AI Drafter 
TaxTMI 
TaxTMI 
2017 (5) TMI 404
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....the assessee being a co-operative housing society is covered under section 80P(2)(c)(ii) of the Income-tax Act, 1961." Grounds of appeal in the assessee's appeal read as under : "1. Having regard to the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the appellant is a 'co-operative society' the main activity of which is duly covered under section 80P(2)(a)(i) of the Income-tax Act, 1961, and therefore, on the 'principle of mutuality' other incomes of the appellant-society being from ancillary activity are also eligible for deduction under section 80P(2)(a)(i). 2. That on the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals)-II, Nagpur, grossly erred in holding that the balance income of the appellant-society of Rs. 14,62,54,397 are not ancillary and incidental to the main activity of business of providing credit facilities to its members, and as such, profits attributable to these incomes amounting to Rs. 48,39,540 are not eligible for deduction under section 80P(2)(a)(i). 3. Whether on the facts and in the circumstances of t....
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....objects of the assessee-society is only to acquire land by purchase or otherwise, develop it and construct houses or flats and allot the same to the members of the society. (ii) What is true is that the main objects of the assessee-society includes providing credit facility to its members for construction of houses or plots and for repairing of houses etc. (iii) The assessee-society provides housing credit facility only providing houses is not the predominant object of the society as appears from your observation. (iv) We have not made a single transaction of loan as alleged in your abovesaid letter but we simply give credit facility to members only for acquiring residential house. (v) To say that the assessee-society does not provide credit facility to its members would be travesty of reality when one reads the accounts of the society for the last several years. To be specific, for the year under assessment, the assessee-society has earned interest of Rs. 31 crores and the balance of housing loan outstanding as on March 31, 2009 is Rs. 221 crores. The assessee-society wishes to submit that by no stretch of imagination one could come to a conclus....
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....iven additional facility to members only who come to us and we do not deal with outsiders except for the members of the society.' The assessee made further submission as under : 'The activities of the society are same and there is no change in activity as in past. The society also takes and execute housing scheme every year. The society provide flats to its members in scheme which shown in gala account. This scheme is implemented by taking over job of construction of flat by the society/s own finance and thereafter conveying the flats to the members by financing loan to them. There is no income as the motive is of recovering that loan from the members on the basis of no profit no loss. This is a service to members of society and not trading or business activity of the society. The object is only to provide housing facility to its needy members. The surplus in gala yojana is reserved for meeting fluctuating prices of materials and administrative expense of the gala yojana'." 4. The Assessing Officer was not satisfied. He observed and held as under : "The assessee has shown 'surplus on schemes' amounting to Rs. 3,51,47,632 under misce....
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....Rs. 50,000 under section 80P(2)(c)(ii), is added back to the total income of the assessee as "income from business". 4. In view of the above remarks, the total income of the assessee is computed as under : Income from business Net profit as per profit and loss account : Rs. 1,66,65,292 Less :House property income considered separately : Rs. 1,69,844 Income from business : Rs. 1,14,95,448 Less: Deduction under section 80P(2)(c)(ii) : Rs. 50,000 Total income from business : Rs. 1,14,45,448 Income from house property as declared : Rs. 1,18,891 Gross total income : Rs. 1,15,64,339 Total assessed income : Rs. 1,15,64,340 5. Against the above order the assessee appealed before the learned Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) noted and reproduced the submissions of the assessee. After reproducing the assessee's submissions the learned Commissioner of Income-tax (Appeals) held as under : "The appellant has submitted the statement of accounts as follows: Sl. No. Nature Particulars Amount (A) Housing loan interest Amount received on long-term credit fac....
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....s of co-operative society do not earn income from themselves and whatever gain is there, it is shared by them in the form of dividend. Hence, such income is exempt. But the moment surplus fund it invested in banks, it is income from other sources as held by the Hon'ble Supreme Court in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC). Even the exemption under section 80P(2)(d) is not applicable to income earned by society from co-operative bank. As the moment co-operative society becomes bank, it is out of section 80P and the word used in section 80P(2)(d) is 'co-operative society' and not 'co-operative bank'. Under the Income-tax Act they have very different connotation so much that now co-operative banks have been taken out of purview of section 80P altogether. Hence, express 'investment' made by the appellant in these banks are going out of co-operative set up and they may in turn be invested in any activity and move out of preview of co-operative society, i.e. can be used commercially by banks as they like and this money is not used for mutual benefit of members of the co-operative banks alone. Hence, the amount of interest rece....
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.... society accepts deposits from its member as contribution in the form of various deposits for the cause of the society. (3) That the entire activity as carried out by the society is for the benefit of the members. The loans are provided only to the members of the society. The society accepts deposits from its members and loans are provided to the members out of the same. The members are the contributors and the beneficiaries themselves. Thus, the principle of mutuality is broadly and correctly applicable in the case of the assessee-society as the contributors and participators are clearly identifiable in all the activities of the society. (4) It is submitted that the bye-laws of the society clearly outline the object of the society which are for the benefits of the members. The motive is service to the members and the society at large by providing housing loan and premises at reasonable costs. Consequently any surplus or profit, if earned by the society, is distributed amongst the members as dividend. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that all the activities carried on by the appellant-society are duly covered by the pr....
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.... 2,12,25,491 (e) Interest on exegency loans 11,24,768 (f) Interest on investments 10,74,65,925 (g) Interest on loan given to owners of tenanted branch premises 1,25,864 30,87,52,650 (2) Miscellaneous receipts : (a) Income from house property 1,69,844 (b) Locker rent received 1,06,385 (c) Surplus from housing schemes 3,51,88,430 (d) Other receipts 7,07,839 3,61,72,498 (3) Share transfer fees 32,722 (4) Other receipts : (a) Loan incidental charges 10,52,853 (b) Loan consolidation charges 78,148 (c) Inoperative savings account charges 1,47,460 (d) Working charges (flat transfer fee) 2,96,100 (e) Loan commitment charges 9,08,448 24,83,010 Total receipts charges 34,74,40,831 (8) It is submitted that the learned Commissioner of Income-tax (Appeals) grossly erred in holding that profits ....
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....ntly without the aid of its employees. The appellant-society provided housing loans, vehicle loans, grain advances, and festival advances to its employees. Interest was duly charged on the loans given. Moreover, the employees are themselves shareholder of the appellant- society and are also contributors to its funds in the form of term deposits. Hence, interest on credit facilities provided to the employees is eligible for deduction under section 80P(2)(a)(i). (11) It is also submitted that the income of Rs. 1,25,864 is interest on loan given to owners of tenanted premises held by the appellant- society for its branches. The owners of tenanted premises are very much the members of the society and the nature of loan given was for repairs of housing property. Thus, the same is in terms of the regular business of the appellant-society of providing credit facility to its members and the income from interest is duly exempt. (12) It is submitted that income of Rs. 10,74,65,925 as interest on investment made in various co-operative banks is ancillary and incidental to carrying on the business of providing credit facilities to its members, and as such, exempt under the pr....
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.... [2002] 175 CTR (SC) 297; [2002] 255 ITR 423 (SC) ; [2002] 123 Taxman 222 (SC) has been pleased to follow the decision taken in the case of Karnataka State Co-op. Apex Bank. Though the decisions cited above relate to co-operative banks, the parity of reasoning given by the apex court can be clearly applied to the case of the assessee that interest earned out of deposits with banks are incidental and ancillary to the business of banking/providing credit facility to its members, and therefore eligible for deduction under section 80P(2)(a)(i). (16) It is further submitted that in case of Bihar State Housing Co-operative Federation Ltd v. CIT [2009] 315 ITR 286 (Patna), the Hon'ble High Court held that (page 288) : '. . . the interest earned on the deposits made, does not arise out of one or more of the activities specified in section 80P(2)(a)(i), but the interest received by the assessee on the bank deposits is ancillary and incidental to carrying on the business of providing credit facility to its member and, as such, exempt under the aforesaid provisions. It may be stated herein that the assessee deposits surplus funds available with it in banks and e....
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....d constructing the scheme thereon, which is duly contemplated in the bye-laws. This activity is carried out as a facility for the members and to provide affordable houses to needy members of the society. Surplus of Rs. 3,51,88,430 was duly credited to the profit and loss account of the appellant- society. (21) That construction of apartments is an ancillary activity of the society. which is evident from the fact that the total investment as on March 31, 2009 for the same was Rs. 32.80 crores, which is only 15 per cent. of the appellants total investment. The apartments are provided to the members, and are absolutely transferred in the favour of the purchasing member immediately by executing a sale deed, along with mortgage deed for the long-term finance provided. What remains is only a relation of a borrower and a lender between the member and the society. It is clearly established that the society is not selling or providing goods on credit to its members, but is only providing credit facility. Any income earned on such activity which is in proximity to the main business of providing credit facility to its members should be eligible for deduction under section 80P(2)(a)(i....
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.... that provision. If a proximate connection between the income in question and the business referred in section 80P(2)(a)(i) is established, it would be sufficient to claim the deduction. (27) It is submitted that the learned Commissioner of Income-tax (Appeals) erred in law to hold that interest income earned from investment in co-operative banks is not eligible for deduction under section 80P(2)(a)(i) or 80P(2)(d). The learned Commissioner of Income-tax (Appeals) held that 'co-operative banks are not co-operative societies' and any investment therein are out of the purview of section 80P and the co-operative set up. (28) That during appeal proceedings before the Hon'ble Commissioner of Income-tax (Appeals), the assessee made an alternate claim that interest from investments in co-operative banks are also eligible for deduction under section 80P(2)(d). The learned Commissioner of Income-tax (Appeals) held that co-operative banks are commercial organisation and 'the word used in the section is society and not bank'. (29) It is submitted that a co-operative bank is a co-operative society, eligible to do banking business with necessary permis....
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....ing or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of the agricultural produce grown by it 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 f....
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....xplanation.-For the purpose 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." A reading of the above makes it clear that a co-operative society can be engaged in different type of activities. If a co-operative society is carrying on business of banking or providing credit facilities to its members and at the same time also engaged in other activities, the deduction under section 80P(2)(a)(i) will still be available to the co-operative society to the extent of income relates to the activity of carrying on the business of banking or providing credit facilities to its members. 10. In this case it is evident that apart from providing credit facilities to its members the co-operative society is also engaged in activities of a housing co-operative society. Hence to the extent the profit of the assessee is attributable to the activity of providing credit facilities to its members the same be qualify for deduction under section 80P(2)(a)(i). 11. The assessee's plea that in the ....
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.... some liquidated funds as a short-term deposit with the banks. This issue was thoroughly discussed by the Income-tax Appellate Tribunal "B" Bench Ahmedabad in the case of ITO v. Jafari Momin Vikas Co-op. Credit Society Ltd. bearing I. T. A. No. 1491/Ahd/2012 (for the assessment year 2009-10) and C. O. No. 138/Ahd/2012 (by the assessee) order dated October 31, 2012. The relevant portion is reproduced below : "19. The issue dealt with by the Hon'ble Supreme Court in the case of Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) is extracted, for appreciation of facts, as under (page 289) : 'What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes ? The assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is-whether interest on su....
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....arities emerge, namely : (1) in the case of the assessee, the entire funds were utilised for the purposes of business and that there were no surplus funds ; -in the case of Totgar's, it had surplus funds, as admitted before the Assessing Officer, out of retained amounts on marketing of agricultural produce of its members ; (2) in the case of present assessee, it did not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such ; -in the case of Totgar's, the Hon'ble Supreme Court had not spelt out anything with regard to operational funds ; 19.5. Considering the above facts, we find that there is force in the argument of the assessee that the assessee not a co-operative bank, but its nature of business was coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds. That was why, it was submitted by the assessee that it had invest....