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Commissioner of Income-tax v. Orissa State Co-operative Housing Corpn. Ltd.
Summary of Judgment — R.N. Misra, J.
Factual and Procedural Background
The assessee is a co-operative society. The relevant assessment years were 1962-63 to 1966-67 (previous years ending 30 September). In those assessments the assessee claimed that income by way of interest on fixed deposits and securities was exempt under section 81 of the Income-tax Act, 1961.
The Income-tax Officer (ITO) accepted the assessee's claim insofar as profits and gains arising from its business of providing credit facilities to members, but refused exemption for interest on securities and fixed deposits on the ground that those did not qualify under section 81(i). The ITO also rejected a claim under section 81(v), being of the view that that provision applied to housing societies and not to the assessee.
On appeal the Appellate Assistant Commissioner (first appellate authority) agreed with the ITO that interest on securities and fixed deposits could not be regarded as business income under section 81(i), but allowed set-off of interest paid on money borrowed for investment in securities and fixed deposits and recomputed taxable interest accordingly.
The revenue appealed to the Income-tax Appellate Tribunal (Cuttack Bench). The assessee filed cross-objections and argued that interest on securities and fixed deposits should be treated as part of "profits and gains of business" for exemption under section 81(i), despite those items being assessable under separate heads.
The Tribunal accepted the assessee's contention in full, holding that interest from securities and fixed deposits was nevertheless business income of the assessee. The revenue, under section 256(2) of the Income-tax Act, asked this court to decide whether it was legal and justifiable for the Tribunal to so hold.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, it was legal and justifiable for the Tribunal to hold that the income derived by the assessee by way of interest on securities and fixed deposits was entitled to exemption as part of "profits and gains of the business" of the assessee under section 81 of the Income-tax Act, 1961?
Arguments of the Parties
Appellant (Revenue)'s Arguments
- The phrase "profits and gains of business" does not include income which is assessable under other heads (i.e., interest on securities and income from other sources) and therefore such income should not get exemption under section 81(i).
- Implicit in the ITO's and first appellate authority's positions was the view that interest on securities and fixed deposits did not qualify as business income for the purpose of section 81(i).
Respondent (Assessee)'s Arguments
- Although interest on securities and fixed deposits are assessable under different heads (interest on securities and income from other sources), the exemption in section 81(i) in respect of "profits and gains of business" should include those amounts when they form part of the business.
- The income in question should be treated as business income on commercial principles and therefore be exempt under section 81(i)(a).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd., [1966] 57 ITR 306 (Supreme Court) | The Court indicated that interest on securities, though separately classified for computation, does not cease to be part of business income if the securities are part of trading assets; the question whether income is business income is to be decided on commercial principles rather than solely by statutory classification. | The Tribunal applied this principle to find that interest on securities and fixed deposits constituted profits and gains of the assessee's business; the court accepted that factual finding and applied the precedent to conclude that the assessee was entitled to exemption under section 81(i)(a). |
Court's Reasoning and Analysis
The court reviewed the Tribunal's factual finding that the income by way of interest on securities and fixed deposits fell within the profits and gains of the assessee's business. It noted the Supreme Court's ruling in Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. that classification under a particular head does not determine whether an item is business income; that question is determined on commercial principles and by reference to the nature of the assets (for example, whether securities are trading assets).
The Tribunal had applied that legal principle and found as a fact that the disputed interest income was business income. The court observed that the revenue placed no direct material before it to challenge that factual finding. Given acceptance of the Tribunal's finding and the applicable principle from the cited precedent, the court held that the assessee was entitled to relief under section 81(i)(a) of the Act.
Holding and Implications
Holding: On the facts and in the circumstances of the case, it was legal and justifiable for the Tribunal to hold that the income derived by the assessee by way of interest on securities and fixed deposits came within the provision of exemption under section 81 of the Income-tax Act, 1961.
Implications:
- The direct effect is that the assessee is entitled to exemption under section 81(i)(a) in respect of the interest income on securities and fixed deposits as found by the Tribunal.
- The court made no order for costs.
- The opinion does not state any broader rule beyond applying the cited precedent and the Tribunal's factual finding to the parties' circumstances.
Judge N.K. Das agreed with the judgment. No directions for costs were made.
JUDGMENT
R.N. Misra, J.—At the instance of the revenue, on an application under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), this court required the Income-tax Appellate Tribunal, Cuttack Bench, to state a case and refer the following question for opinion of the court:
"Whether, on the facts and in the circumstances of the case, it was legal and justifiable for the Tribunal to hold that the income derived by the assessee by way of interest on securities and fixed deposits are entitled to exemption as part of profits and gains of the business of the assessee under the main section 81 of the Income-tax Act, 1961 ?"
Assessee is a co-operative society. The relevant assessment years are 1962-63 to 1966-67 corresponding to the respective previous years ending with 30th of September. In the course of the relevant assessment proceedings for these years, the assessee claimed that income derived by way of interest on fixed deposits and securities were exempted from tax. The Income-tax Officer accepted the assessee's contention so far as profits and gains arising from its business of providing credit facility to its members. He, however, did not accept the claim of exemption in regard to income from interest on securities and fixed deposits on the footing that the same did not qualify for exemption under section 81(i). The Income-tax Officer also rejected the contention that such exemption would be available under section 81(v) of the Act as he was of the opinion that such benefit was available to an assessee not being a housing society.
Assessee appealed to the Appellate Assistant Commissioner and reiterated its claim. The appellate authority agreed with the Income-tax Officer that interest on securities and fixed deposits could not be regarded as part of the profits and gains from the business of the assessee and, therefore, did not come within the ambit of section 81(i) of the Act. He, however, accepted the assessee's contention that interest paid on the money borrowed for investment on securities and fixed deposits should be set off. Accordingly, he re-computed the taxable interest.
Against the decision of the first appellate authority, the revenue carried appeals to the Tribunal. Assessee filed cross-objections for each of the appeals and urged that the rest of its claim should also be allowed under the provisions of section 81 of the Act. According to the assessee, notwith-standing the fact that interest on securities and fixed deposits were assessable under two different heads, namely, interest on securities and income from other sources, the exemption contemplated under section 81(i) of the Act in respect of profits and gains of business included both. The counter-contention advanced by the revenue was that the phrase profits and gains of business did not take within it income assessable under other heads. The Appellate Tribunal considered both the submissions and accepted the assessee's stand in entirety. According to the Tribunal, income derived by way of interest from securities and fixed deposits was none the less business income of the assessee though they were classified under different heads.
The Supreme Court in the case of Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. [1966] 57 ITR 306clearly indicated that though, for the purpose of computation of the income, interest on securities was separately classified, income by way of interest from securities did not cease to be part of income from business if the securities were part of the trading assets. It was further observed that whether a particular income is part of income from a business falls to be decided not on the basis of the provisions of the section dealing with it, but on commercial principles. The Tribunal keeping this legal position in view as a fact found that the income derived from the disputed heads comes within the ambit of profits and gains of business carried on by the assessee. No direct material has been placed before us on behalf of the revenue to challenge this position. Once such a finding is accepted, the assessee becomes entitled to relief under section 81(i)( a) of the Act, that is, the conclusion which the Tribunal arrived at, and we see no justification to take a different view. Our answer to the question referred, therefore, is :
On the facts and in the circumstances of the case, it was legal and justifiable for the Tribunal to hold that the income derived by the assessee by way of interest on securities and fixed deposits came within the provision of exemption under section 81 of the Act.
We make no direction for costs.
N.K. Das J.—I agree.
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