ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an appeal filed by the revenue for assessment year 1982-83 and it is directed against the order of the Appellate Assistant Commissioner of Income-tax, C-Range, Hyderabad dated 30-10-1987.
2. The assessee is a Co-operative Society. It is a registered Co-operative Credit Society. It was established in 1923 and registered as No. 1548 under the Co-operative Societies Act. The business of the society is to provide credit facilities to its members numbering about 42,000 and its share capital is Rs. 11/2 crores at present. The assessee society constructed a building on a plot of land after taking it on long lease of 99 years from the Indian Railways. They have constructed a building in the said premises having a ground and first floor. The assessee was having its office in the first floor and the ground floor was let out to the Slate Bank of Hyderabad on a monthly rental of Rs. 3,000. The question in this case is whether this rental income is assessable in the hands of the assessee as part of its business income and if so it is exempt under Section 80P(2)(a)(i). Section 80P(2)(a)(i) which is relevant for our purposes reads as follows :-
Section (80)P – (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in Sub-section (2), in computing the total income of the assessee.
(2) The sum referred to in Sub-section (1) shall be the following, namely :-
(a) In the case of a co-operative society engaged in-
(i) carrying on the business of banking or providing credit facilities to its members, or the whole of the amount of profits and gains of business attributable to any one or more of such activities.
Therefore from the above reading of the section it would be clear that the amount claimed as exempt should form part of the profits and gains of the business and that business should be attributable to one or more of the activities carried on by the assessee society. In our opinion the assessee has to establish that obtaining rental income from its own building forms part of its business income or letting its building on rent is part of its business activity. The assessee co-operative society is stated to be a multi-State co-operative organisation. I asked the learned counsel for the assessee to produce the bye-laws of the assessee society in order to find out the activities which the assessee is entitled to undertake as its business. Though bye-law No. 53 of the assessee society was sought to be relied upon and mention of it was made before me, the bye-laws were never produced. It is only argued that the rental income derived on the building owned by the assessee is incidental to the main business of the society. It is stated that giving credit to its members and realising them is the main business of the society. It is argued that to carry on the activities of the society, it had constructed a building and because extra space is available in that building, it was let out to the State Bank of Hyderabad on monthly rent. The building was let out in 1970. It is also stated that the Railway Board granted the land on which the building stands on a long lease of 99 years to the assessee co-operative society. The ITO while making the assessment dated 11-3-1985 exempted the business income of the assessee under Section 80P(2)(a)(i) and the amount thus exempted was Rs. 15,20,863. The assessee society voluntarily filed the return and admitted the rent realised from the State Bank of Hyderabad as income from house property under Section 22 while filing its IT return for assessment year 1982-83. After giving deduction of half of municipal taxes and half of ground rent, the total house property income was assessed at Rs. 21,330 by the ITO. Since half portion only was let out and the other half was utilised for the office purposes of the assessee society, half the municipal taxes and half of ground rent payable were only considered as lawful deductions from out of the property income realised. The ITO also granted l/6th of rent realised towards repairs. However, he disallowed 6% claimed as deduction towards collection charges.
3. Aggrieved against the order of the ITO dated 11-3-1985 bringing the amount of Rs. 21,330 as property income of the assessee, the assessee society went in appeal before the AAC, C-Range, Hyderabad. It was contended that merely because a part of the building in which the activity of the assessee is carried on is let out it would to mean that letting out the building is not incidental to the carrying on of the main business of the assessee. The earlier order of this Tribunal in Vizag Co-operative Bank Ltd. v. ITO [1986] 26 TTJ (Hyd.) 387 was relied upon and in the light of the order, the rent realised was contended to be exempt from tax under Section 80P(2)(a)(i). Copy of this earlier order of the Tribunal dated 25-6-1986 was filed before me. In the case before the Tribunal, the assessee was carrying on the business of banking. It had occupied 2/3rd portion of the building and 1/3rd portion of it was only let out which was assessed under the head ‘income from house property’. No doubt the exemption was claimed under Section 80P. However, the exemption was denied to the assessee in that case on a different ground than the ground on which the exemption is denied in this case. The Tribunal stating the facts, found that the exemption was denied by the ITO on the ground that the gross total income of the assessee exceeded Rs. 20,000 and hence the assessee was not entitled to any exemption under Section 80P(2)(f). In that case, there was a definite finding by the Tribunal that investment in purchase of property for its use was also part and parcel of its business of banking because there are restrictions on the bank for investing in immovable property except for purposes of carrying on its own business. The learned Members of the Tribunal relied upon the provisions of Section 6(l)(k) of the Banking Regulation Act, 1949 which is extracted in their orders. It is stated in that provision that in addition to the banking business, a banking company may engage inter alia, in the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for purposes of the company and any such activity should be deemed to be a form of business carried on by the banking company. The learned Members had distinguished the decision rendered by the Andhra Pradesh High Court in the case of Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT [1975] 100 ITR 472 and held the following at para-7 of their orders, copy of which is furnished to me :
Besides, the Andhra Pradesh High Court decision was given in the context of investments of the society’s surplus funds in Government securities. In the case before us, it is the very building of the society in which its business is being carried on which is involved and what has happened is only a part of the building, that too only 1/3rd of the building was let out. It is our considered view that the rental income is attributable to the business activity of the society in that it being incidental thereto or is one covered by Section 6(1)(k) of the Banking Regulation Act, and the claim of the assessee would squarely fall under either Section 80P(2)(a) or Section 80P(2)(c). Therefore, we set aside the order of the CIT (Appeals) and allow the appeals of the assessee in respect of the income from house property.
Now on the basis of the above order, the AAC felt that the rental income is attributable to the business activity of the society and the rent is to be treated as part and parrel of business income and it is exempt under Section 80P(2)(a)(i).
4. The learned DR contended firstly that this Tribunal’s decision is distinguishable. Secondly it is argued that construction of a building cannot be considered to be one of the permitted activities of the assessee either under the Co-operative Societies Act or under any of the bye-laws by which the assessee society is governed. It is argued that the very fact that no bye-law was produced in order to show that the assessee can very well engage in putting up of a building and rent it out would show that had the bye-laws been produced they would not support the case of the assessee. Non-production of bye-laws by the assessee society is capable of an adverse inference being drawn against the assessee society. Providing credit facilities to its members and the realisation of the loans from the members is the permitted activity of the assessee. The assessee is entitled to maintain its office. Half of the building is thus occupied by it and to the extent the building is occupied by its office, it is exempt since it is inseparable part of the activity carried on by the assessee. The whole of the ground floor of the building is felt as extra building space is available to it which is not needed for their business purposes and hence it was let out to the State Bank of Hyderabad on a rental of Rs. 3,000 per month. It was let out long back right from 1970. The question of leasing it out was put before the Managing Committee of the assessee society which in its turn had appointed a Four Member Committee to decide the terms and conditions of the lease and ultimately they agreed to let out the ground floor of the building to the Bank. It is that portion of the building which is found be excess space available and which is not required for its business purposes only was let out. In such a case, it is argued that can such a rent realised over such an excess space could be considered to be part of the business income ? According to the learned DR it could never be considered as business income. He relied upon the following decisions :
1. CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC)
2. CIT v. Phabiomal & Sons [1986] 158 ITR 773 (AP) and
3. Koltayam Co-operative Land Mortgage Bank Ltd. v. CIT [1988] 172 ITR 443 (Ker.).
It is contended that the last of the decisions cited by the learned DR is applicable to the facts of the case on all fours and therefore in view of the ratio of the decision, the action of the ITO should be held to be correct and the exemption granted by the learned AAC is to be set aside.
5. The learned counsel for the assessee strenuously contended that the earlier order of the Tribunal, copy of which is filed before me should be followed since the facts of that case are quite similar to the facts of the present case and that the relief granted by the AAC should be maintained and should not be disturbed.
6. Thus, I have considered the arguments advanced and I have perused (he whole record of the case. I am of the opinion that the departmental appeal should succeed. Firstly I am of the opinion that the earlier order of the Tribunal in Vizag Co-operative Bank Ltd.’s case (supra) is quite distinguishable. That was a case of an assessee who was carrying on banking business and it is governed by the Banking Regulation Act, 1949. Whether owning a building by a bank can be considered to be business activity of a bank which was the assessee before them was considered in the light of Section 6(1)(k) of the Banking Regulations Act, 1949 (10 of 1949) and a definite finding was given by the Tribunal that investment in the purchase of property for its use was also part and parcel of its business of banking. Further, in the ultimate para of the order which is already extracted above, the Tribunal held that the rental income can be considered to be business income and that the activity of letting out is held to be permitted activity under Section 6(1)(k) of the Banking Companies Act, 1949. In this case before us, the assessee is not carrying on banking activity. Its business is only to provide credit facilities to its members and to realise the credits thus given from the members. There is no scope at all for the assessee being governed by the Banking Companies Act, 1949. Thus, the protection of Section 6(1)(k) of the Banking Companies Act is not available to the assessee. Purchasing a building or owning a building cannot be considered to be part of business activity of the assessee-society though the Legislature in its wisdom had taken a different view with regard to banks. When the whole building was considered to be a business asset, letting out a portion of that building asset should necessarily result in business income. However, in this case, the assessee is governed by the Co-operative Societies Act and the bye-laws made thereunder. The counsel for the assessee was unable to lay her hand on any provision of either the Co-operative Societies Act or was able to produce the bye-laws under any of which it can be said that owning a building is the business asset of the assessee or that renting out of a building is the permitted business activity of the assessee. In the absence of any such criteria being present, the assessee cannot derive any benefit from the earlier order of the Tribunal and hence it is distinguishable. I also hold that the judgment of the Kerala High Court in Kottayam Co-operative Land Mortgage Bank Ltd.’s case (supra) and the ratio thereunder aptly applied to the facts of this case. In that case, their Lordships were considering a case of a cooperative society engaged in the business of banking. There also the extra space available in the building belonging to the Co-operative Society was let out on rent and the realisations were claimed as exempt under Section 80P(2)(c) of the Income-tax Act, 1961. Their Lordships held as per the head note of the decision at page-444 as follows :
Where, however, the society as owner of certain property let out that property and receives the rental income, the income thus received cannot partake the character of profits and gains attributable to an activity carried on by the society. The building let out is not a commercial asset nor is the rent received profit or gain arising from the exploitation of a business asset. The word ‘activity’ is wider than the work ‘business’. It connotes a specified form of supervised action or field of action. Read in the context of the profit-earning activity of a co-operative society, it means the corporate activity of the society, that is to say, the combination of operations undertaken by the co-operative society whether or not they amount to a business, trade or profession in the ordinary sense. Clause (c) of Section 80P(2) is intended to cover receipts from sources other than the actual conduct of the business but attributable to an activity which results in profits or gains. Letting out of surplus space is the building owned and used by the assessee is not such an activity falling under Clause (c). The rent thus received by the society is not eligible for the exemption provided under Section 80P(2)(c).
Therefore can anybody say that any corporate activity is involved in letting out the property or whether letting out of the property involves a combination of operations undertaken by the co-operative society? In my opinion letting out of the property and realisation of rent from the building is only an incident of ownership and no corporate activity of the society is required for that purpose. My view of the matter finds support in the judgment of the Andhra Pradesh High Court in Phabimol & Sons’ case (supra). In that case, it is clearly held that letting out of a building and realising rents from them did not amount to carrying on of a business and it was only incidental to ownership. The question there was, whether there can be valid partnership which carries on the business of letting out buildings on rent and whether such firm is entitled to registration. Their Lordships of the Andhra Pradesh High Court categorically held that no business activity is involved and such a firm cannot be granted registration. In this connection I feel that the Andhra Pradesh High Court’s decision in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.’s case (supra) is directly applicable to the facts of the case. There the question was whether interest on securities can be considered to be the business income and if it is not income derived from business whether exemption under Section 81(1)(a)(v) of the Income-tax Act, 1961 is available. Section 81(i)(a) which their Lordships considered in that case is quite analogous to Section 80P(2)(a)(i) under which the exemption is sought. It was held in that case that under Section 81(i)(a) which is equivalent to Section 80P(2)(a)(i) unless and until the assessee establishes that the income sought to be exempted was earned in carrying on the business of banking or providing credit facilities to its members, its claim to exemption must be rejected. In this case, is there any possibility to say that the rent is realised while carrying on the activity of providing credit facilities to the members. Not even an attempt was made by the learned counsel for the assessee to argue this position. I hold that the rent realisation cannot be considered to be the income earned in carrying on the activity of providing credit facilities to the members of the assessee society and therefore its claim for exemption under Section 80P(2)(a)(i) cannot be allowed in view of the categorical decision of the Andhra Pradesh High Court. It is unnecessary to go into the other aspects of the matter and to deal with the other authorities quoted before me by the learned DR. Suffice it to say that the order of the AAC is wrong both factually as well as legally and hence I set. aside the order of the AAC. and restore the order of the Income-tax Officer on this subject.
7. In the result, the appeal of the department is allowed.
