TMI Blog2016 (1) TMI 1262X X X X Extracts X X X X X X X X Extracts X X X X ..... id deposits and business of the assessee providing credit facility to its members, held that it could not claim deduction u/s 80P(2)(d) of the Act. Since, the source of interest, as mentioned earlier, how much from the bank and from the co-operative society are not clear, I remand this appeal to the file of the ld. Assessing Officer to examine the claim of the assessee afresh. The assessee is directed to furnish evidence as to how much interest was received from banks and how much from the co-operative society. Appeal of the assessee is allowed for statistical purposes only. - ITA No.2379/Mum/2015 - - - Dated:- 15-1-2016 - Shri Joginder Singh, Judicial Member For The Assessee : Shri Ravindra N. Naik For The Revenue : Shri V.S. Jadhav-DR ORDER The assessee is aggrieved by the impugned ex-parte order dated 27/08/2014 of the Ld. First Appellate Authority, Mumbai. 2. During hearing of this appeal, the ld. counsel for the assessee, Shri Ravindra N. Naik, invited my attention to the affidavit for condoning the delay of 161 days while filing the appeal before this Tribunal. The ld. DR, Shri V.S. Jadhav, contended that the assessee was expected to be more vigilant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 167 ITR 471 observed as under:- 3. The legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits. The expression sufficient cause employed by the legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which sub-serves the ends of justice that being the lifepurpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message does not appear to have percolated down to all the others courts in the hierarchy. 2.4. Furthermore, the Hon'ble Supreme Court in the case of Vedabai Alia Vaijayanatabai Baburao Patil vs. Shantaram Baburao Patil 253 ITR 798 held that the court has to exercise the discretion on the facts of each case keeping in mind that in construing the expression sufficient cause , the principle of advancing substantial justice is of prime importance. The court held that the expression sufficient cause should receive liberal construction. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals), broadly the stand taken in the assessment order was affirmed against which the assessee is in further appeal before this Tribunal. 2.6. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, before adverting further, I would like to analyze the objects of the assessee society, which are broadly enumerated hereunder:- i) To encourage the members to follow principles of Cooperation and thrift. ii) To accept deposits from the members. iii) To obtain loans or-to raise funds and to create reserves. iv) To provide loans to members on mortgage or on personal guarantee. v) To purchase Land, Building or premises on ownership basis for the use of the Society with the prior permission of the registration authority . vi) To make proper arrangements for disposal of assets which are mortgaged against loans and thereby make arrangements for recovery of loan. vii) To sanction loans for small scale industry, home Industry and self employment. viii) To administer, maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii) the Government or a local authority; or (iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public), the whole of the amount of profits and gains of such business; (c) in the case of a co-operative 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,- (i) where such co-operative society is a consumers' co-operative society, one hundred thousand rupees; and (ii) in any other case, fifty thousand rupees. Explanation.-In this clause, consumers' co-operative society means a society for the benefit of the consumers; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a straight deduction, in computation of total income of the Co-operative society, to the extent mention, in respect of the following income. a(i) the whole of the profits and gains from a business of banking or providing credit facilities to the members of the society. (a)(ii) the whole of the profits and gains from a cottage industry; (a)(iii) the whole of the profits and gains from marketing of agricultural produce of the members of the society; (a)(iv) the whole of the profits and gains from activities consisting of purchase of agricultural implements, seeds, live-stock or other articles intended for agriculture and supply of these to the members of the society; (a)(v) the whole of the profits and gains from processing, without the aid of power, of the agricultural produce of the members of the society; (a)(vi) the whole of the profits and gains from the activity of the collective disposal of the labour of its members subject to certain conditions; (a)(vii) the whole of the profits and gains derived from the business of fishing or allied activities, i.e., the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2009) 318 ITR 62 (Uttrakhand) 2.10. Section 80P (2)(c) is in the nature of a residuary clause, so far as it relates to the activities of the cooperative society. The activities of a cooperative society not falling either in section 80P(2)(a) or 80P(2)(b) will be covered by section 80P(2)(c). Section 80P(2)(c) read with section 80P (1) grants deduction of ₹ 20,000/- in calculation of gross total income of a cooperative society. Section 80P(2)(c) exempts income of a cooperative society to the extent mentioned in that section if the profit and gains are attributable to the activities in which the cooperative society is engaged (CCIT vs Kisan Sahkari Chini Mills Ltd. (2005) 273 ITR 42(All.). 2.11. Now, I would like to analyze certain case laws, which are available in favour and against the assessee, so that a reasonable view can be taken. 2.12. It is noted that the Hon ble Karnataka High Court in Karnataka State Cooperative Marketing Federation Ltd. vs CIT (2001) 251 ITR 736, 740 (Karn.) held that if a cooperative society carries on certain activities, the income from which is exempted and also certain activities income from which is not exempted, the profit and gains a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embers as well as of non-members. In the latter case, there is no difference between a cooperative society or any other business organisation and so will not be entitled to exemption. The exemption is intended to cover all cases where a co-operative society is engaged in marketing agricultural produce of its members. Section 80P does not in effect limit the scope of the exemption to agricultural produce raised by members alone but includes agricultural produce raised by others but belonging to cooperative societies. The contrast in the said provision is with reference to the marketing of agricultural produce of the members of the society or that purchased from non-members. A reading of the provisions of section 80P of the Act would indicate the manner in which the exemptions under the said provisions are 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) referred to above 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, but no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co-operative Apex Marketing Society [1993] 201 ITR 338 is reversed. We hold that the society engaged in the marketing of agricultural produce of its members would mean not only such societies which deal with the produce raised by the members who are individuals or societies which are members thereof who may have purchased such goods from the agriculturists. Thus, we allow the civil appeal by setting aside the order made by the High Court and answering the question referred to us in the affirmative in favour of the assessee and against the Revenue. There shall be no order as to costs. 2.14. Identical ratio was laid down by Hon ble Punjab Haryana High Court in Karnal Cooperative Sugar Mills Ltd. vs CIT (2002) 253 ITR 659, 666 (P H). In CIT v. Haryana State Co-operative Supply and Marketing Federation Limited [1990] 182 ITR 53 (P amp; H), an identical view as taken by the Gujarat High Court adverted to by us just now was taken. In Meenachil Rubber Marketing and Processing Co-operative Society Limited v. CIT [1992] 193 ITR 108, the Kerala High Court had occasion to examine this short question and it took the view that the provision had been incorporated bearing in mind that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 157 (Ori). Contra , on its own facts: Andhra Pradesh Co-op. Central Land Mortgage Bank Ltd. v. CIT, (1975) 100 ITR 472 (AP)]. At the same time, the investment' contemplated above must be from out of the circulating capital or stock- trade of the society [MP. State Co-operative Bank Ltd. vs Addl.CIT, (1979) 119 327 (MP)j Thus, the income derived by the assessee from the investment in Government securities placed with the State Bank of India/Reserve Bank of India cannot be regarded as an essential part of its banking activity inasmuch as the same does not form part of its stock-in-trade or working/ circulating capital [Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT, (1996) 218 ITR 438,447 (SC), affirming, (1979) 119 ITR 327 (MP)]. Similarly, interest on securities earmarked against reserve and provident funds has been held not to be income from banking business [Madhya Pradesh Rajya Sahakari Bank v. CIT, (1988) 174ITR 150 (MP)]. 2.16. The above discussed Supreme Court decision [218 ITR 438 (SC)] has been over- ruled in CIT v. Karnataka State Co-operative Apex Bank [(2001) 251 ITR 194, 196-97 (SC)], where the later Supreme Court has ruled that interest income arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held not entitled to deduction under section 80P. 2.19. However, it is not necessary that a co-operative society should be primarily or exclusively a dealer in securities in order that interest on securities held by it should be entitled to exemption under section 80P(2)(a)(i) [see, Assam Co-operative Apex Bank Ltd. v. CIT, (1978) 112 ITR 87 (Gauh)]. In CIT v. u.r. Rajya Sahkari Bhumi Vikas Bank Ltd. [(1994) 208 ITR 758, 760-61(All)], the assesseeco- operative society was functioning as a bank for the purposes of providing finance to cultivators and co22 operative societies, etc. The assessee held certain shares in the Agricultural Refinance Corporation as well as certain units of the Unit Trust of India. The findings of the Tribunal that such shares and units were held by the assessee as its stock-in-trade have been held to be pure findings of fact recorded on the basis of appreciation of evidence, not giving rise to any question of law. Further, the Tribunal's holding that income from such shares and units was income from business carried on by the assessee and was exempt under section 80P(2)(a)(i) was held giving rise to no statable question of law. Also see, CIT v. Zila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber of a co-operative society. The intention was to extend the exemption to co-operative societies directly extending credit facilities to its members. There is nothing in the said provision to show that the intention was to grant exemption to co-operative societies which were extending credit facilities to persons who, though not the members of the said society, were members of another cooperative society which is a member of the co-operative society seeking exemption. The principle of lifting the corporate veil cannot have any application in the context of the provisions contained in section 80P(2)(a)(i). In that view of the matter, the assessee-federation, having cane unions as its members, was held not entitled to exemption from income from press and income from supply of pumping sets to cane-growers, who were members of the cane unions, under section 80P(2)(a)(i) of the Act. Providing credit facilities.- The expression providing credit facilities , in section 80P(2)(a)(i) of the Act, takes its colour from the activity of banking. In order that the same may constitute a business, it is necessary that these activities must be the chief source of income. A person who advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities to its members. The restriction imposed on the user of the credit facilities extended by the assessee society for house building could not be construed as a means intended to secure the object of the society, viz., house building. At best, it could be regarded only as the imposition of a condition for obtaining credit facilities and would not in any manner affect the character of the activity or detract from the activity being one of providing credit facilities. The facility of selling the goods on credit to its members by a co-operative society is an activity of business of selling of goods of which the facility is only an incidence and it will not amount to providing credit facilities in the nature of the business of banking so as to amount to carrying on the business of banking or providing credit facilities to its members [CIT v. Co-operative Supply Commission Shop Ltd.. (1993) 204 ITR 713, 718 (Raj)). 2.23. In the case of CIT v. Madurai District Central Cooperative Bank Ltd., (1984) 148 ITR 196 (Mad) [interest from securities held as per statutory requirements as also subsidies received from Government for opening new branches and giving loans to poorer sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Federation, (1996) 217 ITR 231, 233 All) [assessee's income from service charges realised from cane growers for arranging credit facilities for them for the purchase of pump sets was held not eligible for deduction under section 80P(2)(a)(i) because the cane growers could not be treated as members of the assessee-society]. This Allahabad decision [217 ITR 231 (All)] has been affirmed in U'P. Cooperative Cane Union Federation Ltd. v. CIT [(1999) 237 ITR 574 (SC)], following Assam Co-operative Apex Marketing Society Ltd. v. Addl. CIT [(1993) 201 ITR 338 (SC)], which, in the context of the provisions of secion 80P(2)(a)(iii) has been impliedly overruled in Kerala State Co-operative Marketing Federation Ltd. v. CIT [(1998) 231 ITR 814 (SC)], which, in its turn has statutorily been superseded as a result of the amendment (w.r.e.f. 1-4- 1968) of section 80P(2)(a)(iii) by the Income-tax (Second Amendment) Act, 1998 (11 of 1999). In the case of CIT v. Jila Sahakari Kendriya Bank Maryadit, (1997) 225 ITR 421, 424 (MP) [income derived from locker rent is not eligible for deduction under section80P(2)(a)(i) because such income cannot be correlated to any of the activities which m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 272 ITR 600 (Raj)] holding that the income from investment could be said to be from banking business and exempt under section 80P(2)(a)(i) of the Act. 2.28. The Hon ble Apex Court in Mehsana District Central Co-operative Bank Ltd. v. ITO, (2001) 251 ITR 522, 525 (SC), reversed the decision of Hon ble Gujarat High Court in Mehsana District Co-operative Bank Ltd. v. ITO, (2001) 251 ITR 520 (Guj). In CIT v. Ratnagiri District Central Co-operative Bank Ltd., (2002) 254 ITR 697, 707 (Born), special leave petition dismissed by the Supreme Court: (2002) 256 ITR (St.) 48 (SC) and (2003) 260 ITR (St.) 272 (SC) [interest accrued on the investment made in Indira Vikas Patra was held income arising out of banking business eligible for deduction under section 80P(2)(a)(i) of the Act. In CIT v. Ramanathapuram District Co-operative Central Bank Ltd., (2002) 255 ITR 423, 425 (SC) [interest on securities, subsidies from the Government, and dividend received by the assessee, a co-operative society carrying on banking business, were business income of the assessee and the same were eligible for deduction under section 80P(2)(a)(i)of the Act. 2.29. In CIT v. Krishak Sahkari Ganna Samiti Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 1991-92. 2.31. In CIT v. Rajasthan State Co-operative Bank, (2005) 272 ITR 600, 602 (Raj), following CIT v. Karnataka State Co-operative Apex Bank, (2001) 251 ITR 194 (SC) [income from investment of the reserves and other funds in various securities has been held eligible for deduction under section 80P(2)(a)(i)] of the Act. In Gorakhpur Kshetriya Gramin Bank v. CIT, (2007) 292 ITR 205 (All) [for assessment year 1988-89, receipts on account of pay recovered from resigned staff, recovery of training cost and security forfeiture were admissible as deduction. In CIT v. Salem Co-operative Sugar Mills Ltd., (2006) 286 ITR 635 (Mad), followed in CIT v. Attur Agricultural Producers Co-operative Marketing Society Ltd., (2008) 306 ITR 151 (Mad); CIT v. Tamil Nadu Co-operative Silk Producers Ltd., (2009) 311 ITR 224 (Mad), SLP granted: (2008) 299 ITR (St.) 91 (SC) [taking into consideration the object for which the assessee-sugar mill had been created and the objects clause and/or the business activities of the assessee which mentioned granting loans and advances to the members at such rates as may be prescribed by the committee, the object of the assessee came within the purview of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 80P(2)(a)(i) of the Act. 2.34. The Hon ble Bombay High Court in CIT v. Maharashtra State Co-operative Bank Ltd., (2006) 282 ITR 581 (Bom) held that the interest arising from investment made by a co-operative society engaged in banking business, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund is deductible under section 80P(2)(a)(i)) of the Act. In Bihar Rajya Sahkari Bhoomi Vikas Co-operative Bank Ltd. v. CIT, (2009) 313 ITR 247 (Pat), the interest derived from investment of the provident fund amount and the rental income, it was held that it did not qualify for deduction under section 80P(2)(a)(i) of the Act. 2.35. In CIT v. Solapur Nagari Audyogic Sahakari Bank Ltd., (2010) 328 ITR 292 (Bom), the interest received from KVPs and IVPs held to be income from banking business eligible for deduction). In CIT v. H. P. State Cooperative Bank Ltd., (2010) 323 ITR 1 (HP), the investment of the funds by the banks including the nonreserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be necessary to appreciate the general understanding of doctrine of mutuality. The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax; only the income which comes within the definition of Section 2(24) of the Act is subject to tax (income from business involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act). The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. Mutuality is not a form of organization, even if the participants are often called members. Any organization can have mutual activities. 2.39. The doctri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not an assessable profit. It was therefore, held to be a case of mutual assurance. The individuals insured and those associated for the purpose of receiving their dividends and meeting other stipulated requisites under the policies were identical. It was held that that identity was not destroyed by the incorporation of the company. Lord Watson even went to the extent of saying that the company in that case did not carry on any business at all, which perhaps was stating the position a little too widely as pointed out by Viscount Cave in a later case; but, be that as it may, all the Noble Lords, who formed the majority, were of the view that what the members received were not profits but their respective shares of the excess amount contributed by themselves. They held thus: ... when a number of individuals agree to contribute funds for a common purpose ... and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them. I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits. 2.40. Lord Watson's statement was explained by the House of Lords in Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contributors and participators. This was first laid down by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills[1932] 16 TC 430, 448 (HL); CIT v. Ferozepur Ice Manufacturers' Association [1972] 84 ITR 607 (Punj. Har.) wherein he observed: The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. 2.44. On this aspect of the doctrine, especially with regard to the non-members, Halsbury's Laws of England, 4th Edition, Reissue, Vol. 23, paras 161 and 162 (pp. 130 and 132) states: Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. Members' clubs are an example of a mutual undertaking; but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting.... 2.45. Simon's Taxes, Vol. B, 3rd Edn., p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contributors to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects.... (Emphasis supplied) 2.47. British Tax Encyclopedia (I), 1962 Edn. (edited by G.S.A. Wheatcroft) at pp. 1201, dealing with mutual trading operations , the law is stated as under: For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate; it does not matter that the class may be diminished by persons going out of the scheme or increased by others coming in.... (Emphasis supplied) 2.48. In Jones v. South-West Lancashire Coal Owners' Association Ltd. 1927 AC 827, Viscount Cave LC held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y J. observed in National Association of Local Government Officers v. Watkins [1934] 18 TC 499 where member of a club orders dinner and consumes it, there is no sale to him. At the same time, as in case of CIT v. Bankipur club Ltd. [1997] 5 SCC 394, where a club makes 'surplus receipts' from the subscriptions and charges for the various conveniences paid by members, even though there is no direct benefit of the receipts to the customers, the fact that they will eventually be used in furtherance of the services of the club must be considered as a furtherance of the mandate of the club. 2.52. Thirdly, there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. The locus classicus pronouncement comes from Rowlatt, J's observations in Thomas v. Richard Evans Co. Ltd. [1927] 11 TC 790 wherein, while interpreting Styles (Surveyor of Taxes) case (supra), he held that if profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. He observed thus: But a company can make a profit out of its members as customers, although its range of customers is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int mutuality ends and commerciality begins is a difficult question of fact. It is best summarized in Bankipur Club (supra) wherein Hon ble Apex Court echoed the following views: if the object of the assessee company claiming to be a mutual concern or club is to carry on a particular business and money is realised both from the members and from nonmembers, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a mutual concern or members 'club is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant surplus is certainly profit - income liable to tax. We should also state, that at what point, does the relationship of mutuality end and that of trading begin is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. Whether or no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cooperative Cotton sales, Ginning and Pressing Society Ltd. vs CIT 177 ITR 418, 422 (SC), CIT vs Pondichery Cooperative Housing Society Ltd. 188 ITR 671 (Mad.), Meeenachil Rubber Marketing and Processing Co-operative Society Ltd. vs CIT 193 ITR 108 (Kerala) and Karnal Cooperative Sugar Mills Ltd. vs CIT (2002) 253 ITR 659, 666 (P H). Identical ratio was laid down in U.P. Co-operative Bank Ltd. vs CIT 61 ITR 563 (All.). So far as, the finding of the ld. Commissioner of Income Tax (Appeals) with respect to provisions of section 80P(2)(a)(i) is concerned, in the light of the decision in the case of Totagar Co-operative vs ITO, it is against the assessee as it cannot be said to be income derived from providing credit facilities to its members. It is noted that in the case of ACIT vs M/s Bajaj Auto Ltd. Employees co-op. Society credit Ltd, relief was granted u/s 80P(2)(d) of the Act. However, I find that sub-section 2(d) also speaks in respect of any income by way of interest or dividends derived by the Co-operative society from its investment with any other Co-operative society and nowhere speaks about bank. It is also noted that section 80P(4) specifically says that provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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