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2023 (8) TMI 281 - AT - Income TaxDeduction u/s 80P - assessee, a cooperative society, registered as a Primary Agricultural Credit Society (PACS) under the Kerala Co-operative Societies Act, 1969 - huge cash deposits with other banks during demonetization period - HELD THAT - A nominal member, i.e., category C or D member, has no voting rights or participation rights in the profits, so that they are not members in the real sense. This explains the Revenue s stand. We further observe that the restriction regarding the area of operation by the first proviso to sec. 2(oa) of the Kerala Act, as Aryanad Panchayath, District Trivandrum, in the instant case, is not applicable to societies or banks in existence at the commencement of the Kerala Co-operative Societies (Amendment) Act, 1999, as the assessee. The assessee-society is thus entitled to service any member of the public at large, giving it the character of a public entity, at par with a cooperative bank.The second proviso to sec. 2(oa) (renumbered as s. 2(oaa) by the Kerala Cooperative (Amendment) Act, 2013), as substituted by the Amendment Act of 1999, clearly provides that in the event of the principal object/s being not fulfilled, the PACS shall loose all its characteristics of being one such, except for staff strength. The same, however, did not find favour in Mavilayi SCB Ltd. 2021 (1) TMI 488 - SUPREME COURT since followed in AnnasahebPatilMathadi Ltd. 2023 (5) TMI 372 - SC ORDER inasmuch as a category C or D member is only in terms of the Kerala Act. Section 2(l) defines a member as inclusive of a nominal or associate member, separately defined u/s. 2(m) to mean a member who possesses only such privileges and rights, and is subject to such liabilities, as specified in the bye-laws. There was thus no parallel with the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995, which had no provision for such members, so that the appellant-society in The Citizen Co-operative Society Ltd 2017 (8) TMI 536 - SUPREME COURT was acting illegally, even as held by the Hon'ble Apex Court in that case. A society as the assessee, in accepting deposit from a nominal member, or extending loan thereto, thus, does not act illegally, but only intra vires the Kerala Act. The assessee-society is, accordingly, an eligible entity u/s. 80P, notwithstanding that it may not be a PACS in terms of s. 2(oaa) of the Kerala Act, or indeed sec. 5(cciv) of the BRA. Head of income under which it s income for the year is to be split, i.e., between the business income (s.28) and income from other sources (s.56) - In our humble view though, sec. 80P(4) makes sec. 80P inapplicable to co-operative banks, i.e., other than the two excepted categories (of PACS or PCARDB), and sec. 80P(d) clearly provides exemption only where both the lender (depositor) and the borrower (depositee) is a co-operative society. This is as in that case income is derived from an eligible source, with the funds continuing to remain in a closed circuit, as explained in Bangalore Club 2013 (1) TMI 343 - SUPREME COURT A co-operative bank, on the other hand, is a public entity, and the money deposited with it on being further advanced to it s customers, goes in the public domain, rupturing this circuit. A cooperative society, it may be noted, is, as indeed in the instant case, assessable as an Association of Persons . We may at this stage also advert to Totgar s Co-operative Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT with a view to state its ratio, applicability of which would, in a given case, determine if the interest income is an operational income or arises qua surplus funds, assessable u/s. 56. And, that is, interest on surplus funds, i.e., not required for the time being for it s operational activities, and which is largely and essentially a question of fact, would stand to be assessed as income from other sources, as opposed to operational income, which may, where specified, be exempt u/s. 80-P. Continuing further, being in the nature of a passive income, is predominantly liable to be assessed u/s. 56, though the same, i.e., the head of income under which interest or dividend income is assessable, is by itself of little consequence or irrelevant for the purposes of s. 80- P(2)(d). Finally, we may consider the import of the factual observation, not rebutted at any stage, of the assessee undertaking chit fund scheme/s, and which is in the nature of banking. The same, in our view, is only a manner of providing credit facilities to it s members. The foreman commission earned by the assessee in the bargain would be the income of such business. Accordingly, nothing, in our view, turns on the assessee running a chit fund scheme/s. The assessee, a PACS, to which BRA is not applicable, the question of it being registered with, or having sought RBI approval, does not arise. That, to our mind, would not detract from the assessee s income, to the extent it so qualifies, being exempt under the Act. Any violation of any law, even if inadvertently, would not by itself impinge adversely on the status of such income under the Act, i.e., tax-exempt or otherwise. We, accordingly, hold the following incomes arising to the appellant-society as deductible u/s. 80P(1) - (a) income attributable to the appellant-society from the activity specified in s. 80P(2)(a)(i), i.e., of providing credit to its members, real or nominal, i.e., other than from non-members ; (b) interest income, net of expenditure attributable thereto, on deposits with a cooperative society or cooperative bank, shall, where and to the extent, not falling within the activity specified u/s. 80P(2)(a)(i), is deductible w.r.t. s. 80P(2)(d); (c) any income, not falling under the clause (a) and (b), shall be exempt to the extent of Rs. 50,000 w.r.t. sec. 80P(2)(c)(ii). Assessee appeal allowed.
Issues Involved:
1. Eligibility for deduction under section 80P of the Income Tax Act, 1961. 2. Classification of income under the appropriate head for tax purposes. 3. Impact of running chit fund schemes on the assessee's tax status. Summary: Issue 1: Eligibility for Deduction under Section 80P The primary issue was whether the assessee, a cooperative society registered as a Primary Agricultural Credit Society (PACS), is eligible for deduction under section 80P of the Income Tax Act, 1961. The Revenue argued that the assessee was engaged in the business of banking without a license from the Reserve Bank of India (RBI) and thus should be classified as a cooperative bank, which would make it ineligible for the deduction under section 80P(4). The Tribunal referred to the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd. v. CIT, which clarified that the applicability of section 80P does not depend on whether the society is a PACS or PCARDB but on whether it is a cooperative bank as defined under section 5(b) of the Banking Regulations Act, 1949. The Tribunal concluded that the assessee is eligible for deduction under section 80P as it is not a cooperative bank by definition. Issue 2: Classification of Income The Tribunal examined whether the income of Rs. 64,65,231 should be classified as business income under section 28 or income from other sources under section 56. The Tribunal noted that the interest income, even if assessable under section 56, would be deductible under section 80P(2)(d) as it is derived from investments with other cooperative societies or banks. The Tribunal emphasized that the head of income under which the interest income is assessable becomes irrelevant due to the binding decision in Pr.CIT v. Peroorkada SCB Ltd., which allows the deduction under section 80P(2)(d). Issue 3: Impact of Running Chit Fund Schemes The Tribunal also addressed the issue of the assessee running chit fund schemes, which the Revenue argued was in the nature of banking. The Tribunal held that running chit fund schemes is a manner of providing credit facilities to its members and does not affect the assessee's eligibility for deduction under section 80P. The Tribunal cited the jurisdictional High Court's decision in CIT v. Kottayam Coop. Bank, which supports the view that such activities do not detract from the assessee's tax-exempt status under the Act. Conclusion The Tribunal allowed the assessee's appeal, holding that: 1. The assessee is eligible for deduction under section 80P. 2. The interest income is deductible under section 80P(2)(d) irrespective of whether it is classified under section 28 or section 56. 3. The chit fund activities do not impact the assessee's eligibility for tax exemption under section 80P. The order was pronounced on July 31, 2023, under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963.
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