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PETITIONER: COMMISSIONER OF INCOME TAX, LUCKNOW

       Vs.

RESPONDENT: U.P. COOPERATIVE FEDERATION LTD.

DATE OF JUDGMENT10/02/1989

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH PATHAK, R.S. (CJ)

CITATION:  1989 AIR  915            1989 SCR  (1) 586  1989 SCC  (1) 747        JT 1989 (1)   258  1989 SCALE  (1)340

ACT:     Income  Tax  Act, 1922: s. 14(3)(iii)  Income  Tax  Act, 1961:   S.   80P  (2)   (d)   --Assessee--Apex   Cooperative Society--Cash  security--Furnished to manufacturer  Coopera- tive  Society  under  agency  agreement--Loans  advanced  to member    cooperative    societies    for    carrying     on business--Whether        investments-Interest         earned thereon--Whether entitled to exemption from tax.     Words   and   Phrases:   ’Investment’--Meaning    of--s. 14(3)(iii), Income Tax Act, 1922.

HEADNOTE:     Clause  (iii)  of Section 14(3) of the Income  Tax  Act, 1922 exempts interest and dividends derived by a cooperative society  from  its investments with  any  other  cooperative society, from payment of tax.     The  respondent-assessee,  an apex body  having  as  its members  various District Co-operative Societies,  District, Co-operative  Banks and some Government and other  co-opera- tive  Societies within the State of U.P., was  appointed  as one of the wholesale dealers under clause (1) of the  agency agreement entered into with a co-operative sugar factory for distribution  of  sugar produced by the  latter  during  the crushing  seasons 1958-59 and 1959-60.  Simultaneously  with the execution of the agreement it furnished a cash  security of  Rs. Two lakhs to the manufacturer under clause  (20)  of the said agreement for the period of two years, which was to carry interest at the rate of 4 1/2 per cent per annum.     In  pursuance of a separate agreement entered  into  be- tween it and the State Government the assessee undertook  to arrange  for lifting, handling, storing and distributing  to the retailers the stock of sugar released by the  Government of  India. In an yet another agreement entered into  between the  assessee and member societies the latter  undertook  to work  as agents for the wholesale distribution of  sugar  in their  districts. Since they were not in a position  to  ar- range  the  entire  finance for the  business  the  assessee agreed  to arrange for the same. The money thus invested  in the business was to earn interest at the rate of 6 per  cent per annum. 587

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   In the accounting year in question the Income Tax  Offi- cer  rejected  the claim of the assessee for  deduction,  on ground of statutory exemption under s. 14(3) of the Act,  of the  amounts  of  interest received  respectively  from  the cooperative  Sugar factory on the cash security deposit  and from  member societies on temporary loans advanced  for  fi- nancing  business.  The  Assistant  Appellate   Commissioner rejected  assessee’s  contention.  The  Appellate   Tribunal rejecting the former claim took the view that the amount  of interest received on cash security furnished by the assessee for carrying on the sugar agency business could not be  said to be interest from securities or investments as  understood under  s. 14(3)(iii) of the Act. Rejecting the latter  claim it  held that the amount on which interest had  been  earned did  not constitute investment and, therefore, was not  cov- ered by s. 14(3)(iii) of the Act. But the High Court accept- ed the claim in regard to both the amounts. Disposing of the appeal by the Revenue, the Court,     HELD:  1.1 The Tribunal did not err in holding that  the amount  received as interest on the cash security  from  the cooperative   sugar  factory  was  not  covered   under   s. 14(3)(iii) of the Income Tax Act, 1922. [591B]     1.2 The High Court failed to take note of the fact  that the  sum of Rs. Two lakhs had been given a security and  the arrangement entered into between the assessee and the  coop- erative  sugar factory stipulated payment of interest  of  4 1/2 per cent per annum. This sum was repayable to him on the expiry of the period fixed in the agreement after adjustment of  accounts.  It  could not, therefore, be said  to  be  an investment.  The  amount  of interest  earned  thereon  thus represented only interest on the security deposit and  could not be mixed up with the other sums received by the assessee in course of carrying on its business. It was not  available to be exempted. [589G; 590F]     2.1  The amount of interest received by the assessee  on advances  to its members was income from sugar business  and was,  therefore,  exempt  under s. 14(3)(iii)  of  the  Act. [595B]     2.2  The  money provided by the assessee was by  way  of investment  with other cooperative societies. If this  money had not been made available the business as stipulated under the scheme could not have been carried out and perhaps there would have been no business. This funding to other  coopera- tive societies was necessary to generate profits, and  under the agreement interest has been earned. The High Court was, 588 therefore,  right in its conclusion that no tax was  payable on this income from sugar business. [594F-G]

JUDGMENT:     CIVIL    APPELLATE   JURISDICTION:  Civil   Appeal   No. 1228(NT) of 1975.     From  the  Judgment and Order dated  29.11.1973  of  the Allahabad High Court in I.T. Reference No. 842 of 1971.     V.  Gauri Shankar, Ms. A. Subhashini, C.V.S.  Rao,  Mrs. Sushma  Suri, P. Parmeshwaran and M.K. Sashidharan  for  the Appellant. Harish N. Salve and Parveen Kumar for the Respondent. The Judgment of the Court was delivered by     RANGANATH  MISRA, J. This appeal at the instance of  the Revenue  is by special leave. Two questions out of  six  re- ferred  by  the Income Tax  Appellate  Tribunal,  Allahabad, survive for consideration in this appeal and these are:

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      (1) Whether on the facts and in the circumstances  of the case, and on a true interpretation of the agreement, the Tribunal erred in holding that the sum of Rs.9,000  received as  interest from Bazpur Cooperative Sugar Factory  Ltd.  is not covered under Section 14(3) of the Income Tax Act?        (2) Whether on the facts and in the circumstances  of the  case, and on a true and correct interpretation  of  the various  clauses of the agreement, the sum of Rs.51,295  and Rs.58,937  received  as interest on advances  would  not  be assessee’s  income  from coal and sugar business  and  would thus  be exempt under Section 14(3) of the Income  Tax  Act, 1922?     At the hearing it has been clarified by counsel for both parties  that in the second question referred to above,  the dispute is confined to the sum of Rs.51,295 only.     The relevant assessment year is 1961-62 corresponding to the accounting year ending with 30th June, 1960. The  asses- see  is a cooperative society registered under the  Coopera- tive  Societies  Act,  1912. This being an  apex  body,  its members are various District Cooperative Societies, District Cooperative Banks and some Govern- 589 ment  and  other cooperative societies within the  State  of Uttar  Pradesh.  The principal object of the Society  is  to regulate  the  distribution and supply of items  like  coal, sugar, cloth etc. through the member cooperative societies.     In  the year in question, the assessee inter alia  main- tained  that the income earned on the various advances  made by  it  to the member societies was  entitled  to  exemption under Section 14(3) of the Income Tax Act, 1922. The  Income Tax  Officer while rejecting the claim of deduction  on  the ground  of exemption on several heads included  interest  of Rs.9,000 received from Bazpur Cooperative Sugar Factory Ltd. and  a  sum of Rs.51,295 received by way  of  interest  from various cooperative societies on temporary loans for financ- ing  sugar business at the rate of 6 per cent on the  amount given as loan as taxable items. The two questions which have survived  for decision in this appeal relate to  refusal  of these  two deductions on the ground of statutory  exemption. The  stand  of  the assessee had not been  accepted  by  the Appellate  Assistant Commissioner and the Income Tax  Appel- late  Tribunal but the High Court has accepted the claim  in regard to both the amounts. The High Court dealing with the amount of Rs.9,000 held:               "The Tribunal considered the claim for  exemp-               tion in respect of amount of Rs.9,000 received               by  the assessee from the  Bazpur  Cooperative               Sugar  Factory and held that this  represented               the interest received on the cash security  of               Rs.2,00,000 which was furnished by the  asses-               see for carrying on the sugar agency business,               and  as such it could not be said that it  was               interest  from  securities  or  interest  from               investments  and  as such rejected  the  claim               made  in respect of this amount under  Section               14(3)(iii) of the Act."     The High Court considered the exigibility of the sum  of Rs.9,000 to tax analogously with the taxability of the other sum and did not pointedly take note of the fact that the sum of  Rs.2,00,000 had been given as security and the  arrange- ment entered into between the assessee and the Bazpur  Coop- erative  Sugar Factory stipulated payment of interest  of  4 1/2 per cent per annum.     We may refer here to clauses (1) and (20) of the  agency agreement:

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590                        "1.  That  the  manufacturer   hereby               appoints the Agent as one of their two  agents               for the whole of the Indian Union for the sale               of  sugar produced by the manufacturer  during               the  crusing seasons 1958-59 and  1959-60  and               the  Agent hereby agrees to act as such  agent               in the said area on the terms mentioned  here-               in. The manufacturer hereby undertakes not  to               appoint more than two agents as aforesaid. "                         "20. The Agent shall  simultaneously               with the execution of this agreement furnish a               cash security of Rs. Two lakhs to the manufac-               turer for a period of two years  (irrespective               of previous determination of the agreement for               any  cause whatsoever) to ensure  against  due               compliance  by the agent of the terms  hereof;               such security shall carry interest at the rate               of  4  1/2 per annum. Such security  shall  be               repayable  with interest to the  agent  within               one month of the expiry of the period fixed in               the  agreement  after adjustment  of  accounts               between  the parties. The  manufacturer  shall               have  the  option  to realise  from  the  said               security  money  all  losses  suffered  and/or               expenses incurred and not paid by the Agent in               pursuance of the provisions of this agreement.               If  the said security shall fall short of  Rs.               Two lakhs at any time, the deficiency  therein               shall be made good by the Agent within 15 days               of the notice in writing from the  manufactur-               er."     The amount of Rs.9,000 thus represented only interest on the  security  deposit and could not be  mixed-up  with  the other sums received by the assessee in course of carrying on its  business. We do not think the High Court was  fight  in concluding that this amount of Rs.9,000 was available to  be exempted  under any of the clauses of Section 14(3)  of  the Act.     Admittedly,  the  assessee’s claim does not  come  under clause  (i) of Section 14(3). Unless this sum is covered  by Section 14(3)(iii), there would be no exemption. The sum  of Rs.  Two lakhs given as security in terms of  the  agreement was not an investment and, therefore, the amount of Rs.9,000 received by way of interest does not come within the purview of  clause (iii). Mr. Salve for the assessee respondent  has fairly  conceded that it would be difficult on his  part  to press the claim of the assessee for exemption in respect  of this sum. The conclusion of the High Court in regard to this amount has, therefore, 591 tO  be reversed and the stand of the Revenue to  the  effect that this amount represents taxable income has to be accept- ed.     Our answer to the first question, therefore, is that  on the facts and in the circumstances of the case and on a true interpretation  of the agreement, the Tribunal did  not  err in  holding  that the sum of Rs.9,000 received  as  interest from  Bazpur Cooperative Sugar Factory Ltd. was not  covered under Section 14(3) of the Income Tax Act.     We shall now deal with the other question. Dealing  with it the High Court stated:                         "The facts relating to the case  for               exemption  in  respect of the two  amounts  of               Rs.51,295 and Rs .58,937 (the second amount is

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             no more in dispute) covered by question No.  3               may be stated. We shall begin by referring  to               facts relating to advances made in relation to               the sugar business. The assessee was appointed               as one of the wholesale dealers for  distribu-               tion of sugar in this State. It had, in pursu-               ance  of an agreement entered into between  it               and  the  State  Government.  to  arrange  for               lifting,  handling,. storing and  distributing               to the retailers the stocks of sugar  released               by  the  Government  of  India.  The  District               Cooperative Development Federations of Deoria,               Garhwal,  Tehri Garhwal, Pilibhit, Etawah  and               Allahabad,  entered into agreements  with  the               assessee to work as agents for the whole  sale               distribution  of sugar in their  Districts.  A               sample  of the agreement entered into  between               the assessee and these various District  Coop-               erative  Development  Federations   ....   The               assessee was to make necessary investments  by               way  of payment of price of sugar to  be  pro-               cured  from the factories and also to pay  the               administrative  charges incurred for the  dis-               tribution of sugar. This administrative charge               was, however, recouped by the agents and  paid               over  to  the assessee. The  delivery  of  the               sugar  from  the various factories was  to  be               taken  by  the  various  District  Cooperative               Development Federations which had entered into               agreements with the assessee on behalf of  the               assessee  as soon as the release  orders  were               issued  by the Government of India. The  sugar               so  received was to be stored in  godowns  and               was to remain under the custody of Godownkeep-               ers  of  the assessee or the  bankers  of  the               assessee.  The salaries of the  Godown-keepers               and the Chowkidars               592               appointed  for safe custody of the  stocks  of               sugar were to be paid by the agents  .....  "                        "The  sugar so stored was to  be  re-               leased  to the agents as and when required  by               them on full payment of its price at the  rate               fixed by the State Government or the  District               Magistrate  concerned.  The  stocks  of  sugar               taken  over  by the agents was to be  sold  by               them to retailers, and permitholders who  were               to be nominated by the District Magistrate  or               the  officer  authorised  by  him.  The  whole               salers’.  margin  on the sugar  sold  for  the               period  beginning September 1959 onwards  with               which we are concerned was Rs.2.06 Naya  Paisa               per  bag.  The share of the assessee  and  the               District  Cooperative Development  Federations               in this amount is set out in clause 18 of  the               agreement  .....  " The High Court extracted the terms and came to hold:               "It appear from a letter dated 30th September,               1959,  that the various  District  Cooperative               Development Federations were not in a position               to  arrange the entire finances for the  busi-               ness  and accordingly the assessee  agreed  to               arrange  for finances of the business on  cer-               tain  terms  and  conditions.  The  terms  and               conditions  on which the finances were  to  be

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             arranged may be extracted:               (5)  The money invested in the  business  will               earn interest at 6 per cent per annum.               "It will be seen that money which the assessee               made  available  to the  District  Cooperative               Development Federations               was  to  be utilised for the purchase  of  the               stocks of sugar which the District Cooperative               sold as agents of the asses-               593               see. In the accounting, year in question,  the               assessee  realised  the following  amounts  of               interest from the District Cooperative  Devel-               opment Federations mentioned below:               Name                              Amount                      i) District Cooperative Development                      Federation        Ltd.,         Deoria.               4,694.16                     ii) District Cooperative Development                     Federation        Ltd.,         Garhwal.               15,797.60                     iii) District Cooperative Development                     Federation    Ltd.,    Tehri     Garhwal               5,557.50                     iv) District Cooperative Development                     Federation         Ltd., Etawah.               2,984.24                      v) District Cooperative Development                      Federation       Ltd.,        Pilibhit.               2,616.21                     vi) District Cooperative Development                     Federation       Ltd.,        Allahabad.               19,645.53               Total      :                        51,295.24     Dispute covered by the second question to be answered is over  this  amount. The Income Tax Officer as also  the  two appellate  authorities  relying upon the  decisions  of  the Bombay High Court in Sir Chinu Bhai Madav Lal v. Commission- er  of income Tax, 37 I.T.R. 210 and Commissioner of  Income Tax,  Bombay City v. Bombay State Cooperative Bank Ltd.,  59 I.T.R.  31 held that the amount on which interest  had  been earned  under  the agreement did not  constitute  investment and, therefore, was not covered by Section 14(3)(iii) of the Act.     Section 14(3) provides that tax shall not be payable  by a  cooperative  society in certain  situations.  Clause  (i) under  its  six sub-clauses refers to  specific  classes  of cooperative  societies in whose case there is  total  exemp- tion. Clause (ii) exempts income in respect of profits and gains  of business of cooperative societies not  covered  by clause  (i) upto Rs. 15,000. Clause (iii) exempts  interest. and  dividends and income derived from investments with  any other cooperative society. Clause 594 (iv)  exempts  income  derived from letting  of  godowns  or warehouses  for  storage,  processing  or  facilitating  the marketing  of commodities while Clause (v) exempts  interest on securities chargeable under Section 8 or any income  from property chargeable under Section 9, where the total  income of the cooperative society of specific type mentioned there- in does not exceed Rs.20,000.     There can be no dispute on the conclusion reached by the High  Court that the money provided by the assessee  was  by way of investment. In fact, if this money had not been  made available the business as stipulated under the scheme  could

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not have been carried out and perhaps there would have  been no  business. "Investment" has not been defined in the  Act. P. Ramanatha Aiyar’s The Law Lexicon, (Reprint Edition 1987) states:                         "The term invest is used in a  sense               broad enough to cover the loaning of the money               but is not restricted to that mode of  invest-               ment  or loans made on commercial  paper.  The               word  invest  has been judicially  defined  as               follows:                         ’To  place property in business;  to               place  so  that it will be safe  and  yield  a               profit.  It  is also  commonly  understood  as               giving  money  for some  other  property  (as)               investing  funds on lands and houses.  Invest-               ment  means  in common parlance,  putting  out               money on interest, either by the way of  loan,               or by the purchase of income producing proper-               ty ...’     In  the facts of the present case the money provided  by the assessee was necessary to run the business and  generate profits;  under the agreement interest has been  earned.  In the peculiar situation appearing in the case as found by the High  Court  the  provision of money by  the  assessee,  the purpose  for which the money was provided,  the  stipulation for earning of interest, were relevant considerations to  be taken  into account and it becomes difficult to take a  view different  from that of the High Court that the funding  was investment and under the agreement interest has been earned. Admittedly the finding was the cooperative societies. In our opinion,  therefore, the amount of Rs.51,295  squarely  came within Section 14(3)(iii) of the Act. The High Court, there- fore, was right in its conclusion that no tax was payable on the  said  amount.  We would like to point  out  that  under Section  14(3)  provision has been made  to  extend  certain advantages  to the cooperative societies in order  that  the legislative  purpose of providing incentive to the  coopera- tive movement may be fulfilled. The High Court 595 was  right in holding that the provisions contained in  Sec- tion 14(3) should be liberally construed.     Our answer to the second question, therefore, is on  the facts  and in the circumstances .of the case and on  a  true and  correct  interpretation of the various clauses  of  the agreement,  the  sum of Rs.51,295 received  as  interest  on advances  in the assessee’s income from sugar  business  was exempt under Section 14(3)of the Income Tax Act, 1922.     There  shall  be no order for costs in  this  appeal  as success is divided. P.S.S.                                      Appeal  disposed of. 596