VEERAKERALAM PACB,COIMBATORE vs. THE INCOME TAX OFFICER, NON CORP WARD 4(1), CBE, COIMBATORE

3.0 We have heard the rival submissions in the light of material available on records. The Ld. Counsel for the assessee vehemently argued against the order of the Ld. AO and of the Ld.CIT(A). It was submitted that the assessee is governed by rules of the Government of Tamil Nadu and that the activity of PDS was thrust upon it. It was stated that to survive, it has to comply with the directions of the state government. In support of its argument, the assessee placed reliance upon the orders of Hon’ble Madras High Court in the case of S-1234 Udaipatti PACCS dated 22.07.2019 and The Kodumudi Growers Cooperative dated 01.11.2018 as well as of Hon’ble Bombay High Court

Page - 3 - of 10 & 1952/Chny/2024 :- 4 -: in the case of Ahmed Nagar District Central Cooperative Bank. The Ld. DR argued that the case laws cited by the assessee are distinguished on facts and do not comes to its rescue.

3.1 As regards the case of Ahmed Nagar District Central Cooperative Bank(ADCB), the decision of Hon’ble Bombay High Court does not comes to assessee’s rescue as the impugned case pertain to the ADCB earning commission income by acquiring the role of acting as commission agent for Maharashtra Electricity Board. It was contended by ADCB that collection of electricity bills was directly related to its business of banking. The Hon’ble Bombay High Court, placing reliance upon the Apex Court decision held that collecting electricity bills was part of banking activity. The Hon’ble Court also placed reliance upon the facts that u/s 6(1)(b) of the banking regulation act a banking company may engage itself as an agent for government or local authorities.

3.2 In the case of The Kodumudi Growers Cooperative (KGC), Hon’ble Jurisdictional high court took cognizance of two crucial facts. Firstly that the activity of PDS undertaken by KGC was supported by its by-laws and secondly that the same, as per facts available on records, was restricted to its members only. Consequently the Hon’ble Madras

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High Court held that the assessee would be entitled for deduction u/s 80P(2)(a)(i). The decision of KGC supra was followed by the Hon’ble Jurisdictional High Court in its decision dated 22.07.2019 in the case of S-1234 Udaipatti PACCS. Here again the assessee had established that it had sold fertilizers to its members only. The decision in the case of The Kodumudi Growers Cooperative (KGC) is reproduced hereunder:- “….7.Thus, we are called upon to decide as to whether the assessee is entitled for deduction under Section 80P(2) of the IT Act in respect of the income earned from the sale under the PDS. 8.It is not in dispute that the fair price http://www.judis.nic.in shops were set up pursuant to the direction issued by the Government of Tamil Nadu and communicated through the District Collector. The assessee, while filing the appeal before the CIT (A), specifically contended that theAssessing Officer erred in fixing the income from the sale of fertilizers (PDS) without considering the material fact that the profit in respect of the same is from the supply and purchase of fertilizers to its members. Further, the assessee referred to the communications received from the Government dated 19.2.1995, 06.11.1995 and 15.11.1995 and the copy of the circular of the Registrar of Cooperative Societies dated 21.1.1992 and also the registered By-laws of the assessee – bank and in particular, By-law No.63. 9.In addition to the grounds raised before the CIT (A), written submissions were filed by the assessee wherein the assessee produced copies of sample sales bills to prove that the assessee sold fertilizers only to members and they contended that in view of the same, they are entitled to deduction in terms of Section 80P(2)(iv) of the IT Act. 10.Further, it is relevant to note that the TNCS Act, 1983 defines the expression 'credit society' under Section 2(13) to mean a registered society as defined under Section 2(22), which has its principal object of raising funds to be lent to its members for the purposes of agriculture, animal husbandry, etc., or for such other purposes as the Government may, by http://www.judis.nic.in notification, specify in this behalf. Thus, a credit society as defined under the provisions of the TNCS Act, 1983 is not only confined to extending loans to its members, but also to such other members as the Government may, by Notification, specify. 11.The assessee placed materials before the CIT (A) to show that the fair price shops for sale of fertilizers to the members were opened based on the directives issued by the Government of Tamil Nadu. Therefore, the activity done by the assessee in the sale of items under the PDS to its members would definitely fall within the ambit of a 'credit society' defined under Section 2(13) of the TNCS Act, 1983. 12.The learned Senior Standing Counsel for the Revenue would contend that there are two categories of sales effected by the assessee, one in favour of its Page - 5 - of 10 & 1952/Chny/2024 :- 6 -: members and the other to non members and that the income earned out of sale to non members cannot be held to be a banking activity of the assessee. 13.To test the correctness of the said submission of the learned Senior Standing Counsel for the Revenue, we have perused the registered By-laws of the society, from which, we find that under By-law No.3, the activities of the society are mentioned. By- law No.3 contains two Sub-Clauses namely (a), which deals with main activities of the appellant society and (b), which deals with ancillary activities of the appellant society. The activity of establishing a fair price shop clearly falls within the scope of By-law No.3(b)(2). Furthermore, the directives issued by the Government of Tamil Nadu, as communicated by the Registrar of Cooperative Societies, are binding on the appellant society. Hence, it cannot be said that the appellant carried on an activity, which was not authorized to be conducted by a credit society. 14.One more argument is advanced by the learned Senior Standing Counsel for the Revenue by contending that there were two categories of people, to whom the items under the PDS were sold. 15.We find that this argument is wholly unsubstantiated and factually incorrect. In this regard, we have earlier referred to the grounds of appeal as well as the written submissions given by the appellant/assessee before the CIT (A) wherein the appellant had produced sample sales bills to prove that they had sold fertilizers only to the members. Thus, we are fully convinced that the activity done by the appellant cannot be said to be an activity, which was not authorized to be done by the society. 16.Our view is strengthened by the decision of the Division Bench of the Bombay High Court in the case of CIT, Nasik Vs. Ahmednagar District Central Cooperative Bank Limited [reported in 2004 (1) Mh. LJ 853]. In the said case, the assessee was a cooperative bank carrying business of banking. Whole amount of profit and gains attributable to the business of banking was not included by the assessee in its income under Section 80P(1) read with Section 80P(2)(a)(i) of the IT Act. During the assessment year in question (1982-83), the assessee earned income by way of commission from the Maharashtra State Electricity Board and from Mula Pravara Cooperative Society for collecting electricity bills from the public on their behalf. The assessee contended that the commission earned from the afore-stated two public undertakings was income derived from the business of banking and, as such, the said income was exempt under Section 80P(2)(a)(i) of the IT Act. The assessee's contention was that collection of electricity bills was a facility extended by the assessee bank to its customers and it was part of banking business. This contention was not accepted by the Assessing Officer and his order was confirmed by the CIT (A) on the ground that the income earned by way of commission was not income from business and held that the assessee was not entitled to exemption under Section 80P(2)(a)(i) of the IT Act. The assessee filed an appeal before the Tribunal and it was allowed. On appeal by the Revenue to the High Court, the question, which was referred to the Court for consideration, was as to whether the income earned by way of commission from the Electricity Board and other organizations is attributable to business of banking and as such, the relief under Section 80P(1) read with Section 80P(2)(a)(i) of the IT Act was allowable to the http://www.judis.nic.in assessee.

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The Division Bench of the Bombay High Court pointed out that the word 'banking' was not restricted only to accepting deposits from the customers for the purpose of lending, that the word 'banking' has been interpreted by the Hon'ble Supreme Court to cover even the rent charged by the banks for hiring out safe deposit vaults to its customers and that in the circumstances, income earned by the assessee bank by way of commission/fees from its customers, being public sector undertakings, would be exempt under Section 80P(2)(a)(i) of the IT Act. Further, the Division Bench pointed out that such view was supported by Section 6(1)(b) of the Banking Regulation Act, 1949, which stated that in addition to the business of banking, a banking company may engage itself as agent for Government or Local Authority or any other person for giving receipts and discharges that is to say for collecting electricity bills from the customers for and on behalf of the Electricity Board and other organizations. 17.The case on hand is factually a better case since the By-laws themselves provide for such an activity as an ancillary activity by the cooperative society. Furthermore, the appellant society is bound by the directives issued by the Government as well as the Registrar of Cooperative Societies. In the instant case, the Revenue has not disputed the fact that the fair price shops were opened based on the directions http://www.judis.nic.in issued by the Government of Tamil Nadu as communicated by the Registrar of Cooperative Societies and the District Collector. 18.The learned Senior Standing Counsel for the Revenue has referred to the decision of the Hon'ble Supreme Court in the case of Citizen Cooperative Society Limited Vs. ACIT, Circle 9(1), Hyderabad [reported in (2017) 88 Taxmann.com 279]. By the said order, the review petition filed by the said society to review the judgment reported in (2017) 84 Taxmann.com 114 was rejected. 19.From the facts given in the copy of the judgment handed over to us by the learned Senior Standing Counsel for the Revenue, we find that in the decision in Citizen Cooperative Society Limited, the assessee was engaged in granting loans to general public without any approval from the Registrar of Societies. Therefore, the Court held that the assessee could not be treated as a cooperative society meant only for providing credit facilities to its members and accordingly, would not be entitled to claim the benefit under Section 80P of the IT Act. This decision can, in no manner, advance the case of the Revenue, as factually we found that the assessee herein is entitled to distribute the items under the PDS, as it is one of the allied activities of the society and is bound by the directives of the Government. 20.Apart from that, the definition of 'credit http://www.judis.nic.in society' is wider in import to include any activity that the Government may, by Notification, specify. Further, we find from By-law No.12(a) that if the society carries on an activity, which is not authorized under the By-laws or with the approval of the Registrar, the society is liable to strike off the Rules and the members engaged in the same are liable to be removed. Furthermore, in terms of By-law No.51, the society is entitled to purchase, in bulk, articles and materials required for its members and distribute the same. 21.Therefore, viewed from any angle, the activity done by the appellant society cannot be truncated

Page - 7 - of 10 & 1952/Chny/2024 :- 8 -: from the activity as a credit society and we are of the considered view that the Authorities below as well as the Tribunal committed an error in rejecting the stand taken by the appellant/ assessee. 22.For the above reasons, the above tax case appeal is allowed, the orders passed by the Authorities below are set aside and the substantial question of law framed is answered in favour of the assessee. The Assessing Officer is directed to extend the benefit of deduction under Section 80P(1) read with Section 80P(2)(a)(i) of the IT Act to the appellant/assessee. No costs.” 5.The Learned Counsel for the Revenue does not dispute the above legal position. 6.Thus, following the decision in the assessee's own case for the earlier Assessment year, this Appeal is allowed and the above tax case appeal is allowed, the orders passed by the Authorities below are set aside and the substantial question of law framed is answered in favour of the assessee. The Assessing Officer is directed to extend the benefit of deduction under Section 80P(1) read with Section 80P(2)(a)(i) of the IT Act to the appellant/assessee. No costs….”

3.3 We have thus noted that the decision of Hon’ble Madras High Court in the case of S-1234 Udaipatti PACCS dated 22.07.2019 and The Kodumudi Growers Cooperative dated 01.11.2018 cited by the Ld.Counsel for the assessee are distinguished on facts only partly. In both the decisions, Hon’ble High Court held that if the economic activity is supported by its by-laws and restricted to its members would entitled the assessee with the benefits of deduction u/s 80P(2)(a)(i). In the present case it is an undisputed facts on record that the PDS activity undertaken by the assessee is supported by its by-laws. It is however seen that the Ld. AO has not brought on record any details as to the quantum of income or receipts attributable to members and that to non-members. Thus, there is nothing on records to indicate any such bifurcation. Needless to say, the ratio laid down by Hon’ble jurisdictional high court in Page - 8 - of 10 & 1952/Chny/2024 :- 9 -: the case of The Kodumudi Growers Cooperative supra would apply as far as PDS activities with the members are concerned.

3.4 Accordingly, we direct the Ld. AO to readjudicate the issue by bifurcating the amounts of monies earned by the assessee, from PDS activity, qua its members and non-members. In respectful compliance to the decision of Hon’ble jurisdictional high court in the case of The Kodumudi Growers Cooperative supra, the Ld. AO would then allow deduction u/s 80P(2)(a)(i) to the assessee in respect of such quantified amounts. The assessee is directed to provide all necessary details etc in this regard to the Ld. AO and comply with his statutory notices, failing which adverse views can be drawn. The Ld. AO shall be bound to provide due opportunity of being heard to the assessee. Accordingly all the grounds of appeal raised by the assessee are allowed for statistical purposes. 4.0 In the result, the appeal of the assessee for for AY- 2018-19 is allowed for statistical purposes. 5.0 As regards for AY-2020-21, since the facts are identical to those in ITA No.1951 supra, the decision taken herein above in ITA No.1951 would also apply to ITA No.1952.

Page - 9 - of 10 & 1952/Chny/2024 :- 10 -: 6.0 In the result, the appeal of the assessee for for AY- 2020-21 is allowed for statistical purposes.

Order pronounced on 10th , January-2025 at Chennai.