M/s the Totgar's Co-Op.Sale Sty.Ltd. Vs Income-Tax Officer,karnataka

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.1622 OF 2010 (Arising out of S.L.P. (C) No.7572 of 2009)

M/s. The Totgars' Cooperative Sale Society Limited ...Appellant(s)

Versus

Income Tax Officer, Karnataka ...Respondent(s)

W I T H

Civil Appeal No.1623/2010 @ S.L.P. (C) No.10489 of 2009 Civil Appeal No.1624/2010 @ S.L.P. (C) No.10490 of 2009 Civil Appeal No.1625/2010 @ S.L.P. (C) No.10491 of 2009 Civil Appeal No.1626/2010 @ S.L.P. (C) No.10492 of 2009 Civil Appeal No.1627/2010 @ S.L.P. (C) No.10494 of 2009 Civil Appeal No.1628/2010 @ S.L.P. (C) No.10497 of 2009 Civil Appeal No.1629/2010 @ S.L.P. (C) No.10498 of 2009

J U D G M E N T

S.H. KAPADIA,J.

Heard learned counsel on both sides.

Leave granted.

Assessee(s) is a cooperative credit

society. During the relevant assessment years in

question, it had surplus funds which the assessee(s)

invested in short-term deposits with the Banks and in

Government securities. On

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such investments, interests accrued to the assessee(s).

Assessee(s) provides credit facilities to its members and

also markets the agricultural produce of its members. The

substantial question of law which arises in this batch of

civil appeals is – Whether such interest income would

qualify for deduction as business income under Section

80P(2)(a)(i) of the Income Tax Act, 1961?

According to the impugned judgement, which

affirms the decision of the Income Tax Appellate Tribunal

[`Tribunal', for short], such interest income would fall

under the Head “Income from other sources” under Section

56 and not under Section 28 of the Income Tax Act, 1961

[`Act', for short], and, consequently, the assessee-

Society would not be entitled to deduction under Section

80P(2)(a)(i) of the Act.

The bunch of civil appeals filed by the

assessee-Society concerns Assessment Years 1991-1992 to

1999-2000 [excluding Assessment Year 1995-1996]; however,

the lead matter is civil appeal arising out of S.L.P. (C)

No.7572 of 2009 which relates to Assessment Year 1991-

1992.

The assessee-Society was assessed to tax as

a cooperative society. The assessee is the appellant in

all eight civil appeals. For all the above Assessment

Years 1991-1992 to 1999-2000 [except Assessment Year 1995-

1996], assessee(s) filed its Returns disclosing income

from business, i.e., marketing of agricultural produce of

its members and providing credit facilities to them.

Assessee(s) also filed its Profits and Loss Accounts and

its balance-sheets along with its Returns. In respect of

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above-mentioned interest income, assessee(s) claimed

deduction under Section 80P(2)(a)(i) of the Act. The

assessment(s) for the afore-stated period stood re-opened

by issue of notice(s) under Section 148 of the Act. In

this case, we are only concerned with interest income on

short-term Bank deposits and securities. On the basis of

the balance-sheets for the relevant assessment years,

under instructions from the Assessing Officer, assessee(s)

submitted a chart to the Assessing Officer giving break-up

of assets and liabilities. We re-produce hereinbelow the

said chart [See Annexure `B' under the caption

`Liabilities']:

LIABILITIES

Asstt. Year

Capital Reserve Fund + Other Funds + Profits

Asami A/c + Purchasers A/c

Deposits, Loans, Interest Payable

Other Liabilities & Expenditure

Total (3), (4) & (5)

1 2 3 4 5 6

1991-92 79,200,553.00 39,341,647.00 45,772,398.00 3,948,442.00 89,176,115.00

1992-93 97,769,923.00 41,684,890.00 59,071,490.00 902,856.00 101,659,132.00

1993-94 116,354,655.00 37,674,924.00 68,927,247.00 2,893,519.00 109,494,694.00

1994-95 133,817,620.00 42,882,786.00 86,462,118.00 1,440,446.00 142,886,414.00

1995-96 156,948,290.00 46,898,160.00 107,201,490.00 4,189,923.00 158,289,580.00

1996-97 180,468,526.00 53,274,684.00 125,289,995.00 3,568,644.00 182,133,326.00

1997-98 211,686,266.00 52,510,175.00 142,529,130.00 46,694,814.00 241,734,125.00

1998-99 253,295,055.00 66,074,107.00 175,757,230.00 17,342,956.00 259,174,281.00

1999-00 269,520,510.00 124,571,325.00 209,202,203.00 25,199,555.00 358,973,088.00

The Assessing Officer held, on the facts

and circumstances of these cases, that the interest income

which the assessee(s) had disclosed under the Head “Income

from business' was liable to be taxed under the Head

“Income from other sources”. In this connection, the

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Assessing Officer held that the assessee-Society had

invested the surplus funds as, and by way of, investment

by an ordinary investor, hence, interest on such

investment has got to be taxed under the Head “Income from

other sources”. Before the Assessing officer, it was

argued by the assessee(s) that it had invested the funds

on short-term basis as the funds were not required

immediately for business purposes and, consequently, such

act of investment constituted a business activity by a

prudent businessman; therefore, such interest income was

liable to be taxed under Section 28 and not under Section

56 of the Act, and, consequently, the assessee(s) was

entitled to deduction under Section 80P(2)(a)(i) of the

Act. This argument was rejected by the Assessing Officer

as also by the Tribunal and the High Court, hence, these

civil appeals have been filed by the assessee(s).

It was the case of the assessee(s) before

us that the assessee(s) is a cooperative credit society.

It's business is to provide credit facilities to its

members and to market the agricultural produce of its

members. According to the assessee(s), it's activity

constituted “eligible activity” under Section 80P(2)(a)(i)

of the Act, hence, it was entitled to the benefit of

deduction from its gross total income. In this

connection, it was urged that, under Section 80P(2) of the

Act, the whole of the amount of “business profits”

attributable to any one of the enumerated activities is

entitled to deduction. According to the assessee(s), one

need not go by the source/head of such interest income

because no sooner

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interest income accrued to the assessee(s) on above-

mentioned specified deposits/securities, it became

business income attributable to the activity carried on by

the assessee(s) by providing credit facilities to its

members or marketing of agricultural produce of its

members and no sooner such interest income falls under the

head “business profits” attributable to one or more of

such eligible activities, such interest income became

eligible for deduction under the said section. The

assessee(s) further contended, before us, that, under

Regulations 23 and 28 read with Sections 57 and 58 of the

Karnataka Cooperative Societies Act, 1959, a statutory

obligation was imposed on cooperative credit societies to

invest its surplus funds in specified securities and, in

view of such statutory obligation, the above-mentioned

interest income derived from short-term deposits and

securities must be considered as income derived by the

assessee(s) from its business activities. In the

alternative, it was submitted that, even assuming for the

sake of argument that such interest income is held to be

covered by Section 56 of the Act under the head “Income

from other sources”, even then the assessee-Society was

entitled to the benefit of Section 80P(2)(a)(i) of the

Act. In this connection, learned counsel for the

assessee(s) submitted, placing reliance on numerous

judgements, that the source or head of income was

irrelevant for deciding the question as to whether a given

item is eligible for deduction under Section 80P of the

Act. According to the assessee(s), once interest income

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accrues on specified investments, particularly when a

local enactment makes it statutorily incumbent on the

society to invest in specified investments, the interest

income is automatically eligible for deduction

irrespective of the source or head under which such income

would fall. In this connection, learned counsel for the

assessee(s) submitted that one needs to compare the

language of Section 80P(2)(a)(i) and (iii) of the Act with

Explanation (baa) to Section 80HHC, the language used in

Section 80HHD(3) and the words used in Section 80HHE(5) of

the Act. In this connection, it was urged that there is a

wide contrast in the language between Section 80P(2)(a) on

one hand and the language used in Section 80HHC read with

Explanation (baa), Section 80HHD(3) and Section 80HHE(5)

as also the language used in Sections 72 and 32AB of the

Act. According to the assessee(s), if one keeps this

contrast in mind, it is clear that the concept of head of

income or source of income will not apply to the

provisions of Section 80P(2) of the Act because wherever

Parliament intended to emphasise the applicability of such

concept, it has expressly so stated in the relevant

section. According to the assessee(s), by way of

illustration, under Explanation (baa) to Section 80HHC or

under Section 80HHD(3) or under Section 80HHE(5), etc.,

the words used are, “`profits of the business' means the

profits of the business as computed under the head

“Profits and gains of business”. Therefore, according to

the assessee(s), when such words do not find place in

Section 80P(2) of the Act, it is clear that the concept of

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source of income or head of income is not inbuilt in

Section 80P(2) of the Act and, consequently, such a

concept cannot be read into the said section. As stated

above, according to the assessee(s), no sooner surplus

funds are invested in specified securities, interest

income from such investment is automatically eligible for

deduction under Section 80P(2)of the Act.

In order to determine the issue involved in

these civil appeals, we need to re-produce hereinbelow the

relevant provision of Section 80P of the Act, as it stood

at the material time. It reads thus:

“Deduction in respect of income of co- operative societies.

80P.(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 the business of banking or providing credit facilities to its members, or

[ii] a cottage industry, or

[iii] the marketing of the agricultural produce of its members, or

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[iv] the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

[v] the processing, without the aid of power, of the agricultural produce of its members, or

[vi] the collective disposal of the labour of its members, or

[vii] fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,

the whole of the amount of profits and gains of business attributable to any one or more of such activ ities. ”

At the outset, an important circumstance

needs to be highlighted. In the present case, the

interest held not eligible for deduction under Section

80P(2)(a)(i) of the Act is not the interest received from

the members for providing credit facilities to them. What

is sought to be taxed under Section 56 of the Act is the

interest income arising on the surplus invested in short-

term deposits and securities which surplus was not

required for business purposes. Assessee(s) markets the

produce of its members whose sale proceeds at times were

retained by it. In this case, we are concerned with the

tax treatment of such amount. Since the fund created by

such retention was not

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required immediately for business purposes, it was

invested in specified securities. The question, before

us, is - whether interest on such deposits/securities,

which strictly speaking accrues to the members' account,

could be taxed as business income under Section 28 of the

Act? In our view, such interest income would come in the

category of “Income from other sources”, hence, such

interest income would be taxable under Section 56 of the

Act, as rightly held by the Assessing Officer. In this

connection, we may analyze Section 80P of the Act. This

section comes in Chapter VI-A, which, in turn, deals with

“Deductions in respect of certain Incomes”. The Headnote

to Section 80P indicates that the said section deals with

deductions in respect of income of cooperative Societies.

Section 80P(1), inter alia, states that where the gross

total income of a cooperative Society includes any income

from one or more specified activities, then such income

shall be deducted from the gross total income in computing

the total taxable income of the assessee-Society. An

income, which is attributable to any of the specified

activities in Section 80P(2) of the Act, would be eligible

for deduction. The word “income” has been defined under

Section 2(24)(i) of the Act to include profits and gains.

This sub-section is an inclusive provision. The

Parliament has included specifically “business profits”

into the definition of the word “income”. Therefore, we

are required to give a precise meaning to the words

“profits and gains of business” mentioned in Section

80P(2) of the Act. In the present case, as stated above,

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assessee-Society regularly invests funds not immediately

required for business purposes. Interest on such

investments, therefore, cannot fall within the meaning of

the expression “profits and gains of business”. Such

interest income cannot be said also to be attributable to

the activities of the society, namely, carrying on the

business of providing credit facilities to its members or

marketing of the agricultural produce of its members.

When the assessee-Society provides credit facilities to

its members, it earns interest income. As stated above,

in this case, interest held as ineligible for deduction

under Section 80P(2)(a)(i) is not in respect of interest

received from members. In this case, we are only

concerned with interest which accrues on funds not

required immediately by the assessee(s) for its business

purposes and which have been only invested in specified

securities as “investment”. Further, as stated above,

assessee(s) markets the agricultural produce of its

members. It retains the sale proceeds in many cases. It

is this “retained amount” which was payable to its

members, from whom produce was bought, which was invested

in short-term deposits/securities. Such an amount, which

was retained by the assessee-Society, was a liability and

it was shown in the balance-sheet on the liability-side.

Therefore, to that extent, such interest income cannot be

said to be attributable either to the activity mentioned

in Section 80P(2)(a)(i) of the Act or in Section

80P(2)(a)(iii) of the Act. Therefore, looking to the

facts and circumstances of this case, we are of the view

that the

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Assessing Officer was right in taxing the interest income,

indicated above, under Section 56 of the Act.

An alternative submission was advanced by

the assessee(s) stating that, if interest income in

question is held to be covered by Section 56 of the Act,

even then, the assessee-Society is entitled to the benefit

of Section 80P(2)(a)(i) of the Act in respect of such

interest income. We find no merit in this submission.

Section 80P(2)(a)(i) of the Act cannot be placed at par

with Explanation (baa) to Section 80HHC, Section 80HHD(3)

and Section 80HHE(5) of the Act. Each of the said

sections has to be interpreted in the context of its

subject-matter. For example, Section 80HHC of the Act, at

the relevant time, dealt with deduction in respect of

profits retained for export business. The scope of

Section 80HHC is, therefore, different from the scope of

Section 80P of the Act, which deals with deduction in

respect of income of cooperative Societies. Even

Explanation (baa) to Section 80HHC was added to restrict

the deduction in respect of profits retained for export

business. The words used in Explanation (baa) to Section

80HHC, therefore, cannot be compared with the words used

in Section 80P of the Act which grants deduction in

respect of “the whole of the amount of profits and gains

of business”. A number of judgements were cited on behalf

of the assessee(s) in support of its contention that the

source was irrelevant while construing the provisions of

Section 80P of the Act. We find no merit because all the

judgements cited were cases relating to Cooperative Banks

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and assessee-Society is not carrying on Banking business.

We are confining this judgement to the facts of the

present case. To say that the source of income is not

relevant for deciding the applicability of Section 80P of

the Act would not be correct because we need to give

weightage to the words “the whole of the amount of profits

and gains of business” attributable to one of the

activities specified in Section 80P(2)(a) of the Act. An

important point needs to be mentioned. The words “the

whole of the amount of profits and gains of business”

emphasise that the income in respect of which deduction is

sought must constitute the operational income and not the

other income which accrues to the Society. In this

particular case, the evidence shows that the assessee-

Society earns interest on funds which are not required for

business purposes at the given point of time. Therefore,

on the facts and circumstances of this case, in our view,

such interest income falls in the category of “Other

Income” which has been rightly taxed by the Department

under Section 56 of the Act.

Apart from the substantial question of law

which we have answered, assessee-Society has challenged

the re-opening of assessment under Section 148 of the Act.

In this connection, it was urged on behalf

of the assessee(s) that, for the relevant assessment years

in question, the Assessing Officer was required to obtain

prior approval of the Joint Commissioner of Income Tax

before issuance of notice under Section 148 of the Act.

According to the assessee(s), the proposal for re-opening

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was made on 31st May, 2001, it was not sent through fax to

the office of the Additional Commissioner of Income Tax,

Panaji, and the fax report indicates the time of 5.18

p.m., which establishes the fact that service of notice on

31st May, 2001, on the assessee(s) was done prior to the

sending of fax for approval. According to the

assessee(s), the approval was given by the Additional

Commissioner of Income Tax on 8th June, 2001. The notice

under Section 148 of the Act was served on 31st May, 2001,

i.e., prior to the approval of the Additional

Commissioner of Income Tax. In the circumstances, it was

urged that the notice under Section 148 of the Act was

invalid and consequential re-assessment under Section 147

read with Section 144A of the Act was bad in law. We find

no merit in this argument. At the outset, we may state

that the point raised on validity of the notice under

Section 148 of the Act essentially concerns factual

aspect. The Tribunal is the final fact finding Authority

under the Income Tax Act. It has given a finding of fact

that, though the written communication of the sanction,

which has no prescribed format, was received by the

Assessing Officer on 8th June, 2001, yet, it cannot be said

that sanction was not accorded prior to 31st May, 2001.

The Tribunal has recorded a finding of fact that there was

a detailed correspondence between the concerned officers

prior to 31st May, 2001, in the context of re-opening of

assessment. It may also be mentioned that there is a

vital difference between grant of sanction and

communication of such sanction. As stated by the

Tribunal, no particular form has been prescribed in the

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matter of grant of sanction. For the afore-stated reason,

the Tribunal came to the conclusion that approval/sanction

for re-opening of assessment in terms of Section 148 of

the Act read with Section 151 existed even prior to 31st

May, 2001. We see no reason to interfere with this

finding of fact given by the Tribunal.

In this matter, one question advanced by

the assessee(s) before the Authorities below has remained

un-answered. That question is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income by way of interest on deposits held with scheduled banks, bonds and other securities was chargeable to tax under section 56 under the head `Income from other sources' without allowing any deduction in respect of cost of funds and proportionate administrative and other expenses under section 57?”

The above question requires an answer. It

involves interpretation of Section 56 and Section 57 of

the Act. It also involves applicability of the said

sections to the facts of the present case. We,

accordingly, remit the said question to the High Court for

consideration in accordance with law.

Subject to what is stated above, these

civil appeals filed by the assessee(s) are dismissed with

no order as to costs.

......................J. [S.H. KAPADIA]

......................J. [AFTAB ALAM]

New Delhi, February 08, 2010.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1622 OF 2010 (Arising out of S.L.P. (C) No.7572 of 2009)

M/s. The Totgars' Cooperative Sale Society Limited ...Appellant(s)

Versus

Income Tax Officer, Karnataka ...Respondent(s)

W I T H

Civil Appeal No.1623/2010 @ S.L.P. (C) No.10489 of 2009 Civil Appeal No.1624/2010 @ S.L.P. (C) No.10490 of 2009 Civil Appeal No.1625/2010 @ S.L.P. (C) No.10491 of 2009 Civil Appeal No.1626/2010 @ S.L.P. (C) No.10492 of 2009 Civil Appeal No.1627/2010 @ S.L.P. (C) No.10494 of 2009 Civil Appeal No.1628/2010 @ S.L.P. (C) No.10497 of 2009 Civil Appeal No.1629/2010 @ S.L.P. (C) No.10498 of 2009

J U D G M E N T

S.H. KAPADIA,J.

Heard learned counsel on both sides.

Leave granted.

Assessee(s) is a cooperative credit society.

During the relevant assessment years in question, it had

surplus funds which the assessee(s) invested in short-term

deposits with the Banks and in Government securities. On

...2/-

- 2 -

such investments, interests accrued to the assessee(s).

Assessee(s) provides credit facilities to its members and

also markets the agricultural produce of its members. The

substantial question of law which arises in this batch of

civil appeals is – Whether such interest income would

qualify for deduction as business under Section

80P(2)(a)(i) of the Income Tax Act, 1961?

According to the impugned judgement, which affirms

the decision of the Income Tax Appellate Tribunal

[`Tribunal', for short], such interest income would fall

under the Head “Income from other sources” under Section

56 and not under Section 28 of the Income Tax Act, 1961

[`Act', for short], and, consequently, the assessee-

Society would not be entitled to deduction under Section

80P(2)(a)(i) of the Act.

The bunch of civil appeals filed by the assessee-

Society concerns Assessment Years 1991-1992 to 1999-2000

[excluding Assessment Year 1995-1996]; however, the lead

matter is civil appeal arising out of S.L.P. (C) No.7572

of 2009 which relates to Assessment Year 1991-1992.

The assessee-Society was assessed to tax as a

cooperative society. The assessee is the appellant in all

eight civil appeals. For all the above Assessment Years

1991-1992 to 1999-2000 [except Assessment Year 1995-1996],

assessee(s) filed its Returns disclosing income from

business, i.e., marketing of agricultural produce of its

members and providing credit facilities to them.