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TMI Blog2017 (8) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary, the appellant society was carrying on the banking business for public at large and for all practical purposes it was acting like a co-operative bank governed by the Banking Regulation Act, 1949, and its operation was not confined to its members but outsiders as well. 3) It may be noted at this stage itself that Section 80P of the Act provides for certain deduction in respect of incomes of the co-operative societies. A co-operative society is defined by Section 2(19) of the Act. Where the gross total income of such co-operative societies includes any income referred to in sub-section (2) of Section 80P, the sums specified in sub-section (2) are allowed as deduction in accordance with and subject to the provisions of the said Section, while computing the total income of the assessee. The profit exempted is the net profit included in the total income and not the gross profit of the business. Sub-section (2) enlists those sums which are allowed as deductions. Clause (a) of sub-section (2) includes seven kinds of co-operative societies which are entitled to this benefit, and in respect of the co-operative societies engaged in the activities mentioned in those seven classes, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The question, therefore, is as to whether the appellant is barred from claiming deduction in view of Section 80P(4) of the Act. In order to ascertain the answer to this question, relevant facts are enumerated hereinbelow: (i) The assessee was established on May 31, 1997 initially as a Mutually Aided Co-operative Credit Society having been registered, under Section 5 of Andhra Pradesh Mutually Aided Co-operative Societies Act, 1995 with Registration No. AMC/RR/DCO/9714 by Registrar of Mutually Aided Co-operative Societies, Ranga Reddy. As operations of assessee over the years had increased manifold and as its operations were spread over States of erstwhile Andhra Pradesh, Maharashtra and Karnataka, the assessee got registered under the Multi State Co-operative Societies Act, 2002 in terms of certificate dated July 26, 2005 issued by Office of Central Registrar of Co-operative Societies, Krishi Bhawan, New Delhi. (ii) The assessee is being assessed to income tax since its inception. It has been claiming exemption under Section 80P of the Act which was being allowed by the Income Tax Authorities. As per the assessee, in course of its operations, members deposit cash into their acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Years 2007-08 and 2008-09. CIT(A) quoted the following discussion from the said order of the ITAT: "22. For Assessment Year 2007-08 and 2008-09, we have to consider the amendment brought out to the section with effect from 1.4.2007 by Finance Act, 2006 whereby section 80P(4) was inserted. The amendment clearly barred all the cooperative banks other than primary agricultural credit society or a primary cooperative agricultural and rural development banks from claiming exemption under the section. The primary activity of the society is to provide banking facilities to its members. The Society is dealing like a bank while accepting deposits from its members. This issue was examined by the ITAT in the assessee's own case while deleting the penalty u/s. 27ID and 27IE. The ITAT held as under: "If the carrying on baking business is not approved by the RBI or the assessee is not having requisite license to carry out the banking business, the authorities could have taken action against the society or stop the society activity. Once the assessee is allowed to carry on the banking business, then the assessee is bound by the relevant provisions of the Banking Regulations Act. The bank fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and mutual aid in accordance with the co-operative principles and keeping in view the same the assessee society can engage in certain specified forms of business stipulated in the objective clause of the society. The purpose, therefore, was to promote the interest of its members and, therefore, it cannot be said that primary object of the assessee is transaction of banking business. 10) The learned senior counsel drew the attention of the Court to Section 5(b) of the Banking Regulation Act, 1949, which defines 'banking business' as under: "(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise." 11) Predicated on the aforesaid definition, he submitted that banking business means accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise which is withdrawable by cheque, draft, order or otherwise. According to him, the assessee was not accepting any money from the public, except its members. Therefore, it was totally wrong on the part of the authorities below to come to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income so related to the banking activities is liable for exemption under Section 80P(2)(a)(i) of the Act. He submitted that this interpretation is supported by various decisions of this Court. For this purpose, he referred to the decision of this Court in Commissioner of Income Tax, Bangalore v. Bangalore Distt. Coop. Central Bank Ltd. (1998) 6 SCC 129 wherein it was held that interest on Government securities and dividends earned by a Co-operative Society engaged in banking business is eligible for deduction under Section 80P of the Act, though said income was not earned from the credit facility provided to its members. Also, in Commissioner of Income Tax, Jalandhar v. Nawanshahar Central Cooperative Bank Limited (2012) 13 SCC 788 this Court held that a Co-operative Society carrying a business of banking would be entitled for deduction under Section 80P of the Act. Plea of the appellant was that if the intention of legislature was not to grant deduction under Section 80P(2)(a)(i) to the cooperative societies carrying on the business of providing credit facilities to its members, said provision would have been deleted from the Statute. According to the learned senior counsel, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive for the same services. Moreover, Section 19 of MACSA does not accept every co-operative to be a panacea for all problems facing an entire population in an area and leaves it to the members to decide how big they wish to grow and how much they can handle. After analysing these provisions, following discussion ensued in the order passed by the Assessing Officer: "As per the above provisions governing the conduct of the assessee, the assessee cannot admit nominal members and deal with them. The main activities of the assessee are in violation of the above provisions, as seen under: (i) As per the information furnished, it was found that the assessee caters to two distinct categories of people. (ii) The first category is that of resident members or ordinary members. (iii) The second category is that of nominal members, who make deposits with the assessee for the purpose of obtaining loans etc. (iv) This category of persons is neither members nor nominal/associate members. (v) As noticed, the assessee accepts deposits mostly from the second category these deposits are mostly kept in FDs. (vi) With banks to earn maximum returns, a portion of these deposits are utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one pursuant to declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (See - Bajaj Tempo Limited, Bombay v. Commissioner of Income Tax, Bombay City-III, Bombay (1992) 3 SCC 78). It is also trite that such a provision has to be construed as to effectuate the object of the Legislature and not to defeat it (See - Commissioner of Income Tax, Bombay & Ors. v. Mahindra and Mahindra Limited & Ors. (1983) 4 SCC 392). Therefore, it hardly needs to be emphasised that all those co-operative societies which fall within the purview of Section 80P of the Act are entitled to deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to anyone or more of such activities which are mentioned in sub-section (2). 19) Since we are concerned here with sub-section (i) of clause (a) of sub-section (2), it recognises two kinds of co-operative societies, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members. 20) In the case of Kerala State Coop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red under this sub-clause. xx xx xx 13. So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provisions of section 80P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the Legislature wanted to restrict the exemption to a primary co-operative society, it was so made clear as is evident from clause (f) with reference to a milk co-operative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk co-operative society." 22) The aforesaid judgment of the High Court correctly analyses the provisions of Section 80P of the Act and it is in tune with the judgment of this Court in Kerala State Cooperative Marketing Federation Limited (supra). 23) With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a co-operative bank. However, if it is a pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 26) It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion: "As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality; that no person can earn from him; that there a profit motivation; and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third party vis-a-vis the assessee entitled betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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