1. These two appeals have been filed by the Co-operative Industrial Estate Ltd., Hyderabad, against the orders of the Commissioner (Appeals), for the assessment years 1979-80 and 1980-81.
2. The assessee is a co-operative institution formed at the instance of the Government of Andhra Pradesh on the recommendation of the Standing Committee of the All India Small-Scale Industries Board, Government of India. The object is to promote an industrial estate on a co-operative basis at Sanatnagar in Hyderabad. The funds were to be raised from credit institutions against the guarantee of participant-industrialists and the State Government. The LIC had agreed to advance loans of 60 per cent of the total cost of the estate repayable in a period not exceeding 15 years. On the basis of the recommendations on the above lines, a specific scheme was submitted by certain members of the Federation of Industrial Cooperatives Ltd. and some others. The Director of Industries and Commerce scrutinised the scheme and approved the same. The State Government sanctioned Rs. 2.5 lakhs for capital participation redeemable in 16 years. It also agreed to stand guarantee to LIC for a loan of Rs. 7.5 lakhs. The State Government further placed the services of an administrative officer of the cadre of an assistant estate engineer for the society. Further, 30 acres of land on 51 years lease was also placed at the disposal of the proposed society. These facts are found in G.O. No. 42, dated 10-1-1963, issued by the Industries Department. It was proposed to set up 50 units of three types (A, B and C). The Government's participation also was enhanced from Rs. 1.5 lakhs to Rs. 7.33 lakhs. The Government also agreed to guarantee the loan from LIC to larger extent of Rs. 21.98 lakhs. The Government undertook to provide common facilities such as development of land, construction of roads, water supply, drainage, watch and ward, fencing, etc., at a cost of Rs. 6.20 lakhs. This enlarged assistance was sanctioned by G.O. No. 442, dated 17-4-1965. The Co-operative Industrial Estate Ltd. had meanwhile been formed and registered in 1963 as a cooperative society under the Andhra Pradesh (Telengana Area) Co-operative Societies Act, 1952. The object was to 'carry on the business of establishing and running of industrial estates for small industries'. This can be stated to be the sole object. For the purposes of attaining this object, the society was authorised to acquire land, to lay roads, to construct factories, to let out plots or buildings, to arrange common facilities, to purchase machinery and equipment and sell them on credit or hire purchase, to supply raw materials, to arrange marketing of the products, to raise funds for the above purposes, to make, accept, endorse and execute promissory notes, bills of exchange and other negotiable instruments for the purpose of its business, to hold shares, to take up insurance agency, to establish factories, workshops, tool rooms, etc. for the benefit of its members and to do all such other or incidental acts for the attainment of its object. It is common ground that it has been listed only as miscellaneous society and not as a credit society, under the Co-operative Societies Act. The understanding at the relevant time was that the co-operative society would build industrial sheds and factory buildings and provide the units for the proposed industries by its members. However, on 23-8-1964, it was found that the responsibility for the same should be taken by individual members themselves who were allottees of the plots and that the society should finance an amount not exceeding the cost of construction of the factory building. It was at this stage that the assessee's main activity came to be that of supply of credit to its members, according to the assessee. Loans were advanced from time to time out of the funds made available to it by the Government and the LIC, besides funds available out of the share capital contributed by the members themselves. At the time of advance, a standard lease-cum-sale agreement was executed between the assessee-society and the member-industrialist. The members, in the said sale deed, agreed to use the unit for the purpose of running a small-scale industry and not to alienate the unit for 10 years and that even thereafter, alienation was to be made only with the prior permission of the Government and on such conditions as may be imposed by the Government. The loan along with interest was to be utilised by the members solely for construction of the unit in accordance with the approved plan. The loan was to be repaid in 13 equal annual instalments starting from 15-6-1968. Interest was fixed at 6 per cent initially, liable to revision by the general body of the cooperative society, subsequently. The unit (the factory building, etc.) was to remain the property of the society till the loan is fully repaid. It was the duty of the members to insure the factory building at their own cost and that the insurance should cover the full value of outstanding loan and interest. The agreement provides for rebate for prompt settlement of the loan and penal interest in case of delay or default. It was on the basis of this agreement that the assessse had advanced loans to the unit-holders members. The outstanding amount was about Rs. 21 lakhs during the relevant periods.
The amount of interest received or receivable was Rs. 90,857 for the year ending on 30-6-1978 and Rs. 1,21,390 for the year ending on 30-6-1979 the two years under consideration before us. The assessee had also received interest on fixed deposits to the extent of Rs. 63,784 for the first year and Rs. 58,548 for the second year. There had also been receipts towards rent in both the years to the extent of Rs. 47,000 and water charges to the extent of Rs. 83,000. But, substantial part of the receipt of water charges was paid by the society as water charges to the corporation. The result is that the main receipts having income character are out of interest on loans from unit-holders and the interest on fixed deposits. The society, in its turn pays interest to the LIC and incurs expenses on employees. The surplus was Rs. 1,16,460 for the year ending 30-6-1978 and Rs. 1,57,208 for the year ending 30-6-1979. It is the assessee's case that the income both from the unit-holders and the bank is out of its business of providing credit facilities to its members and, therefore, exempt under Section 80P(2)(a)(i) of the Income-tax Act, 1961 ('the Act').
3. The facts stated in the immediately preceding paragraph are not in dispute. The ITO was of the view that the assessee derives income from different sources. He considered the rental income as property income.
The balance of income was considered as business income. Since the assessee was, admittedly, not classified as a 'co-operative credit society', he denied the assessee the exemption under Section 80P(2)(a)(i), but gave the basic exemption allowable to co-operative societies under Section 80P(2) (c). He had also given relief on income from letting out godowns to the extent of Rs. 5,368 for the assessment year 1980-81 on that portion of income treated as property income from letting out godowns under Section 80P(2)(e). The assessee was not satisfied with the reliefs and filed appeals before the Commissioner (Appeals).
4. The Commissioner (Appeals) was of the view that the assessee having been formed to establish an industrial estate, it could not be treated as a co-operative credit institution. He was of the view that the assessee's primary object and business should be either banking or provision of credit. He further found that the loan agreement with the members used words to the effect that the amount was 'entrusted' to members and that it did not appear to be even a loan to them. He sought to derive support from the decisions of the Madras High Court in Rodier Mill Employees' Co-Operative Stores Ltd. v. CIT  135 ITR 355 and the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT  100 ITR 472. He, therefore, rejected the main plea of the assessee for exemption as a society engaged in the business of provision of credit. He, however, directed depreciation on particulars being furnished by the assessee. He also directed relief in respect of godown for the assessment year 1979-80.
The assessee has come up in second appeal.
5. The learned Counsel for the assessee took us over the relevant Government orders, the bye-laws, the accounts, the lease agreements, the board resolutions and other relevant facts. He argued that the fact that it was classified as a miscellaneous society cannot, by itself, be taken as conclusive against the assessee. He pointed out that apart from banking, provision of credit also qualifies for exemption. He claimed that the decisions cited by the first appellate authority are far off the mark. In the Allahabad High Court's case the relief was refused merely because the loans were to non-members. This position, according to him, supports the assessee's case. In the case before the Andhra Pradesh High Court, it was found that there was no banking business, but the High Court had rejected the revenue's plea that there was not even provision of credit. The relief was denied only on the investments made by the company and not in respect of its business income. He claimed that both these decisions support the assessee's case on its facts rather than coming in the way of relief. The object, no doubt, is to promote an industrial estate. The means to achieve that object is by provision of credit to member-participants. The major part of the income of the society, according to him, was from interest on loans to the unit-holders who were, admittedly, members. The interest from the bank was also on short-term deposits pending intermediate use of the assessee's business of provision of credit. He claimed that this amount was qualified for exemption on the plea that the fixed deposits were not actually investments by the assessee on facts. He contended that, at any rate, it was attributable to the assessee's business. He pointed out that the assessee's borrowings from the LIC were mainly for the purposes of financing its members. He also pointed out that practically at the very inception, it was decided to give credit to enable the members to construct the factories. He pointed out to the board's resolution, the agreements, the manner in which the amounts are represented in the balance sheet, etc., as sufficient evidence of the assessee's claim that the assessee's main business as well as activity was provision of credit. The inference that it is not in this business, merely because it was classified as a miscellaneous society, was, according to him, over-simplified. He contended that the authorities have chosen to ignore the realities and that this would cause grave injustice inasmuch as the benefit authorised by the statute as a matter of State policy to encourage co-operative institutions of this type gets defeated. He claimed that a fair and proper look at the institution and its affairs would more than justify the relief claimed.
6. The learned departmental representative, on the other hand, stressed the fact that the business of the assessee should be either of banking or of provision of credit. He argued that though the classification as a miscellaneous society has been mentioned, it is not the sole ground for rejection of the assessee's claim. He pointed out that the agreement is one styled as lease-cum-sale and not a pure loan agreement. The fact that the money is shown as entrusted and not lent, as pointed out by the first appellate authority, would, according to him, buttress the departmental inference. Even the resolution of the board of directors, dated 23-8-1964, merely mentions the money being advanced for a consideration. It is in this context, he stated that a number of decisions relied on by the department would come to its aid.
In the case of Rodier Mill Employees' Co-operative Stores Ltd. (supra), it was found that provision of credit at the time of sale of consumer goods would not make the co-operative society eligible for relief under Section 80P(2)(a)(i), because it was primarily a consumer society. In the assessee's case, there was hardly any difference as the finance, instead of being for consumer goods, is for construction. He pointed out to the clauses which make it necessary that the funds should be utilised only for construction. He also pointed out that the Madras High Court in a recent decision in CIT v. Madras Autorickshaw Drivers' Cooperative Society Ltd.  143 ITR 981, had similarly rejected hire purchase finance as constituting provision of credit. In this case, the High Court has laid stress on the bye-laws. He claimed that the bye-laws in the assessee's case are also not much different from those encountered in that case. Similar views have been taken by the Madras High Court itself in the case of CIT\. Coral Mills Workers Co-operative Stores Ltd.  106 ITR 868 and by the Madhya Pradesh High Court in the case of Malwa Mills Karamchari Paraspar Sahakari Sanstha v. CIT  134 ITR 505.
7. The learned Counsel, in reply, claimed that there is a lot of difference between credit given in hire purchase or in a consumer society where the predominant object, as pointed out by the courts in the cases cited by the learned departmental representative, was one of sale and not one of provision of credit. In the assessee's case, it was a loan transaction. There was provision of credit. Neither the materials nor the construction activity was a matter of responsibility for the society. The fact that the loan was given for the purposes of construction does not mean that the society was undertaking the construction itself or that the transaction was one essentially of construction. He pointed out to the various clauses in the agreement, which show that the transaction was primarily one of loan securing the repayment of the loan by mortgage of the constructed property. The stipulation that the loan amount was to be used in construction apart from according with the primary object of promotion of industrial estate, also ensures that there is a security for the repayment of the loan. He further pointed out that in cases of housing societies and many other (purely) credit societies, the loans were given to members for particular purposes. But they do not -cease to have the character of loan. He claimed that the decisions cited by the learned departmental representative should help his client's case unless, of course, we go merely by the object and classification ignoring the board's resolution, the loan transactions, the accounts and other realities.
8. We have carefully considered the facts as well as the arguments.
Section 80P(2)(a)(i) exempts income of a co-operative society which carries on 'business of banking or providing credit facilities to its members'. Admittedly, the assessee does not carry on business of banking. Mere provision of credit facilities by itself, it is established, cannot be treated as sufficient qualification for the benefit. It has been established in a number of cases that either consumer credit or hire purchase could not be treated as sufficient qualification for the benefit. There is no doubt that the assessee should carry on business of providing credit facilities. Since the words 'providing credit facilities' are preceded by the word 'banking', the principle of ejusdem generis should apply. Though the institution itself may not carry on the business of banking, as such the provision of credit should, more or less, be in the nature of a banking activity.
In other words, the co-operative institution need not be a banker, but its activity must be in the nature of banking. There is also no doubt that though exemptions and deductions may be intended to promote State policy such as extension of co-operative sector in provision of credit and other State policy goals, the exemption clauses themselves have to be strictly interpreted inasmuch as it is the burden of the taxpayer to show that the exemption claimed falls within the four corners of the statute. It is in this view, we approach the assessee's claim for exemption.
9. The assessee-co-operative society has been classified as a miscellaneous society. Its object is to promote an industrial estate.
This by itself would not be sufficient to discredit the assessee's claim. The exemption or otherwise is not granted merely on the basis of the status of the co-operative society. The exemption is on different categories of income. It is pointed out by the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.'s case (supra) as under: Section 81(0 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 Sub-clauses (a) to (f) of Clause (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 Clause (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....
It may be that a co-operative society may have different sources of income. It cannot be said that a society has only one business merely because it may have a consolidated account or balance sheet. Though a solitary activity cannot be characterised as business, if there are a number of transactions pursuant to a definite plan, we should assume that such activities may qualify under one or the other of the sub-clauses under Section 80P if they satisfy the conditions thereunder. It is clearly seen that what is exempted under Section 80P is not the income of the business as such in all cases. It is only 'the whole of the amount of profits and gains of a business attributable to any one or more of such activities' that are exempt. In other words, even -where a co-operative society engaged in a cottage industry is exempt under Section 80P(2)(a)(ii), only income attributable to such cottage industry will be exempt. Income from investments other than those specifically exempt and other categories of income may well be taxable. In certain clauses like those relating to exemption for fishing, the word 'activities' is used. In such cases, and in cases like income from godown, the very income will be exempt, whatever might be the business of the cooperative society. However, in matters of provision of credit facilities, this should be, more or less, the business of the co-operative society. For an inference as to whether a co-operative society is in such business, one may, no doubt, look into the bye-laws. But bye-laws themselves are not conclusive. There may be a co-operative credit society which may not actually do banking business and may derive income from investment. Such a society cannot obviously be declared exempt. On the other hand, a miscellaneous society may utilise its funds substantially on provision of credit to its members. If it does by way of large number of loans and if it happens to be the primary or one of the main objects of such society, utilising substantial part of its funds, we find it difficult to see how we can hold that such a society is not engaged in the business of providing credit facilities. No doubt, the ultimate object is to encourage small industries in the co-operative sector. So is the intention of many other Government agencies and co-operative institutions. If this intention is actually carried out by the provision of credit in the co-operative society, it would appear that both the object behind the policy of such exemption and the letter of the statute in Section 80P(2)(a)(i), would justify the exemption. It was initially contemplated that the units would be built by the society and let out to its members. Soon after the formation, this object was found to be difficult of achievement. It was for this reason that the board of directors decided that the society should provide funds by way of loans to its members on a long-term basis so as to enable the members to put up their own superstructures. Since the resolution came subsequent to the formation, the bye-laws as well as the classification appear to be divergent in this case though they are not really divergent because the object of the bye-laws as well as the resolution is to enable the industrial estate to come into existence. At the same time, the provision of credit became the means by which the object was to be achieved. The resolution of the board of directors, dated 23-8-1964, clearly provides that the object should be achieved by the provision of payment of monies to the members. The agreement between the members and the society is clearly in the nature of a loan agreement. It provides for security by way of proposed construction. It provides for interest rate. It provides for rebate for prompt payment and higher rate for delay. No doubt, there is a clear stipulation that the funds given should be utilised for construction. It is like any other loan as, for example, a housing loan, where the funds are given for a particular purpose. But the character of the transaction is essentially one of loan. They are exhibited in the final accounts of the co-operative society year after year as loans to unit-holders. The interest is brought to the account. The ITO, himself rightly considered the income as business income in the assessee's hands apart from property income which he chose to treat separately. It could not be said that the assessee was investing its surplus funds with the members. The assessee had borrowed from the Government and the LIC for purposes of financing the members. Besides, the assessee has no doubt other investments as outlay on properties to the extent of Rs. 6.2 lakhs and the outlay on expansion scheme. But substantial part of its own capital and borrowings are utilised for financing the members.
Hence, as a matter of fact, it is found that there are substantial activities constituting a business of providing credit facilities to its members.
10. We have, however, to meet the revenue's objections to our inference that the assessee is in the business of providing credit facilities to its members. The decision in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.'s case (supra) was relied upon by the revenue under the mistaken belief that the dispute there related to income similar to the one under consideration here. The dispute there related to the question of earning income from interest on securities held as investment by the cooperative society which was, in that case, a Central Land Mortgage Bank. In that case, while holding that the assessee was not in the business of banking, the High Court observed "it is clear that its prime intendment and object is undoubtedly to provide long-term credit facilities to member mortgage banks. . ." Even on this finding, the particular income was not found exempt. It is in this context that the Andhra Pradesh High Court observed in the passage reproduced earlier that it is not all categories of income of a society providing credit to its members, that would be exempt. Hence, this decision cannot help the revenue. So are the other decisions relating to supply of goods on credit. In the case before the Allahabad High Court in Addl. CIT v. U.P. Co-operative Cane Union  114 ITR 70, it was found that the business of providing credit facilities should be akin to banking and that supply of goods on credit cannot be so considered. So are the decisions in the cases of Rodier Mill Employees' Co-operative Stores Ltd. (supra) and Madras Autorickshaw Drivers' Co-operative Society Ltd's case (supra). In these cases, there was no loan by way of money given to the members. Goods were given. It was the sale proceeds which were to be given in instalments along with interest. The dominant object, as pointed out by the Madras High Court in these cases, was one of sale and not provision of credit. When money is given as loan for interest, it is essentially provision of credit.
In fact, one of the decisions relied upon by the revenue which is in CIT v. U.P. Co-operative Cane Union Federation Ltd.  122 ITR 913 (All.), is itself in favour of a more reasonable view of the phrase 'providing credit facilities'. The High Court observed in the said decision as under: 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." (p. 916) In the above passage, the business of guaranteeing credit to members was treated as business of banking itself. The assessee's facts are much stronger. This decision of the High Court went against the taxpayer merely because the provision was not to its members. In this decision, the High Court repeated its earlier view in U.P. Co-operative Cane Union Federation Ltd's case (supra), wherein it was pointed out that: 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." (p. 916).
Applying the above tests, we have no doubt that in the assessee's case, we must hold that the assessee is actually engaged in the business of provision of credit without being inconsistent with its object of establishing an industrial estate on a co-operative basis. There is nothing inconsistent between the objects in the bye-laws and the activities of the society.
11. It is also seen that the Madhya Pradesh High Court in CIT v. Bhopal Co-operative Central Bank Ltd. had asked for a supplementary statement on facts, where the issue before them was whether interest on securities received by the said bank could be treated as income under Section 80P(2)(a)(i). The High Court observed that the question whether such interest would be exempt as part of the assessee's banking business would depend upon the particular facts relating to securities.
In other words, this decision also reiterates our conclusion that what are exempt are categories of income and such exemption does not depend on merely the status assigned to a co-operative society under the Co-operative Societies Act. If it is seen that the activities constitute business for provision of credit, the income therefrom and the income otherwise attributable to such activities would qualify for deduction under Section 80P(2)(a)(i).
12. It is under these circumstances, that we must uphold the assessee's claim on principle.
13. Having agreed with the assessee on principle, we do not think that we have to go into the further question as to the income other than those received by way of interest from the unit-holder members. The assessee received interest from banks. If the deposits are on short-term merely pending utilisation in giving loans to members, it may well be attributable to the business of provision of credit facilities as it has been laid down after the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd v. CIT  113 ITR 84 that the words 'attributable to' may have a wider meaning than the expression 'derived from' and it may cover receipts from sources other than the actual conduct of the business of the assessee. This decision was applied to the co-operative sector by the Allahabad High Court in CIT v. Co-operative Cane Development Union Ltd.  118 ITR 770. However, a decision either way is possible only after ascertaining the nature of the deposits in the facts of the assessee's case. We are of the view that the entire accounts and computation would require revision and a fresh look in the light of our finding in the preceding paragraphs. We, therefore, consider it necessary to set aside the assessments for a fresh consideration by treating the assessee as having been engaged in the business of provision of credit facilities as far as loans to the unit-holders are concerned. The nature of the other income as well as the final computation of that portion of business income which is exempt, will be gone into afresh by the ITO.14. In the result, the appeals will be treated as allowed for statistical purposes.