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Commissioner of Income-tax, Tamil Nadu-iii Vs. Madras Autorickshaw Drivers' Co-operative Society Ltd. (14.10.1982 - MADHC) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 1234 and 1246 of 1977
Judge
Reported in(1983)37CTR(Mad)332; [1983]143ITR981(Mad)
ActsIncome Tax Act, 1961 - Sections 80P(1)(2)
AppellantCommissioner of Income-tax, Tamil Nadu-iii
RespondentMadras Autorickshaw Drivers' Co-operative Society Ltd.
Appellant AdvocateNalini Chidambaram, Adv.
Respondent AdvocateS.V. Subramaniam, Adv.
Cases Referred and Sundaram Finance Ltd. v. State of Kerala
Excerpt:
.....economic interest of members by purchasing autorickshaws and selling it to members on terms of hire purchase - co-operative society is juristic body which cannot act ultra vires its bye laws - activity of society not confined to granting of credit to its members - income obtained by society not be broken up for claiming relief on income from credit activities - held, tax relief under section 80p not allowable. - - we do recognize that while money-lending is clearly included within the phrase 'providing credit facilities',there are obviously other modes of making credit facilities available which are sometimes referred to by the broad expression 'financing operations'.the question, however, in this case is whether a business of buying and selling goods per se can be regarded as..........interests of the members of the society by purchasing autorickshaw vehicles and selling them on hire purchase terms to the members.' 3. on a mere reading of the bye-law it is clear that the society has come into being for the purpose of purchasing autorickshaw vehicles and re-selling them to its members on hire purchase terms. the question is whether a society having as its object a business of thins kind can be held to be a society carrying on the business of providing credit facilities. 4. statutory draftsmen are seldom given to euphemisms. perhaps it is not permissible for them to employ figures of speech. for, otherwise, we should be inclined to imagine that providing credit facilities is only a euphemism for lending money, euphemism which we may often hear in polite drawing room.....
Judgment:

Balasubrahmanyan, J.

1. The assessee in this tax reference is a co-operative society. The question for out consideration is whether the assessee is a co-operative society engaged in carrying on the business of providing credit facilities to its members within the meaning of s. 80P(2)(a)(i) of the I.T. Act, 1961. This question has to be considered by reference to, (i) the principal object of the co-operative society, and (ii) the character of the business actually carried on by the society in terms of the object.

2. The name of the assessee is the Madras Autorickshaw Drivers' Co-operative Society Ltd. The main, if not, the only object of this society as avowed by its bye-law is :

'To promote the economic interests of the members of the society by purchasing autorickshaw vehicles and selling them on hire purchase terms to the members.'

3. On a mere reading of the bye-law it is clear that the society has come into being for the purpose of purchasing autorickshaw vehicles and re-selling them to its members on hire purchase terms. The question is whether a society having as its object a business of thins kind can be held to be a society carrying on the business of providing credit facilities.

4. Statutory draftsmen are seldom given to euphemisms. Perhaps it is not permissible for them to employ figures of speech. For, otherwise, we should be inclined to imagine that providing credit facilities is only a euphemism for lending money, euphemism which we may often hear in polite drawing room conversation. We do recognize that while money-lending is clearly included within the phrase 'providing credit facilities', there are obviously other modes of making credit facilities available which are sometimes referred to by the broad expression 'financing operations'. The question, however, in this case is whether a business of buying and selling goods per se can be regarded as providing credit facilities merely because purchasers are allowed some credit in the matter of payment of the price. There are two decisions of this court, one in CIT v. Coral Mills Workers Co-operative stores Ltd. : [1977]106ITR868(Mad) , and the other in Rodier Mill Employees' Co-op. Stores Ltd. v. CIT : [1982]135ITR355(Mad) , in both of which the view has been expressed that 'providing credit facilities, however broadly in might be understood, would not include the mere sale of goods on credit even by a co-operative society to its members.'

5. Mr. S. V. Subramaniam, learned counsel for the assessee, however, submitted that the present case may have to be distinguished from cases where the only credit aspect present is a sale of goods on credit. Learned counsel submitted that although the object of this society is to purchase autorickshaws and re-sell them to the members, the object itself clearly enjoins the society to effect the sales only on hire purchase terms. Learned counsel submitted that there is a world of difference between a credit sale on the one hand and a sale on hire purchase method on the other. Transactions of hire purchase, according to learned counsel, partake of the character of financing operations although they undoubtedly result in the borrower ultimately acquiring title to the commodity in question. Learned counsel submitted that a hire purchase transaction is both a modern commercial phenomenon as well as a juristic conception. It no doubt has certain elements of sale but it also has a predominant element of bailment such as a pledge or mortgage of movables. Learned counsel submitted that the significant gesture of hire purchase agreements, especially those which have been in vogue in the assessee's business must be dealt with more as financing transactions than as transactions of purchase and re-sale. In order to underline these basic submissions, learned counsel referred to certain decision of court which have arisen in sales tax matters.

6. Before proceedings to consider the contentions urged by Mr. Subramaniam, it might be convenient to find out what in essence was the nature or modus operandi of the hire purchase transactions carried on by this society in the course of its business. A sample hire purchase agreement which was being used by the society has been annexed as part of the record in the stated case. Learned counsel on both the sides addressed their arguments on one or other of the clauses found in this hire purchase agreement. It is, however, common ground that the society in the first instance purchases autorickshaws in its own name from out of its own funds or from of funds borrowed by it from the banks. After the autorickshaws become the property of the society, it proceeds to effect sales thereof on hire purchase terms to the members who have made applications in that regard. Under the terms of the hire purchase, the members concerned has got to pay n overall consideration in instalments spread over a period of five years. At the end of the five-years period, provided that the member has paid all the instalments without default and has also complied with other subsidiary conditions of the agreement such for instance as paying insurance on the vehicle, the society is under an obligation to effect an outright conveyance of the vehicle in favour of the member. The nominal consideration for this conveyance is fixed in the agreement at Re. 1. It is, however, clear, beyond doubt, that the overall consideration which proceeds from the member to the society for the acquisition of the ownership of the vehicle includes not only the final payment of Re. 1 but also the instalments which precede that payment. As we earlier observed, the society purchases autorickshaws in the first instance and is the owner thereof at the time when it enters into hire purchase agreement with its members. Even under the agreement, the society is seen to retain its title as owner of the vehicle for the duration of the agreement till so long as the last instalments remains unpaid even though the society parts with the possession of the vehicle in favour of the member immediately on the execution of the agreement. It may be observed that the title of the society during the interregnum would remain intact notwithstanding that the member might accelerate the payment of the instalments before the expiry of the five-year period. These provisions ensuring the continued legal ownership of the vehicle in the hands of the society enables it to enforce its rights against the member by the simple expedient of seizure of the vehicle. Referring to the terms of the hire purchase as summarised above, Mr. Subramaniam submitted that the be all and end all of the agreement was merely the provision of finance or credit facilities by the society to the member concerned who has applied for purchase of the autorickshaw from the society.

7. Learned counsel relied on two decision of the Supreme Court in support of his submission : Johar and Co. v. Dy CTO [1965] 16 STC 213 and Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489. We do not think it necessary to go into the nature of the controversy before the Supreme Court in these two cases. It is sufficient for the present purpose to summarise the analysis made by the Supreme Court in the two cases of the nature and incidence of hire purchase as a specie of transfer of property. By and large, hire purchase transactions are divisible into two classes. In one form of hire purchase agreement goods are purchased by a financier from a dealer in goods and the financier thereafter obtains a hire purchase agreement from the customer under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and by exercise of an option to purchase the goods on payment of a nominal price. In the other form of hire purchase transaction, goods are purchased by the customer himself, who enters into a hire purchase agreement with a financier who permits the customer to pay for the goods in hire purchase instalments subject to the financial reserving to himself a licence to seize the goods in the event of failure by the customer to abide by the conditions of hire purchase. The first kind of hire purchase agreement figured in the former of the decisions of the Supreme Court. The second kind of agreement which we may, for convenience sake, call 'TVS type of hire purchase', figured in the latter decision. The Supreme Court held in the earlier case that a hire purchase agreement in which the goods are purchased by the financier himself and re-sold under the agreement to the customer must be regarded as involving, in essence, a transaction of sale by the financier to the customer. It is only in the latter decision, concerned with the TVS type of hire purchase agreement, that the Supreme Court expressed the view that notwithstanding the form of the hire purchase agreement it remained a mere instrumentality for financing the purchase of the goods by the customer from the dealer of the goods, the financier merely being inducted into the transaction for providing the necessary credit facilities.

8. Keeping in mind this distinction between the two kinds of hire purchases agreements, we are satisfied that the present case by no means be regarded as belonging to the TVS category of hire purchase agreements. It is clear form the terms of the assessee's transaction of hire purchase that the members of the society do not enter into direct transactions of purchase with the dealers in autorickshaws. As we earlier pointed out, it is the society which in the first instance purchases the vehicles from the dealers and thereafter enters into the hire purchase transactions with it sown members on terms which retain the ownership in the goods with the society till the last instalment is paid by the member concerned. Having regard to the nature an incidence of the transaction, we are satisfied that the element of financing is not uppermost therein. On the contrary, the element of sale predominates, if not thoroughly excluded, the element of provision of finance.

9. Having examined the nature and incidence of the transactions put through by the society in terms of its hire purchase agreements with its members, we must, however, observed that an inquiry into the applicability or non-applicability of s. 80P(2)(a)(i) of the I.T. Act, is not quite properly undertaken by considering the nature of the transactions of the society either individually or in the gross. What we have to consider is whether the society is really engaged in carrying on the business of providing credit facilities to its members. This has to be considered by examining the nature of the trade as such rather than by concentrating our attention on the terms and conditions of individual transactions dealt with the by the society in the course of its trade. In other words, we have to consider the eligibility to tax relief under s. 80P(2)(a)(i) of a co-operative society by finding out what it is for which the society has come into being. That, as we earlier pointed out, is more accurately and more safely ascertained by reference to the avowed objects of the society as appearing from the society's bye-laws. It is the objects clauses in the bye-laws which will give us a proper idea as to the nature of the business. As the society's objects, so too the society's activities, for we have no right to assume that a society being a juristic body would embark on transactions which are ultra its objects. The objects, therefore, are an indicia of the society's business. In the present case, although we had referred in some detail to the terms of the hire purchase agreements which are the means by which the society transacted its business with is members, the true nature of the society's business remains what it has been described in the bye-law to be. We have earlier quoted verbatim from the objects clause. To promote the economic interests of the members y purchasing autorickshaws and selling them on hire purchase terms to the members, is the object avowed in the bye-law. It must have been farthest from the minds of those who framed the bye-law in these terms to imply that the mere act of purchasing and re-selling vehicles on hire purchase terms could not involve transactions of sale as such but merely the financing of purchase of vehicles by the members from third parties. Even a secondary object in the bye-law which might demand construction on its own terms also negates any ideas of the society undertaking any financing operations in the sense of providing credit facilities to the members. This bye-law declares that the subsidiary object of the society to be 'to encourage thrift and self-help'. By 'thirft', we suppose, is meant the observation of one's monetary or economic resources, what we ordinarily call as 'saving' from one's income or from one's other receipts. Thrift is different from hire purchase. The society would not be advancing its object of encouraging thrift among its members by inviting them to purchase autorickshaws on credit being supplied by the society itself.

10. We believe that a reference to the objects avowed in the bye-law of a society give a clearer indication of the nature of the business than any inquiry into the actual modus operandi of the business activities of the society. Co-operative societies are now governed, in our country, by special statutes. They are a class apart from other corporate bodies only because of the particular provision contained in relevant statutes In this context the I.T. Act makes reference both to Central Act II of 1912 (The Co- operative Societies Act, 1912) and the various State enactments governing co-operative societies while making special provisions both for assessment and for tax relief concerning the income earned by those societies. It seems to us, therefore, permissible to look into the particular provision under which any given co-operative society functions with a view to finding out the precise nature of the society and the character of the business carried on by it. Under the scheme of the Tamil Nadu Co-operative Societies Act, 1951, and the Rules made the reunder, co-operative societies fall under many distinct classifications. One such classification refers to a credit society. Without exhausting the entire classification of societies under the relevant rules, we may point out that a credit society is distinct from a distributable society and a marketing society. Credit society, as defined in the relevant rule, refers to a society which has as its principal object, the raising of funds to lend to its members primarily for production or for any useful purpose. The description 'co-operative society engaged in providing credit facilities to its members 'occurring in s. 80P(2)(a)(i) of the I.T. Act is, in our opinion, merely a shorthand way of referring to a credit society as described or defined in the Tamil Nadu Co-operative societies Rules, 1963. This line of inquiry, we find, had been adopted in the earlier decision of this court to which we have already referred, namely, Rodier Mill Employee's Co-operative Stores Ltd. v. CIT : [1982]135ITR355(Mad) .

11. The tax relief under s. 80P(2)(a)(i) is a grant by Parliament not to a category of income but to a category of assessee, namely, a co-operative society answering the description of a society engaged in carrying on the business of providing credit facilities to its members. If the society in question does not answer this description, it is not entitled to the relief. For invoking or applying this provision, it is not permissible to make a break-up of the income of the society as so much derived from the provision of credit facilities and so much from other income, if the society itself, in its true nature and object, is not a society engaged in the business of providing credit facilities.

12. The Tribunal in their order have come to the opposite conclusion on the basis of the following reasoning. According to the Tribunal providing credit facility does not mean only advancing moneys by way of loan. Even where a commodity is sold on credit, it may amount to providing 'credit facility'.

13. While we agree with the first observation of the Tribunal, for reasons which we have set out at some length in the foregoing paragraphs, we cannot subscribe to the latter observation of the Tribunal. The question of law, which has to be answered by us in this case, has been formulated as under.

'Whether, on the facts and in the circumstances of the case, the income derived by the assessee-co-operative society by selling autorickshaws to its members under hire purchase agreements is to be exempted from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961, for the assessment years 1973-74 and 1974-75 ?'

14. Having regard to the considerations we have earlier set out, our answer to the question is in the negative and against the assessee. However, considering that the assessee is an Autorickshaw Drivers' Co-operative Society, we do not think we should make any order as to costs.


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