2010-VIL-30-SC-DT

Equivalent Citation: [2010] 322 ITR 283 (SC)

Supreme Court of India

1622 - 1629 OF 2010

Date: 08.02.2010

M/s . THE TOTGARS´ COOPERATIVE SALE SOCIETY LIMITED

Vs

INCOME TAX OFFICER. KARNATAKA

BENCH

S.H. KAPADIA, and Aftab Alam JJ.

JUDGMENT

"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

[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 activities."

10. 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 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, 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 Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act.

11. 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 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.

12. 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.

13. 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 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 aised 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 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.  

14. 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?"

15. 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.

16. 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

 

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