2000 (3) TMI 31 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 93,360 received from its members qualified for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961.
2. Interpretation of "providing credit facilities to its members" under section 80P(2)(a)(i).
3. Whether the service charges collected by the assessee constitute income from business activities.

Detailed Analysis:

Issue 1: Exemption under Section 80P(2)(a)(i)
The primary question was whether the service charges of Rs. 93,360 collected by the assessee from its members qualified for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961. The court examined whether the income derived from service charges could be considered as profits and gains from business activities attributable to providing credit facilities to its members. It concluded that the amount did not qualify for exemption under section 80P(2)(a)(i) as the service charges collected did not have a proximate connection with any of the activities listed under the section.

Issue 2: Interpretation of "Providing Credit Facilities"
The court interpreted the phrase "providing credit facilities to its members" and considered whether it necessitated direct involvement of the society in lending or whether facilitating loans through another agency (State Bank of India) sufficed. The court referred to the Allahabad High Court judgment in CIT v. U.P. Co-operative Cane Union Federation Ltd., which held that providing credit facilities could include guaranteeing payments and lending services for profit. However, in the present case, the court found that merely appending certificates to loan applications did not constitute an activity of providing credit facilities as it lacked the direct involvement and responsibility in repayment.

Issue 3: Service Charges as Business Income
The court examined whether the service charges collected for certifying loan applications could be considered as income from business activities. The assessee argued that the service charges were part of its business income from providing credit facilities. However, the court found no evidence that the service charges constituted a significant source of income or were directly linked to the business of providing credit facilities. The court emphasized that the income must have a direct or proximate connection with the business activities of the society to qualify for exemption.

Conclusion:
The court concluded that the service charges collected by the assessee did not qualify for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961. The amount of Rs. 93,360 received from its members as service charges was not considered as income from business activities attributable to providing credit facilities. Therefore, the reference was answered in favor of the Revenue and against the assessee.