MSEB EMPLOYEES CO OP CR. SOC. LTD,MUMBAI vs. ITO 15(2)(2), MUMBAI

आदेश / O R D E R

MSEB Employee’s Co-op. Credit Society Ltd.

Mumbai. The only ground argued/pressed by the ld. counsel for the assessee pertains to not allowing deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter the Act), in respect of interest income earned by the assessee on the deposits kept by it with co-operative bank. Alternatively, it was contended that such interest is eligible for deduction u/s 80P(2)(d) of the Act.

MSEB Employee’s Co-op. Credit Society Ltd.

Supply society ltd. (2015) 57 taxman.com 367 (Ahd. Trib.) (Supra).

2.1. I have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a cooperative society, registered with the registrar of cooperative society under Maharashtra Cooperative Society Act, 1960. The objects of the society is to enable its member to obtain loans and to save their income in a safe and convenient way to lent money etc. Briefly, the objects of the society are enumerated hereunder:- a. To encourage thrift and co-operation amongst the members. b. To enable its members to obtain loans on reasonable terms. c. To enable members to save part of their income in a safe convenient way. d. To lend money from funds to be created by means specified hereinafter with or without interest to the members of the society. e. To undertake with the prior approval of the Registering authority the business of supply of consumers good to its members.

MSEB Employee’s Co-op. Credit Society Ltd. f. To do such other things incidental or conducive to the attainment of all or any of the objects.

2.2. Before adverting further, we are also reproducing hereunder the relevant provision of section 80P of the Act.

“Deduction in respect of income of co-operative societies. 80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (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, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under sub- clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:— (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government;

MSEB Employee’s Co-op. Credit Society Ltd.

(b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to— (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii) the Government or a local authority; or (iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public), the whole of the amount of profits and gains of such business; (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,— (i) where such co-operative society is a consumers' co-operative society, one hundred thousand rupees; and (ii) in any other case, fifty thousand rupees. Explanation.—In this clause, "consumers' co-operative society" means a society for the benefit of the consumers; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co- operative society, the whole of such income; (e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22. Explanation.—For the purposes of this section, an "urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. (3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the MSEB Employee’s Co-op. Credit Society Ltd. deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD,section 80-I, section 80- IA, section 80J and section 80JJ. (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.” 2.3. Now, I shall analyze the scope of section 80P which allows a straight deduction, in computation of total income of the cooperative society, to the extent mention, in respect of the following income. a(i) the whole of the profits and gains from a business of banking or providing credit facilities to the members of the society. (a)(ii) the whole of the profits and gains from a cottage industry; (a)(iii) the whole of the profits and gains from marketing of agricultural produce of the members of the society; (a)(iv) the whole of the profits and gains from activities consisting of purchase of agricultural implements, seeds, live-stock or other articles intended for agriculture and supply of these to the members of the society;

MSEB Employee’s Co-op. Credit Society Ltd.

(a)(v) the whole of the profits and gains from processing, without the aid of power, of the agricultural produce of the members of the society; (a)(vi) the whole of the profits and gains from the activity of the collective disposal of the labour of its members subject to certain conditions; (a)(vii) the whole of the profits and gains derived from the business of fishing or allied activities, i.e., the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members subject to certain conditions; (b) the whole of the profits and gains derived by a primary co-operative society from supply of -milk -(for and from assessment year 1984-85) oilseeds, fruits or vegetables raised or grown by its members to-- (i) a federal co-operative society, where such society is engaged in supplying- -milk, -(for and from assessment year 1984-85) oilseeds, fruits or vegetables; or MSEB Employee’s Co-op. Credit Society Ltd.

(ii) (for and from assessment year 1979-80) the Government or a local authority; or (iii) (for and from assessment year 1979-80) a 'Government company' or a corporation established by or under an Act, where such company or corporation is engaged in supplying- -milk, -(for and from assessment year 1984-85) oilseeds, fruits or vegetables to the public; (c) out of the profits and gains derived by a co-operative society from a business (other than an insurance business or any business of the nature specified at (a) (i) to (b) hereinbefore), to the extent of Rs. 15,000 of such profits for assessment years 1968-69 and 1969-70, and to the extent of Rs. 20,000 for and from assessment year 1970-71. The said extent of Rs. 20,000 has, for and from assessment year 1980-81, been raised to Rs. 40,00022 if the co- operative society is a "consumers' co-operative society". In case of other co-operative societies, the extent has been maintained at Rs. 20,000.

2.4. Section 80P(2)(a)(i) of the Act envisaged two category of business, namely (1) engaging in carrying on the business of banking and MSEB Employee’s Co-op. Credit Society Ltd.

(2) engaging in the business of providing credit facilities to its members. The twin requirements of the second category are (i) providing credit facility must be one of the activities of the assessee and (ii) the income attributable to such any activity must be towards profit or gains therefrom. The income earned by the society must have a direct or proximate nexus or connection with the business of the society (CIT vs Anakapalli Co-operative marketing Society Ltd. (200) 245 ITR 616, 619 (AP)]. Section 80P(2)(a) provides for deduction in respect of income of a cooperative society engaged in banking business. Only income from banking business is qualified for deduction u/s 80P(2)(a)(i) (CIT vs Nainital District Cooperative Bank (2009) 318 ITR 62 (Uttrakhand)

2.5. Section 80P (2)(c) is in the nature of a residuary clause, so far as it relates to the activities of the cooperative society. The activities of a cooperative society not falling either in section 80P(2)(a) or 80P(2)(b) will be covered by section 80P(2)(c). Section 80P(2)(c) read with section 80P (1) grants deduction of Rs.20,000/- in calculation of gross total income of a cooperative society. Section 80P(2)(c) exempts income of a cooperative society to the extent mentioned in that section if the profit and gains are MSEB Employee’s Co-op. Credit Society Ltd. attributable to the activities in which the cooperative society is engaged (CCIT vs Kisan Sahkari Chini Mills Ltd. (2005) 273 ITR 42(All.).

2.6. It is noted that the Hon’ble Karnataka High Court in Karnataka State Cooperative Marketing Federation Ltd. vs CIT (2001) 251 ITR 736, 740 (Karn.) held that if a cooperative society carries on certain activities, the income from which is exempted and also certain activities income from which is not exempted, the profit and gains attributable to exempted activities shall enjoy the exemption and those attributable to the non-exempted activities, shall be taxed.

2.7. The Hon’ble Apex Court in Kerala State Cooperative Marketing Federation Ltd. vs CIT (1998) 231 ITR 814, 819 (SC) held that “We may notice that the provision is introduced with a view to encouraging and promoting the growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government, the correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax what has to be seen is whether the income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. The expression “marketing” is an expression of wide import. It involves exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial activities such MSEB Employee’s Co-op. Credit Society Ltd. as standardisation, financing, marketing intelligence, etc. Such activities can be carried on by an apex society rather than a primary society.

So long as agricultural produce handled by the assessee belonged to its members it was entitled to exemption in respect of the profits derived from the marketing of the same. Whether the members came by the produce because of their own agricultural activities or whether they acquired it by purchasing it from cultivators was of no consequence for the purpose of determining whether the assessee was entitled to the exemption. The only condition required for qualifying the assessee’s income for exemption was that the assessee’s business must be that of marketing, the marketing must be of agricultural produce and that agricultural produce must have belonged to the members of the assessee-society before they came up for marketing by it, whether on its own account or on account of the members themselves. Thus, there is no scope to limit the exemption. The co-operative societies are engaged in marketing of an agricultural produce both of its members as well as of non-members. In the latter case, there is no difference between a co- operative society or any other business organisation and so will not be entitled to exemption. The exemption is intended to cover all cases where a co-operative society is engaged in marketing agricultural produce of its members. Section 80P does not in effect limit the scope of the exemption to agricultural produce raised by members alone but includes agricultural produce raised by others but belonging to co- operative societies. The contrast in the said provision is with reference to the marketing of agricultural produce of the members of the society or that purchased from non-members.

A reading of the provisions of section 80P of the Act would indicate the manner in which the exemptions under the said provisions are sought to be extended. Whenever the Legislature wanted to restrict the exemption to a primary co-operative society it was so made clear as is evident from clause (f) referred to above with reference to a milk co-operative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk co-operative society, but no such distinction is made with reference to a banking business which provides trade facilities to its members. It is clear, therefore, that the Legislature did not intend to limit the scope of exemption only to those which are primary societies. If a small agricultural co-operative society does not have any marketing facilities it can certainly become a member of the apex society which may market the produce of its members.

MSEB Employee’s Co-op. Credit Society Ltd. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

We agree with this view. The analysis made by the Delhi High Court is with reference to the lexicographical meaning of the expression “of” occurring in the relevant provision. The use of the expression in the context, setting of the different categories of societies in the legislation in comparison with other provisions thereof would indicate that the expression “of” acquires the meaning as “belonging to”. Any expression in any enactment will like a chameleon acquire colour from the background in which it is situate. Trite, to say, that a word acquires meaning only with reference to text and context.

In CIT (Addl.) v. Ryots Agricultural Produce Co-operative Marketing Society Ltd. [1978] 115 ITR 709 (Kar), wherein the scope of section 81(i)(c) as it stood then was considered in respect of income from marketing of agricultural produce of its members after processing it (sic).

In CIT v. Karjan Co-operative Cotton Sale, Ginning and Pressing Society Ltd. [1981] 159 ITR 821 (Guj), again an identical question was considered. The Gujarat High Court explained the expression used in section 80P of the Income-tax Act. So long as the commodity brought to the assessee-society was agricultural produce and belonged to its members, it was agricultural produce of its members, be the member a co-operative society in itself or an individual member, the concept was of ownership of agricultural produce. On that basis, the said provision was interpreted and it fits in with the view taken by us. xxxxxxxxxxxxxxxxxxxxxxxx

The attention of this court does not seem to have been drawn to the aforesaid decisions while deciding Assam Co-operative Apex Marketing Society’s case [1993] 201 ITR 338 (SC). With respect, we, therefore, hold that the view taken therein requires reconsideration as stated earlier by us. In the result, the order of the Kerala High Court following the decision of this court in Assam Co-operative Apex Marketing Society [1993] 201 ITR 338 is reversed. We hold that the society engaged in the marketing of agricultural produce of its members would mean not only such societies which deal with the produce raised by the members who are individuals or societies which are members thereof who may have purchased such goods from the agriculturists. Thus, we allow the civil appeal by setting aside the order made by the High Court and answering

MSEB Employee’s Co-op. Credit Society Ltd. the question referred to us in the affirmative in favour of the assessee and against the Revenue. There shall be no order as to costs.” 2.8. Identical ratio was laid down by Hon’ble Punjab & Haryana High Court in Karnala Cooperative Sugar Mills Ltd. vs CIT (2002) 253 ITR 659, 666 (P & H). In CIT v. Haryana State Co-operative Supply and Marketing Federation Limited [1990] 182 ITR 53 (P & H), an identical view as taken by the Gujarat High Court adverted to by us just now was taken. In Meenachil Rubber Marketing and Processing Co-operative Society Limited v. CIT [1992] 193 ITR 108, the Kerala High Court had occasion to examine this short question and it took the view that the provision had been incorporated bearing in mind that the exemption had been granted to encourage vital national activity in the nature of rural economy in the co-operative sector and, therefore, the construction to be placed on the provision should advance that intention. Explaining the meaning of marketing as was done by the Karnataka High Court to which we have adverted to earlier, the Kerala High Court was of the view that once the co- operative society buys the agricultural produce of the members of the society, that buying is the first activity in the several links of the activities to constitute marketing and the co-operative society is entitled to exemption. Similarly in CIT v. Kerala State Co-operative Marketing Federation Ltd. [1992] 193 ITR 624 (Ker), this question was again considered and the view taken by the Gujarat High

MSEB Employee’s Co-op. Credit Society Ltd.

Court to which we have adverted in Karjan Co-operative Cotton Sale, Ginning and Pressing Society Ltd.’s case [1981] 129 ITR 821, was reiterated. In CIT v. Tamil Nadu Co-operative Marketing Federation Ltd. [1983] 144 ITR 74 (Mad), it was held that the expression “co-operative society” occurring in section 80P(1) covers any co-operative society whether it is a primary society or an apex society and hence reference to members in clause (iv) of section 80P(2) can be taken to refer to the members of a primary society or members of an apex society as the case may be.

2.9. Now, I shall analyze, what is Co-operative bank? Ordinarily, banks do invest their money in Government securities. One of the purposes of such activity is to ensure availability of ready money meet various exigencies of the banking business. In case of co-operative banks, holding of Government securities would indeed appropriately connected with the banking business and thus their matter would be covered by the first part of section 80P(2)(a)(i) of the Act. The ratio laid down in following cases supports my view. i. Berhampur Co-operative Central Bank v. Addl. CIT, (1974) 93 ITR 168 (Ori); ii. Malabar Co-op. Central Bank Ltd. v. CIT, (1975) 101 ITR 87 (Ker); iii. Punjab Co-op. Bank Ltd. v. CIT, (1940) 8ITR 635 (PC); iv. Bihar State Co-op. Bank Ltd. v. CIT, (1960) 39 ITR 114 (SC);

MSEB Employee’s Co-op. Credit Society Ltd. v. Addl. CIT v. Ahmedabad Dist. Co-op. Bank Ltd. (1975) 101 ITR 733 (Guj); vi. CIT v. Co-op. Cane Development Union Ltd., (1973) Tax LR 869 (All); vii. CIT v. Orissa State Co-operative Housing Corporation Ltd., (1976) 104 ITR 157 (Ori).

Contra, on its own facts: Andhra Pradesh Co-op. Central Land Mortgage Bank Ltd. v. CIT, (1975) 100 ITR 472 (AP)]. At the same time, the ‘investment' contemplated above must be from out of the circulating capital or stock- trade of the society [MP. State Co-operative Bank Ltd. vs Addl.CIT, (1979) 119 327 (MP)j Thus, the income derived by the assessee from the investment in Government securities placed with the State Bank of India/Reserve Bank of India cannot be regarded as an essential part of its banking activity inasmuch as the same does not form part of its stock-in-trade or working/ circulating capital [Madhya Pradesh Co-operative Bank Ltd. v. Add!. ClT, (1996) 218 ITR 438,447 (SC), affirming, (1979) 119 ITR 327 (MP)]. Similarly, interest on securities earmarked against reserve and provident funds has been held not to be income from banking business [Madhya Pradesh Rajya Sahakari Bank v. ClT, (1988) 174ITR 150 (MP)].

2.10. The above discussed Supreme Court decision [218 ITR 438 (SC)] has been over- ruled in ClT v. Karnataka State Co-operative Apex Bank [(2001) 251 ITR 194, 196-97

MSEB Employee’s Co-op. Credit Society Ltd.

(SC)], where the later Supreme Court decision has ruled that interest income arising from the investment made, in compliance with the statutory provisions to enable it to carry on banking business, out of the reserve fund by a co- operative society engaged in banking business, is exempt under section 80P(2)(a)(i). The placement of such funds being imperative for the purpose of carrying on banking business the income therefrom would be income from the assessee's business.

Further, there is nothing in the phraseology of section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital [CIT v. Karnataka State Co-operative Apex Bank, (2001) 251 ITR 194, 196 (SC)].

2.11. In that view of the matter, interest on Government securities held as stock-in-trade is eligible for deduction under the provisions similar to section 80P(2)(a)(i). To such interest provisions similar to section 80P(2)(f) are not applicable [Add!. CIT. v. Rajasthan State Co-operative Bank Ltd., (1987) 163 ITR 213 (Raj); CIT v. Rajasthan State Co-operative Bank Ltd., (1985) 22 Taxman 69 (Raj)]. Following the Supreme Court decision [218 ITR 438 (SC)], the Rajasthan High Court has, in CIT v. Rajasthan State Co-operative Bank [(1997) 223 ITR 55, 66- 67 (Raj)], held that the Rajasthan decision [163 ITR 213 (Raj)] cannot be considered to be good law, on facts, in view

MSEB Employee’s Co-op. Credit Society Ltd. of the above Supreme Court decision [218 ITR 438 (SC)] and the provisions of the Rajasthan Co-operative Societies Act, 1965 (13 of 1965), and the Rules made thereunder from which it is evident that interest earned on securities investments by the bank is not a banking business as the said investment is neither of circulating capital or stock-in- trade of the co-operative bank as it has no absolute or unfettered right to withdraw the same whenever it likes. It can be withdrawn only in the proceedings of winding up of the co-operative society. In that view of the matter, the Tribunal was held not justified in holding that the income of Rs.35,69,868 from investment of reserve funds was exempt under section 80P [CIT v. Rajasthan State Co- operative Bank, (1997) 223 ITR 55, 66-67 (Raj)]. Also see, Rajasthan State Co-operative Bank Ltd. v. CIT, SLP (C) Nos. 12652-53 of 2002 :. (2003) 259 ITR (St.) 66 (SC).

2.12. In CIT v. Jila Sahakari Kendriya Bank Maryadit [(1997) 225 ITR 421, 425-26 (MP)], income from interest on securities earmarked to reserve fund and gratuity has been held not entitled to deduction under section 80P. 2.13. However, it is not necessary that a co-operative society should be primarily or exclusively a dealer in securities in order that interest on securities held by it should be entitled to exemption under section 80P(2)(a)(i) [see, Assam Co-operative Apex Bank Ltd. v. CIT, (1978) 112 ITR 87 (Gauh)]. In CIT v. u.r. Rajya Sahkari Bhumi Vikas Bank Ltd. [(1994) 208 ITR 758, 760-61(All)], the assessee-

MSEB Employee’s Co-op. Credit Society Ltd. co-operative society was functioning as a bank for the purposes of providing finance to cultivators and co- operative societies, etc. The assessee held certain shares in the Agricultural Refinance Corporation as well as certain units of the Unit Trust of India. The findings of the Tribunal that such shares and units were held by the assessee as its stock-in-trade have been held to be pure findings of fact recorded on the basis of appreciation of evidence, not giving rise to any question of law. Further, the Tribunal's holding that income from such shares and units was income from business carried on by the assessee and was exempt under section 80P(2)(a)(i) was held giving rise to no statable question of law. Also see, CIT v. Zila Sahakari Bank Ltd., SLP (Civil) No. 6328 of 1985: (1991) 189 ITR (St.) 115 (SC). In CIT v. Bangalore Distt. Co-operative Central Bank Ltd. [(1998) 233 ITR 282, 284-85 (SC)], it has been held that the decision in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT [(1996) 218 ITR 438 (SC)] was rendered on the facts of that case and it was not applicable to this case in view of the finding of the Tribunal that the income by way of interest on Government securities and dividends on shares of the Industrial Financial Corporation was attributable to the banking business of the assessee. Therefore, such income was eligible for deduction under section 80P(2)(a)(i). Approving the view taken in [233 ITR 282 (SC)], the larger Bench of the Supreme Court in CIT v. Kamataka State Co-operative Apex Bank [(2001) 251 ITR

MSEB Employee’s Co-op. Credit Society Ltd.

194, 196 (SC)] did not agree with the finding in that case [233 ITR 282 (SC)] that the Supreme Court decision [218 ITR 438 (SC)] was rendered on its own facts. 2.14. Where in the activity of advancing loans to the staff members, the interest paid on the money borrowed for this purpose would have to be set off against the interest charged from the staff members, the net result in this activity would be loss. Thus, in the absence of any income from this activity, no deduction under section 80P(2)(a)(i) could be claimed [CIT v. Haryana State Co-operative Land Development Bank Ltd., (2002) 254 ITR 107, 111 (Punj)] , CIT v. Bangalore City Co-operative Bank Ltd., SLP (Civil) Nos. 4334- 4335 of 1992: (1992) 195 ITR (St.) 2-3 (SC); CIT v. Kamataka State Co-operative Apex Bank, SLP (Civil) Nos. 13178-13180 of 2000 : (2001) 247 ITR (St.) 3 (SC).

2.15. Now, I shall analyze with respect to members of the society. -A member of the assessee-society, in section 80P, ordinarily, refers to a person who himself is a member of the society. Where another society is a member of the assessee-society, all members of the former do not ipso facto become members of the assessee-society [see, CIT v. U'P. Co-operative Cane Union Federation Ltd., (1980) 122 ITR 913 (All)]. Affirming the said Allahabad decision [122 ITR 913 (All)], the Supreme Court has, in U'P. Co-operative Cane Unions' Federation Ltd. v. CIT [(1997) 11 SCC 287, 291], held that in section 80P(2)(a)(i), when Parliament has MSEB Employee’s Co-op. Credit Society Ltd. used the expression 'members' it has used it in the normal sense of a member of a co-operative society. The intention was to extend the exemption to co-operative societies directly extending credit facilities to its members. There is nothing in the said provision to show that the intention was to grant exemption to co-operative societies which were extending credit facilities to persons who, though not the members of the said society, were members of another co- operative society which is a member of the co-operative society seeking exemption. The principle of lifting the corporate veil cannot have any application in the context of the provisions contained in section 80P(2)(a)(i). In that view of the matter, the assessee-federation, having cane unions as its members, was held not entitled to exemption from income from press and income from supply of pumping sets to cane-growers, who were members of the cane unions, under section 80P(2)(a)( i).

Providing credit facilities.- The expression "providing credit facilities", in section 80P(2)(a)(i), takes its colour from the activity of banking. In order that the same may constitute a business, it is necessary that these activities must be the chief source of income. A person who advances loans or supplies goods on credit in connection with and in the course of some other business of manufacture or purchase or sale of goods, etc., cannot be said to be carrying on the business of providing credit facilities [Addl. CIT v. U.P. Co- op. Cane Union, (1978) 114 ITR 70 (All)]. A "credit society"

MSEB Employee’s Co-op. Credit Society Ltd. within the meaning of these provisions can only mean a society which provides credit by way of loans of money to its members and not a society which sells goods on credit [CIT v. Coral Mills Workers Co-operative Stores Ltd., (1977) 106 ITR 868, 871 (Mad), special leave petition granted by the Supreme Court: (1991) 187 ITR (St.) 44 (SC)]. Also see, Malwa Mills Karamchari Paraspar Sahakari Sanstha v. CIT, (1982) 134 ITR 505 (MP); Rodier Mill Employees' Co- operative Stores Ltd. v. CIT, (1982) 135 ITR 355 (Mad). Thus, where the assessee-society was engaged in purchasing auto-rickshaws and selling them to its members under hire-purchase terms, it was held that the assessee could not be treated as providing credit facilities [CIT v. Madras Autorickshaw Drivers' Co-operative Society Ltd., (1983) 143 ITR 981 (Mad), special leave petition granted by the Supreme Court: (1991) 187 ITR (St.) 44 (SC), affirmed in Madras Auto Rickshaw Drivers' Co-operative Society v. CIT, (2001) 249 ITR 330, 331 (SC)]. So much so, selling goods on credit to the members does not amount to 'providing credit facilities' within the meaning of section 80P(2)(a)(i) [Kerala Co-operative Consumers' Federation Ltd. v. CIT, (1988) 170 ITR 455 (Ker), followed in CIT v. Kerala State Co-operative Marketing Federation Ltd., (1998) 234 ITR 301,302-03 (Ker)].

2.16. The expression "providing credit facilities" in section 80P(2)(a)(i) would comprehend the business of lending money on interest. It would also comprehend the MSEB Employee’s Co-op. Credit Society Ltd. business of lending services on profit for guaranteeing payments, because guaranteeing payments is as much a part of banking business for affording credit facility as advancing loans [CIT v. UP, Co-operative Cane Union Federation Ltd., (1980) 122 ITR 913, 916 (All)].

In CIT v. Pondicherry Co-operative Housing Society Ltd. [(1991) 188 ITR 671. 675 (Mad)], the activity of the assessee-society, a co-operative housing society, in making available funds for house building to a member has been held to be regarded as one of carrying on the business of providing credit facilities to its members. The restriction imposed on the user of the credit facilities extended by the assessee society for house building could not be construed as a means intended to secure the object of the society, viz., house building. At best, it could be regarded only as the imposition of a condition for obtaining credit facilities and would not in any manner affect the character of the activity or detract from the activity being one of providing credit facilities.

The facility of selling the goods on credit to its members by a co-operative society is an activity of business of selling of goods of which the facility is only an incidence and it will not amount to providing credit facilities in the nature of the business of banking so as to amount to carrying on the business of banking or providing credit

MSEB Employee’s Co-op. Credit Society Ltd. facilities to its members [CIT v. Co-operative Supply & Commission Shop Ltd.. (1993) 204 ITR 713, 718 (Raj)).

2.17. In the case of CIT v. Madurai District Central Co- operative Bank Ltd., (1984) 148 ITR 196 (Mad) [interest from securities held as per statutory requirements as also subsidies received from Government for opening new branches and giving loans to poorer sections at lower rate of interest were held income attributable to banking business and eligible for deduction]; Also see, CIT v. Ramanathapuram District Central Co-operative Bank Ltd., (1997) 224 ITR 226, 227 (Mad); CIT v. Madurai District Central Co-operative Bank Ltd., (1997) 224 ITR 237, 238 (Mad); CIT v. Ramanathapuram District Co-operative Central Bank Ltd., (1996) Tax LR 621,622 (Mad).

It is noted that in the case of CIT v. Dhar Central Co- operative Bank, (1984) 149 ITR 438 (MP) [income earned by the assessee, a co-operative society carrying on the business of banking and providing credit facilities to its members, from commission and brokerage by dealing in bills of exchange, Government subsidy, admission fee from members, incidental charges, etc., were held eligible for deduction benefit]. Also see, Bhopal Co- operative Central Bank Ltd. v. CIT, (1985) 156 ITR 655 (MP); Bhopal Co- operative Central Bank v. CIT, (1983) 169 ITR 573 (MP); CIT v. Bhopal Co-operative Central Bank Ltd., (1988) 172 ITR 423 (MP); Madhya Pradesh Rajya Sahakari Bank v. CIT,

MSEB Employee’s Co-op. Credit Society Ltd.

(1988) 174 ITR 150 (MP), special leave petition granted by the Supreme Court: (1992) 195 ITR (St.) 5-6 (SC); CIT v. Dhar Central Co-operative Bank Ltd., (1990) 183ITR 174 (MP).

It is observed that in CIT v. Bhopal Co-operative Central Bank Ltd., (1987) 164 ITR 713 (MP) [interest from Government securities held as per statutory requirements- held eligible for deduction. In the case of CIT v. Pondicherry Co-operative Housing Society Ltd., (1991) 188 ITR 671, 677 (Mad), special leave petition dismissed by the Supreme Court: (1994) 209 ITR (St.) 87 (SC) [interest received by the co-operative society, functioning as a co-operative housing society, on advances made by it to its members for constructing houses was held eligible for deduction under section 80P as it was engaged in carrying on the business of providing credit facilities to its members, amongst its other activities.

2.18. It is noted that in the case of CIT v. Co-operative Supply & Commission Shop Ltd., (1993) 204 ITR 713,718 Raj) [interest on the outstanding balances in respect of supplies of goods-held not eligible for deduction]. Also see, CIT v. Co-operative Supply & Commission Shop Ltd., (1996) 220 ITR 352, 354 (Raj); CIT v. Co-operative Supply & Commission Shop Ltd., (1996) 133 CTR (Raj) 40, 41.

2.19. In CIT v. U.P. Co-operative Cane Union Federation, (1996) 217 ITR 231, 233 All) [assessee's income

MSEB Employee’s Co-op. Credit Society Ltd. from service charges realised from cane growers for arranging credit facilities for them for the purchase of pump sets was held not eligible for deduction under section 80P(2)(a)(i) because the cane growers could not be treated as members of the assessee-society]. This Allahabad decision [217 ITR 231 (All)] has been affirmed in U'P. Co- operative Cane Union Federation Ltd. v. CIT [(1999) 237 ITR 574 (SC)], following Assam Co-operative Apex Marketing Society Ltd. v. Addl. CIT [(1993) 201 ITR 338 (SC)], which, in the context of the provisions of secion 80P(2)(a)(iii) has been impliedly overruled in Kerala State Co-operative Marketing Federation Ltd. v. CIT [(1998) 231 ITR 814 (SC)], which, in its turn has statutorily been superseded as a result of the amendment (w.r.e.f. 1-4- 1968) of section 80P(2)(a)(iii) by the Income-tax (Second Amendment) Act, 1998 (11 of 1999).

In the case of CIT v. Jila Sahakari Kendriya Bank Maryadit, (1997) 225 ITR 421, 424 (MP) [income derived from locker rent is not eligible for deduction under section80P(2)(a)(i) because such income cannot be correlated to any of the activities which may fall within the definition of 'banking'. However, miscellaneous receipts attributable to the banking business of the assessee are eligible for deduction under section 80P(2)(a)(i). But, house rent, which is not attributable to the banking business of the assessee, is not eligible for deduction].

MSEB Employee’s Co-op. Credit Society Ltd.

2.20. In CIT v. Madurai District Co-operative Bank Ltd., (1999) 239 ITR 700, 701-02 (Mad), following 148 ITR 196 (Mad) and 224 ITR 237 (Mad), discussed at serial No. (2) u/s. 80P, ante. [interest on securities; subsidy from Government; interest from other co-operative institutions and banks; dividend received by the assessee were business income entitled to deduction under section 80P(2)(a)(i)]. Also see, CIT v. Madurai District Central Co- operative Bank Ltd., (2000) 164 CTR (Mad) 71, 72, 73-74.

The Hon’ble Madras High Court in CIT v. Madurai District Co-operative Bank Ltd., (1999) 239 ITR 700, 703- 04 (Mad) [income from letting out the surplus meeting hall of the assessee, which was properly assessed as business income was held eligible for deduction.

The Hon’ble High Court in CIT v. Anakapalli Co- operative Marketing Society Ltd., (2000) 245 ITR 616, 618,624 (AP) [amount of service charges collected by the assessee from its members did not qualify for exemption under section 80P(2)(a)(i) especially when the assessee acted only as an agent between its members and the bank granting the loans to the members without the involvement directly or indirectly in the matter of repayment of loan.

2.21. The Hon’ble Apex Court in the case of Gujarat State Co-operative Bank Ltd. v. CIT, (2001) 251 ITR 522, 524 (SC), reversing Gujarat State Co-operative Bank Ltd. v.

MSEB Employee’s Co-op. Credit Society Ltd.

CIT, (2001) 250 ITR 229 (Guj) and following CIT v. Karnataka State Co-operative Apex Bank, (2001) 251 ITR 194 (SC) on the first point [assessee was held entitled to deduction under section 80P(2)(a)(i) in respect of the interest earned from funds utilised for the statutory reserves; income derived by the assessee from the hiring out of the safe deposit vaults, provision of which was part of the ordinary banking business of a bank as shown by section 6(1)(a) of the Banking Regulation Act, 1949, was income from the business of banking and deductible under section 80P(2)(a)(i)]. The Supreme Court decision [251 ITR 194 (SC)] has been followed in CIT v. Rajasthan State Co- operative Bank [(2005) 272 ITR 600 (Raj)] holding that the income from investment could be said to be from banking business and exempt under section 80P(2)(a)(i) of the Act.

2.22. The Hon’ble Apex Court in Mehsana District Central Co-operative Bank Ltd. v. ITO, (2001) 251 ITR 522, 525 (SC), reversed the decision of Hon’ble Gujarat High Court in Mehsana District Co-operative Bank Ltd. v. ITO, (2001) 251 ITR 520 (Guj). In CIT v. Ratnagiri District Central Co-operative Bank Ltd., (2002) 254 ITR 697, 707 (Born), special leave petition dismissed by the Supreme Court: (2002) 256 ITR (St.) 48 (SC) and (2003) 260 ITR (St.) 272 (SC) [interest accrued on the investment made in Indira Vikas Patra was held income arising out of banking business eligible for deduction under section 80P(2)(a)(i) of the Act.

MSEB Employee’s Co-op. Credit Society Ltd.

In CIT v. Ramanathapuram District Co-operative Central Bank Ltd., (2002) 255 ITR 423, 425 (SC) [interest on securities, subsidies from the Government, and dividend received by the assessee, a co-operative society carrying on banking business, were business income of the assessee and the same were eligible for deduction under section 80P(2)(a)(i)of the Act.

2.23. In CIT v. Krishak Sahkari Ganna Samiti Ltd., (2002) 258 ITR 594, 599-600 (All) [interest earned by the assessee-co-operative society from its members was held eligible for deduction under section 80P(2)(a)(i) of the Act as the main object of it was to lend to its members or to arrange finance to its members to enable them to purchase good seeds of sugarcane, fertilizers, etc.]. Also see, CfT v. Co-operative Cane Development Union Ltd., (2003) 130 Taxman 603, 604 (All). In CIT v. Nawanshahar Central Co- operative Bank Ltd., (2003) 263 ITR 320, 321-22 (P & H) [income from investment in PSEB Bonds, which was in the nature of security specified under section 20 of the Indian Trusts Act, 1882, and therefore, was an investment in accordance with the mandatory provisions of section 44 of the Punjab Co-operative Societies Act, 1961, was eligible for deduction under section 80P(2)(a)(i) of the Act for the assessment year 1994-95. 2.24. The Hon’ble jurisdictional High Court in CIT v. Ahmednagar District Central Co-operative Bank Ltd. :

MSEB Employee’s Co-op. Credit Society Ltd.

Osmanabad District Central Co-operative Bank Ltd. : Latur District Central Co-operative Bank Ltd., (2003) 264 ITR 38, 40, 41-42 (Bom) [commission from MSEB and MPCS was held eligible for deduction under section 80P(2)(a)(i) as the same was attributable to business of banking; still, each activity/form of business enumerated in section 6(1) of the Banking Regulation Act, 1949; per se, the activities/forms of business enumerated in clauses (a) to (0) of that section 6(1) may not attract the reliefs under section 80P(2)(a)(i)] of the Act. In CIT v. Sri Ram Sahakari Bank Ltd., (2004) 266 ITR 632, 634 (Karn) [interest and dividend income of Rs. 2,50,664 derived out of investment in National Savings Certificates, Indira Vikas Patras, Kisan Vikas Patras, short- term deposits in banks and shares of Maharashtra State Financial Corporation of India, were held to be eligible for deduction under section 80P(2)(a)(i)]. This view has been followed in ITO v. Karnataka Central Co-operative Bank Ltd. [(2004) 266 ITR 635, 636 (Karn)].

In CIT v. Grain Merchants Co-operative Bank Ltd., (2004) 267 ITR 742, 743-44, 749 (Karn) income received by the co-operative society by letting out the premise belonging to it, as also interest received out of the funds deposited in the Reserve Bank and other banks have been held exempt under section 80P(2)(a)(i) of the Act for the assessment years 1989-90 to 1991-92. 2.25. In CIT v. Rajasthan State Co-operative Bank, (2005) 272 ITR 600, 602 (Raj), following CIT v. Karnataka

MSEB Employee’s Co-op. Credit Society Ltd.

State Co-operative Apex Bank, (2001) 251 ITR 194 (SC) [income from investment of the reserves and other funds in various securities has been held eligible for deduction under section 80P(2)(a)(i)] of the Act.

In Gorakhpur Kshetriya Gramin Bank v. CIT, (2007) 292 ITR 205 (All) [for assessment year 1988-89, receipts on account of pay recovered from resigned staff, recovery of training cost and security forfeiture were admissible as deduction. In CIT v. Salem Co-operative Sugar Mills Ltd., (2006) 286 ITR 635 (Mad), followed in CIT v. Attur Agricultural Producers Co-operative Marketing Society Ltd., (2008) 306 ITR 151 (Mad); CIT v. Tamil Nadu Co-operative Silk Producers Ltd., (2009) 311 ITR 224 (Mad), SLP granted: (2008) 299 ITR (St.) 91 (SC) [taking into consideration the object for which the assessee-sugar mill had been created and the objects clause and/or the business activities of the assessee which mentioned granting loans and advances to the members at such rates as may be prescribed by the committee, the object of the assessee came within the purview of section 80P(2)(a)(i) of the Act and as such eligible to deduction for assessment year 1986-87].

2.26. In the case of CIT v. Sirohi S. B. V. Bank Ltd., (2010) 321 ITR 533 (Raj), SLP dismissed: (2010) 320 ITR (St.) 19 (SC) the activity of the bank in advancing house

MSEB Employee’s Co-op. Credit Society Ltd. building loans or provident fund loans was not the advancement to the customers of the bank but to employees only. The amount of interest earned by the assessee on various loans extended to its employees on provident fund and house building loans was not exigible for deduction under section 80P(2)(a)(i) of the Act.

In Bihar State Housing Co-operative Federation Ltd. v. ClT, (2009) 315 ITR 286 (Pat) the assessee was an apex housing co-operative society and its business was to provide credit facilities to its members, which were primary co-operative societies. The sum of Rs. 15,98,592 received by way of interest on bank deposit was ancillary and incidental to the business of providing credit facility to its members and, hence, deductible under section 80P(2)(a)(i) of the Act.

2.27. In CIT v. Haryana State Co-operative Apex Bank Ltd., (2010) 322 ITR 404 (Punj) [the assessee was entitled to deduction under section 80P(2)(a)(i) of the Act on the interest on refund of excess of income-tax. Once income-tax paid was derived from business income then interest income would partake of the character of the principal amount because the interest paid to the assessee is compensation on account of deprivation of the use of money. It is noted that in the case of CIT v. Punjab State Co-operative Bank Ltd., (2008) 304 ITR 113 (Punj), SLP dismissed: (2008) 306 ITR (St.) 3 (SC) [the assessee, a co-

MSEB Employee’s Co-op. Credit Society Ltd. operative bank, engaged in the business of banking, claimed deduction under section 80P(2)(a)(i). The income earned from HDFC bonds was eligible for deduction under section 80P(2)(a)(i)] of the Act.

The Hon’ble Gujarat High Court in CIT v. Baroda Peoples Co-operative Bank Ltd., (2006) 280 ITR 282 (Guj) [the deduction under section 80P(2)(a)(i) was rightly allowed on interest income as being attributable to the business of banking.

CIT v. Muzaffar Nagar Kshetriya Gramin Bank Ltd., (2010) 323 ITR 202 (All) [the deposit exceeding the statutory liquidity ratio was also in relation to banking activity. Thus, the income accrued out of such deposit was also attributable to the banking business and was deductible under section 80P(2)(a)(i) of the Act.

2.28. The Hon’ble Bombay High Court in CIT v. Maharashtra State Co-operative Bank Ltd., (2006) 282 ITR 581 (Bom) held that the interest arising from investment made by a co-operative society engaged in banking business, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund is deductible under section 80P(2)(a)(i)) of the Act.

In Bihar Rajya Sahkari Bhoomi Vikas Co-operative Bank Ltd. v. CIT, (2009) 313 ITR 247 (Pat), the interest derived from investment of the provident fund amount and MSEB Employee’s Co-op. Credit Society Ltd. the rental income, it was held that it did not qualify for deduction under section 80P(2)(a)(i) of the Act.

2.29. In CIT v. Solapur Nagari Audyogic Sahakari Bank Ltd., (2010) 328 ITR 292 (Bom), the interest received from KVPs and IVPs held to be income from banking business eligible for deduction). In CIT v. H. P. State Co- operative Bank Ltd., (2010) 323 ITR 1 (HP), the in- vestment of the funds by the banks including the non- reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also a part of the activity of banking. Thus, the interest earned on such deposits was directly attributable to the business of banking. The assessee-bank was entitled to deduction under section 80P(2)(a)(i) of the Act in respect of interest earned on deposits made even out of non-SLR fund ).

In Bihar State Co-operative Bank Ltd. v. CIT, (2010) 328 ITR 139 (Pat) [the rental income from property held eligible for deduction under section 80P(2)(a)(i)] of the Act.

In CIT v. Rajasthan State Co-operative Bank, (2005) 272 ITR 600 (Raj) [the Tribunal was correct in holding that the income from investment could be said to be from banking business and exempt under section 80P(2)(a)(i)] of the Act.

MSEB Employee’s Co-op. Credit Society Ltd.

2.30. In CIT v. Nawanshahar Central Co-operative Bank Ltd., (2007) 289 ITR 6 (SC), affirming CIT v. Nawanshahar Central Co-operative Bank Ltd., (2003) 263 ITR 320 (P & H). The SC decision [(2007) 289 ITR 6 (SC)] has been followed in CIT v. Punjab State Co-operative Bank Ltd., (2008) 300 ITR 24 (Punj); CIT v. Kangra Co-operative Bank Ltd., (2009) 309 ITR 106 (HP); CIT v. Nawanshahar Central Co-op. Bank Ltd., (2012) 349 ITR 689 (SC) [where a co-operative bank carrying on business of banking is statutorily required to place a part of its funds in approved securities, the income attributable thereto is deductible under section 80P(2)(a)(i) of the Act.

In Punjab State Co-operative Milk Producers Federation Ltd. v. CIT, (2011) 336 ITR 501 (P & H) the credit facility extended by the assessee to its members was ancillary to its main object and it was not carrying on the business of banking or providing credit facilities to its members and, thus, held not entitled to the benefits of section 80P(2)(a)(i) of the Act.

In CIT v. Andhra Pradesh State Co-operative Bank Ltd., (2011) 336 ITR 516 (AP) investment of funds by banks including the non-reserves is part of banking activities since no bank would like its reserve funds to remain idle and not earn any interest thus, the interest earned on such deposits is directly attributable to the business of banking and, hence, exempt under section 80P(2)(a)(i) of the Act.

MSEB Employee’s Co-op. Credit Society Ltd.

2.31. So far as the meaning of bank is concerned, beneficially, reference may be made to part V of banking regulation Act 1949, whereas, a primary cooperative bank is defined in section 56 of banking regulation Act, 1949.

2.32. Before I proceed further, it would be necessary to appreciate the general understanding of doctrine of mutuality. The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax; only the income which comes within the definition of Section 2(24) of the Act is subject to tax (income from business involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act). The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. Mutuality is not a form of organization, even if the participants are often called members. Any organization can have mutual activities.

MSEB Employee’s Co-op. Credit Society Ltd.

2.33. The doctrine of mutuality finds its origin in common law. One of the earliest modern judicial statements of the mutuality principle is by Lord Watson in the House of Lords, in 1889, in Styles (Surveyor of Taxes) v. New York Life Insurance Co. [1889] 2 TC 460 (hereinafter referred to as the "Styles case"). The appellant in that case was an incorporated company. The company issued life policies of two kinds, namely, participating and non-participating. The members of the mutual life insurance company were confined to the holders of the participating policies, and each year, the surplus of receipts over expenses and estimated liabilities was divided among them, either in the form of a reduction of future premiums or of a reversionary addition to the policies. There were no shares or shareholders in the ordinary sense of the term but each and every holder of a participating policy became ipso facto a member of the company and as such became entitled to a share in the assets and liable for a share in the losses. The company conducted a calculation of the probable death rate amongst the members and the probable expenses and liabilities; calls in the shape of premiums were made on the members accordingly. An account used to be taken annually and the greater part of the surplus of such premiums, over the expenditure referable to such policies, was returned to the members i.e. (holders of participating policies) and the balance was MSEB Employee’s Co-op. Credit Society Ltd. carried forward as a fund in hand to the credit of the general body of members. The question was whether the surplus returned to the members was liable to be assessed to income tax as profits or gains. The majority of the Law Lords answered the question in the negative. It may be noticed that in that case the members had associated themselves together for the purpose of insuring each other's life on the principle of mutual assurance, that is to say, they contributed annually to a common fund out of which payments were to be made, in the event of death, to the representatives of the deceased members. Those persons were alone the owners of the common fund and they alone were entitled to participate in the surplus. This surplus was obtained partly from the profits arising from non-participating policies and other business. It was held that that portion of the surplus which arose from the excess contributions of the holders of participating policies was not an assessable profit. It was therefore, held to be a case of mutual assurance. The individuals insured and those associated for the purpose of receiving their dividends and meeting other stipulated requisites under the policies were identical. It was held that that identity was not destroyed by the incorporation of the company. Lord Watson even went to the extent of saying that the company in that case did not carry on any business at all, which perhaps was stating the position a little too widely as pointed out by Viscount

MSEB Employee’s Co-op. Credit Society Ltd.

Cave in a later case; but, be that as it may, all the Noble Lords, who formed the majority, were of the view that what the members received were not profits but their respective shares of the excess amount contributed by themselves. They held thus:

"... when a number of individuals agree to contribute funds for a common purpose ... and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them. I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits."

2.34. Lord Watson's statement was explained by the House of Lords in Commissioners Of Inland Revenue v. Cornish Mutual Assurance Co. Ltd. [1926] 12 TC 841 (HL) wherein it was held that a mutual concern may be held to carry on a business or trade with its members, though the surplus arising from such trade is not taxable income or profit.

2.35. The Hon’ble High Court of Australia first considered the mutuality principle in Bohemians Club v. Acting Federal Commissioner of Taxation [1918] 24 CLR 334 :

"A man is not the source of his own income ... A man's income consists of moneys derived from sources outside of himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income ... The contributions are, in MSEB Employee’s Co-op. Credit Society Ltd. substance, advances of capital for a common purpose, which are expected to be exhausted during the year for which they are paid. They are not income of the collective body of members any more than the calls paid by members of a company upon their shares are income of the company. If anything is left unexpended it is not income or profits, but savings, which the members may claim to have returned to them." (Emphasis added)

2.36. One of the first Indian cases that dealt with the principle was CIT v. Royal Western India Turf Club Ltd. AIR 1954 SC 85. It quoted with approval three conditions stipulated in The English & Scottish Joint Co- operative Wholesale Society Ltd. (supra), which were propounded after referring to various passages from the speeches of the different Law Lords in Styles (Surveyor of Taxes) case (supra). Lord Normand, who delivered the judgment of the Board summarized the grounds of the decision in Styles (Surveyor of Taxes) case (supra) as follows:

"From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund; (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate; and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves."

MSEB Employee’s Co-op. Credit Society Ltd.

2.37. Now, I Shall consider each of these conditions in detail before proceeding to the facts of the case. The first condition requires that there must be a complete identity between the contributors and participators. This was first laid down by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills[1932] 16 TC 430, 448 (HL); CIT v. Ferozepur Ice Manufacturers' Association [1972] 84 ITR 607 (Punj. & Har.) wherein he observed:

"The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators."

2.38. On this aspect of the doctrine, especially with regard to the non-members, Halsbury's Laws of England, 4th Edition, Reissue, Vol. 23, paras 161 and 162 (pp. 130 and 132) states:

"Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.

Members' clubs are an example of a mutual undertaking; but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting...."

MSEB Employee’s Co-op. Credit Society Ltd.

2.39. Simon's Taxes, Vol. B, 3rd Edn., paras B1.218 and B1. 222 (pp. 159 and 167) formulate the law on the point, thus:

"..it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered....

It has been held that a company conducting a members' (and not a proprietary) club, the members of the company and of the club being identical, was not carrying on a trade or business or undertaking of a similar character for purposes of the former corporation profits tax.

A members' club is assessable, however, in respect of profits derived from affording its facilities to non- members. Thus, in Carlisle and Silloth Golf club v. Smith, [1913] 3 K.B. 75, where a members' golf club admitted non-members to play on payment of MSEB Employee’s Co-op. Credit Society Ltd. green fees it was held that it was carrying on a business which could be isolated and defined, and the profit of which was assessable to income tax. But there is no liability in respect of profits made from members who avail themselves of the facilities provided for members."

(Emphasis supplied)

2.40. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequence. Kanga & Palkhivala explain this concept in "The Law and Practice of Income Tax" (8th Edn. Vol. I, 1990) at p. 113 as follows:

"...The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid." The Madras, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects...."

(Emphasis supplied)

MSEB Employee’s Co-op. Credit Society Ltd.

2.41. British Tax Encyclopedia (I), 1962 Edn. (edited by G.S.A. Wheatcroft) at pp. 1201, dealing with "mutual trading operations", the law is stated as under:

"For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate; it does not matter that the class may be diminished by persons going out of the scheme or increased by others coming in...." (Emphasis supplied)

2.42. In Jones v. South-West Lancashire Coal Owners' Association Ltd. 1927 AC 827, Viscount Cave LC held that "sooner or later, in meal or in malt, the whole of the associations" receipts must go back to the policy holders as a class, though not precisely in the proportions in which they have contributed to them and the association does not in any true sense make any profit out of their contributions.

2.43. Therefore, in the case of Royal Western India Turf Club Ltd. (supra), since the club realized money from both members and non- members, in lieu of the same services rendered in the course of the same business, the MSEB Employee’s Co-op. Credit Society Ltd. exemption of mutuality could not be granted. The Hon’ble Supreme Court held thus:

"As already stated, in the instant case there is no mutual dealing between the members inter se and no putting up of a common fund for discharging the common obligations to each other undertaken by the contributors for their mutual benefit. On the contrary, we have here an incorporated company authorised to carry on an ordinary business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. There is no dispute that the dealings of the company with non-members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern."

(Emphasis supplied)

2.44. The second feature demands that the actions of the participators and contributors must be in furtherance of the mandate of the association. In the case of a club , it would be necessary to show that steps are taken in furtherance of activities that benefit the club, and in turn its members. Therefore, in Chelmsford Club (supra), since the appellant provided recreational facilities exclusively to its members and their guests on "no-profit-no-loss" basis and surplus, if any, was used solely for maintenance and development of the club , the Court allowed the exception of mutuality.

2.45. The mandate of the club is a question of fact and can be determined from the memorandum or articles of association, rules of membership, rules of the organization,

MSEB Employee’s Co-op. Credit Society Ltd. etc. However, the mandate must not be construed myopically. While in some situations, the benefits may be evident directly in the short-run, in others, they may be accruable to an organization indirectly, in the long-run. Space must be made for both such forms of interactions between the organization and its members. Therefore, as Finlay J. observed in National Association of Local Government Officers v. Watkins [1934] 18 TC 499 where member of a club orders dinner and consumes it, there is no sale to him. At the same time, as in case of CIT v. Bankipur club Ltd. [1997] 5 SCC 394, where a club makes 'surplus receipts' from the subscriptions and charges for the various conveniences paid by members, even though there is no direct benefit of the receipts to the customers, the fact that they will eventually be used in furtherance of the services of the club must be considered as a furtherance of the mandate of the club.

2.46. Thirdly, there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. The locus classicus pronouncement comes from Rowlatt, J's observations in Thomas v. Richard Evans & Co. Ltd. [1927] 11 TC 790 wherein, while interpreting Styles (Surveyor of Taxes) case (supra), he held that if profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. He observed thus:

MSEB Employee’s Co-op. Credit Society Ltd.

"But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if a trading company, by trading with the shareholders - even if it limited to trading with them - makes a profit, that profit belongs to the shareholders, in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers. It comes back to them as shareholders, upon their shares. Where all that a company does is to collect money from a certain number of people - it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand it, is the effect of the decision in the New York case." (Emphasis supplied)

2.47. In CIT v. Kumbakonam Mutual Benefit Fund Ltd. AIR 1965 SC 96, the Hon’ble Apex Court differentiated the facts of the case before it from those of Styles (Surveyor of Taxes) case (supra) and denied the exemption of MSEB Employee’s Co-op. Credit Society Ltd. mutuality because of the taint of commerciality. It was observed thus:

"It seems to us that it is difficult to hold that Style's case applies to the facts of the case. A shareholder in the assessee company is entitled to participate in the profits without contributing to the funds of the company by taking loans. He is entitled to receive his dividend as long as he holds a share. He has not to fulfill any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the position of the assessee is no different from an ordinary bank except that it lends money to and receives deposits from its shareholders. This does not by itself make its income any the less income from business within S. 10 of the Indian Income Tax Act."

2.48. However, at what point mutuality ends and commerciality begins is a difficult question of fact. It is best summarized in Bankipur Club (supra) wherein Hon’ble Apex Court echoed the following views:

"…if the object of the assessee company claiming to be a "mutual concern" or “club” is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or "members 'club " is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a MSEB Employee’s Co-op. Credit Society Ltd. trade/business/transaction and the resultant surplus is certainly profit - income liable to tax. We should also state, that "at what point, does the relationship of mutuality end and that of trading begin" is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. "Whether or not the persons dealing with each other, is a 'mutual club or carrying on a trading activity or an adventure in the nature of trade", is largely a question of fact [Wilcock's case - 9 Tax Cases 111, (p.132); C.A. (1925) (1) KB 30 at p. 44 and 45]."

2.49. In Royal Western India Turf club Ltd. (supra), Hon’ble Supreme Court made similar observations, holding that it is not always the case that a legal entity cannot make profits out of its members. It held as follows :

"14…The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing 'per se' to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them.

Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact

MSEB Employee’s Co-op. Credit Society Ltd. of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members…"

2.50. In the light of discussion made hereinabove along with the judicial pronouncements, I am of the view that for getting the deduction under the section, there has to be direct and proximate connection or nexus to the earning of the assessee society. Provision of section 80P was intended to encourage and promote to growth of co- operative societies, therefore, a liberal construction should be given to the language employed in the provision as was held in CIT vs South Arcot District Co-operative Marketing Society Ltd. 176 ITR 117, 119 (SC), Broach District Co- operative Cotton sales, Ginning and Pressing Society Ltd. vs CIT 177 ITR 418, 422 (SC), CIT vs Pondichery Co- operative Housing Society Ltd. 188 ITR 671 (Mad.), Meeenachil Rubber Marketing and Processing Co-operative Society Ltd. vs CIT 193 ITR 108 (Kerala) and Karnal Co- operative Sugar Mills Ltd. vs CIT (2002) 253 ITR 659, 666 (P & H). Identical ratio was laid down in U.P. Co-operative Bank Ltd. vs CIT 61 ITR 563 (All.). So far as, the finding of the ld. Commissioner of Income Tax (Appeals) with respect to provisions of section 80P(2)(a)(i) is concerned, in the light

MSEB Employee’s Co-op. Credit Society Ltd. of the decision in the case of Totagar Co-operative vs ITO, it is against the assessee as it cannot be said to be income “derived from” providing credit facilities to its members. It is noted that in the case of ACIT vs M/s Bajaj Auto Ltd. Employees co-op. Society credit Ltd, relief was granted u/s 80P(2)(d) of the Act. However, I find that sub-section 2(d) also speaks in respect of “any income” by way of interest or dividends derived by the Co-operative society from its investment with any other Co-operative society and nowhere speaks about bank. It is also noted that section 80P(4) specifically says that 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. With the insertion of 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) and “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a Taluk and the principle of object of which is to provide for long term credit for agricultural and rural development activities. Whereas, sub-section (4) of section 80P has withdrawn the deduction to the co-operative bank other than co-operative agriculture society or a primary Co-operative agricultural and rural development bank w.e.f. A.Y. 2007-08. If the totality of MSEB Employee’s Co-op. Credit Society Ltd. facts are analyzed with the facts of the present appeal is not clear as to how much interest was received from fixed deposits maintained with the banks and how much from co-operative societies. The Ahmedabad Bench of the Tribunal in State Bank of India Employees co-operative credit society ltd. (2015) 57 taxman.com 367 vide order dated 26/03/2015, wherein the assessee society, having accepted deposits from its members, kept the idle fund with bank, since there was no nexus between the interest earned on the said deposits and business of the assessee providing credit facility to its members, held that it could not claim deduction u/s 80P(2)(d) of the Act. Since, the source of interest, as mentioned earlier, how much from the bank and from the co-operative society are not clear, I remand this appeal to the file of the ld. Assessing Officer to examine the claim of the assessee afresh. The assessee is directed to furnish evidence as to how much interest was received from banks and how much from the co-operative society. After getting such bifurcation, the ld. Assessing Officer is directed to decide, in the light of the aforesaid decisions and discussion made hereinabove, including the decision from Hon’ble Apex Court in Bangalore Club (2013) 29 taxman.com 29 (SC) (on doctrine of mutuality), Totgars Co-operative Sale Society Ltd. vs ITO (2010) 322 ITR 283 (SC), CIT vs Usha International Ltd. (2012) 348 ITR 485 (Del.) and in accordance with law. The assessee be given opportunity of being heard and further liberty to furnish

MSEB Employee’s Co-op. Credit Society Ltd. evidence, if any, in support of its claim. Thus, the appeal of the assessee is allowed for statistical purposes only.

Finally, the appeal of the assessee is allowed for statistical purposes only.

This order was pronounced in the open court on 15/01/2016.