RANGANATH MISRA J.

1. This appeal, at the instance of the Revenue, is by special leave. Two questions out of six referred by the Income-tax Appellate Tribunal, Allahabad, survive for consideration in this appeal and these are:

" (1) Whether, on the facts and in the circumstances of the case and on a true interpretation of the agreement, the Tribunal erred in holding that the sum of Rs. 9, 000 received as interest from Bazpur Co-operative Sugar Factory Ltd. is not covered under section 14(3) of the Indian Income-tax Act, 1922

(2) Whether, on the facts and in the circumstances of the case and on a true and correct interpretation of the various clauses of the agreement, the sums of Rs. 51, 295 and Rs. 58, 937 received as interest on advances would not be the assessees income from coal and sugar business and would thus be exempt under section 14(3) of the Indian Income-tax Act, 1922

2. At the hearing, it has been clarified by counsel for both parties that in the second question referred to above, the dispute is confined to the sum of Rs. 51, 295 only.

3. The relevant assessment year is 1961-62 corresponding to the accounting year ending with June 30, 1960. The assessee is a co-operative society registered under the Co-operative Societies Act, 1912. This being an apex body, its members are the various district co-operative societies, district co-operative banks and some Government and other co-operative societies within the State of Uttar Pradesh. The principal object of the society is to regulate the distribution and supply of items like coal, sugar, cloth, etc., through the member co-operative societies.

4. In the year in question, the assessee, inter alia, maintained that the income earned on the various advances made by it to the member societies was entitled to exemption under section 14(3) of the Indian Income-tax Act, 1922. The Income-tax Officer, while rejecting the claim for deduction on the ground of exemption on several heads, included interest of Rs. 9, 000 received from Bazpur Co-operative Sugar Factory Ltd. and a sum of Rs. 51, 295 received by way of interest from various co-operative societies on temporary loans for financing sugar business at the rate of 6 per cent. on the amount given as loan as taxable items. The two questions which have survived for decision in this appeal relate to the refusal of these two deductions on the ground of statutory exemption. The stand of the assessee had not been accepted by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal, but the High Court has accepted the claim in regard to both the amountsThe High Court, dealing with the amount of Rs. 9, 000, held:

"The Tribunal considered the claim for exemption in respect of the amount of Rs. 9, 000 received by the assessee from the Bazpur Co-operative Sugar Factory and held that this represented the interest received on the cash security of Rs. 2, 00, 000 which was furnished by the assessee for carrying on the sugar agency business, and as such it could not be said that it was interest from securities or interest from investments and as such rejected the claim made in respect of this amount under section 14 (3) (iii) of the Act."

5. The High Court considered the exigibility of the sum of Rs. 9, 000 to tax analogously with the taxability of the other sum and did not pointedly take note of the fact that the sum of Rs. 2, 00, 000 had been given as security and the arrangement entered into between the assessee and the Bazpur Co-operative Sugar Factory stipulated payment of interest at 41/2 per cent. per annum.

6. We may refer here to clauses (1) and (20) of the agency agreement:

"(1) That the manufacturer hereby appoints the agent as one of their two agents for the whole of the Indian Union for the sale of sugar produced by the manufacturer during the crushing seasons 1958-59 and 1959-60 and the agent hereby agrees to act as such agent in the said area on the terms mentioned herein. The manufacturer hereby undertakes not to appoint more than two agents as aforesaid."

"(20) The agent shall, simultaneously with the execution of this agreement, furnish a cash security of Rs. two lakhs to the manufacturer for a period of two years (irrespective of previous determination of the agreement for any cause whatsoever) to ensure against due compliance by the agent of the terms hereof ; such security shall carry interest at the rate of 4 1/2 per cent. per annum. Such security shall be repayable with interest to the agent within one month of the expiry of the period fixed in the agreement after adjustment of accounts between the parties. The manufacturer shall have the option to realise from the said security money all losses suffered and/or expenses incurred and not paid by the agent in pursuance of the provisions of this agreement. If the said security shall fall short of Rs. two lakhs at any time, the deficiency therein shall be made good by the agent within 15 days of the notice in writing from the manufacturer."

The amount of Rs. 9, 000 thus represented only interest on the security deposit and could not be mixed up with the other sums received by the assessee in the course of carrying on its business. We do not think the High Court was right in concluding that this amount of Rs. 9, 000 was available to be exempted under any of the clauses of section 14(3) of the Act.

Admittedly, the assessees claim does not come under clause (i) of section 14(3). Unless this sum is covered by section 14(3)(iii), there would be no exemption. The sum of Rs.two lakhs given as security in terms of the agreement was not an investment and, therefore, the amount of Rs. 9, 000 received by way of interest does not come within the purview of clause (iii). Mr. Salve, for the assessee-respondent, has fairly conceded that it would be difficult on his part to press the claim of the assessee for exemption in respect of this sum. The conclusion of the High Court in regard to this amount has, therefore, to be reversed and the stand of the Revenue to the effect that this amount represents taxable income has to be accepted.

7. Our answer to the first question, therefore, is that, on the facts and in the circumstances of the case and on a true interpretation of the agreement, the Tribunal did not err in holding that the sum of Rs. 9, 000 received as interest from Bazpur Co-operative Sugar Factory Ltd. was not covered under section 14(3) of the Income-tax Act.

8. We shall now deal with the other question. Dealing with it, the High Court stated:

"The facts relating to the case for exemption in respect of the two amounts of Rs. 51, 295 and Rs. 58, 937 [the second amount is no more in dispute] covered by question No. (3) may be stated. We shall begin by referring to facts relating to advances made in relation to the sugar business. The assessee was appointed as one of the wholesale dealers for distribution of sugar in this State. It had, in pursuance of an agreement entered into between it and the State Government, to arrange for lifting, handling, storing and distributing to the retailers the stocks of sugar released by the Government of India. The District Co-operative Development Federations of Deoria, Garhwal, Tehri Garhwal, Pilibhit, Etawah and Allahabad, entered into agreements with the assessee to work as agents for the wholesale distribution of sugar in their districts. A sample of the agreement entered into between the assessee and these various District Cooperative Development Federations . . . The assessee was to make necessary investments by way of payment of price of sugar to be procured from the factories and also to pay the administrative charges incurred for the distribution of sugar. This administrative charge was, however, recouped by the agents and paid over to the assessee. The delivery of the sugar from the various factories was to be taken by the various District Co-operative Development Federations which had entered into agreements with the assessee on behalf of the assessee as soon as the release orders were issued by the Government of India. The sugar so received was to be stored in godowns and was to remain under the custody of godown-keepers of the assessee or the bankers of the assessee. The salaries of the godown-keepers and the chowkidars appointed for safe custody of the stocks of sugar were to be paid by the agents . . .The sugar so stored was to be released to the agents as and when required by them on full payment of its price at the rate fixed by the State Government or the District Magistrate concerned. The stocks of sugar taken over by the agents was to be sold by them to retailers, and permit-holders who were to be nominated by the District Magistrate or the officer authorised by him. The wholesalers margin on the sugar sold for the period beginning September 1959, onwards with which we are concerned was Rs. 2.06 per bag. The share of the assessee and the District Cooperative Development Federations in this amount is set out in clause 18 of the agreement . . ."

The High Court extracted the terms and came to hold

"It appears from a letter dated 30th September, 1959, that the various District Co-operative Development Federations were not in a position to arrange the entire finances for the business and accordingly the assessee agreed to arrange for finances of the business on certain terms and conditions. The terms and conditions on which the finances were to be arranged may be extracted:-

(5) the money invested in the business will earn interest at 6 percent. per annum . . ."

9. It will be seen that Money which the assessee made available to the District Co-operative Development Federations was to be utilised for the purchase of the stocks of sugar which the District Co-operatives sold as agents of the assessee. In the accounting year in question, the assessee realised the the following amounts of interest from the District Co-operative Development Federations mentioned below:

Name Amount

(i) District Co-operative Development Federation

Ltd., Deoria. 4, 694.16

(ii) District Co-operative Development Federation

Ltd., Garhwal. 15, 797.60

(iii) District Co-operative Development FederationLtd., Tehri Garhwal 5, 557.50

(iv) District Co-operative Development Federation

Ltd., Etawah. 2, 984.24

(v) District Co-operative Development Federation

Ltd., Pilibhit. 2, 616.21

(vi) District Co-operative Development Federation

Ltd., Allahabad. 19, 645.53

Total 51, 295.24

10. The dispute covered by the second question to be answered is over this amount. The Income-tax Officer as also the two appellate authorities, relying upon the decisions of the Bombay High Court in Sir Chinnubhai Madhavlal v. CIT [1937] 5 ITR 210 [LQ/BomHC/1936/37] and CIT v. Bombay State Cooperative Bank Ltd. [1966] 59 ITR 31 [LQ/BomHC/1965/16] , held that the amount on which interest had been earned under the agreement did not constitute investment and, therefore, was not covered by section 14(3)(iii) of the Act.

11. Section 14(3) provides that tax shall not be payable by a co-operative society in certain situations. Clause (i) under its six sub-clauses refers to specific classes of co-operative societies in whose cases there is total exemption. Clause (ii) exempts income in respect of profits and gains of business of co-operative societies not covered by clause (i) up to Rs. 15, 000. Clause (iii) exempts interest and dividends and income derived from investments with any other co-operative society. Clause (iv) exempts income derived from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities while clause (v) exempts interest on securities chargeable under section 8 or any income from property chargeable under section 9, where the total income of the co-operative society of specific types mentioned therein does not exceed Rs. 20, 000.

12. There can be no dispute on the conclusion reached by the High Court that the money provided by the assessee was by way of investment. In fact, if this money had not been made available, the business as stipulated under the scheme could not have been carried out and perhaps there would have been no business. "Investment" has not been defined in the Act. P. Ramanatha Aiyars Law Lexicon (Reprint Edition 1987) states"The term invest is used in a sense broad enough to cover the loaning of the money but is not restricted to that mode of investment or loans made on commercial paper. The word Invest has been judicially defined as follows:

To place property in business ; to place so that it will be safe and yield a profit. It is also commonly understood as giving money for some other property (as) investing funds on lands and houses.

"Investment" means, in common parlance, putting out money on interest, either by way of loan, or by purchase of income producing property . . ."

13. In the facts of the present case, the money provided by the assessee was necessary to run the business and generate profits ; under the agreement, interest has been earned. In the peculiar situation appearing in the case as found by the High Court, the provision of money by the assessee, the purpose for which the money was provided, the stipulation for earning of interest, were all relevant considerations to be taken into account and it becomes difficult to take a view different from that of the High Court that the funding was investment and under the agreement, interest has been earned. Admittedly, the funding was to other co-operative societies. In our opinion, therefore, the amount of Rs. 51, 295 squarely came within section 14(3)(iii) of the Act. The High Court, therefore, was right in its conclusion that no tax was payable on the said amount. We would like to point out that under section 14(3), provision has been made to extend certain advantages to co-operative societies in order that the legislative purpose of providing incentives to the co-operative movement may be fulfilled. The High Court was right in holding that the provisions contained in section 14(3) should be liberally construedOur answer to the second question, therefore, is that, on the facts and in the circumstances of the case and on a true and correct interpretation of the various clauses of the agreement, the sum of Rs. 51, 295 received as interest on advances in the assessees income from sugar business was exempt under section 14(3) of the Income-tax Act, 1922.

14. There shall be no order for costs in this appeal as success is divided.