AA-435 VELANKATTUVALASUPRIMARY AGRICULTURAL COOPERATIVE CREDIT SOCIETY LTD.,ERODE vs. ACIT(OSD), WARD 2(3), RANGE-2, ERODE

The first common issue in both the appeals of assessee is against the faceless appeal proceedings conducted without affording personal hearing and in assessment year 2011-12, one more issue of reopening of assessment, the ld.counsel for the assessee at the first stage stated that she is not interested in prosecuting these two grounds and hence, the same are dismissed as not-pressed.

The only common issue on merits in these two appeals of assessee, is as regards to disallowance of claim of deduction u/s.80P of the Act in regard to income received from associate members i.e., interest received from Class B members. For this, assessee has raised identically worded grounds in both the years and facts and circumstances are also exactly identical. Hence, we will take grounds from for assessment year 2011-12. The relevant Ground Nos. 6 to 10 reads as under:- 6. The CIT(A) ought to have seen that the Appellant is a Primary Agricultural Cooperative Society registered under the Tamil Nadu Cooperative Societies Act, 1983 and provides providing agricultural loans to its members (Class A and Class B)

7. The CIT(A) ought to have seen that there is no definition of members under the Income Tax Act, 1961 and all the members have to renew their membership once in three years.

The CIT(A) ought to have seen that the ratio descendi in the case of Citizen Co-operative Society Ltd., vs. ACIT, [2017] 397 ITR 1 (SC) is that Section 80P of the Act, being a benevolent provision 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.

The CIT(A) also confirmed the action of AO vide para 6 as under:- “6. I have carefully considered the action of the Assessing Officer and the submissions of the appellant. I find that after thorough and detailed investigation the Assessing Officer had discovered that the appellant society has both members and non-members, has earned more interest from non- members who are not shareholders and has advanced loans at very high rates. Hence, it is concluded by the Assessing Officer that principle of mutuality is violated. I have also noted that the Assessing Officer has enquired into the sources of interest received by the appellant, considered it as income from other sources and hence not eligible for deduction u/s 80P of the Income Tax Act.”

Before us, ld.counsel for the assessee argued on merits that the assessee is a primary agricultural cooperative society registered under the Tamil Nadu Co-operative Societies Act, 1983 and the assessee society accepts deposit, advancing loans and providing credit facilities to its regular members i.e., A Class members with voting powers, etc., as well as to associate members. The details are given by CIT(A) in his order and accordingly, it is engaged in carrying on the business of providing credit facilities to its members and therefore eligible for claim of deduction u/s.80P(2)(a)(i) of the Act. The ld.counsel argued that the AO as well as CIT(A) has gone into the issue of concept of members i.e., providing agricultural loan to its members i.e., Class A & Class B, but there is no distinction between the members. The ld.counsel for the assessee stated that the case law relied on by the Revenue in the case of Citizens Cooperative Society Limited vs. ACIT, (2017) 94 taxman 114(SC) was explained further by the Hon’ble Supreme Court in the case of The Mavilayi Service Co-operative Bank Ltd., vs. CIT, [2021] 123 taxmann.com 161. She referred to the Jurisdictional High Court decision in the case of PCIT vs. S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd., [2019] 108 taxmann.com 594 and stated that the Hon’ble Jurisdictional High Court has explained the definition of members provided as per section 2(6) of the Tamil Nadu Co-operative Societies Act and also considered the decision of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd., supra.

On the other hand, the ld.Senior DR relied on the orders of the lower authorities.

We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that this issue is squarely covered exactly on identical facts by the Co-ordinate Bench decision in the case of Tamilnadu Co-operative State Agriculture and Rural Development Bank Limited in to 33/CHNY/2021, the decision pronounced on 29.04.2022, wherein considering the decision of Hon’ble Supreme Court in the case of The Mavilayi Service Co-operative Bank Ltd., supra and the decision of Hon’ble Madras High Court in the case of S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd., supra, the deduction is allowed u/s.80P(2) of the Act in respect of income earned from associated members. The Tribunal in the case of Tamilnadu Co-operative State Agriculture and Rural Development Bank Limited, supra held as under:- 21. We have heard the rival contentions and had gone through the facts and circumstances of the case. We have perused the case records, including the assessment order and the order of the CIT(A). We have also perused the paper-book filed by the learned Counsel of the Assessee consisting of pages 1 to 120 and pages 1 to 25. The Revenue has also filed a paper-book consisting of 1 to 84 pages and also filed written submissions along with annexures which were considered. We noted that the first objection of the learned CIT-DR is that the Assessee is a Co-operative Bank and not a Co-operative Society. We will deal with this argument of the learned CIT-DR. First of all, we have gone through the bye-laws of the Assessee Society which are placed at page 92. The relevant objects of the Assessee are mentioned at pages 93 and 94 of the Assessee’s paper-book and the relevant reads as under:

In order to fulfill such object, it shall have power: a) To float debentures on the security / of its assets and of land mortgages, other assets transferred or deemed under the provisions of section 23A of the Act to have been transferred to it by Primary Land Development Banks or against the guarantee of Government of Tamil Nadu for repayment in full of principal and payment of interest in respect of loans granted by Tamil Nadu Co-operative State Land Development Bank to any institution approved by the Government by general or special order in writing, for such period and on such conditions as may be laid down by the provisions of the Act and the regulations made there under by the Board.[R.D. is 938/90C, dated 14.05.1990] (aa) TO OBTAIN LOANS WITH GOVERNMENT GUARANTEE FROM ANY FINANCING AGENCIES OR FROM GOVERNMENT WITHOUT FLOATATION OF DEBENTURE ON SUCH CONDITIOONS AS MAY BE LAID DOWN BY THE GOVERNMENT. (1) Enbloc amendments from 1 to 35 and 43 to 54 registered by the DR of CS(c) vide his letter No.Rc.4673/71-k, dated 21.05.1971 (2) Enbloc amendments from 36 to 42 registered by the DR of CS(c) vide his letter No.Rc.4673/71-k, dated 19.04.1971. (b) to receive deposits; (c) to grant loans to Primary Land Development Banks and other institutions referred to in by law 2(c) for the purpose specified in Rule 13 of the Tamil Nadu Co-operative Land Development Banks (Miscellaneous provisions) Rules 1970 and on such terms consistent with their bylaws as the Board shall decide; [No.Rc.1636/77K, dated 26.02.1977) (d) to function as the agent of any Co-operative Bank, subject to such conditions as the Registrar may, by general or special order, specify;

We noted that the learned CIT-DR heavily relied on the decision of the Hon’ble Supreme Court in the case of Citizen Co- operative Society Limited (supra); wherein the Hon’ble Supreme Court has upheld the disallowance of the claim of deduction u/s.80P of the Act. We noted the facts that the Hon’ble Supreme Court has discussed the following crucial aspects: I. The Society was originally formed under the mutually aided co-operative Societies Act, 1995 [MACSA] and subsequently had got registered under the Multi-State Co- operative Societies Act 2002 and their activities were in violations of the provisions of the Multi-State Co-operative Societies Act 2002 under which it had been functioning; II. The persons from whom deposits were received were not traceable; III. Additions were proposed u/s.68 of the Income Tax Act, 1961; IV. They had approached the Reserve Bank of India [RBI] vide letter dated 19.10.1997 requesting for conversion of the Co-operative Society into an Urban Bank; V. They had lent money to general public without obtaining permission from the concerned Registrar of the Co- operative Societies; VI. They had claimed to be a Co-operative Society for the claim of deduction u/s.80P of the Act and Banking Company / Co-operative Bank for the purpose of Section 269SS and 269T.

Now, we have gone through the facts of the Assessee and that, what is the difference as in the case-law of the Hon’ble Supreme Court, in the case of Citizen Co-operative Society Limited (supra) and that of the present case is noted as follows: I. That the Assessee is registered as a Co-operative Society under 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,

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.

We noted that the Assessee had filed before us, the extracts of the provisions of the Tamil Nadu Co-operative Societies Act, 1983 and the Tamil Nadu Co-operative Societies Rules. The Rule relating to the Associate Member as provided in Section 2(6) and in Section 2(16) reads as under: a. “Definitions as in the Act: I. Section 2(6) of the Act defines “Associate Member” as member who possesses only such privileges and rights of a member and who is subject only to such liabilities of a member as may be specified in this Act and the bye-laws. II. Section 2(16) of the Act defines a “Member” as a person joining in the application for the registration of a Society and a person admitted to membership after registration in accordance with the provisions of this Act, the Rules and Bye-laws and includes an Associate Member.”

Before us, the learned Counsel for the Assessee explained the procedure and argued that an individual member, to become an Associate member of the Assessee Society, they will have to get the approval from the Registrar of the Co-operative Society. He agreed that the bye-laws of the Assessee Society clearly states that all the members are required to hold shares but Associate members are exempted from holding such shares, in view of the Section 22(2) of the Tamil Nadu Co-operative Societies Act, 1983 and the Rules as amended from time to time. We noted that the Assessee’s transactions are restricted only to the members or Associate members and not to the general public as alleged by the learned CIT-DR.

Before us, the learned Counsel for the Assessee has categorically made statement at the bar and produced evidences that the Assessee has records of the names and addresses of the members and all the members are identifiable and available. Further, it was contended that the Assessee has always submitted all relevant documents as and when sought for and it is not the case of the Assessing Officer that the Assessee has not submitted the relevant documents or any particular depositor is not an Associate member. Further, we also noted that the applicability of the provisions of Section 80P(4) of the Act was first raised by the Revenue for the Assessment Year 2009 – 2010, as the Assessee had adopted the same deduction and had filed his return of income accordingly. The Tribunal has categorically held that, in Assessment Year 2009 – 2010 in Assessee’s own case, in dated 01.05.2014 that the Assessee is a Co-operative Society and is not engaged in the business of Banking and hence the provisions of Section 80P(4) of the Act does not apply to the Assessee’s case.

Now, we have noted that the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Limited (supra) considering the earlier decision in the case of Citizen Co-operative Society Limited (supra) has considered exactly an identical issue on exactly identical facts and held in paragraph nos.39 and 40, as under: “39. The above material would clearly indicate that the limited object of Section 80P(4) is to exclude co-operative banks that function at par with other commercial banks, i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is not to be seen, what is clear from Section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co- operative bank and holds a license issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.

Another aspect highlighted by the learned Counsel for the Assessee is that the Revenue while framing the assessment u/s.143(3) of the Act for the Assessment Year 2017 – 2018, vide order dated 25.12.2019 has accepted the above stated position that the Assessee is a Co-operative Society and is not engaged in any banking business and therefore eligible for claim of deduction u/s.80P(2) of the Act and further the Revenue has followed the decision of the Hon’ble Supreme Court in the case of Mavilayi Co- operative Society Limited (supra). It means that the Revenue has accepted the position in the Assessment Year 2017 – 2018 while framing the scrutiny assessment and now the Revenue cannot go back from its stand because there is no change in the facts.

In view of the above facts discussed and the case-laws of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Limited vs. Commissioner of Income Tax, Calicut (supra), we are of the view that the Assessee is a Co-operative Society under the name and style as “Tamil Nadu Co-operative State Agricultural and Rural Development Bank Limited” and it is not engaged in the banking activities. It is also clear that in view of Section 3 read with Section 56 of the Banking Regulation Act, 1949, the Assessee cannot be considered as a Primary Co-operative Bank but it is a Primary Agricultural Credit Society because Co-operative Bank must be engaged in the business of Banking as defined in the Section 5(b) of the Banking Regulation Act, which means accepting, for the purpose of lending or investment of deposits of money from the public. Similarly, u/s.22(1)(b) of the Banking Regulation Act, as applicable to Co-operative Societies, no Co-operative Society shall carry on in banking business in India, unless it is a Co-operative Bank and holds license issued on this behalf by the Reserve Bank of India. 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 Co- operative 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.

In the result, the appeal filed by the assessee is partly allowed.