Decided on September 24,1971



Kondaiah, J. - (1.)AT the instance of M/s. Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd., Hyderabad (hereinafter referred to as " the assessee "), under Section 256(1) of the Income-tax Act, 1961 (hereinafter called " the Income-tax Act "), the following question has been referred by the Income-tax Appellate Tribunal, Hyderabad Bench, for the opinion of this court:
" Whether, on the facts and in the circumstances of the case, the assessee's income from interest on securities earned by the investment of funds other than the debenture redemption (sinking) funds was exempt from tax in terms of Section 81(i)(a) or Section 81(v) of the Income-tax Act, 1961?"

(2.)IN order to appreciate the scope of the reference it is necessary to state briefly the material facts that gave rise to the question. The assessee-society, registered under Section 10 of the Andhra Pradesh (Andhra area) Co-operative Societies Act (VI of 1932) (hereinafter called the " Cooperative Societies Act "), as a co-operative society came into existence on March 4, 1962, by an Act of the State legislature, viz., Act No. 44 of 1961, as a result of amalgamation of the Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. and the Hyderabad Central Co-operative Land Mortgage Bank Ltd. For the assessment years 1962-63 and 1963-64, the relevant accounting years ended on June 30, 1961, and June 30, 1962, respectively, the assessee has been assessed in the status of an association of persons determining its total income at Rs. 6,70,609 and Rs. 11,09,767, respectively. Out of the aforesaid total income the income earned by the assessee by way of interest on securities was Rs, 4,67,852 and Rs. 4,37,144 on which a tax of Rs. 1,40,181 and Rs. 1,30,971, respectively, had been deducted at source by the INcome-tax Officer. The claim of the assessee for the refund of the aforesaid amounts of tax deducted at source on the ground that it was entitled to exemption from tax in respect of interest income from securities as it formed part of its business income exempt from assessment under Section 81(i)(a) or under Section 81(v) of the INcome-tax Act was negatived by the INcome-tax Officer. Aggrieved by the decision of the INcome-tax Officer, the assessee preferred appeals to the Appellate Assistant Commissioner who agreed with the submission of the assessee to the extent of the interest earned by the assessee on the investment of debentures redemption (sinking) fund in Government securities as the same was found to be necessary for carrying on the assessee's business and allowed exemption in respect of Rs. 3,64,324 and Rs. 3,31,704 for the assessment years 1962-63 and 1963-64, respectively, and disallowed the claim of the assessee in respect of the remaining amounts on the ground that investment of the other funds in Government securities was not necessary for the carrying on of the assessee's business. Both the assessee and the department, aggrieved by the orders of the Appellate Assistant Commissioner, preferred appeals to the INcome-tax Appellate Tribunal. The assessee sought for exemption from tax in respect of the entire total income by way of interest on securities whereas the department took the stand that no part of the total income earned by way of interest on securities is exempt either under Section 81(i)(a) or 81(v) of the INcome-tax Act. However, the INcome-tax Appellate Tribunal affirmed the orders of the Appellate Assistant Commissioner holding that the interest incomes of Rs. 3,64,324 and Rs. 3,31,704 had arisen to the assessee out of its business activity and, therefore, they are exempt from tax under Section 81(i)(a) of the INcome-tax Act but the remaining amounts are not liable to be exempted from tax as sought for. Hence this reference.
The principal contention of Sri A. Siva Rao, the learned counsel for the assessee, was that the Appellate Assistant Commissioner and the Tribunal were not justified in bifurcating the total income earned by his client by way of interest on securities on the ground that the investment of the debentures redemption (sinking) fund in Government securities alone amounted to business activity and not the rest. According to his submission no such distinction in the instant case could be drawn between the debentures redemption (sinking) fund and the other funds invested by the assessee in securities to earn, as the investment of the other funds, in respect of which interest earned has not been exempted by the Tribunal, is necessary and in any event has a nexus or connection with or is ancillary to the object and purpose of the assessee's business. He, therefore, contends that the balance of Rs, 1,03,528 and 1,03,440 in respect of which the claim of the assessee was rejected on the application of the provisions of Sections 81(i)(a) and 81(v) of the Act must be exempted.

The claim of the assessee is resisted by Mr. P. Rama Rao, the learned counsel appearing for the revenue, contending, inter alia, that the funds other than debentures redumption (sinking) fund are not trading or business assets of the assessee and they have been simply invested in securities and, therefore, the interest earned thereon is rightly chargeable under Section 18 and they do not come within the purview of Section 81(i)(a) or 81(v) of the Income-tax Act.

(3.)THE answer to the question turns upon the scope of the provisions of Section 81(i)(a) and (v) of the Income-tax Act and their application to the facts and circumstances of the instant case. Sections 81 to 86 comprised in Chapter VIII deal with incomes forming part of total income on which no income-tax is payable. It is well settled that if any income received or accrued to an assessee during the relevant accounting year is claimed to be exempted from assessment under the provisions of the Act, the onus is on the assessee to establish the same. In the present case the assessee in order to successfully claim refund of the tax deducted at source in respect of the incomes in question has to bring its case within the four corners of Section 81(i)(a) or 81(v) of the Act.
We shall first deal with the applicability or otherwise of the provisions of Section 81(i)(a), which reads thus :

"81. Income-tax shall not be payable by a co-operative society--

(i) In respect of the profits and gains of business carried on by it, if it is--

(a) a society engaged in carrying on the business of banking or providing credit facilities to its members."


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