2008 (3) TMI 45 - HC - Income Tax

Interest income from the loans advanced to various loanees, the said income was related to the banking activities, therefore, is liable for exemption under Section 80P(2)(a)(i). In that situation, if the assessee received the interest income from the loan advanced to various loanees related to the banking activities, then whether a loanee was the member or not the member of the co-operative society, loses its significance Therefore, interest earned from members can not be disallowed.

Issues Involved: Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act for income earned from banking business with nominal members.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The primary issue was whether income earned from banking business with nominal members is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act. The respondent, a Cooperative Bank, claimed exemption under this section for the Assessment Year 1999-2000. The Assessing Officer, however, added interest income from loans to nominal members to the total income, treating it as income from other sources, and disallowed the exemption claim. The Commissioner of Income Tax (Appeals) and subsequently the ITAT, ruled in favor of the assessee, holding that the income derived from banking activities with nominal members is eligible for deduction under Section 80P(2)(a)(i).

2. Interpretation of "Members" under the Societies Act:
The revenue contended that nominal members, who are not shareholders and have no voting rights, do not qualify as "members" under the Societies Act, and thus, income derived from them should not be exempt under Section 80P. However, the court referred to the definition of "Member" under Section 2(g) of the Societies Act, which includes nominal and associate members. It clarified that nominal members admitted as per the bye-laws of the society are considered members, even if they do not subscribe to the share capital.

3. Legislative Intent and Interpretation of Section 80P:
The court emphasized that Section 80P was introduced to promote the cooperative sector. It stated that the different heads of exemption under Section 80P are separate and distinct. The court rejected the revenue's argument to read "or" as "and" in Section 80P(2)(a)(i), which would limit the exemption only to income from credit facilities provided to members. The court held that a cooperative society engaged in banking is eligible for exemption on income derived from both members and non-members.

4. Precedents Supporting Exemption:
The court cited several Supreme Court judgments supporting the interpretation that income from banking activities, whether from members or non-members, is eligible for exemption under Section 80P(2)(a)(i). These included cases like Commissioner of Income Tax vs. Bangalore Distt. Co-operative Central Bank Ltd., Commissioner of Income Tax vs. Karnataka State Co-operative Apex Bank, and Mehsana District Central Co-operative Bank Ltd. vs. Income Tax Officer. These cases established that income from activities like interest on government securities, dividends, and rental income from lockers, even when not directly from members, is exempt under Section 80P.

Conclusion:
The court concluded that the interest income earned by a cooperative society engaged in banking from nominal members is exempt under Section 80P(2)(a)(i). It affirmed the ITAT's decision, stating that the income derived from banking activities, regardless of whether the loanees are members or nominal members, qualifies for exemption. The appeal was dismissed, and no substantial question of law was found to arise from the ITAT's order.

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