Supreme Court Tax Ruling: Interest Taxable on Security Deposit, Exempt on Cooperative Investments

Commissioner of Income-Tax, Lucknow Versus UP Co-operative Union Limited

Commissioner of Income-Tax, Lucknow Versus UP Co-operative Union Limited - [1989] 176 ITR 435 (SC) Issues Involved:
1. Taxability of Rs. 9,000 interest received from Bazpur Co-operative Sugar Factory Ltd. under Section 14(3) of the Indian Income-tax Act, 1922.
2. Taxability of Rs. 51,295 interest received on advances under Section 14(3) of the Indian Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Taxability of Rs. 9,000 Interest from Bazpur Co-operative Sugar Factory Ltd.
The first issue revolves around whether the Rs. 9,000 received as interest from Bazpur Co-operative Sugar Factory Ltd. qualifies for exemption under Section 14(3) of the Indian Income-tax Act, 1922. The High Court had initially accepted the claim for exemption, holding that the interest was not from securities or investments but from a cash security deposit furnished for carrying on the sugar agency business.

However, the Supreme Court scrutinized the agency agreement, particularly clauses (1) and (20), and concluded that the Rs. 9,000 represented interest on a security deposit of Rs. 2,00,000. This deposit was not an investment but a security to ensure compliance with the terms of the agreement. As such, it did not fall under the purview of Section 14(3)(iii), which exempts interest from investments with any other co-operative society. The Supreme Court reversed the High Court's decision, holding that the Rs. 9,000 was taxable income.

Conclusion: The Rs. 9,000 interest received from Bazpur Co-operative Sugar Factory Ltd. is taxable and not exempt under Section 14(3) of the Indian Income-tax Act, 1922.

Issue 2: Taxability of Rs. 51,295 Interest on Advances
The second issue concerns whether the Rs. 51,295 received as interest on advances made to various District Co-operative Development Federations for financing sugar business is exempt under Section 14(3) of the Indian Income-tax Act, 1922. The High Court had accepted the assessee's claim for exemption, noting that the funds provided were necessary for the business operations and thus constituted an investment.

The Supreme Court examined the agreements between the assessee and the District Co-operative Development Federations. It noted that the funds were essential for purchasing sugar stocks and running the business. The interest earned on these advances was considered income derived from investments with other co-operative societies, falling squarely within Section 14(3)(iii).

The Court emphasized that the term 'investment' should be broadly interpreted to fulfill the legislative intent of incentivizing the co-operative movement. The provision of funds by the assessee to the District Co-operative Development Federations was deemed an investment, and the interest earned was exempt from tax.

Conclusion: The Rs. 51,295 received as interest on advances is exempt under Section 14(3) of the Indian Income-tax Act, 1922.

Final Judgment:
- The Rs. 9,000 interest received from Bazpur Co-operative Sugar Factory Ltd. is taxable.
- The Rs. 51,295 interest received on advances for the sugar business is exempt from tax.

No order for costs as success is divided.