M/S ARIYALLUR SERVICE CO-OP BANK,MALAPPURAM vs. INCOME TAX OFFICER WARD (3), TIRUR

O R D E R Per: Bench This is a set of Appeals by two different co-operative banks directed against the respective orders by the National Faceless Appeal Centre, Delhi (‘CIT(A)’ for short), dismissing the Assessee’s appeals contesting their assessments under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for Assessment Years (AYs) 2009-10 & 2017-18. The issues arising in these appeals are being 64&65/Coch/2022 ITA Nos. 932/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. common, the appeals were heard together and are being disposed of vide consolidated order.

(I) That section 80P of the Income-tax Act is a benevolent provision, which was enacted by the Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; 64&65/Coch/2022 ITA Nos. 932/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. (II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub- section (2) of section 80P must be given by way of deduction; (III) That this court in Kerala State Co-operative Marketing Federation Ltd. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the Legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the Legislature expressly says so—which is not the case with section 80P(2)(a)(i); (V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are co-operative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4).” The appellant-society in that case being not a co-operative bank, was therefore found by the Hon'ble Courtas not coming within the mischief of s. 80P(4). So, however, it was conducting business illegally with nominal members, who could not be Members of the society under the Andra Pradesh Mutually Aided Cooperative Societies Act, 1995, as well as to the members of the general public. It was for this reason that it could not be regarded as a co-operative society meant only for its members and providing credit facilities to it’s Members. In case of the Kerala Act, on the other hand, the definition of a member, which reads as under, includes a nominal member: ‘2. In this Act, unless the context otherwise requires,—. . . (f) 'Co-operative Society' or 'society' means a Co-operative society registered or deemed to be registered under this Act; . . .

ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. (l) 'member' means a person joining in the application for the registration of a Co- operative society or a person admitted to membership after such registration in accordance with this Act, the rules and the bye-laws and includes a nominal or associate member; . . . (m) 'nominal or associate member' means a member who possess only such privilege and rights of a member who is subject only to such liabilities of a member as may be specified in the bye-laws; . . . It, in fact, expressly permits loans to non-members as well (ss. 59(2) & 59(3)), which is thus not illegal. The decision in Citizen Co-op. Society Ltd. (supra) was thus found by the Apex Court in Mavilayi Service Co-operative Bank Ltd. (supra),a society registered under the Kerala Act as a PACS, as not applicable on facts, and being therefore entitled to deduction u/s. 80P on the profits attributable to the qualifying activity of provision of credit to its members (s.80P(2)(a)(i)). This, then, enlists broadly the case of the parties before us.

5.1 We may, next, toward examining the issue before us, delineated hereinabove, draw out the salient features of the Judgment in Mavilayi Service Co- operative Bank Ltd. (supra), relied upon by the assessee, as under: a) section 80P is a benevolent provision enacted by the Parliament to encourage and promote the growth of cooperative sector in the economic life of the country. As such, it is to be read liberally and in favour of the assessee; b) the burden is on the assessee to show, by adducing facts that it entitled to claim u/s. 80P; c) The word ‘engaged’in s.80P(2)(a) entails examination of all the facts of the case; d) The AO, when he engages in a fact finding enquiry, cannot be said to be going behind the registration certification; e) The deduction u/s. 80P(2)(a)(i) is given without reference to any restriction or limitation and, therefore, cannot be restricted or limited by implication by adding the word ‘agricultural’ into s. 80P(2)(a)(i) when it is not there; f) credit to its members (which would be as per the Kerala Act) does not necessarily mean agriculture credit alone; 64&65/Coch/2022 ITA Nos. 932/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. g) the specific provision does not require the cooperative society to be a PACS to claim deduction u/s. 80P(2)(a)(i). That is, the nature of cooperative society, as ‘X’ or ‘Y’, is irrelevant; h) a co-operative bank is a co-operative society in the business of banking as defined u/s. 5(b) of BRA, operating under licence from RBI; i) whether the assessee has lost all characteristics of being a PACS or the Registrar of Co-operativeSocieties alone can look into as to whether the PACS is, or is not, a cooperative bank, and whether the assessee’s classification as a PACS ought to continue or be reclassified as a co-operative bank, is not relevant. j) The Kerala Act especially permits loans by a PACS to non-members, which therefore is not illegal. k) extension of credit to non-members would not disentitle to the society from availing the deduction u/s. 80P(2)(a)(i). The distinction between eligibility for deduction and attributability of profits and gains to an activity (i.e., the quantum of deduction), is a real one.

The Revenue’s case, on the other hand, may be summed up as follows, for which reference may also be made to para 2 of this order: a) The assessee, though registered under the Kerala Act as PACS has lost all characteristics thereof 93-99% of its lending is for non- agricultural purposes. b) It is engaged in accepting the deposits as well as providing all types of loans, to members of the public, by being compulsorily required to become nominal members either under category ‘C’ or ‘D’. c) It invests in shares of District Co-operative Bank and also different co-op. societies, i.e., with a view to earn profit, diluting mutuality.

5.2 A plain reading of the provision,which has witnessed an amendment by way of the extant sec. 80P(4) w.e.f. 01/04/2007 (AY 2007-08 onwards), shows that PACS is defined in sec. 80P with reference to BRA. This is quizzical as BRA itself is not applicable both to PACS (as well as Primary Co-operative Agricultural Rural 64&65/Coch/2022 ITA Nos. 932/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. Development Bank (PCARDB) (s.3). Two, PACS being defined under the Act, i.e., with reference to BRA, it is not necessary for the purpose to visit the provisions of the Kerala Act. The Apex Court in Mavilayi SCB Ltd. (supra)observedw.r.t. s.2(19) of the Act that once an assessee is a co-operative society registered under the relevant State Act, it is not necessary for the purpose of eligibility to probe further as to if it is a society ‘X’ or ‘Y’ (para 28). That is to say, once the condition of deduction as specified in the Act is satisfied, it is not necessary to explore further in the matter.

5.3 What,then, one may ask, is the purport of sec. 80P(4), which refers to PACS, as indeed to Primary Co-operative Agricultural Rural Development Bank (PCARDB). As explained in Citizen CS Ltd. (supra), which also finds reproduction in Mavilayi SCB Ltd. (supra) (at para 20/pg. 33): ‘23. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a co-operative bank. However, if it is a primary agriculture credit society or a primary co-operative agriculture and rural development bank, the deduction would still be provided. Thus, co-operative banks are now specifically excluded from the ambit of section 80P of the Act.’ (pg.14) The Apex Court, whose word is final in the matter, thus reads it exactly in terms of the clear language of the provision; a tautology as it were. This is also inferable from contemporaneous exposito, being the Finance Minister’s speech dated 28/02/2006 on explaining the need for introducing s.80P(4) (A), as well as the Circular dated 28/12/2006 (at [2007] 288 ITR (St.) 9, 28, containing explanatory notes on Provisions contained in Finance Act, 2006 (B), both of which, duly noted in Mavilayi SCB Ltd. (supra), may be reproduced for ready reference: “166. Co-operative Banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Co- operative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income- taxAct. However, I propose to excludeall other co-operative banks from the scope of that section." (A)(para 36/pg.41-42) "Withdrawal of tax benefits available to certain co-operative banks ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. 22.2. The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operative bankother than a primary agri cultural credit society or a primary co-operative agricultural and rural development bank. The expressions 'co-operative bank', 'primary agricultural credit society' and 'primary co-operative agricultural and rural development bank' have also been defined to lend clarity to them.” (B) (para 37/pg.42) ([2007] 288 ITR (St.) 9, 28) The said reading clearly suggests that PACS and PCARDBare categories of co- operative banks, i.e., a subset within the larger set of ‘co-operative banks’, excluded from the benefit of sec. 80P w.e.f. 01/04/2007 per s.80P(4). However, a PACS, to which we would now limit our discussion, is, by definition, not a primary co-operative bank and, thus, not a co-operative bank (s. 5(cci) r/w 5(cciv)& (ccv)).There is thus a clear dichotomy in the provision.What, one may ask, is the purpose of retaining PACS within the ambit of sec. 80-P by carving an exception for it u/s. 80-P(4), when it is not a cooperative bank, which only is excluded thereby? The provision of s.80P(4) may well have ended with the words ‘any cooperative bank’ occurring therein. The provision of sec. 80P(4), explained by the Apex Court to be in the nature of aproviso, is thus internally inconsistent. Why,the question arises, it uses the word ‘Bank’ in it’s name, proscribed by s. 7 of the BRA for a cooperative society other than a cooperative bank, to which rule there is an exception for a primary credit society, defined u/s. 5(ccvi) as a cooperative society, other than a PACS, in the business of banking! The same creates a doubt if the appellant-societies are indeed PACSs. We visitthe relevant provision of the Kerala Act to eliminate any doubt in the matter, to find the definition of PACS therein, reproduced as under, to be in agreement with thatunder the Act and, further, to include, inter alia, a service cooperative bank as the assessee, resolving the aspect of the user of the word ‘bank’ in the name: ‘2.(oaa) 'Primary Agricultural Credit Society' means a Service Co-operative Society, a Service Co-operative Bank, a Farmers Service Co-operative Bank and a Rural Bank, the principal object of which is to undertake agricultural credit activities and to provide loans and advances for agricultural purposes, the rate of interest on such loans and ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. advances shall be the rate fixed by the Registrar and having its area of operation confined to a Village, Panchayat or a Municipality; Provided that the restriction regarding the area of operation shall not apply to Societies or Banks in existence at the commencement of the Kerala Co-operative Societies (Amendment) Act, 1999 (1 of 2000). Provided further that if the above principal object is not fulfilled, such societies shall lose all characteristics of a Primary Agricultural Credit Society as specified in the Act, Rules and Bye-laws except the existing staff strength. . . . The definition per the Kerala Act is rather even more stringent, providing explicitly for the society losing all the characteristics of a PACS if it does not fulfil the conditions thereof, i.e., subsequent to its registration as a PACS.

5.4 The question that thus arises next is if, taking cognizance of this inconsistency, which is glaring, the provision of s. 80P, all parts of which, as in case of any other provision,are to be read together and in harmony, drawing on all aids, internal and external, to the interpretation of statutes,this dichotomy is to be resolved.We think it certainly is to; the Apex Court in K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) -noted and duly relied upon in Mavilayi SCBLtd. (supra), stating that even the marginal note to a provision is important inasmuch as it indicates the general ‘drift’ of the provision. It, in CC (Imports) v. Dilip Kumar & Co. (CA 3327/2007, dated 30/7/2018),explained that an exemption provision is to be strictly construed. The question, however, may arise for consideration only where the assessee-society is, on facts, a co-operative bank. This is, as explained in Mavilayi SCB Ltd. (supra), where it is not, as was in that case, the further question of whether it is, or is not, a PACS (or PCARDB) becomes irrelevant. The argument, or logic of the argument, is unexceptional, and follows the clear language of s. 80P(4). However, the basic premise thereof is that a PACS (or PCARDB) is a class or category of co-operative bank, which has been, despite being excluded from the purview of s. 80P w.e.f. 01/04/2007, saved by the amending provision itself. If the assessee is not a co-operative bank, it gets excluded at the threshold, being outside the scope of the proviso of s. 80P(4),so ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. that the further inquiry if it is a PACS is rendered superfluous. If, on the other hand, it is, the enquiry as to if it is a PACS is again irrelevant as a PACS cannot, by definition, be a co-operative bank. That is, it being registered as a PACS is itself sufficient to be regarded as not a cooperative bank. We are here, we clarify, not speaking with reference to the facts of a case, as where it is on facts foundto be not working as a PACS, but w.r.t. the architecture of the provision, i.e., its structural integrity. As such, consideration as to whether an assessee is, or is not, a PACS, become irrelevant irrespective of whether it is a co-operative bank or not. Reference to PACS in s. 80P(4) isrendered otiose and redundant, violating a basic postulate of interpretation of statues. This could not apparently be the intention of the Legislature, to discern which is the foundational basis of any interpretative exercise(CIT v. BabyMarine Exports[2007]290 ITR 323 (SC)).This is particularly so as aproviso is, as explained in Mavilayi SCB Ltd. (supra) with reference to judicial precedents (paras 41 to 44), to be read inconsistence with the main provision, i.e., to which it operates as an exclusion; the golden rule of interpretation being to read the section as a whole, i.e., inclusive of the proviso, in a manner that they mutually throw light on each other and result in a harmonious construction (UoI v. Dileep Kumar Singh [2015] 4 SCC 421). Further still, it is again trite law that a provision is to be read so as to effectuate the object of the statute and not to defeat it: refer CIT v. Mahindra & Mahindra Ltd. [1983] 144 ITR 225 (SC), noted with approval in both,Citizen CS Ltd. (supra) and Mavilayi SCB Ltd. (supra). Aswe think, the provision of s. 80P, read as a whole and harmoniously, would imply giving meaning and purpose to the reference to PACS in s. 80P(4), so that it is not rendered as without purpose. As such, a co-operative society engaged in either the business of banking or provision of credit to its members, is, w.e.f. 01/04/2007, excluded from the purview of s. 80P except where it falls to be regarded as a PACS or PCARDB, both terms being read and understood in terms of their clear definitions, provided for in the Act.We are in this guided by the final 13 | P a g e ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. decision therein by the Hon’ble Court, determining the appellant-society, though not a cooperative bank, as yet a cooperative society which would stand to be included u/s. 80P(4) and, thus, excluded for the benefit of s. 80P.We also take note of the fact that both the eligible activities u/s. 80P(2)(a)(i), i.e., carrying on the business a) of banking, or, b) providing credit facilities to its members, are regarded by the provision at par, i.e., it regards both as eligible activities, and draws no distinction between the two, so that the profit and gains from either would fall to be exempt u/s. 80P(2)(a)(i). That is, cooperative societies,where engaged in the business of lending,are saved only where it is predominantly for agricultural purposes, treating all other co-operative societies engaged either in the business of banking or lending to their members, firstly, at par and, secondly, as otherwiseincluded u/s. 80P(4). This would also eschew cases as the instant where, taking advantage of an ambiguity therein, affairs are arranged in a manner to defeat the law inasmuch as all types of loans are made to all and sundry adopting the route of ‘nominal members’. Cooperative societies engaged in lending to their members, or predominantly so, for whatever purpose,could stand to be excluded on the principle of mutuality. Income by way of interest or dividend on investment in another cooperative society stands exempted u/s. 80P(2)(d), being only an extension of the principle of mutuality.It is this, we would like to think, that prompted the Apex Court in Citizen CS Ltd. (supra) to state the assessee-appellant as being not a cooperative society meant for its members and providing credit facilities thereto.

5.5 So, however, the aforesaid expression of opinion is to no consequence, being in fact stated only so as to take the observation of the internal consistency afore-said to its logical end; the Apex Court, as afore-noted,clearly opining that the credit to members does not include and cannot be read to mean agricultural credit, ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. or agricultural credit alone; further, abundantly clarifying that an enquiry into whether a co-operative society is a PACS is of no relevance where it is not a co- operative bank, i.e., engaged in the business of banking as defined in s. 5(b) of the BRA and, further, under licence from RBI. Section 3 of the BRA in fact excludes PACS (and PCARDB) from the purview of the BRA. Reference, for clarity, stands also made by it to the clarification letter dated 09/05/2008 by CBDT opining of Delhi Co-op. Urban T & C Society as being entitled to deduction u/s. 80P as it is not a co-operative bank as defined in Part V of the BRA. It is, further, while doing so, cognizant of the inconsistency aforesaid, for which reference may be made to para 39 (pgs. 42-43), which reads as under, though does not consider it necessary to dwell thereon:- “The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks that function at par with othercommercial banks, i.e., which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56, is that a primary co- operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Bank- -ing Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. (emphasis, ours) Cognizant of the dichotomy presented by the language of s. 80P(4), i.e., given that ‘cooperative bank’ and ‘PACS’ are mutually exclusive groupings, so that reference to the latter in s. 80P(4) could only be in the context of a ‘co-operative society’, as distinct from a ‘cooperative bank’, the Hon’ble Court has, as appears to us, adopted the principle of strict interpretation of taxing statutes, allowing the subject the benefit of doubt; it’s decision being the final word in the matter.

5.6 We may next advert to the second objection by the Revenue in the instant case, being germane to the issue before us. That is, by lending to non- 15 | P a g e ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. members, as indeed to nominal members, there has been a violation of the condition of mutuality, i.e., all the contributors and participants forming an identity. Besides nominal members, who could not be regarded as real members, it also cites the investment of it’s funds by the appellant-society in cooperative banks and societies with a view to earning profit. We may toward this reproduce the relevant part of the arguments before, and of its consideration by, the Apex Court in Citizen Co-op. Society Ltd. (supra), as under:- ‘25. So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction providedunder section 80P of the Act is not sub-section (4) thereof. What has been noticed by the Assessing Officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violation of the provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of "nominal members". These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co-operative Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction under section 80P(2)(a)(i) of the Act.

ITA Nos. 882&883/Coch/2022/SA 64&65/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. It is noticed that the fund invested with banks which are not members of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund as said by the MD vide his statement dated December 20, 2010. Though the bank formed the third-party vis-a-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients ofmutuality are also found to be missing as discussed in further paragraphs. In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred to as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all."

5.7 In Mavilayi SCB Ltd. (supra), however, the Hon’ble Court, while considering it’s earlier decision in Citizen CSLtd. (supra), relied upon by the 64&65/Coch/2022 ITA Nos. 932/Coch/2022 & SP 69/Coch/2022 Ariyallur Service Co-op. Bank Ltd. &Niramaruthur Service Co-op. Bank Ltd. Revenue before it, does not regard absence of mutuality as a proposition laid down therein (para 21). We say ‘absence of mutuality’ as that would be the only fall-out of accepting deposits from public and lending thereto; the nominal members, in absence of any provision to induct them as members, being liable to be regarded as members of the general public. It regards the conduct of a business with general public and/or with members illegally as the basis of the decision in Citizen CS Ltd. (supra) in non-allowing deduction u/s. 80P. The Apex Court in Mavilayi SCB Ltd. (supra) having thus duly considered the decision in Citizen CS Ltd. (supra) in totality, including this part; rather, reproducing it at para 20 (pgs. 30 to 35), it’s opinion thereon is final. We in fact also observe no argument qua mutuality having been raised before it by either side.