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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 ..... fits for the relevant years. The assessees are co-operative societies, registered under the Kerala Co-operative Societies Act, 1969 ('Kerala Act' hereinafter), and classified as a Primary Agricultural Credit Society (PACS) by the Registrar of Societies, the Authority administering the said Act. They are in the business of providing credit to their Members. The denial of the assessee/s's claim u/s. 80P was for the following factually admitted reasons: a) predominant (93%-99%) lending for non-agricultural purposes, with that for agricultural purposes being marginal. b) lending to nominal Members, i.e. , classified as B, C, D Members, with no voting rights, as against category A Members, who only have voting rights and, therefore, regarded as real members. While the former destroys the character of the society as a PACS, a class of cooperative banks saved from the operation of s. 80P(4) excluding the benefit of s. 80P for co-operative banks, the latter operates to dilute its character as a cooperative society itself inasmuch as mutuality is lost, so that the co-operative society is no more than an Association of Persons (AOP). The assessee, a service co-operative bank, lends, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or (ii) to (vii) 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 subclause (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 provide financial assistance to the society; (3) the State Government; (b) to (f) (3) In a case where the assessee is entitled also to the deduction under section.... (4) The provisions of this section shall not apply in relation to any co-operative bank other thana primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation. -For the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'co-operative bank' means a state co-operative bank, a central co-operative bank and a primary co-operative bank; (ccii) 'co-operative credit society' means a co-operative society, the primary object of which is to provide financial accommodation to its members and includes a cooperative land mortgage bank; (cciia) 'co-operative society' means a society registered or deemed to have been registered under any Central Act for the time being in force relating to the multi- State co-operative societies, or any other Central or State law relating to co-operative societies for the time being in force; (cciii) 'director', in relation to a co-operative society, includes a member of any committee or body for the time being vested with the management of the affairs of that society; (cciiia) 'multi-State co-operative bank' means a multi-State co- operative society which is a primary co-operative bank; (cciiib) 'multi-State co-operative society' means a multi-State co- operative society registered as such under any Central Act for the time being in force relating to the multi State co-operative societies but does not include a national ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions from it's Judgment in Citizen Co-op. Society Ltd. (supra), as under: (para 21/pg. 35) "21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment: (I) That section 80P of the Income-tax Act is a benevolent provision, which was enacted by the Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; (II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in subsection (2) of section 80P must be given by way of deduction; (III) That this court in Kerala State Co-operative Marketing Federation Ltd. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable on facts, and being therefore entitled to deduction u/s. 80P on the profits attributable to the qualifying activity of provision of credit to its members (s. 80P(2)(a)(i)). This, then, enlists broadly the case of the parties before us. 5. 1 We may, next, toward examining the issue before us, delineated hereinabove, draw out the salient features of the Judgment in Mavilayi Service Cooperative Bank Ltd. (supra), relied upon by the assessee, as under: a) section 80P is a benevolent provision enacted by the Parliament to encourage and promote the growth of cooperative sector in the economic life of the country. As such, it is to be read liberally and in favour of the assessee; b) the burden is on the assessee to show, by adducing facts that it entitled to claim u/s. 80P; c) The word 'engaged' in s. 80P(2)(a) entails examination of all the facts of the case; d) The AO, when he engages in a fact finding enquiry, cannot be said to be going behind the registration certification; e) The deduction u/s. 80P(2)(a)(i) is given without reference to any restriction or limitation and, therefore, cannot be restricted or limited by implication by adding the word 'agricultural' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .t. s. 2(19) of the Act that once an assessee is a co-operative society registered under the relevant State Act, it is not necessary for the purpose of eligibility to probe further as to if it is a society 'X' or 'Y' (para 28). That is to say, once the condition of deduction as specified in the Act is satisfied, it is not necessary to explore further in the matter. 5. 3 What, then, one may ask, is the purport of sec. 80P(4), which refers to PACS, as indeed to Primary Co-operative Agricultural Rural Development Bank (PCARDB). As explained in Citizen CS Ltd. (supra), which also finds reproduction in Mavilayi SCB Ltd. (supra) (at para 20/pg. 33): '23. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a co-operative bank. However, if it is a primary agriculture credit society or a 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. ' (pg. 14) The Apex Court, whose word is final in the matter, thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have ended with the words 'any cooperative bank' occurring therein. The provision of sec. 80P(4), explained by the Apex Court to be in the nature of a proviso, is thus internally inconsistent. Why, the question arises, it uses the word 'Bank' in it's name, proscribed by s. 7 of the BRA for a cooperative society other than a cooperative bank, to which rule there is an exception for a primary credit society, defined u/s. 5(ccvi) as a cooperative society, other than a PACS, in the business of banking! The same creates a doubt if the appellant-societies are indeed PACSs. We visit the relevant provision of the Kerala Act to eliminate any doubt in the matter, to find the definition of PACS therein, reproduced as under, to be in agreement with that under the Act and, further, to include, inter alia, a service cooperative bank as the assessee, resolving the aspect of the user of the word 'bank' in the name: '2. (oaa) 'Primary Agricultural Credit Society' means a Service Co-operative Society, a Service Co-operative Bank, a Farmers Service Co-operative Bank and a Rural Bank, the principal object of which is to undertake agricultural credit activities and to provide loans and advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso of s. 80P(4), so that the further inquiry if it is a PACS is rendered superfluous. If, on the other hand, it is, the enquiry as to if it is a PACS is again irrelevant as a PACS cannot, by definition, be a co-operative bank. That is, it being registered as a PACS is itself sufficient to be regarded as not a cooperative bank. We are here, we clarify, not speaking with reference to the facts of a case, as where it is on facts found to be not working as a PACS, but w. r. t. the architecture of the provision, i.e., its structural integrity. As such, consideration as to whether an assessee is, or is not, a PACS, become irrelevant irrespective of whether it is a co-operative bank or not. Reference to PACS in s. 80P(4) is rendered otiose and redundant, violating a basic postulate of interpretation of statues. This could not apparently be the intention of the Legislature, to discern which is the foundational basis of any interpretative exercise(CIT v. Baby Marine Exports[2007]290 ITR 323 (SC)). This is particularly so as a proviso is, as explained in Mavilayi SCB Ltd. (supra) with reference to judicial precedents (paras 41 to 44), to be read inconsistence with the main provision, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for whatever purpose, could stand to be excluded on the principle of mutuality. Income by way of interest or dividend on investment in another cooperative society stands exempted u/s. 80P(2)(d), being only an extension of the principle of mutuality. It is this, we would like to think, that prompted the Apex Court in Citizen CS Ltd. (supra) to state the assessee-appellant as being not a cooperative society meant for its members and providing credit facilities thereto. 5. 5 So, however, the aforesaid expression of opinion is to no consequence, being in fact stated only so as to take the observation of the internal consistency afore-said to its logical end; the Apex Court, as afore-noted, clearly opining that the credit to members does not include and cannot be read to mean agricultural credit, or agricultural credit alone; further, abundantly clarifying that an enquiry into whether a co-operative society is a PACS is of no relevance where it is not a co-operative bank, i.e. , engaged in the business of banking as defined in s. 5(b) of the BRA and, further, under licence from RBI. Section 3 of the BRA in fact excludes PACS (and PCARDB) from the purview of the BRA. Reference, for cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articipants forming an identity. Besides nominal members, who could not be regarded as real members, it also cites the investment of it's funds by the appellant-society in cooperative banks and societies with a view to earning profit. We may toward this reproduce the relevant part of the arguments before, and of its consideration by, the Apex Court in Citizen Co-op. Society Ltd. (supra), as under:- '25. So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under section 80P of the Act is not sub-section (4) thereof. What 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 violation 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 carved out another category of "nominal members". These are those members who are making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred to as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all. " 27. These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of section 80P of the Act. " (emphasis, supplied) That is, the Hon'ble Court, in view of the uncontroverted findings of fact, stated that the appellant-society could not be regarded as a co-operative society meant only for it's members and providing credit to it's members, disqualifying it for the benefit u/s. 80P. True, it could not under the provisions of the AP Act lend to non-members nor introduce a class of nominal members - who would therefore be liable to be regarded as non-members. However, this fact by itself may not be of much conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument. Cooperative society is thus an entity separate and distinct from it's members. The argument yet has relevance as it is an admitted position that as cooperative banks operate at par with commercial banks, the benefit of s. 80P stands withdrawn. The same therefore obtains only where the sanctity of the cooperative society as a self-contained group is maintained. This is with a view to promote the cooperative sector. Exception though is made where the activity is in the field of agriculture which stands prioritized for food security of the country. 5. 7 In Mavilayi SCB Ltd. (supra), however, the Hon'ble Court, while considering it's earlier decision in Citizen CSLtd. (supra), relied upon by the Revenue before it, does not regard absence of mutuality as a proposition laid down therein (para 21). We say 'absence of mutuality' as that would be the only fall-out of accepting deposits from public and lending thereto; the nominal members, in absence of any provision to induct them as members, being liable to be regarded as members of the general public. It regards the conduct of a business with general public and/or with members illegally as the basis of the decision in Citizen CS ..... 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