TaxTMI 
TaxTMI 
2023 (4) TMI 743
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..../s. 80P, claimed on the entirety of it's profits for the relevant years. The assessees are co-operative societies, registered under the Kerala Co-operative Societies Act, 1969 ('Kerala Act' hereinafter), and classified as a Primary Agricultural Credit Society (PACS) by the Registrar of Societies, the Authority administering the said Act. They are in the business of providing credit to their Members. The denial of the assessee/s's claim u/s. 80P was for the following factually admitted reasons: a) predominant (93%-99%) lending for non-agricultural purposes, with that for agricultural purposes being marginal. b) lending to nominal Members, i.e. , classified as B, C, D Members, with no voting rights, as against category A Members, who only have voting rights and, therefore, regarded as real members. While the former destroys the character of the society as a PACS, a class of cooperative banks saved from the operation of s. 80P(4) excluding the benefit of s. 80P for co-operative banks, the latter operates to dilute its character as a cooperative society itself inasmuch as mutuality is lost, so that the co-operative society is no more than an Association of Persons ....
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....n accordance with and subject to the pro visions 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) to (vii) 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 subclause (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; (b) to (f) (3) In a case where the assessee is entitled also to the deduction under section.... (4) The provisions of this section shall not apply in relation....
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....t of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965); (b) in section 2, the words and figures 'the Companies Act, 1956 (1 of 1956), and' shall be omitted; (c) in section 5, - (i) after clause (cc), the following clauses shall be inserted namely:- (cci) 'co-operative bank' means a state co-operative bank, a central co-operative bank and a primary co-operative bank; (ccii) 'co-operative credit society' means a co-operative society, the primary object of which is to provide financial accommodation to its members and includes a cooperative land mortgage bank; (cciia) 'co-operative society' means a society registered or deemed to have been registered under any Central Act for the time being in force relating to the multi- State co-operative societies, or any other Central or State law relating to co-operative societies for the time being in force; (cciii) 'director', in relation to a co-operative society, includes a member of any committee or body for the time being vested with the management of the affairs of that society; (cciiia) 'multi-S....
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....rative bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose. Explanation. -If any dispute arises as to the primary object or principal business of any co-operative society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by the Reserve Bank shall be final; 4. The Apex Court in Mavilayi Service Co-operative Bank Ltd. (supra), has culled out various propositions from it's Judgment in Citizen Co-op. Society Ltd. (supra), as under: (para 21/pg. 35) "21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment: (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; (II) That once the assessee is entitled to avail of deduction, the entire amount of profits an....
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....ciate 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 Cooperative 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 ....
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.... 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 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)observed w.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 ....
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.... The said reading clearly suggests that PACS and PCARDB are 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 a proviso, 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....
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....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 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 found to be not working as a PACS, but w. r. t. the arch....
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...., 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 otherwise included 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 ther....
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....sented 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- 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 signific....
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....motivation; and that there is no sharing of profit. 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 of mutuality 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. " 27. These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the....
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....ity of sec. 80P, the Apex Court in Citizen CSLtd. (supra) considered it relevant to be reproduce and highlight only the AO's findings in respect of mutuality (para 26), signifying its relevancy in the matter. We, therefore, consider the same as the basis for it's holding the co-operative society in Citizen CS Ltd. (supra) as not an eligible co-operative society (para 27). We are conscious that a mutual concern can have no income, which can only arise outside oneself. The argument thus runs counter to the premise of a deduction, as u/s. 80P, in computing total income; the issue in the instant case arising only consequent to the amendment to s. 80P by Finance Act, 2006 per s. 80P(4). Why, the very fact that a cooperative society can, where allowed by it's bye-laws, deal with non-members, put pays the argument. Cooperative society is thus an entity separate and distinct from it's members. The argument yet has relevance as it is an admitted position that as cooperative banks operate at par with commercial banks, the benefit of s. 80P stands withdrawn. The same therefore obtains only where the sanctity of the cooperative society as a self-contained group is maintained. This is with a vi....