Clarification on Tax Exemption for Co-operative Societies: Commissioner Of Income-Tax v. U.P Co-Operative Cane Union Federation Ltd.

Introduction

The case of Commissioner Of Income-Tax, Lucknow v. U.P Co-Operative Cane Union Federation Ltd. adjudicated by the Allahabad High Court on September 18, 1978, presents a pivotal moment in the interpretation of tax exemptions applicable to co-operative societies under the Indian Income Tax Act, 1961. The central issue revolves around whether income derived from specific activities by a co-operative society qualifies for tax exemption under Section 80P(2)(a)(i) of the Act.

The parties involved include the assessee, a co-operative society engaged in the printing press business and providing service charges for the supply of pumping sets to cane growers via M/s. Southern Engineering Works. The conflict arose when the Internal Tax Officer (ITO) disallowed certain incomes, prompting the assessee to pursue appeals, eventually leading the Tribunal to grant exemption. Disagreed by the Commissioner, the matter escalated to the High Court for a definitive resolution.

Summary of the Judgment

The Allahabad High Court, presided over by Justice M.B. Farooqi, examined whether the income derived by the U.P. Co-Operative Cane Union Federation Ltd. from its printing press operations and service charges for supplying pumping sets was exempt from taxation under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

The ITO had initially assessed the income, rejecting the co-operative society's claim for exemption. Subsequent appeals led the Tribunal to accept the assessee's position, asserting that the service charge income was exempt as it was derived from providing credit facilities to its members. However, the High Court overturned this, concluding that while the printing press income was rightly non-exempt, the service charges income did not qualify for exemption because the cane growers were not direct members of the co-operative society.

The Court emphasized the strict interpretation of "members" as defined under relevant co-operative statutes, thereby denying the exemption for income sourced from activities that did not directly cater to the society's members.

Analysis

Precedents Cited

The judgment references several key precedents that shaped its reasoning:

• Additional Commissioner Of Income-Tax v. U.P Co-Operative Cane Union: This Inter partes decision previously held that income from a printing press was not exempt under Section 80P(2)(a)(i). The High Court reaffirmed this stance, maintaining consistency in the interpretation of exempt income.
• R.C Cooper v. Union of India, Bennet Coleman & Co. v. Union of India, and Godhra Electricity Co. v. State of Gujarat: These Supreme Court decisions were cited by the assessee to argue that a shareholder operates through the corporation's agency, implying that members of a member-society could be considered members of the parent co-operative society. The High Court, however, distinguished these cases, noting their different contexts and rejecting their applicability to the matter at hand.

The reliance on Words and Phrases, Permanent Edition by the Tribunal was deemed insufficient due to the lack of detailed factual and legal background, leading the High Court to discount its authority.

Legal Reasoning

The crux of the High Court's reasoning centered on the interpretation of "providing credit facilities" and the definition of "members" within a co-operative society as per the U.P. Co-operative Societies Act, 1965.

• Providing Credit Facilities: Drawing from the Additional Commissioner’s observations, the Court clarified that merely selling goods on credit does not constitute providing credit facilities. The activity must align with the broader banking business, wherein providing credit is a primary income source. In this case, while the Federation did guarantee payments for pumping sets, this activity was intertwined with selling goods rather than being a standalone credit business.
• Definition of Members: Section 2(n) of the U.P. Co-operative Societies Act, 1965, provides a clear definition of "member." The Court underscored that being a member of a member-society does not automatically confer membership of the parent society. The cane-growers were members of the member-society, not the Federation itself, thereby disqualifying the income from service charges from being tax-exempt.

The High Court emphasized the legislative intent and the precise meanings of statutory terms, rejecting broader interpretations that could dilute the specificity required for tax exemptions.

Impact

This judgment has profound implications for co-operative societies seeking tax exemptions under Section 80P(2)(a)(i):

• Strict Membership Criteria: The decision reinforces the necessity for direct membership in the co-operative society to qualify for income tax exemptions. Activities benefiting non-members, even if indirectly, do not warrant exemption.
• Clarification of Credit Facilities: It delineates the boundaries between general credit sales and the provision of credit facilities as a principal business activity. Co-operative societies must demonstrate that providing credit is a primary source of income to avail exemptions.
• Legal Precedent: The ruling serves as a precedent for similar cases, guiding tax authorities and co-operative societies in interpreting and applying income tax provisions accurately.

Future cases will reference this judgment to ascertain the eligibility of income sources for tax exemptions, ensuring adherence to the legislative framework governing co-operative societies.

Complex Concepts Simplified

Section 80P of the Income Tax Act, 1961

Section 80P provides tax exemptions to co-operative societies on certain types of income. Specifically, Sub-section (2)(a)(i) allows deductions for income derived from activities like banking or providing credit facilities to members. Understanding whether an income stream falls under these categories is pivotal for co-operatives seeking tax benefits.

Definition of "Members" in a Co-operative Society

According to Section 2(n) of the U.P. Co-operative Societies Act, 1965, a "member" is defined as:

“A person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws in force. However, references to 'members' in relation to rights, powers, liabilities, or duties exclude classes of members devoid of such attributes.”

This precise definition is crucial in determining eligibility for tax exemptions, as only activities benefiting these defined members qualify.

Providing Credit Facilities

In the context of the Income Tax Act, "providing credit facilities" encompasses activities akin to those in traditional banking, such as advancing loans or guaranteeing payments. However, ancillary credit activities linked to other business operations do not meet the threshold for exemption unless they constitute a primary income source.

Conclusion