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The Citizen Co-Operative Society Limited, Through Its Managing Director, Hyderabad Versus Assistant Commissioner of Income Tax

Benefit of Section 80P - income of co-operative societies under Section 80P - providing credit facilities / financial business - its operation was not confined to its members but outsiders as well - whether the appellant is barred from claiming deduction in view of Section 80P(4) - Held that:- The activities of the appellant are in violations of the provisions of the MACSA under which it is formed. The assessee had carved out another category of ‘nominal members’. These are those members who are .....

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- 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 .....

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Petitioner : Mr. K. Shivraj Choudhuri, AOR For the Respondent : Ms. Anil Katiyar, AOR JUDGMENT A.K. SIKRI, J. Leave granted. 2) The appellant herein, after losing in all the fora below, has knocked the doors of this Court by means of the present appeal seeking the benefit of Section 80P of the Income Tax Act, 1961 (hereinafter referred to as the Act ). The Assessing Officer held that deduction in respect of income of co-operative societies under Section 80P of the Act is not admissible to the a .....

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ell. 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 .....

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yone or more of such activities is exempted from income by allowing the said income as deduction. We are concerned with sub-clause (i) of clause (a) of sub-section (2) of Section 80P which enlists a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. For the sake of better understanding, we reproduce below the aforesaid portion of Section 80P: 80P. Deduction in respect of income of co-operative societies. - (1) Where, in the case of .....

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ts members, or xx xx xx the whole of the amount of profits and gains of business attributable to any one or more of such activities: xx xx xx 4) Section 80P was amended by the Finance Act, 2006 with effect from April 01, 2007 and sub-section (4) was inserted thereto. This sub-section (4) reads as under: (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural developme .....

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d be seen from the facts hereafter, the appellant is a co-operative society. However, it has been denied the benefit of Section 80P on the ground that it is a co-operative society of the nature covered by sub-section (4) of Section 80P and, therefore, becomes disentitled to get the benefit. 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 .....

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he 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 accounts with t .....

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eturn of income before Assistant Commissioner of Income Tax, Circle-9(I), Hyderabad for the Assessment Year 2009-10, for the year ending March 31, 2009 on September 30, 2009 declaring NIL income. In the return filed for the Assessment Year 2009-10, year ending with March 31, 2009, the assessee claimed a sum of ₹ 4,26,37,081/- as deduction under Section 80P of the Act. Return filed by the assessee was taken up for scrutiny under CASS (Computer Assisted Selection of Cases for Scrutiny) and n .....

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Rs.38,53,72,794/- Add: Disallowance of deduction claimed u/s 80P : Rs.4,26,37,817/- Total assessed income : Rs.42,80,09,880/- Tax there on : (as per computation Form enclosed). Tax payable : Rs.19,57,32,920/- 6) It may be pointed out that in the appeal before Commissioner of Income Tax (Appeals) {CIT(A)}, the order of the Assessing Officer making disallowance under Section 68 of the Act was reversed and that addition was deleted. Therefore, we are not concerned with that aspect of the mater whic .....

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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 .....

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nt provisions of the Banking Regulations Act. The bank for all its banking activities is strictly governed by the Banking Regulations Act, 1949. 23. The Society is carrying on the banking business and for all practical purpose it acts like a co-op bank. The ITAT observed that the society is governed by the Banking Regulations Act. Therefore, the Society being a co-op bank providing banking facilities to members is not eligible to claim the deduction u/s. 80P(2)(i)(a) after the introduction of su .....

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AT in the assessee s own case for the preceding years, the appeal of the assessee is dismissed on the issue of deduction u/s. 80P. 8) Further appeal to the ITAT met the same fate as ITAT also referred to its aforesaid order and dismissed the appeal of the appellant. Undeterred, the appellant approached the High Court in the form of appeal under Section 260A of the Act. This appeal has been dismissed by the High Court with the observations that there is no illegality or infirmity in the order pas .....

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r direction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. He referred to the objects for which the assessee society has been established and submitted that the principal object of the society is to promote interest of all its members to attain their social and economic betterment through self help and mutual aid in accordance with the co-operative pr .....

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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 .....

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perative society in the following manner: CO-OPERATIVE BANK CO-OPERATIVE SOCIETY Nature of business 1. As defined in Section 6 of Banking Regulation Act. 2. Banks are bound to follow the rules, regulations and directions 1. As per bye laws of the cooperative society. 2. Society is bound by rules issued by Reserve Bank of India and regulations as specified by (RBI), if any applicable. Inspection RBI has the power to inspect accounts and overall functioning of the bank. Registrar has the power to .....

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hat Section 80P(4) of the Act provides that deduction shall not allowable to any Co-operative Bank other than Agricultural Credit Society or Primary Co-operative Agricultural and Rural Development Bank. Submission was that since the assessee does not fall within the meaning of Co-operative Bank as defined in Part-V of the Banking Regulation Act, 1949 and Section 80P(4) will not, therefore, apply to the assessee. 12) Continuing with the aforesaid line of argument, Mr. Shekhar further submitted th .....

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the 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 el .....

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) 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, the new proviso to Section 80P(4) which was brought onto Statute Book is applicable only to cooperative banks and not to credit cooperative societies. The intention of the legislature in bringing the cooperative banks into the taxation structure was mainly to bring them on par with commercial banks .....

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apply. In order to apply principle of mutuality, there must be complete identity between contributors and participators and requirement of law bring that contributors of the common fund and participators in the surplus must be an identical body. What is essential is that members of the assessee as a class must be able to participate in the surplus. It is immaterial whether surplus is paid back to the members or is put to reserve with the society for development and for providing better amenitie .....

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k was based on the material on record and needed no interference. In this behalf he not only relied upon the findings of the Tribunal as per the discussion contained therein, but also submitted that these are findings of fact. The Assessing Officer scrutinised the bye-laws of the appellants and in particular those bye-laws which deal with the liability of membership etc. as well as provisions of Mutually Aided Co-operative Societies Act, 1995 (MACSA) under which the appellant is registered. The .....

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rning 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 loan .....

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y out of funds received as deposits from the second category of persons referred above. (viii) As a class, the depositors and borrowers are quite distinct and the activity is finance business and cannot be termed as cooperative activity. (ix) The assessee is also engaged in the activity of granting loans to general public etc. which has nothing to do with cooperation amongst members. It is plain business and any willing buyer can utilize the services of the assessee. (x) As understood, the asses .....

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from investment of surplus funds as per decision of IT at Hyderabad Bench in ITA No. 1141/Hyd/2007 in the case of SBI Staff Mutually Aided Cooperative Society Ltd. 16) He submitted that there was a clear finding of the Assessing Officer, which was consistently approved by the higher authorities as well, that provisions of Section 80P(2)(i)(a) were grossly violated as the appellant Society was found not dealing with its members only but also with general public as well. On that basis, further sub .....

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is a benevolent provision which is enacted by the Parliament in order to encourage and promote growth of co-operative sector in the economic life of the country. It was done 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 .....

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ttributable 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 Cooperative Marketing Federation Limited & Ors. v. Commissioner of Income Tax (1998) 5 SCC 48, this Court, while dealing wi .....

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nt heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is .....

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he different heads of exemption enumerated in the section are separate and distinct heads of exemption and are to be treated as such. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax, then it has to be seen whether such income fell within any of the several heads of exemption. If it fell within any one head of exemption,.... It means that a co-operative society engaged in carrying on the business of banking and a co-operat .....

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ot 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. .....

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primary co-operative agriculture and rural development bank, the deduction would still be provided. Thus, co-operative banks are now specifically excluded from the ambit of Section 80P of the Act. 24) Undoubtedly, if one has to go by the aforesaid definition of co-operative bank , the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a co-operative bank, it is imperative to have a licence from the Reserve Bank of India, which the .....

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t has been noticed by the Assessing Officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violations of the provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carve .....

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as a matter of fact, that he depositors and borrowers are quiet 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 a .....

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