VARATHAPPAM PALAYAM PRIMARY AGRICULTURAL CO-OP CREDIT SOCIETY,TIRUPPUR vs. ITO, WARD 1(5), DELHI

आयकर अपीलीय अिधकरण, ‘ए’ �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI �ी वी. दुगा� राव, �ाियक सद� एवं �ी िगरीश अ�वाल, लेखा सद� के सम� । Before Shri V. Durga Rao, Judicial Member & Shri Girish Agrawal, Accountant Member आयकर अपील सं./ Year: 2016-17 Varathappam Palayam Primary Vs. The Income Tax Officer, Agricultural Co-op. Credit Society, Ward 1(5), 149, Varathappampalayam, Tiruppur Kangeyam Taluk, Tiruppur 638 701. [PAN:AABAV1796N] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri S. Sridhar, Advocate, Erode ��थ� की ओर से/Respondent by : Shri AR V Sreenivasan, Addl. CIT सुनवाई की तारीख/ Date of hearing : 31.05.2022 घोषणा की तारीख /Date of Pronouncement : 29.06.2022 आदेश /O R D E R PER V. DURGA RAO, JUDICIAL MEMBER:

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), New Delhi dated 02.08.2021 relevant to the assessment year 2016-17.

2.1 Brief facts of the case are that the assessee is a co-operative credit society having “A” class Members as well as “B” class Members as its society’s Members. The case of the Assessing Officer is that in so far as deposits received from “B” class Members, there is no mutuality and they are only “nominal members”. By following the judgement in the case of Citizen Co-Operative Society Limited v. ACIT in Civil Appeal No. 10245 of 2017 dated 08.08.2017, the Assessing Officer has held that the assessee is not entitled for claiming exemption under section 80P(2)(a)(i) of the Act. On appeal, the ld. CIT(A) confirmed the order of the Assessing Officer by observing as under: With regard to disallowance of business income of ₹16,71,658/-, 7.4 reliance is based on judgement of Hon’ble Supreme Court in the case of ‘The Citizen Co-operative Society Limited, Hyderabad vs ACIT, Circle-9(1), Hyderabad in Civil Appeal No. 10245 of 2017 dated 8.8.2017. In para 25 and 26 of the said judgement, it was held 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 so far as this category is concerned. However, the assessee had carved out another category of 'nominal members’. These are those members who are making deposits with the assessee for the purpose of obtaining loans etc and in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilized to advance gold loans etc to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be .... It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion: 'As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality; It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund…. In the present case both the parties to the transaction are the contributors towards surplus, however, there are not participators to the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred 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'..." 7.5 The appellant pleaded that the Supreme Court judgement of Citizen Co-Operative Society is not applicable to it because appellant is doing business only with its members which include associate members (B Class Members), which is approved by the Registrar of Co-Operatives Society. The depositors and borrowers are all members of the society and as such there is no violation of any section of the Tamil Nadu Co-Operatives Registration Act and its Rules. The Society is not transacting with any outsider. As against this, Citizen Co-Operative Society transacted with outsiders, i.e., with non- members. The assessee relied upon the judgement given by Hon'ble High Court in the case of CIT, Chennai Vs Tamilnadu Co-operative Housing Federation Ltd, Chennai (Tax case Appeal No.685 of 2014). However, the fact remains in this instant case that the contributors to the profit are different from the participators of that profit as is in the case of Citizen Co- Operative Society. Further, it may be noted that Hon'ble Supreme Court has delivered its judgment dated 8.8.2017 in the case of Citizen Co-Operative Society subsequent to the judgment of Hon'ble High Court of Chennai in the case of Commissioner of Income Tax, Chennai Vs Tamil Nadu Co-operative Housing Federation Ltd, Chennai (Tax case Appeal No.685 of 2014) pronounced on 23.11.2016. Hon'ble Supreme Court has clearly stated that 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.’ When there is provision for unequal rights between different sets of members, the concept of Principle of Mutuality is misplaced.

7.6 Hon’ble Supreme Court in its judgement in the case of CIT Vs Bankipur Club Ltd. (1997) 226 ITR 97 (SC) held that – “……. For this doctrine to apply, it is essential that all the contributories to the common fund are entitled to participate in the surplus and that all its participants in the surplus and that all its participants in the surplus are contributors, so that there is complete identity between contributors and participators ... " 7.7 In view of the above, in assessee's case the principle of mutuality is defeated. As such, guided by the two judgments of Honourable Supreme Court cited in this order, the AO rightly disallowed assessee’s claim of deduction under section 80P(2)(i)(a) and the entire business profit of Rs.16,89,266/- is taxed under the head 'Business Income. …..”

4. On the other hand, the ld. DR supported the orders of authorities below.

“Objects : 3. The object of the Bank shall be primarily to finance Primary Land Development Banks.

(e) to acquire such immovable properties and construct such buildings as it may consider necessary for the proper conduct of its business; (f) to appoint what staff it considers necessary to conduct the affairs of the bank; (g) to inspect the primary land development banks and the lands mortgaged to them and to appoint the necessary staff or the authority; (h) to develop, assist and co-ordinate the work of the affiliated primary land development banks and afford them financial and other help wherever necessary; (i) to do such other things as are incidental to or conducive to the above subject; The Assessee’s primary objective as mentioned in the objects is to provide finance to primary land development banks to extend loans for agricultural activities. We noted that the Assessee is a Cooperative Society registered under the Tamil Nadu Co-operative Society Act, 1983 and obtained registration as a Co-operative Society on 12.12.1929 and since then, it has been operating as a Cooperative Society providing finance to the members of the Society. We noted that the Assessee, like other co-operative institutions is a Co- operative Society and was entitled for deduction u/s.80P of the Act, the legislature, through the Finance Act 2006, introduced Section 80P(4) of the Act with a specific intention to exclude co-operative banks from this scope of deduction u/s.80P of the Act. The reasons sighted in the Finance Act, 2006 reads as under: “166. Co-operative Banks, like any other Bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies [PACS] and Primary Co- operative Agricultural and Rural Development Banks [PCARDb] stand on a special footing and will continue to be exempt for tax under section 80P of the Income Tax Act. However, I propose to exclude all other co-operative banks from the scope of that section.” From the above, it is clear that the provisions of Section 80P(4) of the Act was brought under the statute book, is to exclude the co-operative banks out from the ambit of Section 80P of the Act because, they have functions of any normal bank. In the present case, before us, although the Assessee by nomenclature, the name is “Tamil Nadu Co-operative Society, Agriculture and Rural Development Bank Limited”, but it is a co-operative Society registered under the Tamil Nadu Co-operative Societies Act, 1983.

II. That the Assessee provides services only to its members and not to the public and hence the principle of mutuality applies, III. That the Society has a record of the name and address of all the members are identifiable and available; IV. That the Society has not obtained any authorization or License from RBI to operate as a Banking Institution. Added to that, there is no inspection by the Reserve Bank of India [RBI], no reports are sent to RBI, there is no cheque withdrawal facility, the Society is not allowed to issue Demand Drafts and finally, the deposits are only from members and no non-members are involved; V. That the Society has taken due approval for admission of members from the Registrar of Co-operative Societies and with members’ capital only, it has been lending and conducting its business transactions; 24. Now, coming to an another objection of the learned CIT-DR that the Assessee never gave the list of “B” category members or Associate members, as they were general public and whole of their accounts were in the banks. It was the argument of the learned CIT- DR that “B” category members were general public derived the facilities of the Assessee Bank without having any voting right in the Bank and moreover, they only gave the maximum business support to the Assessee Bank. We have considered this argument and noted that the Assessee has two categories of members, as under: a) Members – State Government and Primary Co-operative Agriculture and Rural Development Banks. b) Associate Members – Individuals and other Institutions.

After considering these, the Hon’ble Supreme Court has summed up the issue in paragraph nos.45 and 46 as under: “45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Limited (supra), must be given effect to Section 80P of the Income Tax Act, being a benevolent provision enacted by the Parliament to encourage and promote the credit of the co- operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the Assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the world “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co- operative banks which are co-operative societies engaged in banking business, i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench Judgement is wholly incorrect in its reading of Citizen Co-operative Society Limited (supra). Clearly, therefore, once Section 80P(4) is out of harm’s way, all the Assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.

2.(n). ‘Member’ means a person who joined in the application for registration of a Society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the byelaws for the time being force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power have no such liability or duty; ” Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).”

In the present case also, there is no banking activity and it is not registered as a Bank and it does not hold any license issued by the Reserve Bank of India. The Assessee being a Primary Agriculture Credit Society is a Co-operative Society. The primary object of which is to provide financial accommodation to its members, i.e. members as well as Associate members for agriculture purposes or for purpose connected with the agricultural activities. Further, we are of the view that the provision of Section 80P(4) of the Act is to be read as a proviso, which proviso now specifically excludes co- operative banks which are co-operative societies engaged in the banking business, i.e. engaged in lending money to members of the public, which have a license in this behalf from the Reserve Bank of India. Clearly, therefore, the Assessee’s case is out of the provisions of Section 80P(4) of the Act. In relation to the Associate members, we are of the view that the provisions of Section 22 read with Rule 32 of the Tamil Nadu Co-operative Societies Act, 1983 and Tamil Nadu Co-operative Societies Rules clearly determine the procedure to admit Associate members and accordingly in the present case, the Assessee’s Cooperative Society has admitted the same. In view of the above finding, we hold that the Assessee is entitled for the claim of deduction u/s.80P(2)(a)(i) of the Act. Thus, we reverse the orders of the lower authorities and allow these three appeals of the Assessee. Accordingly, we find the issue is squarely covered and hence, in this case also we allow the claim of deduction u/s.80P(2) of the Act.” 5.1 Respectfully following the above decision of the Coordinate Benches of the Tribunal, we hold that irrespective of the fact that whether the assessee is having “A” class Members or “B” class Members, the assessee is entitled for claiming exemption under section 80P(2)(a)(i) of the Act. Thus, the ground raised by the assessee is allowed.

So far as interest income received by the assessee of ₹.2,82,017/- 6. from Erode District Central Co-operative Bank is concerned, the Assessing Officer has held that the interest income falls in the category of “Other Income” and brought to tax. On appeal, the ld. CIT(A) confirmed the same. 6.1 Before us, the ld. Counsel for the assessee has submitted that the issue is covered in favour of the assessee by the decision of the Tribunal in the case of The Salem Agricultural Producers Co-operative Marketing Society Ltd. v. ITO in 731 & 732/Mds/2014 dated 30.06.2014 for the assessment years 2007-08, 2009-10 & 2010-11 dated 30.06.2014, which was confirmed by the Hon’ble Jurisdictional High Court in T.C.A. No. 5 of 2015 dated 10.08.2016, wherein, the Tribunal has held that the interest income received by the assessee is eligible for claiming exemption under section 80P(2)(d) of the Act and prayed for following the same.

6.2 On the other hand, the ld. DR relied on the orders of authorities below.

6.3 We have heard the rival contentions. The assessee has claimed deduction of interest income received under section 80P of the Act. However, the Assessing Officer has denied the same and held that the interest income falls in the category of “Other Income” and brought to tax, which was confirmed by the ld. CIT(A). Similar issue on identical facts was subject matter in appeal before the Tribunal in the case of The Salem Agricultural Producers Co-operative Marketing Society Ltd. v. ITO (supra), wherein, the Tribunal has observed and held as under: “8. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The case of the assessee is that the income by way of interest and dividend earned by the assessee society are from investments made in Salem District Central Cooperative Bank, which is also admittedly, a co-operative society and are allowable deduction. The Assessing Officer has held that the assessee has made only with Salem District Central Cooperative Bank and therefore, the income from investment with the Bank is not entitled for deduction under section 80P(2)(d) of the Act. On appeal, the ld. CIT(Appeals confirmed the order passed by the ld. CIT(Appeals). We find that in the case of CIT v. Kangra Co-operative Bank Ltd. [2009] 309 ITR 106 (HP), the Hon’ble Himachal Pradesh High Court has considered section 80P(2)(d) of the Act. The interest earned by the assessee co-operative bank on fixed deposits with Himachal Pradesh State Co-operative Bank in compliance with the provisions of section 57 of the Himachal Pradesh Co-operative Societies Act, 1968, the income derived from banking business is eligible for deduction under section 80P(2)(a)(i) of the Act. Exemption is also available under section 80P(2)(d) of the Act. In the present case, the assessee is an Agricultural Producers Co-operative Marketing Society Ltd., registered under Tamilnadu Co-operative Societies Act and established for the benefit of the agricultural producers and the interest or dividend earned by the assessee will be beneficial to the members alone. Therefore, keeping in view of the decision in the case of CIT v. Kangra Co-operative Bank Ltd. (supra), we hold that the assessee is eligible for benefit under section 80P(2)(d) of the Act and also this being a beneficial section to the co-operative societies. 6.4 On further appeal, while dismissing the appeal of the Department, the Hon’ble Jurisdictional High Court has confirmed the order of the Tribunal and the relevant portion of the order of the Hon’ble High Court is extracted as under: “9. Though Mr.J. Narayanasamy, learned Senior Standing Counsel for Income Tax Department submitted that the Tribunal was not right in holding that the interest earned from the Salem Agricultural Producers Co-operative Marketing Society Ltd., for reduction under Section 80 P (2(a) (i) of the Income Tax Act, we are not inclined to accept the said contentions. For the reason that a District Central Co-operative Bank, is also a Society, in which event, the income by way of interest and dividend earned by the assessee/respondent Society from the investments made in Salem District Central Co-operative Bank, which is also a Co-operative Society is entitled for deduction under Section 80 P (2) (a) (i) of the Income Tax Act. Decision relied on by the assessee and considered by the Tribunal squarely applies to the facts on hand. Question of law, figuring as 4, is negatived as against the appellant. 6.5 Respectfully following the decision of the Tribunal as well as the judgement of the Hon’ble Jurisdictional High Court, we hold that the assessee is eligible for claiming deduction under section 80P(2)(d) of the Act. Thus, the ground raised by the assessee is allowed.