income.'

9. On these observations, the expression 'providing credit facilities' would comprehend the business of lending money on interest. We might add that it would as well comprehend the business of lending services on profit for guaranteeing payments. We say so because guaranteeing payments is as much a part of banking business for affording credit facility as advancing loans. If the aforesaid expression is to be interpreted in the light of the immediately preceding expression 'business of banking ', as it should be, then it must be held to be so.

10. In the present case, the Tribunal found that the assessee-society had lent its services for guaranteeing payment of the price of pumping sets supplied by M/s. Southern Engineering Works to the cane-growers. It istrue that the service charges were paid by the supplier and not by the cane-growers, but that does not make any difference. What really matters is whether the service charges were paid for service rendered to the cane-growers. That is actually so, as may be gathered from Clause 13 of the agreement dated March 15, 1970, which reads :

'In consideration of the services rendered by the Federation for providing facilities to the farmers for the purchase of Vargin engine pump-sets, M/s. Southern Engg. Works, Kolhapur, agrees to pay the service charges to the Federation at the rate of 5% to be calculated on the price of the pump-sets excluding taxes charged thereon. For the purpose of calculation, the prices approved under the Rate Contract of the Government of U.P. from time to time will be taken into account. Such payments will be made at the end of such quarter.'

11. Applying the principles set out above to these facts, we hold that the assessee-society was engaged in providing credit facilities to the cane-growers.

12. The real problem is whether the cane growers were members of the assessee-society. The Tribunal found that they were members of a member-society of the assessee-society and relying on a ruling quoted in the compilation Words and Phrases, Permanent Edn. 27th, concluded that they were also members of the assessee-society. The factual and legal background of this ruling is nowhere given in the aforesaid compilation. As such, no reliance can be placed on it. The learned counsel for the assessee-society, however, tried to support the conclusion on the ground of the decisions of the Suprme Court in R. C. Cooper v. Union of India [1970] 40 Comp Cas 325, Bennet Coleman & Co. v. Union of India, : [1973]2SCR757 , and Godhra Electricity Co. v: State of Gujrat, : [1975]2SCR42 . The principle laid down in these decisions is that a shareholder carries oa business through the agency of the Corporation of which he is a shareholder. Relying on this principle, the learned counsel for the assessee-society argued that the cane-growers were not separate from the member-society and, as such, they could reasonably be held to be the members of the assessee-society, being the parent-society. The question before the Supreme Court was, whether a shareholder could challenge the State action touching the company of which he was a shareholder, under Article 19 of the Constitution. It was held that he could do so, if his right to carry on business through the agency of the company was taken away or abridged by such action. Thus, the principles relied on by the learned counsel was laid down in a wholly different context. At any rate, there is hardly any room for the application of the general rules to the present controversy. We say so, because in our opinion the words 'co-operative society' and 'members' have, in law, acquired a definite and precise sense, being the sense in which theyare used in the legislation governing co-operative societies. They have been adopted by Parliament in Section 80P and elsewhere in the I. T. Act in that sense and so the rules of construction would require that these words should be construed in the sense in which they have been used in the Co-operative Societies Act. We are, however, concerned here with the word 'members' only. Section 2(n) of the U. P. Co-operative Societies Act, 1965, defines the word 'member' as follows :

'2 (n). 'Member' means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to 'members' anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such rights or power or have no such liability or duty.'

13. On the terms of this definition, it is clear that the members of a member-society do not ipso facto become members of the parent society. An individual member and a member-society are two distinct entities in the contemplation of the Act, as may be gathered from Section 17 thereof. Section 17, so far as is relevant, reads as under :

'17. (1) No person shall be a member of a co-operative society except the following, namely:

(a) an individual who, except as provided in Sub-section (4) of Section 18, Section 80 and Sub-section (2) of Section 81, is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject;

(b) any other co-operative society;

(c) the State Government;

(d) the Central Government;

(e) the State Warehousing Corporation established or deemed to be established under the Warehousing Corporations Act, 1962 (Act LVIII of 1962);

(f) a body corporate not covered by any other clause and approved by the Registrar, for ordinary or nominal membership of co-operative societies in general or any particular co-operative society or class of cooperative societies on the ground of its being useful in the development of such societies, society or class of societies.'

14. In the circumstances, we hold that the cane-growers were not members of the assessee-society. In that view, the conditions of Section 80P(2)(a)(i) arenot fully satisfied in so far as the income from service charges is concerned. Accordingly, we hold that the income from service charges was not exempt from tax under the said section.

15. For the reasons stated above, our reply to the question referred is in the negative, against the assessee and in favour of the department. The Commissioner shall be entitled to costs, which are assessed at Rs. 200.


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