TMI Blog2008 (3) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... owing substantial question of law:-Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that income earned from banking business with 'nominal' members is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961? The brief facts of the case are that the respondent-Cooperative Bank (hereinafter referred to as 'the assessee') is a registered society under the Punjab Co-operative Societies Act, 1961 (hereinafter referred to as 'the Societies Act'). The assessee is a co-operative society carrying on the business of banking and extending the credit facilities to its members and nominal members. The assessee being carrying on the business of banking, claimed exemption under Section 80P(2)(a)(i) of the Act and filed its return of income declaring its income at nil for the Assessment Year 1999-2000. The Assessing Officer vide its order dated 16.10.2002 framed the assessment for the present assessment year under Section 143(2) of the Act whereby the assessee's income was determined at Rs.1,64,79,254/- by also adding interest income to the tune of Rs.68,56,901/- which was derived from the loans advanced to nominal members a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he members from the very beginning but were made members just before sanctioning and disbursing of loans to them. According to the learned counsel, such commercial transactions, which do not strictly fall in the fold of cooperative movement, do not entitle the assessee Co-operative Bank to concessional treatment under Section 80P of the Act. The admission of such kind of members just before the advancement of loans was only to satisfy the provisions of statute which is against the spirit of Section 80P which gives special treatment to banking activity with members of cooperative societies. The learned counsel submits that that the nominal members are not the share holders and have no share in the profit of the co-operative society. They are having no voting rights. Therefore, they do not strictly fall under the definition of "member" of the co-operative society as defined under the Societies Act, and any interest income derived from the loans advanced to them will not be exempted under Section 80P of the Act. Learned counsel submits that the purpose of exemption under Section 80P is obviously to engage employment of as much capital as possible for financing and extending the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:- (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of activities which are covered under this sub-clause. A society engaged in carrying on the business of banking whether from its members or non-members is entitled for exemption under this sub-clause and a society which is not engaged in carrying on the business of banking but providing credit facilities to its members is also entitled for exemption under this sub-clause because the word "or" used in the section cannot be read as "and". Therefore, a co-operative society engaged in carrying on the business of banking is earning some income from the business activities of banking whether from its members or non-members, is entitled for exemption under this clause. Learned counsel argued that the word "or" in this sub-clause should be read as "and". If the said word is read as "and", then it will provide that a cooperative society engaged in carrying on the business of banking and providing credit facilities to its members, will be entitled for exemption under this clause. If this interpretation is accepted, then there are number of co-operative societies, though who are not engaged in carrying on the business of banking but providing credit facilities to its members and earning inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been rightly held that any interest income received by the co-operative society engaged in carrying on the business of banking activities from its members or nonmembers, is liable for exemption under this sub-clause. This interpretation is supported by various decisions of the Supreme Court and High Courts. The Supreme Court in Commissioner of Income Tax vs. Bangalore Distt. Co-operative Central Bank Ltd. (1998) 233 ITR 282 (SC) has held that the interest on Govt. securities and dividends earned by co-operative society engaged in banking business is eligible for deduction under Section 80P(2)(a)(i) of the Act, though the said income was not earned by the co-operative society from the credit facilities provided to its members. It was held that if the assessee is a co-operative society carrying on the business of banking and if the income in question is attributable to the said activity, there is no doubt that the same is to be deducted from the gross total income. Again, in Commissioner of Income Tax vs. Kartataka State Co-operative Apex Bank, (2001) 251 ITR 194 (SC), it was held that the interest income derived by co-operative bank from investment of funds with Reserve Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 742 (Kar) has held that rental income received by the assessee-society engaged in the business of banking letting out the premises is an income received by carrying on the business of banking and as such it is entitled for deduction under Section 80P(2)(a)(i) of the Act. It was observed that the reading of clauses (k) and (I) of Section 6(1) of the Banking Regulation Act, 1949 shows that in addition to the business of banking set out in clause (b) of Section of that Act, acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the banking company and also selling/improving or leasing or otherwise dealing with all or any part of the property and rights of the company, also should be treated as a banking business. A contention raised in that case that in view of clause(f) of sub-section (2) of Section 80P, the deduction on account of the rental income should not be given to a co-operative society even though the same is engaged in the business of banking. In this regard, it was held that the society referred to in clause (f) of sub-section (2) of Section 80P must e understood as the society which is not carrying on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-operative society with others but whose name does not stand first in the share certificate." Learned counsel for the appellant raised the contention that as per the definition of "Member", it includes a nominal and an associate member and the Government 'when it subscribes to the share-capital of a society'. His contention is that if a nominal member does not subscribe to the share-capital of a society, he can not become a member of the society. This contention of the learned counsel for the appellant is not acceptable because the words 'when it subscribes to the share-capital of a society' are relating to the Government and not to the nominal and associate members. The associate members have been clearly defined as members who jointly hold a share of a co-operative society with others but whose name does not stand first in the share certificate, whereas nominal members means the persons admitted to membership as such after registration in accordance with the bye-laws. A person can become the nominal member of a co-operative society even according to the bye-laws of the society by paying the membership fees. It is not necessary for becoming the nominal member that he has to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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