An assessee cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members if it has carved out a category called ‘nominal members’.
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEALNO. 10245 OF 2017 (ARISING OUT OF SLP (C) NO. 20044 OF 2015)
TheCitizens Cooperative Society Ltd vs. ACIT (Supreme Court)
The key observation bythe Apex court started from Para 18 is reproduced for ease of reference of thereaders:
- We may mention at the outset that there cannotbe any dispute to the proposition that Section 80P of the Act is a benevolentprovision which is enacted by the Parliament in order to encourage and promotegrowth of co-operative sector in the economic life of the country. It was donepursuant to declared policy of the Government. Therefore, such a provision hasto be read liberally, reasonably and in favour of the assessee (See – BajajTempo 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 toeffectuate the object of the Legislature and not to defeat it (See –Commissioner of Income Tax, Bombay & Ors. v. Mahindra and Mahindra Limited& Ors. (1983) 4 SCC 392). Therefore, it hardly needs to be emphasised thatall those co-operative societies which fall within the purview of Section 80Pof the Act are entitled to deduction in respect of any income referred to insub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of wholeof the amount of profits and gains of business attributable to anyone or moreof such activities which are mentioned in sub-section (2).
- (ii) Since we areconcerned here with sub-section (i) of clause (a) of sub-section (2), itrecognises two kinds of co-operative societies, namely: (i) those carrying onthe business of banking and; (ii) those providing credit facilities to itsmembers. 3 (1992) 3 SCC 78 4 (1983) 4 SCC 392 17 20) In the case of KeralaState Cooperative Marketing Federation Limited & Ors. v. Commissioner ofIncome Tax (1998) 5 SCC 48, this Court, while dealing with classes of societiescovered by Section 80P of the Act, held as follows:
6. The classes of societies covered by Section80-P of the Act are as follows: (a) Engaged in business of banking andproviding credit facilities to its members; xx xx xx
7. We may notice that theprovision is introduced with a view to encouraging and promoting growth of cooperative sector in the economiclife of the country and in pursuance of the declared policy of the Government.The correct way of reading the different heads of exemption enumerated in thesection 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 incomeof a cooperative society is exempt from tax what has to be seen is whetherincome fell within any of the several heads of exemption. If it fell within anyone head of exemption, it would be free from tax notwithstanding that theconditions of another head of exemption are not satisfied and such income isnot free from tax under that head of exemption…”
(iii) In the case of Commissioner of IncomeTax v. Punjab State Co-operative Bank Ltd. (2008) 300 ITR 24 (Punjab &Haryana H.C.), while dealing with an identical issue, the High Court of Punjaband Haryana held as follows:
8. The provisions of section 80P wereintroduced with a view 5 (1998) 5 SCC 48 6 (2008) 300 ITR 24 (Punjab &Haryana H.C.) 18 to encouraging and promoting the growth of the co-operativesector in the economic life of the country and in pursuance of the declaredpolicy of the Government. The different heads of exemption enumerated in thesection are separate and distinct heads of exemption and are to be treated assuch. Whenever a question arises as to whether any particular category of anincome of a co-operative society is exempt from tax, then it has to be seenwhether such income fell within any of the several heads of exemption. If itfell within any one head of exemption,…. It means that a co-operative societyengaged in carrying on the business of banking and a co-operative society providingcredit facilities to its members will be entitled for exemption under thissub-clause. The carrying on the business of banking by a cooperative society orproviding credit facilities to its members are two different types ofactivities which are covered under this sub-clause. xx xx xx
13. So, in our view, if the income of asociety is falling within any one head of exemption, it has to be exempted fromtax notwithstanding that the condition of other heads of exemption are notsatisfied. A reading of the provisions of section 80P of the Act would indicatethe manner in which the exemption under the said provisions is sought to beextended. Whenever the Legislature wanted to restrict the exemption to aprimary 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 societyengaged in supplying milk is entitled to such exemption while denying the sameto a federal milk co-operative society.”
(iv) The aforesaid judgment of the High Courtcorrectly analyses the provisions of Section 80P of the Act and it is in tunewith the judgment of this Court in Kerala State Cooperative MarketingFederation Limited (supra).
(v) With the insertion of sub-section (4) bythe Finance Act, 2006, which is in the nature of a proviso to the aforesaidprovision, it is made clear that such a deduction shall not be admissible to aco-operative bank. However, if it is a primary agriculture credit society or aprimary co-operative agriculture and rural development bank, the deductionwould still be provided. Thus, co-operative banks are now specifically excludedfrom the ambit of Section 80P of the Act.
(vi) Undoubtedly, if one has to go by theaforesaid definition of ‘co-operative bank’, the appellant does not get coveredthereby. It is also a matter of common knowledge that in order to do thebusiness of a co-operative bank, it is imperative to have a licence from theReserve Bank of India, which the appellant does not possess. Not only this, asnoticed above, the Reserve Bank of India has itself clarified that the businessof the appellant does not amount to that of a co-operative bank. The appellant,therefore, would not come within the mischief of sub-section (4) of Section80P.
(vii) So far so good. However, it issignificant to point out that the main reason for disentitling the appellantfrom getting the deduction provided under Section 80P of the Act is notsub-section (4) thereof. What has been noticed by the Assessing Officer, afterdiscussing in detail the activities of the appellant, is that the activities ofthe appellant are in violations of the provisions of the MACSA under which itis formed. It is pointed out by the Assessing Officer that the assessee iscatering to two distinct categories of people. The first category is that ofresident members or ordinary members. There may not be any difficulty as far asthis category is concerned. However, the assessee had carved out anothercategory of ‘nominal members’. These are those members who are making depositswith the assessee for the purpose of obtaining loans, etc. and, in fact, theyare not members in real sense. Most of the business of the appellant was withthis second category of persons who have been giving deposits which are kept inFixed Deposits with a motive to earn maximum returns. A portion of thesedeposits is utilised to advance gold loans, etc. to the members of the firstcategory. It is found, as a matter of fact, that the depositors and borrowersare quiet distinct. In reality, such activity of the appellant is that offinance business and cannot be termed as co-operative society. It is also foundthat the appellant is engaged in the activity of granting loans to generalpublic as well. All this is done without any approval from the Registrar of theSocieties. With indulgence in such kind of activity by the appellant, it isremarked by the Assessing Officer that the activity of the appellant is inviolation of the Co-operative Societies Act. Moreover, it is a co-operativecredit society which is not entitled to deduction under Section 80P(2)(a)(i) ofthe Act.
(viii) It is in this background, a specificfinding is also rendered that the principle of mutuality is missing in theinstant case. Though there is a detailed discussion in this behalf in the orderof the Assessing Officer, our purpose would be served by taking note of thefollowing portion of the discussion:
As various courtshave observed that the following three conditions must exist before an activitycould be brought under the concept of mutuality; that no person can earn fromhim; that there a profit motivation; and that there is no sharing of profit. Itis noticed that the fund invested with bank which are not member of associationwelfare fund, and the interest has been earned on such investment for example,ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010].[Though the bank formed the third party vis-a-vis the assessee entitled betweencontributor and recipient is lost in such case. The other ingredients ofmutuality are also found to be missing as discussed in further paragraphs]. Inthe present case both the parties to the transaction are the contributorstowards surplus, however, there are no participators in the surpluses. There isno common consent of whatsoever for participators as their identity is notestablished. Hence, the assessee fails to satisfy the test of mutuality at thetime of making the payments the number in referred as members may not be themember of the society as such the AOP body by the society is not covered byconcept of mutuality at all.”
(ix) These are the findings of fact which haveremained unshaken till the stage of the High Court. Once we keep the aforesaidaspects in mind, the conclusion is obvious, namely, the appellant cannot betreated as a co-operative society meant only for its members and providingcredit facilities to its members. We are afraid such a society cannot claim thebenefit of Section 80P of the Act