2017 (8) TMI 536 - SC - Income Tax

Benefit of Section 80P - income of co-operative societies under Section 80P - providing credit facilities / financial business - its operation was not confined to its members but outsiders as well - whether the appellant is barred from claiming deduction in view of Section 80P(4) - Held that - The activities of the appellant are in violations of the provisions of the MACSA under which it is formed. The assessee had carved out another category of nominal members . These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co-operative Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction under Section 80P(2)(a)(i) of the Act. The appellant cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act. - Decided against assessee.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P of the Income Tax Act, 1961.
2. Definition and scope of a co-operative society under Section 80P.
3. Applicability of Section 80P(4) post the Finance Act, 2006 amendment.
4. Principle of mutuality in the context of co-operative societies.
5. Compliance with the provisions of the Mutually Aided Co-operative Societies Act, 1995 (MACSA).

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P of the Income Tax Act, 1961:
The appellant sought the benefit of Section 80P, which provides deductions for co-operative societies. The Assessing Officer denied this benefit, arguing the appellant operated like a co-operative bank, serving the public rather than just its members. The Supreme Court emphasized that Section 80P is a benevolent provision aimed at promoting the co-operative sector and should be interpreted liberally in favor of the assessee. However, the appellant's activities were found to be in violation of the co-operative principles, thus disentitling it from the deduction under Section 80P.

2. Definition and Scope of a Co-operative Society under Section 80P:
Section 80P(2)(a)(i) provides deductions for co-operative societies engaged in banking or providing credit facilities to its members. The appellant argued that its primary objective was to promote the interests of its members, not to conduct banking business. The Supreme Court noted that the appellant's activities included accepting deposits from non-members and engaging in banking-like operations, which went beyond the scope of a co-operative society as defined under Section 80P.

3. Applicability of Section 80P(4) Post the Finance Act, 2006 Amendment:
Section 80P(4) excludes co-operative banks from the benefits of Section 80P, except for primary agricultural credit societies or primary co-operative agricultural and rural development banks. The appellant contended that it was not a co-operative bank as defined under the Banking Regulation Act, 1949, and thus should not be excluded. The Supreme Court agreed that the appellant did not qualify as a co-operative bank but highlighted that the main reason for denial was the appellant's non-compliance with co-operative principles and not solely the applicability of Section 80P(4).

4. Principle of Mutuality in the Context of Co-operative Societies:
The principle of mutuality requires that contributors to a common fund should be entitled to participate in the surplus. The Assessing Officer found that the appellant's activities lacked mutuality, as it dealt with non-members and engaged in profit-oriented activities. The Supreme Court upheld this finding, noting that the appellant's operations did not adhere to the mutuality principle, thereby disqualifying it from Section 80P benefits.

5. Compliance with the Provisions of the Mutually Aided Co-operative Societies Act, 1995 (MACSA):
The appellant was registered under MACSA, which restricts co-operatives from admitting nominal members and engaging in certain activities without approval. The Assessing Officer found that the appellant violated these provisions by dealing with non-members and conducting unapproved activities. The Supreme Court concurred, stating that the appellant's non-compliance with MACSA provisions further justified the denial of Section 80P benefits.

Conclusion:
The Supreme Court dismissed the appeal, holding that the appellant's activities did not qualify for the benefits under Section 80P due to non-compliance with co-operative principles, lack of mutuality, and violations of MACSA provisions. The judgment underscores the importance of adhering to statutory definitions and principles to claim tax benefits.