TaxTMI 
TaxTMI 
2016 (1) TMI 1262
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....rms of the relevant provisions of the Act. Nevertheless, a liberal approach has to be adopted by the appellate authorities, where delay has occurred for bona fide reasons on the part of the assessee or the Revenue in filing the appeals. In matters concerning the filing of appeals, in exercise of the statutory right, a refusal to condone the delay can result in a meritorious matter being thrown out at the threshold, which may lead to miscarriage of justice. The judiciary is respected not on account of its power to legalize in justice on technical grounds but because it is capable of removing injustice and is expected to do so. 2.3. The Hon'ble Apex Court in a celebrated decision in Collector, Land Acquisition vs Mst. Katiji & Ors. 167 ITR 471 opined that when technical consideration and substantial justice are pitted against each other, the courts are expected to further the cause of substantial justice. This is for the reason that an opposing party, in a dispute, cannot have a vested right in injustice being done because of a non- deliberate delay. Therefore, it follows that while considering matters relating to condonation of delay, judicious and liberal approach is to be adopt....
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....ll deal with the merits of the case for denying the deduction of interest income earned from fixed deposits u/s 80P(a)(i) and 80P(2)(d) of the Income Tax Act, 1961 (hereinafter the Act). The facts in brief, are that the assessee is registered as a Co-operative Society with the Registrar of Co-operative Societies under Maharashtra Cooperative Society Act 1960. The objects of the Society is to enable its members to obtain loans and to save their income in a safe and convenient way to lent money etc. as per the bye laws of the society. As per the copy of accounts, furnished before the Department, the society had paid up capital of Rs. 81.30 lakhs and various statutory reserves of Rs. 90.17 lakhs , deposits of about Rs. 591.72 lakhs from its members and other liabilities. On the asset side, the assessee had balances with various scheduled and Co-operative banks, investment in FDs maintained with Co-operative banks and loans/advances. The ld. Assessing Officer examined the claimed deduction u/s 80P(2)(a)(i) of the Act amounting to Rs. 10,15,347/-. It is noted that in para 4.9 of the assessment order, the ld. Assessing Officer has observed that the assessee is a co-operative society carr....
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.... 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....
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....ssing 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....
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....tions; (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 (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 ....
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....l enjoy the exemption and those attributable to the non-exempted activities, shall be taxed. 2.13. 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 storag....
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....th 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. 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....
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....n 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 I have adverted to earlier, the Kerala High Court was of the view that once the cooperative 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 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 c....
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....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 cooperative 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)]. 2.17. 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 [Addl. 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,....
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.... 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 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. 2.20. 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 ....
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.... 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" 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 Cooperative 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 assesseesociety 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) ....
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....orer 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 Cooperative 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 Cooperative 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, (1988) 174 ITR 150 (MP), special leave petition granted by the Supreme Court: (1992) 195 ITR (St.) 5-6 (SC); CIT v. Dhar ....
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.... 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]. 2.26. 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 Cooperative 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 Cooperative Marketing Society Ltd., (2000) 245 ITR 616, 618,624 (AP) ....
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....miti 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 Cooperative 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. 2.30. The Hon'ble jurisdictional High Court in CIT v. Ahmednagar District Central Co-operative Bank 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 dedu....
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....w of section 80P(2)(a)(i) of the Act and as such eligible to deduction for assessment year 1986-87]. 2.32. 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 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. 2.33. In CIT v. Haryana State Co-operative Apex Bank Ltd., (2010) 322 ITR 404 (Punj) [the assessee was entitled to deduction under secti....
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....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. 2.36. 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 s....
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....ne 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 accor....
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....oners 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. 2.41. 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 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) 2.42. One of the first Indian cases that dealt ....
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.... 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 aff....
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....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. 2.49. 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 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 cou....
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.... 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....
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....rrive 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]." 2.55. 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 memb....
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....on 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 subsection, 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 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 Tribu....