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TMI Blog2023 (4) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... f mutuality. It is this, we would like to think, that p rompted the Apex Court in Citizen CS Ltd. [ 2017 (8) TMI 536 - SUPREME COURT ] to state the assessee-appellant as being not a cooperative society meant for its members and providing credit facilities thereto. Even as we consider it proper to bring on record our understanding of the decision in The Citizen CS Ltd. (supra), i.e. , qua both the aspects of the Revenue s case, the same having been explained in Mavilayi Service Co-op. Bank Ltd [ 2019 (3) TMI 1580 - KERALA HIGH COURT ] have no hesitation in, respectfully following the same, holding that the appellant-societies in the instant case/sas eligible for deduction u/s. 80P as claimed. In this, we also take into account the absence of any finding of the lending being in violation of s. 59 of the Kerala Act, as well as the decision in CIT v. Peroorkada Service Co-op. Bank Ltd. [ 2021 (12) TMI 1084 - KERALA HIGH COURT ] holding investment in cooperative banks as not impeding the deduction on interest thereon. Decided in favour of assessee. - ITA Nos. 882& 883/Coch/2022, SA Nos. 64 & 65/Coch/2022, ITA No. 932/Coch/2022 & SP 69/Coch/2022 - - - Dated:- 17-4-2023 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uality and self-help group. Reliance for the purpose is placed by the Revenue on the decision in The Citizen Co-op. Society Ltd . v. CIT [2017] 397 ITR 1 (SC) and, following it, by the full bench decision in Pr. CIT v. Poonjar Service Co-op. Bank [2019] 414 ITR 67 (Ker)(FB), reversing the decision in Chirakkal Service Co-op. Bank Ltd. v. CIT [2016] 384 ITR 490 (Ker), besides others by the Tribunal. The assessee, again, does not deny any of these, but places reliance on the decision in Mavilayi Service Co-operative Bank Ltd . v . CIT [2021] 431 ITR 1 (SC) reversing Poonjar Service Co-op. Bank (supra), and distinguishing Citizen Co-op. Society Ltd. (supra)on facts. 3. The question thus arising is the true interpretation of s. 80-P in the context of cooperative societies engaged in the business of banking or provision of credit facilities to their Members. The same having received the consideration by the Apex Court per its two recent, cited decisions, issue before us would therefore be to examine if the decision in Mavilayi Service Co-operative Bank Ltd. (supra), which holds the field and, in fact, explains Citizen Co-op. Society Ltd. (supra), is applicable in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d rural development bank' means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities. (emphasis, supplied) Banking Regulation Act, 1949: 3 . Act to apply to co-operative societies in certain cases. Nothing in this Act shall apply to (a) a primary agricultural credit society; (b) a co-operative land mortgage bank; and (c) any other co-operative society, except in the manner and to the extent specified in Part V. The provision stands substituted by Act 39 of 2020, w.e.f. 26/6/2020, reading as: 3 . Act to apply to co-operative societies in certain cases. Notwithstanding anything contained in the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981), this Act shall not apply to a) a primary agricultural credit society; or b) a co-operative society whose primary object and principal business is providing of long-term finance for agricultural development, if such society does not use as part of its name, or in connection with its business, the words bank , banker or banking and does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops); and (2) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative 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 purpose; (ccv) 'primary co-operative bank' means a co-operative society, other than a primary agricultural credit society, (1) the primary object or principal business of which is the 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: Provided that this sub-clause shall not apply to the admission of a co-operative 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 purpose; (ccvi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)(b) qua milk co-operative societies, the Legislature expressly says so which is not the case with section 80P(2)(a)(i); (V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are co-operative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4). The appellant-society in that case being not a co-operative bank, was therefore found by the Hon'ble Court as not coming within the mischief of s. 80P(4). So, however, it was conducting business illegally with nominal members, who could not be Members of the society under the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995, as well as to the members of the general public. It was for this reason that it could not be regarded as a co-operative society meant only for its members and providing credit facilities to it s Members . In case of the Kerala Act, on the other hand, the definition of a member, which reads as under, includes a nomi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g) the specific provision does not require the cooperative society to be a PACS to claim deduction u/s. 80P(2)(a)(i). That is, the nature of cooperative society, as X or Y , is irrelevant; h) a co-operative bank is a co-operative society in the business of banking as defined u/s. 5(b) of BRA, operating under licence from RBI; i) whether the assessee has lost all characteristics of being a PACS or the Registrar of Co-operative Societies alone can look into as to whether the PACS is, or is not, a cooperative bank, and whether the assessee s classification as a PACS ought to continue or be reclassified as a co-operative bank, is not relevant. j) The Kerala Act especially permits loans by a PACS to non-members, which therefore is not illegal. k) extension of credit to non-members would not disentitle to the society from availing the deduction u/s. 80P(2)(a)(i). The distinction between eligibility for deduction and attributability of profits and gains to an activity (i.e. , the quantum of deduction), is a real one. The Revenue s case, on the other hand, may be summed up as follows, for which reference may also be made to para 2 of this order: a) The assessee, tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exposito , being the Finance Minister s speech dated 28/02/2006 on explaining the need for introducing s. 80P(4) (A), as well as the Circular dated 28/12/2006 (at [2007] 288 ITR (St. ) 9, 28, containing explanatory notes on Provisions contained in Finance Act, 2006 (B), both of which, duly noted in Mavilayi SCB Ltd. (supra), may be reproduced for ready reference: 166. Co-operative Banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income-tax Act. However, I propose to exclude all other co-operative banks from the scope of that section. (A)(para 36/pg. 41-42) Withdrawal of tax benefits available to certain co-operative banks 22. 2. The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registrar and having its area of operation confined to a Village, Panchayat or a Municipality; Provided that the restriction regarding the area of operation shall not apply to Societies or Banks in existence at the commencement of the Kerala Co-operative Societies (Amendment) Act, 1999 (1 of 2000). Provided further that if the above principal object is not fulfilled, such societies shall lose all characteristics of a Primary Agricultural Credit Society as specified in the Act, Rules and Bye-laws except the existing staff strength . . . . The definition per the Kerala Act is rather even more stringent, providing explicitly for the society losing all the characteristics of a PACS if it does not fulfil the conditions thereof, i.e. , subsequent to its registration as a PACS. 5. 4 The question that thus arises next is if, taking cognizance of this inconsistency, which is glaring, the provision of s. 80P, all parts of which, as in case of any other provision, are to be read together and in harmony, drawing on all aids, internal and external, to the interpretation of statutes, this dichotomy is to be resolved. We think it certainly is to; the Apex Court in K. P. Varghes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to read the section as a whole, i.e. , inclusive of the proviso , in a manner that they mutually throw light on each other and result in a harmonious construction ( UoI v. Dileep Kumar Singh [2015] 4 SCC 421). Further still, it is again trite law that a provision is to be read so as to effectuate the object of the statute and not to defeat it: refer CIT v. Mahindra Mahindra Ltd . [1983] 144 ITR 225 (SC), noted with approval in both, Citizen CS Ltd . (supra) and Mavilayi SCB Ltd. (supra). As we think, the provision of s. 80P, read as a whole and harmoniously, would imply giving meaning and purpose to the reference to PACS in s. 80P(4), so that it is not rendered as without purpose. As such, a co-operative society engaged in either the business of banking or provision of credit to its members, is, w.e.f. 01/04/2007, excluded from the purview of s. 80P except where it falls to be regarded as a PACS or PCARDB, both terms being read and understood in terms of their clear definitions, provided for in the Act. We are in this guided by the final decision therein by the Hon ble Court, determining the appellant-society, though not a cooperative bank , as yet a cooperative so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter dated 09/05/2008 by CBDT opining of Delhi Co-op. Urban T C Society as being entitled to deduction u/s. 80P as it is not a co-operative bank as defined in Part V of the BRA. It is, further, while doing so, cognizant of the inconsistency aforesaid, for which reference may be made to para 39 (pgs. 42-43), which reads as under, though does not consider it necessary to dwell thereon:- The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banks, i.e. , which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56, is that a primary cooperative bank cannot be a primary agricultural credit society , as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose 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 the depositors and borrowers are quite 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. 26. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the activity of providing credit to it s members which is liable for deduction u/s. 80P. That is, notwithstanding that the assessee is undertaking activities not permitted by it s governing statute, it is only the profit and gains of those permitted thereby and, further, qualifying to be an eligible activity, on which deduction u/s. 80P could and, accordingly, would stand to be allowed. The undertaking of non-admissible activities, profit of which is even otherwise, i.e. , irrespective of legality, liable to be taxed, may not therefore be of any consequence from the stand-point of deduction u/s. 80-P, which is to be on its own terms. As afore-noted, the only difference would be that where not permitted by the relevant Act read with it s bye laws, lending to nominal members would be regarded as at par with that to non- members. Nothing, in our view, therefore, turns on the undertaking of those noneligible activities, even if not legal. It is the loss of the attribute of mutuality that therefore can only be regarded as having prevailed upon the Hon'ble Court in holding that such a society cannot be regarded as one meant only for it s members and for providing credit faciliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g deduction u/s. 80P. The Apex Court in Mavilayi SCB Ltd. ( supra) having thus duly considered the decision in Citizen CS Ltd. (supra) in totality, including this part; rather, reproducing it at para 20 (pgs. 30 to 35), it s opinion thereon is final. We in fact also observe no argument qua mutuality having been raised before it by either side. 6. We, accordingly, even as we consider it proper to bring on record our understanding of the decision in The Citizen CS Ltd. (supra), i.e. , qua both the aspects of the Revenue s case, the same having been explained in Mavilayi Service Co-op. Bank Ltd. (supra), have no hesitation in, respectfully following the same, holding that the appellant-societies in the instant case/sas eligible for deduction u/s. 80P as claimed. In this, we also take into account the absence of any finding of the lending being in violation of s. 59 of the Kerala Act, as well as the decision in CIT v. Peroorkada Service Co-op. Bank Ltd. [2022] 442 ITR 141 (Ker) holding investment in cooperative banks as not impeding the deduction on interest thereon. 7. In the result, the appeals by the assessees are allowed. The stay petitions are, in consequence, r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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