9911796707
TMI Blog2016 (2) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... tal to the carrying on of the actual business. Where, however, the assessee as owner of certain property lets out that property and receives rental income, the income thus received cannot partake of the character of profits and gains attributable to an activity carried on by the society. The building let out is not a commercial asset or the rent received is not profit or gain arising from the exploitation of a business asset. The word "activity" is wider than the word "business". It connotes a specified form of supervised action or 0field 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, 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 and gains. Letting out of surplus space in the building owned and used by the assessee is not such an activity falling under clause (c). The rent thus received by the assessee is not eligible for the exemption provided thereunder. In this vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to ₹ 33,85,886/- being interest received from other co-operative societies. 1.1. The learned CIT(A) ought to have seen that by virtue of section 80P(2)(a)(i) in the case of a cooperative society carrying on the business of banking or providing credit facilities to its members, whole of the profits and gains attributable to such activities is eligible for deduction. If the income is derived by a co-operative society from the business of banking or providing credit facility to its members, it will fall within the exemption. In the case of CIT vs. Karnataka State Cooperative Apex Bank, reported in (2001), 251 IRE 194 (SC), it was held that interest from surplus funds kept as deposits in banks, being ancillary and incidental to the carrying on of the business of providing credit facility by the assessee cooperative society to its members is entitled to deduction u/s. 80(P)(2)(a)(i). It is a normal mode of carrying on banking business to invest money in a manner that are readily available and that is just as much as a part of the mode of conducting bank's business as a receiving deposits of or lending money. The returns following from them would form part of its pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the same in the case of your respondent which was rightly deleted by the Learned Commissioner of Income-tax(Appeals). 1.6 All the interest income received on loans given to its members are your respondent's business income which is to be taxed under the head Profits and Gains of Business or Profession and being a Primary Agricultural Credit Society are eligible for exemption u/s. 80P. 1.7 The Learned Commissioner of Income Tax(Appeals) has convinced and rightly held that the decision in Totgar's Co-operative Sale Society Ltd. Vs. Income Tax Officer was not applicable to your respondent but the appellant was wrongly relied on it while making the assessment. 2. For these and other grounds that may be urged at the time of the hearing, it is humbly prayed that the appeal filed by Income Tax Officer, Ward-3, Kottayam be dismissed. 5. The brief facts of the case as emanating from the order of the Assessing officer are reproduced for the sake of convenience as under: "This office vide letter No AAAAP4839K/ITO/Wd-3/2011-12 dated 30/11/2011 has asked the Secretary to furnish the details head wise amount for the income received for the period ended 31/03/2009. (i) I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans - 8,94,833/- at 12% (v) Ordinary Loan - 42,86,229/- at 15.5% (vi) Trade Loan - 1,58,258/- at 13% (vii) Housing Repair - 18,570/- at 12.5% 2,79,63,652/- During the relevant asst year, the assessee had surplus funds which the assessee had invested in the short term deposits with Banks as follows and earned interest to ₹ 3385886/-. 1. District Co-operative Bank, Pala ₹ 5,57,461/- 2. District Co-operative Bank, pala ₹ 417/- 3. District Co-operative Bank, Erattupetta Rs.20,08,270/- 4. Meenachil Taluk Co-operative Employees Society ₹ 3,19,738/- 5. Meenachil Rubber Marketing Co-operative Society ₹ 5,00,000/- Total Rs.33,85,886/- As per Sec 2(24)(1), both the above income of ₹ 2,79,63,652/- and ₹ 33,85,886/- includes profit and gains. Here the interest income received cannot fall under the business income attributable to the activities of the society and cannot be considered for deduction u/s. 80P(1). Hence it is assessable u/s. 56 for income from other sources based on the hon'ble apex courts decision in the case of Totgar's Co-op sales society Ltd. 6.3 Subject to the above remarks, total income is computed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operative Society (PACS) registered under Cooperative Societies Act. The contention of the assessee was that subject to satisfaction of provisions of section 80P(1), if the gross total income includes any income referred in sub-section (2) of section 80P, the assessee shall be eligible only for that income for deduction in computing the total income. It is not denied by the Ld. Counsel for the assessee, as per the findings at page 2 of the order of the Assessing Officer, that interest earned to the extent of ₹ 2,79,63,652/- is for the purpose of providing gold loan, housing loan, ordinary loan, trading loan, housing repair loan etc. apart from interest earned from co-operative banks and co-operative societies amounting to ₹ 33,85,886/-. From the perusal of the record and arguments of the Ld. Counsel for the assessee, it is evident that banking business is not the object of the Society. The Society is formed mainly for providing credit facilities to its members for carrying out agricultural activities and also other agro-based activities. The principal business of the assessee is not doing banking business for the reason that for doing banking business, one has to obtain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [PAN:AAAAC 0458M] The Income Tax Officer, Ward-1, Kannur 13. 683/Coch/2013 14. 684/Coch/2013 15. 685/Coch/2013 2007- 08 2008- 09 2010- 11 The Kappad Service Cooperative Bank Ltd., P.O. Kappad, Kannur-670 006. [PAN:AABAK 4922D] The Income Tax Officer, Ward-1, Kannur. 16. 739/Coch/2013 17. 740/Coch/2013 18. 741/Coch/2013 2007- 08 2008- 09 2009- 10 Cherukunnu Service Cooperative Bank Ltd., P.O. Cherukunnu, Kannur. [PAN:AAAAC 5016F] The Income Tax Officer, Ward-1, Kannur. 19. 742/Coch/2013 20. 743/Coch/2013 21. 744/Coch/2013 2007- 08 2008- 09 2010- 11 The Kannapuram Service Cooperative Bank Ltd., P.O. Cherukunnu, Kannur. [PAN:AABAT 3964G] The Income Tax Officer, Ward-1, Kannur. 22. 745/Coch/2013 23. 746/Coch/2013 24. 747/Coch/2013 2007- 08 2008- 09 2010- 11 The Madai Co-operative Bank Ltd., Vengara P.O., Kannur-670 305. [PAN:AAAJM 1064A] The Income Tax Officer, Ward-1, Kannur. 25. 800/Coch/2013 26. 801/Coch/2013 2008- 09 2009- 10 The Kuttikakam Service Cooperative Bank Ltd., Kuttikakam Post, Kannur. [PAN: AAAAK 4614M] The Income Tax Officer, Ward-1, Kannur. Appellant Rep by: Shri K K John, Sr. DR Respondent Rep by: Shri Vedanga Prabhu, Sri K P Pradeep and Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the decision of the Assessing officer. 4. Section 80P as amended by Finance Act 2006 reads as under: "Deduction in respect of income of co-operative societies 80P. (1) where, in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), they shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in subsection (2), in computing the total income of the assessee. (2) The sums 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 (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar of cooperative societies, Govt of Kerala. The co-operative department has classified the assessee as a Primary Agricultural Credit Society. The area of operation of this society is limited to a Village. This society is formed mainly for providing credit facility to the members for carrying out their agricultural and allied activities. The fund is mobilized mainly through deposits from members. The money is advanced or lent only to members and not to public mostly for agricultural, animal husbandry and other agro based activities as per the objects of the Society. The Co-operative department has classified the assessee as a primary agricultural credit society. b) Definition of primary agricultural credit society. Definition in Banking Regulation Act. 8. As per the explanation 'a' to section 80P(4),"Co-operative bank" and "primary agricultural credit society" shall have the meaning respectively assigned to them in part V of the Banking Regulation Act, 1949 Part V of the Banking Regulation Act as referred to in the above explanation defines a primary agricultural society as "a Co-operative society, - (1) the primary object or principal busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll come to 8.5% to 10.5%. But for agricultural advances the assessee can collect interest at the rate of 7% only from the borrowers as per law. Since there is no effective mechanism for refinancing the agricultural loans of the societies by the apex banks, the assessee society will not be in a position to lend to agriculturists classifying the loan as agricultural per se, as fund collected at 10% will have to be lent for 7%. This is the situation which compels a primary agricultural society to classify a part of the agricultural loans lend by it as non agricultural. Hence the assessee is a primary agricultural credit society factually and theoretically. 11. The alternative "or" in the term 'primary" object or principal business" is quite relevant. Once the primary object of the society is providing financial accommodation to members for agricultural purposes it satisfies the condition to be a Primary Agricultural Credit Society. In the case of the assessee its principal business also is lending for agricultural purposes. All the facts pointed out clearly indicate that the assessee society is a primary agricultural society as prescribed in Banking Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imary co-operative bank" means a cooperative society, other than a primary agricultural credit society". (1) the primary object or principal business of which is transaction of banking business" (2) the paid-up share capital and reserves of which are not less than one lakh of rupees: and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: (4) Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such co-operative bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purposes" 15. From the expression in clause (ccv) quoted above "primary cooperative bank means a co-operative society, other than a primary agricultural credit society," it is doubtlessly clear that a primary agricultural society cannot be a co-operative bank as the definition is mutually exclusive one. The assessee being a primary agricultural credit society is not a co-operative bank. 16. Without prejudice to the assessee's contention that assessee is a primary agricultural credit society, the Ld. AR contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the banking means accepting the deposits of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft or otherwise and these deposits are accepted for the purpose of lending or investment. In the case of the assessee, the deposits are mostly accepted from the members and the deposits from public individuals are negligible. The money is advanced or lent only to members and not to public mostly for agricultural purposes. Hence the principle of mutuality is applicable in the case of the assessee which means that the activity of the assessee is not of banking but is that of providing credit facility to only members. 22. The Ld. AR submitted that the assessee is not a scheduled bank and hence not a member of the clearing house. According to the Ld. AR a bank cannot do the business of banking without being a member of the clearing house. The assessee has saving bank accounts with cheque facility. But these cheques are in effect only withdrawal slips as any cheque issued outside the district will not be accepted by anybody. 23. The Ld. AR also submitted that the assessee is not allowed to open NRE/NRO/FCNR accounts, issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Co-operative Bank which are functioning at par with other commercial banks. 28. The Ld. AR drew our attention to the interpretation of section 2(24) (viia) of the Act. For denying the claim of deduction u/s. 80P the Assessing officer has also relied on the insertion of clause (viia) of sub section (24) of section 2 by which 'the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members' is included in the definition of income. The Ld. AR submitted that the earned Assessing officer has failed to appreciate the fact that the income referred to in section 2(24) is gross total income and the assessee is free to claim the eligible deductions provided under the Act. 29. The Ld. AR also drew our attention to the relief provided u/s. 43D of the Act. In the Income Tax Act, a differential treatment is meted out to primary agricultural societies in the matter of revenue recognition on nonperforming assets u/s. 43D. While all financial institutions including nationalized banks and scheduled banks are allowed to account income by way of interest on non performing assets on receipt basis, such a benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business Therefore the assessee will not comply with the first condition as laid down in the definition as given under section 5(ccv) of the Banking Regulation Act, 1949 for becoming "primary co-operative bank". The assessee, therefore, cannot be regarded to be a primary co-operative bank and in consequence thereof, it cannot be a co-operative bank as defined under Part V of the Banking Regulation Act, 1949. Accordingly, in our opinion, the provisions of sec. 80P(4) read with explanation thereunder will not be applicable in the case of the assessee. The assessee, therefore, in our opinion, will be entitled for the deduction u/s. 80P(2)(a)(i). We accordingly confirm the order of CIT(A) allowing deduction to the assessee." (ii) Recently in the case of CIT Vs. Sri Biluru Gurubasava Pattina Sahakari sangha Niyamitha, Bagalkot, wherein the Hon'ble Karnataka High Court has held has under: "the assessee is not a co-operative bank carrying on exclusively banking business and as it does not possess a license from Reserve Bank of India to carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der: "U/s. 80P (2)(a)(i) of the Income Tax Act, 1961, in order to claim the benefit of deduction under section 80P(1) of the Act, the cooperative society should be engaged in carrying on the business of banking or providing credit facility to its members. As the provision is intended to encourage cooperative societies, a liberal construction should be given to the language employed in the provision. Hence, if a co-operative society is engaged in carrying on business of providing credit facilities to its members, that would suffice to attract the benefit of deduction u/s. 80P(1) and (2) (a)(i)." 31. Thus the Ld. AR concluded that it is doubtlessly clear that a primary agricultural credit society providing credit facility to its members is not a bank coming under the control of Reserve Bank of India and is eligible for deduction u/s. 80P. It is not open for the revenue to dissect the operations of the society to remove it out of the exemption clause as observed by the Hon'ble High Court of Kerala in the case of Moolamattom Electricity employees Credit Society (supra). The intention of law was also to tax only the state and district co-operative banks and operate at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorizing the assessee as a primary agricultural credit society is sufficient to claim deduction u/s. 80P. This finding of the CIT(A) is against the finding of the Hon'ble High Court of Kerala in WP(C) No. 14226 of 2012(C) dated 14th September 2012 in the case of Thathamangalam Service Co-operative Bank Ltd. and others, wherein their Lordships have observed as under: "True, some of the petitioners have obtained a certificate as to the classification/registration as Primary Agricultural Credit Societies. But by virtue of the amendment to section 2(oa) of the Kerala Cooperative Societies Act, if the Society does not continue to fulfill the obligation, it will lose the color and characteristics of a Primary Agricultural Credit Society, except for the purpose of staff strength. Thus it is very much obligatory for the petitioners societies, who claim the status and the benefits of Primary Agricultural Credit Societies to substantiate that their main object of incorporation is being continued to be fulfilled as well." 37. The ld DR submitted that it is for the petitioners to establish their status as Primary Agricultural Credit Societies by obtaining and producing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulations Act. Therefore, the society being a co-operative bank providing banking facilities to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P. In view of this finding, the Assessee was denied deduction u/s 80P(2)(a)(i). We have also gone through the decision of the Bangalore Bench of the Tribunal in the case of ITO vs. Divyajyothi Credit Co-operative Society Ltd. (supra) in ITA No.72/Bang/2013. In this case, we notice that the Hon'ble Tribunal confirmed the order of CIT(A) following the decision of the Tribunal in the case of ACIT, Circle 3(1), Bangalore vs. M/s. Bangalore Commercial Transport Credit Cooperative Society Ltd. in ITA No.1069/Bang/2010 holding that Sec. 80P(2)(a)(i) is applicable only to a co-operative bank and not to credit cooperative society. With due regards to the Bench, we are unable to find any term„credit cooperative society u/s 80P(2)(a)(i) or u/s 80P(4), therefore, this decision cannot assist us. We noted that the Hon'ble Gujarat High Court in the case of CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd. in Tax Appeals no 442 of 2013, 443 of 2013 and 863 of 2013 (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is apparent that none of the aims and objects allows the assessee cooperative society to accept deposits of money „from public for the purpose of lending or investment. In our opinion until and unless that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business. Therefore, the assessee will not comply with the first condition as laid down in the definition as given u/s. 5(ccv) of the Banking Regulation act, 1959 for becoming "primary cooperative bank". The assessee, therefore, cannot be regarded to be primary cooperative bank and in consequence thereof, it cannot be a cooperative bank as defined under part V of the Banking Regulation Act 1949. Accordingly, in our opinion the provisions of section 80P (4) read with explanation there under will not be applicable in the case of the assessee. The assessee, therefore, in our opinion will be entitled for the deduction u/s 80P(2)(a)(i). We accordingly confirm the order of CIT(A) allowing deduction to the assessee." The other decisions also relied on are not applicable to the facts of the case of the assessee. 8.11. In view of our aforesaid discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the rule of construction of ejusdem generis applies to the construction of clause (c), which results in profits and gains, that the income from house property has been dealt with in sections 22 to 27 as income and not as profits and gains and that the assessee is not, therefore, entitled to any exemption under clause (c). The Tribunal did not accept the alternative contention raised by the assessee for the first time before the Tribunal that the letting out of surplus space should be treated as a business activity under clause (a) of sub-section (2) of section 80P of the Act. The appeals were accordingly allowed. The question of law arises out of the order of the Tribunal. Section 80P of the Income-tax Act, 1961, allows a straight deduction, in the computation of the total income of a co-operative society, to the extent mentioned. Clause(c) of section 80P(2) provides that in the case of a cooperative society engaged in activities other than those specified in clause (a) or clause (b) either independently of, or in addition to, all or any of the activities so specified, so much of its profits and gains attributable to such activities as does not exceed ₹ 20,000 shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive society, it means the corporate activity of the society, that is to say, 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 and gains. Letting out of surplus space in the building owned and used by the assessee is not such an activity falling under clause (c). The rent thus received by the assessee is not eligible for the exemption provided thereunder. In this view, the Appellate Tribunal was justified in rejecting the assessee's claim." 10. In view of the above discussions, we are inclined to hold that the assessee is not entitled for deduction u/s. 80P of the Act on any reasoning." 40 In view of the order or the Tribunal, we are inclined to dismiss this ground of the assessee in all the appeals. However, in the case of revenue appeal in I.T.A. No. 770/Coch/2013, the CIT(A) has brought on record that the primary object or principal business of the assessee is to provide financial accommodation to its members for agricultural purposes or for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot;A scheduled bank not being a bank approved by Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner." Under explanation to Section 36 for better understanding of certain terms used in sub-clause (a) of clause (viia) definitions are provided. For the purpose of the above appeals, we need to know what exactly non-scheduled bank, rural branch co-operative bank and scheduled bank mean as per the explanation which read as under: "Non-scheduled bank" means a banking company as defined under clause (c) of section 5 of the Banking Regulation Act, 1949, which is not a scheduled bank. "Rural branch" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007, they could claim deductions as provided u/s. 36(1) of the Act. We are concerned with sub-clause(a) of clause (viia) to Section 36(1). Prior to Finance Act of 2007, co-operative bank was not included in subclause (a) so far as provisions for bad and doubtful debts. With effect from 01.04.2007, co-operative bank was included under subclause (a) of clause (viia) of Section 36(1). It is further clarified that only such co-operative bank other than a primary agriculture credit society, etc. is included in sub-clause (a) of clause (viia). The provision is a beneficial one. No doubt, plain reading of main Section 36(1) (viia)(a) and Explanation under said section present certain difficulties, but situation is not without possibilities. The object and intention of the legislature is to be understood by harmonious construction of the provisions. The policy was to include Cooperative Banks as well, as they could not take shelter u/s. 80P of the Income Tax Act any more. By restricting the scope of the provisions, the very purpose of inclusion of Co-operative Bank would be lost. Sub-clause 9a) consists of two types of deductions. One refers to deduction of an amount not exceeding 7.5% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Here the only question raised is as to basis of classifying branches of the bank as rural branches and other branches. Rural branch is defined under Explanation (ia) to section 36(1)(viia) as follows: "rural branch" means a branch of a scheduled bank or a non- schedules bank situated in a place which has a population of nor more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.". What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee's case that found acceptance with the Tribunal is that "place" referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing officer took the view that "place" contained in the definition clause should mean a revenue village. No doubt," as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of "place" referred to in the section. Standing counsel for the Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a unit is less than 10000." It is clear from the above judgment that this Court had already an occasion to consider the meaning of place with reference to above section. Therefore,rural branch is a branch which falls under Explanation (ia) to Section 36(1) (viia). Tribunal had to reverse the judgment of CIT(appeals) in the light of the decision in Lord Krishna Bank's case (supra). 12. Then coming to the controversy whether co-operative bank could claim deduction of 10% of the aggregate average advances while computing the income irrespective of falling under rural branch as per Explanation, in order to consider a company as a banking company it must transact business of banking in India as defined u/s. 5(c) of Banking Regulation Act. Explanation to Section 5(c) clearly indicates which are the transactions which would not come within the meaning of banking business. Non-schedule bank means a banking company as defined u/s. 5(c) which is not a scheduled bank. As already stated above, co-operative bank cannot be considered as a scheduled bank as Second Schedule to Reserve Bank of India Act does not include any of the cooperative banks. Reading of Section 5(c) along with ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeals is dismissed. 42. Next ground No in I.T.A. Nos. 325/Coch/2012, 660/Coch/2013, 680/coch/2013, 681/Coch/2013, 682/Coch/2013, 745/Coch/2013, 746/Coch/2013, 747/Coch/2013, 801/Coch/2013, 123/Coch/2013, 683/Coch/2013, 684/Coch/2013, 685/Coch/2013, 739/Coch/2013, 740/Coch/2013, 742/Coch/2013, 743/Coch/2013 and 744/Coch/2013 is with regard to disallowance of interest paid without deducting tax to non members u/s. 40(a)(ia) of the Act. 42.1 We have heard both the parties. We find a similar issue came up for consideration of the Cochin Bench of Tribunal in the case of Karivelloor Service Co-operative Bank Ltd. vs. ITO in I.T.A. No. 311/Coch/2012 vide order dated 22-03-2013 wherein it was held as under: "11. We have considered the rival submissions on either side and also perused the material available on record. In the case of Kadachira Service Co-operative Bank Ltd. (supra), this Tribunal found that the taxpayers were not carrying on any banking activity and, therefore, they are agricultural cooperative societies. In view of the specific provisions exempting the agricultural co-operative societies from deduction of tax in respect of agricultural co-operative societi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to approved gratuity fund or LIC Pension Fund was within the time limit for filing return of income u/s. 139(1) of the Act. On the similar line, we are inclined to remit the issue back to the file of the Assessing officer for fresh examination. Being so, this ground is allowed for statistical purposes. 44. The next ground in I.T.A. Nos. 325/Coch/2012, 720/Coch/2013 and 719/Coch/2013 is with regard to disallowance of unrealised interest on overdue loans. In earlier paragraph, we have decided the issue against the assessee which deciding the ground relating to deduction of provision for bad and doubtful debts u/s. 36(1)(viia) of the Act. More so, the judgment of the Delhi High Court in the case of CIT vs. Talangang Co-op Group Housing Society Ltd. reported in 339 ITR 518 is also against the assessee. 45. To sum-up, all the appeals filed by the assessees as well as the Cross Objection in C.O No. 05/Coch/2015 are dismissed except the appeal Nos.325/Coch/2012;680/Coch/2013;681/Coch/2013;683/Coch/2013; 684/Coch/2013 and 685/Coch/2013 are partly allowed for statistical purpose. The appeal filed by the Revenue in I.T.A. No. 770/Coch/2013 is dismissed. (Pronounced accordingly on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the society. 6. The assessee society is filing return under the Act every year and the assessment is completed u/s. 143(3) of the Act and the disallowance u/s. 80P is not justified. 3. The first ground of appeal is with regard to disallowance of deduction u/s. 80P of the Act. 4. The brief facts of the case are that the assessee filed its return of income for the assessment year 2009-10 declaring nil income as 26-03-2011. The return was processed and selected for scrutiny assessment under CASS. In the course of assessment, the Assessing officer noticed that the assessee has claimed its entire income as being exempt u/s. 80P of the Income Tax Act. As per Finance Act, 2006, deduction u/s. 80P of the Act is limited to primary Agricultural Society and Primary Co-operative Agricultural and Rural Development Bank with an intersection to allow tax benefits only to primary societies which help agriculturists by providing agricultural credits to promote agricultural activities in the country. Since the main activity of the society is to provide non agricultural credits and banking business, the Assessing officer disallowed the claim of deduction u/s. 80P of the Act, and completed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llip;.." In the instant case, it is crystal clear, as stated by the Assessing officer in his order that the assessee has been more in the field of banking instead of its principal object of extending credit facility to its members for agricultural purposes. At no point of time either before the Assessing officer or during the course of appeal hearing, the Ld. Counsel has produced any evidence to controvert the business activities tabulated by the Assessing officer in the assessment order, from which it is clear that hardly 3.56% of the total loans advanced during the year was for the purpose of agricultural activities. Regarding the claim of the ld counsel that the nature of the business of the assessee is in the character of 'mutuality', and therefore its income is exempt from taxation does not hold muster. First, because the ld. counsel has not supported his plea with any fact. Second, admitting any new fact at this late stage will be a clear violation of rule 46A of IT Rules. Thus, in view of the decision of the Hon'ble High Court of Kerala referred above, and also for the reasons stated in my order in I.T.A. No. 245/KNR/CLT/2011-12 dated 21-09-2012 in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. The Assessing officer has clearly brought on record that the assessee has lent only 3.56% of total loans advanced during the year under consideration for the purpose of agricultural activities. The assessee was unable to point out that how with this meagre 3.56% of the loans advanced for the purpose of agricultural activities; the assessee is entitled for deduction u/s. 80P of the I.T. Act. The question before us is whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and whether the Assessee is hit by the provisions of Sec. 80P(4) which was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007. The relevant provisions of both the sections are re-produced for our ready reference as under : "80P.(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 sums referred to in sub-section (1) shall be the following, namely :- (a) in the case of a co-operative society engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come which relates to the business of banking facilities to its members or providing credit facilities to its members will only be eligible for deduction u/s 80P(2)(a)(i). There is no prohibition u/s 80P not to allow deduction to such co-operative societies in respect of business relating to its members. 8.2 Now, the question before us is whether the Assessee is a co-operative bank or not. Co-operative Bank as defined in Part V of the Banking Regulations Act, 1949 is as under : "Co-operative bank" means a state co-operative bank, a central cooperative bank and a primary co-operative bank:" 8.3 From the definition of Co-operative bank it is apparent that Co-operative bank means state co-operative bank, a Central Co-operative Bank and a Primary Co-operative bank. It is not the case of the revenue that the assessee is a state Co-operative bank or Central Co-operative bank. We have therefore to find whether the assessee is a primary Co-operative bank. 8.4 The Primary Co-operative bank is defined under section 5 clause (CCV) of Banking Regulation Act 1949 as under:- "(CCV)" primary co-operative bank" means a co-operative society, other than a prim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fertilizers, pesticides and equipments for agricultural purposes and different articles for house-hold needs of the members; 5) To devise different schemes for collection, processing and the marketing of agricultural produce of the members; 6) In order to lend money to members, take loans from government and other co-operative institutions; 7) To provide banking facilities to members including encashment of cheque, drafts, bills etc.; 8) To acquire movable and immovable assets for the functioning of the bank; 9) To collect deposits from members and customers under different deposit Schemes; 10) Marketing of the agricultural produce of the members, cooperating with government and Quasi government agencies; 11) To start branches and extension counters within its area of operation if necessary for the development of the bank; 12) To acquire and market industrial products for the benefit of the members; 13) To issue loans to members under hire purchase scheme for purchasing household articles, machinery, jeep, autorikshaw, car etc. 14) To accept deposits from primary non-agricultural cooperative societies. Out of these, only four objects (i.e. clause no. 2,4,5 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 25/- each without voting rights. These shares are also issued to individuals. As per the bye-laws of the banks, (B) class shares can be issued to State Government, State Co-operative bank, District Co-operative bank, Kerala Coconut Farmer's Co-operative Federation, Local bodies and trust falling under the area of operation of the bank. There is no specific clause in the Bye-laws of the bank which do not permit admission of any other cooperative society as a member. 18. The assessee Co-operative bank is registered as a Primary Agricultural Credit Society, but as narrated above, it does not satisfy the criteria or conditions stipulated in the Banking Regulation Act, 1949. So it squarely falls under the operation of Sub-section (4) of Section 80P of Income Tax Act, 1961. As such the assessee is not eligible for deduction u/s. 80P of the Income Tax Act, 1961." 8.8 The deposits accepted are used by the Assessee co-operative society for lending or investment. This fact has not been denied. Even out of the deposits so received, the loans have been given to the members of the society in accordance with the objects as enumerated above. Thus, in our opinion, conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) we notice that the issue before the Hon'ble High Court in the Writ Petition filed by the Petitioner related to the legislative competence of the State Legislature for issuing a circular. The issue does not relate to the claim of deduction u/s 80P(2)(a)(i). While dealing with this issue, the Hon'ble High Court under para 12 observed as under : "12.It is not possible to accept this contention. The petitioners are not the banking institutions coming under the purview of the Banking Regulation Act. They are the co-operative societies registered under the Act, and as such they are governed by the provisions of the Act passed by the State Legislature. Consequently, the State Government has control over them to the extent the Act permits. Major activities of the petitioners are to finance its members. For the purpose of financing its members, they borrow money from the financing agencies and repay the same. Merely because the petitioners-the co-operative societies in question-are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor can they be treated as banking companies. It is also not possible to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s lending money only to its members. Being so, applying the concept of mutuality, the total income of the assessee has to be exempt from tax. However, we find that this argument of the assessee is also devoid of merits. The Hon'ble Supreme Court had an occasion to consider this mutuality concept. Similar issue came up for consideration of the Hon'ble Supreme Court in the case of CIT vs. Kumbakonam Mutual Benefit Fund Ltd., 53 ITR 241 (SC) wherein it was held that if the profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. A shareholder in the assessee-company is entitled to participate in the profits without contributing to the funds of the company by taking loans. He is entitled to receive dividend as long as he held shares. He did not have to fulfil any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the position of the assessee is no different from an ordinary bank except that it lends money and receives dividend from its shareholders which does not by itself make its income any the less income from business. The same judgment was followed in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 80P(2). The claim for exemption under clause (c) is in addition to the exemption provided under clause (a). The provisions are cumulative and mutually supplementing. The limits specified in clause(c) are in relation to the profits and gains attributable to the activity other than that specified in clause (a). If the rental income received by the society is attributable to any activity of the society, clause (c) would be attracted. It is then necessary that the co-operative society must prove that it has engaged itself in carrying on the activity giving rise to profits or gains. Such activity of the assessee must have a direct or proximate connection with or nexus to the earning in order that the assessee may enjoy the exemption. Section 80P(2)(c) of the Act exempts income of co-operative societies to the extent mentioned therein if the profits or gains are attributable to the activity in which the co-operative society is engaged. The expression "attributable to" is much wider than the expression "derived from" and it covers receipts from sources other than the actual conduct of the business of the assessee. In this view of the matter, interest earned by a co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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