Holding

Interest on a cash security is not an investment and is taxable, whereas interest on loans advanced to member cooperatives is an investment and is exempt under Section 14(3)(iii).

Summary

The U.P. Cooperative Federation Ltd., an apex cooperative society, received interest of Rs.9,000 on a cash security of Rs.2 lakh furnished to a cooperative sugar factory under an agency agreement, and interest of Rs.51,295 on loans advanced to its member societies for sugar distribution. The Revenue challenged the society's claim that both amounts were exempt under Section 14(3)(iii) of the Income Tax Act, 1922, which exempts interest and dividends from investments with other cooperatives. The Income Tax Appellate Tribunal held that the interest on the cash security was not an investment and therefore taxable, while it allowed the exemption for the interest on loans to member societies. The High Court affirmed both findings, a decision upheld by the Supreme Court. The Court affirmed that a security deposit does not constitute an investment, but loans made to member cooperatives for business purposes are investments and qualify for exemption under Section 14(3)(iii).

Issues considered

Whether the interest of Rs.9,000 received on the cash security furnished to the cooperative sugar factory falls within the exemption of Section 14(3)(iii) of the Income Tax Act, 1922.
Whether the interest of Rs.51,295 received on advances made to member cooperative societies constitutes an investment covered by Section 14(3)(iii) and is therefore exempt.

Legislation cited

Income Tax Act, 1922s. 14(3)(iii)
Income Tax Act, 1961s. 14(3)(d)

Subjects

Income TaxSection 14(3)(iii)Cooperative SocietyInvestmentInterest ExemptionCash SecurityLoanApex Cooperative

Judgment

A
COMMISSIONER OF INCOME TAX, LUCKNOW
v.
U.P. COOPERATIVE FEDERATION LTD.

FEBRUARY 10, 1989
B
[R.S. PATHAK, CJ AND RANGANATH MISRA, Jc]

Income Tax Act, 1922: s. 14(3)(iii)/Income.Tax Act, 1961: S. BOP
(2)(d) -Assessee-Apex Cooperative Society----Cash security-Furnished to
manufacturer Cooperative Society under agency agreement-Loans advan-
ced to member cooperative societies for carrying on business-Whether in-
c vestments-Interest earned thereon--Whether entitled to exemption from tax.

Words and Phrases: 'Investment'-Meaning of-s. 14(3)(iii),
Income Tax Act, 1922.

D Clause (iii) of Section 14(3) of the Income Tax Act, 1922 exempts
interest and dividends derived by a cooperative society from its invest-
ments 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
•
E some Government and other co-operative 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 agree-
ment it furnished a cash security of Rs. Two lakhs to the manufactnrer :.
F under clause (20) of the said agreement for the period of two years,_,,.,-,
which was to carry interest at the rate of 41/2 per cent per annum. (

In pursuance of a separate agreement entered into between it and
the State Government the assessee undertook to arrange for lifting,
handling, storing and distributing to the retailers the stock of sugar
G released by the Government of India. In an yet another agreement
entered into between the assessee and member societies the latter under-
took to work as agents for the wholesale distribution of sugar in their
districts. Since they were not in a position to arrange 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
H perannum.

586
COMMR. OF INCOME TAX v. U.P. CO-OPT, FEDERATION 587

In the accounting year in question the Income Tax. Ollicer re-
A
jected 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
financing business. The Assistant Appellate Commissioner rejected.
assessee's contention. The Appellate Tribunal rejecting the former ll
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 under-
stood 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 invest-
ment and, therefore, was not covered bys. l4(3)(iii) of the Act. But the
High Court accepted the claim in regard to both the amounts. c
Disposing of the appeal by the Revenue, the Court,

HELD: I. I The Tribunal did not err in holding that the amount
received as interest on the cash security from the cooperative D
sugar factory was not covered under s. 14(3)(iii) of the Income Tax
Act, 1922. [591BI

-4 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 cooperative sugar factory stipulated E
payment of interest of 41/z per cent per annum. This sum was repayable
to him on the expiry of the period fixed in the agreement after adjust-
ment 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 carryin2 on its business. It was not F
available to be exempted. l589G; 590FI

2.1 The a~ount 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. [5958]
G
2.2 The money provided by the assessee was by way of investment
with other cooperative societies. If this money had not been made avail-
able the business as stipulated under the scheme could not have been
carried out and perhaps there would have been no business. This fund-
ing to other cooperative societies was necessary to generate profits, and
under the agreement interest has been earned. The High Court was, H
588 SUPREME COURT REPORTS [1989] 1 S.C.R.

therefore, ,right in its conclusion that no tax was payable on this income
A
from sugar business. [594F-G I

CIVIL APPELLATE JURISDICTION: Civil Appeal No.
1228(NT) of 1975.

B From the Judgment and Order dated 29. 11.1973 of the Allaha-
bad High Court in l.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.
c
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 referred by the
D Income Tax Appellate Tribunal, Allahabad, survive for consideration
in this appeal and these are:

( 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
E 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 ~
F received as interest on advances would not be assessee's income~ z ...,..
from coal and sugar business and would thus be exempt under
Section 14(3) of the Income Tax Act, 192i?

At the hearing it has been clarified by counsel for both parties
that in the second question referred to above, the dispute is confined
G 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 assessee is a co-
operative society registered under the Cooperative Societies Act,
1912. This being an apex body, its members are various District
H Cooperative Societies, District Cooperative Banks and some Govern-
COMMR. OF INCOME TAX v. U.P. CO-OPT. FEDERATION [MISRA, J.] 589

ment and other cooperative societies within the State of Uttar A
Pradesh. The principal object of the Society is to regulate the distribu-
tion and supply of items like coal, sugar, cloth etc. through the
member cooperative societies.

In the year in question, the assessee inter alia maintained that the B
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 in-

~··
terest 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 financing sugar business c
at the rate of 6 per cent on the amount given as loan ~s 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 Appellate Tri- D
bunal 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 exemption in
E
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 assessee for car-
rying on the sugar agency business, and as such it could not
be said that it was interest from securities or interest from
F
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 ~s.2,00,000 had been
G
given as security and the arrangement entered into between the asses-
see and the Bazpur Cooperative Sugar Factory stipulated payment of
~
. . interest of 4'12 per cent per annum .

We may refer here to clauses (1) and {20) of the agency
agreement: H
590 SUPREME COURT REPORTS I 1989] 1 S.C.R.

"1. That the manufacturer hereby appoints the _,_
A
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 herein. The manufacturer hereby
B undertakes not to appoint more than two agents as afore- -,
said."

"20. The Agent shall simultaneously with the execu-
tion of this agreement furnish a cash security of Rs. Two
lakhs to the manufacturer for a period of two years
-1·
(irrespective of previous determination of the agreement
c for any cause whatsoever) to ensure against due compli-
ance by the agent of the terms hereof; such security shall ~
carry interest at the rate of 41/2 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
D 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
E good by the Agent within 15 days of the notice in writing
from the manufacturer."

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 _j.
F not think the High Court was right 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),
G there would be no exemption. The sum of Rs. Two lakhs given as
security in terms of the agreement was not an investment and, there- J-·
fore, 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
H conclusion of the High Court in regard to this amount has, therefore,
COMMR. OF INCOME TAX v. U.P. CO-OPT. FEDERATION [MISRA, J.[ 591

to be reversed and the stand of the Revenue to the effect that this
amount represents taxable income has to be accepted.
A

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 B
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 c
second amount is 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 distribution of sugar in this State. It had, in pursuance of D
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 E
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 Cooperative Development Federa-
tions .... The assessee was to make necessary investments
by way of payment of price of sugar to be procured from F
the factories and also to pay the administrative charges
incurred for the distribution 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 G
into agreements with the assessee on behalf of the assessee
as soon as the release orders were issued by the Govern-
ment of India. The sugar so received was to be stored in
godowns and was to remain under the custody of Godown-
f:-. keepers of the assessee or the bankers of the assessee. The
salaries of the Godown-keepers and the Chowkidars H
592 SUPREME COURT REPORTS [19891 1 S.C.R.

appointed for safe custody of the stocks of sugar were to be
A
paid by the agents ..... "

"The sugar so stored was to be released 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
B Magistrate concerned. The stocks of sugar taken over by
the agents was to be sold by them to retailers, and permit-
holders who were to be nominated by the District Magis-
trate or the officer authorised by him. The whole salers'.
margin on the sugar sold for the period beginning Sep-
tember 1959 onwards with which we are concerned was
Rs.2.06 Naya Paisa per bag. The share of the assessee and
c 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:

D "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
business and accordingly the assessee agreed to arrange for
finances of the business on certain terms and conditions.
The terms and conditions on which the finances were to be
E arranged may be extracted:

(1)

(2)

F (3)

(4)

( 5) The money invested in the business will earn interest
at 6 per cent per annum.
G
(6)

"It will be seen that money which the assessee made avail-
able to the District Cooperative Development Federations
was to be utilised for the purchase of the stocks of sugar
H which the District Cooperative sold as agents of the asses-
COMMR. OF INCOME TAX Y. U .P. CO-OPT. FEDERATION [MISRA, J. J 593

see. In the accounting, year in question, the assessee realised A
the following amounts of interest from the District Co-
. operative Development Federations mentioned below:

Name Amount

i) District Cooperative Development B

,_ _Federation Ltd., Deoria.

ii) District Cooperative Development
Federation Ltd., Garhwal.

iii) District Cooperative Development
4,694.16

15,797.60

c
Federation Ltd., Tehri Garhwal 5,557.50
-·~

iv) District Cooperative Development
Federation Ltd., Etawah. 2,984.24

v) District Cooperative Development D
Federation Ltd., Pilibhit. 2,616.21

vi) District Cooperative Development
Federation Ltd., Allahabad. 19,645.53
Total 51,295.24
E

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. Commissioner oflncome Tax, 37 I.T.R. 210
i and Commissioner of Income Tax, Bombay City v. Bombay State F
Cooperative Bank Ltd., 59 I.T.R. 31 held that the amount on which
interest had been earned under the agreement did not constitute in-
vestment 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 coopera- G
-X tive society in certain situations. Clause (i) under its six sub-clauses
refers to specific classes of cooperative societies in whose case there is
total exemption. 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 H
594 SUPREME COURT REPORTS [1989] 1 S.C.R.

(iv) exempts income derived from letting of godowns or warehouses
A
for storage, processing or facilitating the marketing of commodities
while Clause (v) exempts interest on securities chargeable under Sec-
tion 8 or any income from property chargeable under Section 9, where
the total income of the cooperative society of specific type mentioned
therein does not exceed Rs.20,000.
B
· · There can be no dispute on the conclusion reached by the High
Court that the money provided by the assessee was by way of invest-
ment. I11 fact, if this money had not been made available the business
as stipulated under the scheme could not have been carried out and·
-l
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 investment or loans made on commercial paper.
D 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. Investment means in common par-
E lance, putting out money on interest, either by the way of
loan, or by the purchase of income producing property ... '

In the facts of the present case the money provided by the asses-
see was necessary to run the business and generate profits; under the ,
agreement interest has been earned. In the peculiar situation appear~ ;.
F ing 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 stipu-
lation 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
G cooperative societies. In our opinion, therefore, the amount of
Rs.51,295 squarely came within Section 14(3)(iii) of the Act. The High T
Court, therefore, 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 coopera-
tive societies in order that the legislative purpose of providing incen-
H tive to the cooperative movement may be fulfilled. The High Court
COMMR. OF INCOME TAX v. U.P. CO-OPT. FEDERATION IMISRA,J.] 595

was right in holding that the provisions· contained in Section 14(3) . A
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 interpreta-
tion of the various clauses of the agreement, the sum of Rs.51,295 B
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. C
---~
'

-. '

,. - • 'J '

'.;

"
,··r

_,,. ··Ii-
' '

·•"'.