NATIONAL FEDERATION OF URBAN COOPERATIVE BANKS & CREDIT SOCIETIES LTD,DELHI vs. CIT(EXEMPTION) , NEW DELHI

Now appreciating the impugned order we find that ld. CIT(E) in para 7.1 to 13 has examined the claim of assessee and has held as follows:-

The assessee has submitted that it is a Multi-unit Cooperative Society which is a society mentioned in sub-rule (2) of 17A. For the sake of clarity relevant portion of rule 17A of the Income Tax Rules is reproduced as under: Rule 17A (2) The application under sub-rule (1) shall be accompanied by the following documents, as required by Form Nos.10A or 10AB, as the case may be, namely:— (c) self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be; 8.1 The wordings mention in the rule very much clear and it provides that registration with Registrar of Firms and Societies not with registrar of Co-operative societies. The above position of Rule is in place for considerable amount of time. Had legislation intended to provide the benefit of registration u/s.12A of the I. T. Act, the same would have been provided in the relevant rules. Further the nature of entities registered under Societies registration Act, 1860 is quite different from those under the Multi State Cooperative Act, 2002. The preamble for Societies registration Act, 1860 is as under: An Act for the Registration of Literary, Scientific and Charitable Societies. Preamble.—WHEREAS it is expedient that provision should be made for improving the legal condition of societies established for the promotion of literature, science, or the fine arts, or for the diffusion of useful knowledge, 2 [the diffusion of political education] or for charitable purposes; It is enacted as follows:—

Further section 14 of the Societies registration Act debars any distribution of property amongst the member of society. From the discussions para 7 and 8 above, the contention of the assessee that it fulfills the requirement of rule 17A of the Income Tax Rules is not acceptable and it is also evident that the objects of the assessee are for the benefit of members only and not for public at large. 5 ITA No.-2985/Del/2022 National Federation of Urban Cooperative Banks & Credit Societies Ltd.

The assessee has claimed to incurred significant expenditure on R&D. However, what kind of research & development work has been carried out and how the same is beneficial to public at large has not been provided. The assessee has failed to reply to specific query w.r.t. nature of R & D done by it.

Though the objects of the assessee are not for benefit of public at large, even for the sake of discussion it is assumed that activities of it falls under the category of ‘advancement of other object of general public utility’. The assessee is charging fee from its members and as per by-laws it is providing consultancy services to its members. During the past three years the assessee has received the following incomes:

It can be seen from the table above that the income of assessee is mostly from the members and benefit is also meant for members only. Therefore the activity of providing services to the members for a fee cannot be considered as a charitable activity. Charity is necessarily, altruistic, and involves the idea and aid or benefit to others. Mutual benefit societies and chartable societies both are different type of societies. Mutual society is not charitable for two reasons firstly, although a member, might share in the funds held by the society for the mutual benefit of the subscribing members, it cannot be said that he had subscribed for a charitable purpose where in truth it had subscribed for the primary purpose of benefitting itself. Secondly, whereas the possible beneficiaries of a charity have 6 ITA No.-2985/Del/2022 National Federation of Urban Cooperative Banks & Credit Societies Ltd. no right to demand anything from the party who administers the charity, in a mutual society a member can claim benefits as of right in return for his own and his co-members’ subscriptions. Charity must be by way of bounty, it cannot be by way of bargain. Therefore, the mutual society would be non- charitable on the further ground that the benefit of the subscribing members is not public benefit, whereas the definition in section 2(15) requires charity to be of a public character. Further a person incurring expenditure on him by out of his own income does not amount to expenditure of charity.

In view of the discussions above and facts & circumstances of the case it is held that neither the assessee is a charitable institution nor it is an eligible entity as per rule 17A of the Income Tax Rules. Therefore the application for grant of registration u/s 12A(1)(ac)(iii) of the Income Tax Act is hereby rejected.”

We are of considered view that CBDT vide Circular No. 11/2008 dated 19th December, 2008 with regard to “Definition of ‘Charitable purpose’ under section 2(15) of the Income Tax Act, 1961”, has dealt with the issue of charitable activities by ‘entities’ operating on principles of mutuality and has held that they are also entitled to benefit of Section 11 of the Act. The relevant part is reproduced below; “3.1. There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under ‘any other object of general public utility’. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such 7 ITA No.-2985/Del/2022 National Federation of Urban Cooperative Banks & Credit Societies Ltd. association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15). 3.2. In the final analysis, however, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is ‘charitable purpose’ within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.”

It appears that ld. CIT(E) has not taken into consideration this circular and though went on to examine the claim of assessee under the clause ‘ advancement of other object of general public utility’ did not accept the claim on the basis that assessee is operating on principles of mutuality. At the same time we find that the said circular uses the words ‘entities’, and cooperative societies are distinct entities. Only for the reason that in Rule 17 A relied by ld. CIT(E), in para 8.1 in the impugned order, there is no reference ITA No.-2985/Del/2022 National Federation of Urban Cooperative Banks & Credit Societies Ltd. of Registrar of Co-operative Societies, cannot disentitle assessee, as Rules are subservient to the main provisions, where there is no bar to any specific form of legal entities to be not entitled to registration and the requirement is to see if the purpose is charitable, as per the Act.

Thus we consider it an appropriate case to remit the issue to the ld. CIT(E) for a afresh examination of claim of assessee as per aforesaid CBDT Circular No. 11/2008 dated 19th December, 2008. In aforesaid terms the appeal of assessee is allowed for statistical purposes and issue is restored to ld.CIT(E) for decision afresh in the light of aforesaid observations.