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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.
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