TMI Blog2023 (8) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (RBI). That apart, interest income of Rs. 84.08 lacs earned by it on deposits with other banks/financial institutions, being on it s surplus funds, not required for the time being, were liable to be assessed u/s. 56, i.e., as income from other sources. The amount transferred to and from special reserves, by way of debit and credit respectively to the profit and loss a/c, were excluded by him to yield a net profit of Rs. 64,65,231, which was accordingly assessed u/s. 56 and u/s. 28 at Rs. 84,07,706 and (-) Rs. 19,42,475 respectively. Reliance for the purpose was placed by him on Pr.CIT v. Poonjar Service Co-op. Bank Ltd. [2019] 414 ITR 67 (Ker)(FB) . 2.2 In appeal, the assessee clarified that carrying on the business of banking was only incidental to its primary object of extending loans to agriculturists of the AryanadPanchayath. The sums invested with other co-operative banks is only in terms of the directions by the Department of Co-operative Societies, Government of Kerala, issued under the Kerala Act. The interest income earned is, thus, also liable to be regarded as from business inasmuch as it is incidental to the business of banking and providing credit faciliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perative society in the business of banking, as defined u/s. 5(b) of the Banking Regulations Act, 1949 (BRA), which in fact is not applicable to a PACS (sec.3 of BRA). Such societies shall, therefore, be entitled to deduction u/s. 80P(2)(a)(i) to the extent of income attributable to the activities specified therein, i.e., banking or the provision of credit facilities to its members. Further, as the Kerala Act draws no distinction between real and nominal members, i.e., for the purpose of accepting deposits from, or extending loans thereto, the same could not be by the assessing authority under the Act. All the four categories of members, i.e., A, B, C and D, recognized under the Kerala Act, would, irrespective of some category of Members having no voting rights or being not entitled to participate in the surplus, stand to fall within the scope of the term member as envisaged in sec. 80P(2). In the facts of the instant case, the Revenue regards the assessee-society as being engaged in the business of banking and, thus, a co-operative bank by definition, albeit without a license from RBI. sec. 5(b) of the BRA, defines banking business, as under: 5. Interpretation. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant-society in The Citizen Co-operative Society Ltd.v. Asst. CIT [2017] 397 ITR 1 (SC) 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. 4.2 The next question that arises is the head of income under which it s income of Rs. 64,65,231 for the year is to be split, i.e., between the business income (s.28) and income from other sources (s.56). We see this as a non-issue. The reason is simple. There has clearly been, on account of demonetization, a spurt in the cash deposits with the assessee, which, in turn, stand deposited by it with the two co-operative banks with which it maintains account. It is facile to accept, as the assessee claims, that the same is so deposited as a part of its business of providing credit to its members. There is nothing to show, not even a contention to the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 4.3 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. This in fact we find to be the clear stand of the Hon ble jurisdictional High Court in CIT v. Kottayam Coop. Bank [1974] 96 ITR 181 (Ker), even otherwise binding on us. We are conscious that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d time and again by the Hon'ble Apex Court, as recently in Mavilayi SCB Ltd. (supra). Banks are public entities, so that, save where operating with the primary object of serving the agriculture sector, as PACS (to which BRA does not apply), or PCARDB (which is again principally for providing long-term credit for agriculture and rural development), co-operative banks stand excluded from the purview of sec. 80P w.e.f. 01.04.2007. A co-operative society is defined u/s. 2(19) of the Act as one registered under the Co-operative Societies Act, 1912, or under any other law for the time being in force in any State (of India) for registration of co-operative societies. State Co-operative Societies Acts differ not only in the procedural aspects, but also in the fundamental aspect of who constitutes a Member of one such. Inasmuch as it exists and functions for the benefit of it s members, a co-operative society is assessable under the Act as an AOP, and which, coupled with it being a vehicle for providing impetus to the agricultural sector of the economy, furnishes the rationale for the exemption of it s income under the Act. There is no uniformity as to who could be a member of a cooper ..... X X X X Extracts X X X X X X X X Extracts X X X X
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