SHRI RAM PISTRON & RINGS EMP. SAL. EDU. SOCIETY,GHAZIABAD vs. JCIT, GHAZIABAD

O R D E R PER S.V. MEHROTRA, A.M :

This is an appeal filed by the assessee against the order dated 09.12.2014 passed by the Commissioner of Income Tax (Appeals), Ghaziabad, u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”) relating to assessment year 2010-11.

“the assessee is a registered cooperative society, providing credit facility to its members, so income is deductible u/s 80P of the Act”.

3. The Assessing Officer denied the deduction u/s 80P for the following reasons :-

(a) The assessee society is registered with the Registrar of Society for receiving deposits and providing credit facility to its members. (b) The society is created for the benefit of employees of M/s Sri Ram Pistons and Rings Ltd., (c) The object of society was as under :-

From perusal of the object of society, he concluded that the society had declared itself as banking organization providing credit facility to its members. He pointed out section 80P provides the deduction in respect of income of co-operative society. Further, the Finance Act, 2006 w.e.f. 01.04.2007 had inserted section 80P(4) which provides that the provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank”. (d) He rejected the assessee’s claim that society was registered co- operative society observing that part V of the Banking Regulations Act, 1949 defines primary agricultural credit society as under :- “Primary agricultural credit society” means a co-operative society- (1) the primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops);” (e) He observed that intention of legislation was to encourage co- operative activity in the rural society and community development of the agricultural society and not the activity of receiving deposits and providing credit facilities to the employees.

4. Ld. CIT(A) dismissed the assessee’s appeal by observing as under :-

“5.3 I find that in the bye laws of society, it has used the term bank/society which shows the intention of society to conduct banking transactions. I also find that the society has charged interest at the rate of 12% whereas the bank has charged interest at 10%. The profit and loss account of the society shows that it has earned interest of Rs. 82,07,335/- during the year but has paid interest of Rs. 5757555/-. Besides, it has earned a dividend of Rs. 499767/- from Bank. All these facts clearly prove that the society exists for profit making and principle of mutuality does not apply in this case. The paid capital of the society is Rs. 10293500/t and by virtue of Section 56(ccv) of Banking Regulation Act, 1949 a cooperative society other than the primary agricultural credit society would be deemed to be a "primary cooperative bank" if it fulfills following condition:- "Primary co-operative bank" means a co-operative society, other than a primary agricultural credit society- (1) The primary object or principal business of which is the transaction of banking business; (2) The paid-up share capital and reserve of which are not less than one lakh of Rupees. (3) The bye-law of which do not permit admission of any other co- operative society as a member. Provided that this sub-clause shall not apply to the admission of a co- operative bank as a member by reason of such co-operative society out of funds provided by the State Government for the purpose;"

5.4 In case of the appellant society all the three conditions are satisfied. Its primary object is banking business of taking deposits and advancing loans. Its object is to earn profit as can be seen from the difference in rate of interest charged by bank and by it. In the bye laws, there is no mention of the fact that it is open to other cooperative society except cooperative bank. The relevant clause regarding the membership in bye laws is as under :-

“The term Sewayojak” does not translate to cooperative. Thus, membership is not open to other cooperative society. Therefore, for the purpose of Section 80P(4) the society is deemed to be primary cooperative bank as per Section 56(ccv) of BRA 1949 irrespective of the fact that it has not sought or been granted license for banking. Having license is not material. This is altogether a different matter that the assessee society despite coming under definition of primary cooperative bank by virtue of Section 56(ccv) of Banking Regulation Act, 1949, it has not taken the requisite license.”

5. Ld. counsel for the assessee submitted that a co-operative society has been treated as a co-operative bank. He referred to the assessment order page 2 and pointed out that the Assessing Officer has not disputed that the assessee’s society is registered with the Registrar of Society for receiving deposits and providing credit facilities to its members. He further pointed out that it is not disputed that the society had been created for the benefit of employees of M/s Sri Ram Pistons and Rings Ltd.. Ld. counsel further referred to page 7 of Paper Book, wherein, the ld. CIT(A)’s order is contained and pointed out that he has also not disputed that the society was taking deposits from members and providing them credit facilities. Ld. counsel further referred to page 48 of Paper Book, wherein, society’s memorandum is contained, wherein, the name of assessee has been referred to as ‘M/s Sri Ram Pistons and Rings Ltd. Employees (salary owners)

Cooperative debt and credit society ltd..’ Further, scope of society is limited to the employees of M/s Sri Ram Pistons and Rings Ltd.. Ld. counsel submitted that before any co-operative society can be treated as co-operative bank, the various conditions of the Banking Regulations Act, 1949 (BRA) have to be fulfilled. In this regard, ld. counsel referred to page 33 of Paper Book, wherein, BRA is contained, and referred to section 5(b) of the same which reads as under :-

“5. Interpretation. - [In this Act], unless there is anything repugnant in the subject or context, - (b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;”

“22. Licensing of banking companies - [(1) Save as hereinafter provided, no company shall carryon banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject of such conditions as the Reserve Bank may think fit to impose.]”

7. With reference to this section, ld. counsel pointed out that unless a company holds a licence issued in regard to banking activity by the Reserve Bank of India, it cannot carry on banking business. Ld. counsel further referred to page 42 to 44 of the Paper Book, wherein, part V of the Banking Regulations Act, 1949 is contained, which deals with the application of the Act to co-operative banks. He referred to relevant sections of this section as under :-

“56. Act to apply to co-operative societies subject to modifications.-- The provisions of this Act, as in force for the time being, shall apply to, or in relation to, co-operative societies as they apply to, or in relation to banking companies subject to the following modifications, namely:-- ………. (c) in section 5,-- [(i) after clause (cc), the following clauses shall be inserted, namely:-- (cci) "Co-operative bank" means a state co-operative bank, a central co- operative bank and a primary co-operative bank;

(ccii) "co-operative credit society" means a co-operative society, the primary object of which is to provide financial accommodation to its members and includes a co-operative land mortgage bank; ………. (ccv) "primary co-operative bank" means a co-operative society, other than a primary agricultural credit society,-- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co- operative society as a member: PROVIDED that this sub-clause shall not apply to the admission of a co- operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co-operative society out of funds PROVIDED by the State Government for the purpose; (ccvi) "primary credit society" means a co-operative society, other than a primary agricultural credit society,-- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co- operative society as a member: PROVIDED that this sub-clause shall not apply to the admission of a co- operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose. Explanation.--If any dispute arises as to the primary object or principal business of any co-operative society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by the Reserve Bank shall be final;

(1) CIT vs. Shri Laxmi Credit Souhard Sahakari Ltd., (2016) 65 taxmann.com 96 (Karnataka), wherein the Hon’ble Karnataka High Court held as under :- “4. The question of law that arise for our consideration in this appeal are : i. Whether the benefit of deduction, under Section 80P(2)(a)(i) of the IT Act, could be denied to the assessee on the footing that, though the respondent was said to be a Co-operative Society, it was in fact a co- operative bank, within the meaning as assigned to such bank under Part V of the BR Act. ii. Whether the Authorities under the IT Act were competent and possessed the jurisdiction to resolve the controversy as to whether the assessee was a co-operative society or co-operative bank, as defined under the provisions of the BR Act? ………. Attention is also drawn to the relevant portion of the Finance Minister’s Budget Speech explaining the reasons for withdrawal of tax benefits to some Societies by way of insertion of sub-section 80P(4) and insertion of new sub-clause (viia) in clause (24) of Section 2 definition of “income” by the Finance Act, 2006, with effect from 1.4.2007, is as under: The Co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefits. It is, therefore proposed to amend section 80P by inserting a new sub-section (4) so as to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than primary credit society or a primary co- operative agricultural and rural development bank. It is also proposed to define the expressions “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank”. ………. It is also stated that in some matter, the Tribunal has granted relief by holding that Section 80P(4) is not applicable, by referring to one circular of CBDT No.133 of 2007 dated 9.5.2007 which provided as under : Subject: clarification regarding admissibility of deduction under Section 80P of the Income-tax Act, 1961.

2. In this regard, I have been directed to state that sub-section (4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co- operative bank shall have the meaning assigned to it in part V of the Banking Regulations Act, 1949.

3. In part V of the Banking Regulation Act, “Co-operative Bank” means a State Co-operative Bank, a Central Co-operative Bank and a Primary Co-operative Bank.

4. Thus, if the Delhi Co-op Urban T and C Society Ltd. does not fall within the meaning of “Co-operative Banks” as defined in part V of the Banking Regulation Act, 1949, sub-section (4) of Section 80P will not apply in this case.”

2. Can open savings bank 2. Society cannot open account, current account, savings bank account, overdraft account, cash current account, issue letter credit account issue letter of credit, discounting bills of credit, discounting bills of exchange, issue cheque, of exchange, issue cheques, demand draft, pay orders, demand drafts (DD), Pay gift cheques, lockers, bank orders, Gift cheques, guarantees, etc. lockers, bank guarantees etc.

3. Co-operative Banks can 3. Society cannot act act as clearing agent for clearing agent, for cheques, cheques, DDs pay orders DDs, pay orders and other and other forms. forms.

2. ACIT vs. Palhawas Primary Agriculture Co-op. Society Ltd., (2012) 23 taxmann.com 318 (Delhi), wherein, the Tribunal held as under :- “Head Notes : The assessee was a registered agriculture co-operative society carrying out banking activities like borrowing, raising or taking up money and lending or advancing money for the purpose of agriculture, sale and purchase of seeds and fertilizers, etc. It was accepting deposits from non-members also. However, credit facilities and supply of seeds, urea, etc. for the purpose of agriculture were given only to the members of the assessee-society. The assessee claimed deduction under section 80P(2)(a)(i) and 80P(2)(a)(iv). The Assessing Officer rejected the assessee’s claim holding that income of the assessee was not attributable to the qualifying activity of carrying on the business of banking or providing credit facilities to its members and the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members as the similar activities were being performed for the non-members also. On appeal, the Commissioner (Appeals) held that merely because the assessee was unable to bifurcate the expenditure for the deposits from the members and non-members, deduction under section 80P(2)(a)(i) and under section 80P(2)(a)(iv) could not be denied. On revenue’s appeal : The exemption under section 80P(2)(a) is available to the income of a cooperative society engaged in the business or activities facilitating to its members as mentioned in clauses (i) to (vi) of sub-section (a) of section 80P(2). As the provisions of Section 80P(2)(a)(i) of the Act clearly states that income earned from credit facilities to members and as per sub-clause (iv), the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributed to any one or more of such activities are entitled for deduction. First limb of sub-clause (i) of clause (a) states that “carrying on the business of banking” and after “or” second limb states that “as providing credit facilities to its members”, therefore, it construed that income from business of banking as well as income from credit facilities

restricted to its members only are entitled for deduction and income from non- members is not included and entitled for deduction under said provisions. But in the present case, it was not in dispute that credit facilities and supply of seeds, urea etc. were given only to the members of the appellant society. Only with regard to the deposits, the appellant banking society accepted from non- members does not, in any way, affect the revenue generated by the appellant in providing credit facilities and supply of other agriculture related equipments and fertilizers etc. to its members. Banking cooperative society does not earn income from deposits but it has to pay interest on the deposits, therefore, deposits from non-members can never earn income in the hands of assessee although if out of deposits, the bank cooperative society had provided credit to its members, only then the income arising from these activities are entitled for deduction. On the basis of foregoing discussion, the AO was not justified in disallowing deduction on this sole ground that the income declared by the assessee includes income from business of banking from its non-members because there was no income from the same activities as the assessee accepted only deposits from non- members on which the assessee bank was under obligation to pay interest, therefore, these deposits from non-members, in any way, never brought any income to the assessee. Accordingly, the Commissioner (Appeals) rightly allowed the deduction and accepted the appeals of assessee societies and there was no reason to interfere with the impugned orders.”

As per this Board's Circular this amendment was applicable from A.Y. 2007-08. In assessment year 2007-08, the AO had allowed the benefit under section 80P(2)(a)(i) of the Act in the case of assessee. This issue has been considered by the various High Courts as well as ITATs particularly in case of ACIT vs. M/s. Bangalore commercial Transport Credit Cooperative Society Ltd. in dated 8.4.2011. The operative portion is reproduced as under :- "9.3. If the intention of the legislature was not to grant deduction u/s 80P(2)(a)(i) to co-operative societies carrying on the business of providing credit facilities to its members, then, this section would have been deleted. The new proviso to section 80P(4) which is brought into Statute is applicable only to co-operative banks and not to credit co- operative societies. The intention of the legislature of bring in co- operative banks into the taxation structure was mainly to bring in par with commercial banks. Since the assessee is a co-operative society and not a co-operative bank, the provisions of section 80P(4) will not have application in the assessee's case and, therefore, it is entitled to deduction u/s 80P(2)(a)(i) of the Act ............". The facts being similar, the decision squarely applies." The Hon'ble Gujarat High Court also considered this issue in the case of CIT vs. Surat Vankar Sahakari Sangh Ltd. in Tax Appeal No.1150 of 2013 dated 17.01.2014. The operative portion is reproduced as under :- After considering the aims and objects of the assessee, it is held that assessee is not a cooperative bank in terms of Banking Regulations Act. The case laws relied upon by the CIT (A) are not squarely applicable on the case of the assessee. Therefore, we reverse the order of ld. CIT(A). Assessee is entitled to deduction under section 80P(2)(a)(i) of the IT Act.”

Therefore, the main issue to be decided is as to whether assessee falls u/s 80P(2)(a)(i) or u/s 80P(4). The assessee society had been formed for the benefit of employees of M/s Sri Ram Pistons and Rings Ltd. and was extending credit facilities to its members/employees on the basis of cooperative principles. This was primarily for the benefit of its members only. Before coming to any conclusion, it would be useful to consider section 80P(2)(a)(i) and section 80P(4), which reads as under :-

“80P(2) The sums referred to in sub-section (1) shall be the following, namely :— (a) in the case of a co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members .......... “80P(4) The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank.” Explanation.—For the purposes of this sub-section,— (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.

(a) a primary agricultural credit society; (b) a co-operative land mortage bank; and (c) any other co-operative society, except in the manner and to the extent specified in Part V of BRA. Thus, it is evident that to a very limited extent the BRA has been made applicable to co-operative societies. Therefore, very strict interpretation is to be made.

5. Interpretation – (In this Act) unless there is anything repugnant in the subject or context –

Therefore, the term ‘banking’ as defined in section 5(b) cannot be understood in any other manner throughout the Act other than as defined in section 5(b), which reads as under :-

“5(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;”