1989 (2) TMI 3 - SC - Income Tax

Section 14(3)(iii) clarified: deposit interest taxable, but interest on advances to co-operative societies exempt as investment income

SC held that interest of Rs. 9,000 received on a security deposit of Rs. 2 lakhs with a sugar factory was not an 'investment' within section 14(3)(iii) of ... Interest on advances - exemption under section 14(3) of the Indian Income-tax Act, 1922 - Whether on a true interpretation of the agreement, the Tribunal erred in holding that the sum received as interest from Bazpur Co-operative Sugar Factory Ltd. is not covered under section 14(3) - HELD THAT:- 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 ₹ 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, to be reversed and the stand of the Revenue to the effect that this amount represents taxable income has to be accepted. 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 all 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 funding was to other co-operative societies. In our opinion, therefore, the amount of ₹ 51,295 squarely came within section 14(3)(iii) of the Act. The High 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 co-operative societies in order that the legislative purpose of providing incentives to the co-operative movement may be fulfilled. The High Court was right in holding that the provisions contained in section 14(3) should be liberally construed. 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 ₹ 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. 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 AdvancesThe 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.