TaxTMI 
TaxTMI 
2025 (10) TMI 1107
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....Co-operative Societies since 1958. It is engaged int the business of accepting deposits and providing credit facilities to its members and making investments. The assessee filed its return of income on 10.10.2018 at a gross total income of Rs. 19,97,173 and claimed the same as deduction under section 80 P of Chapter VIA of the Act resulting into total income at Nil. 4. The return was picked up for scrutiny and it was found that assessee has earned interest from cooperative bank and dividend of Rs. 1,10,197. The ld. AO held that assessee is not entitled to deduction under Chapter VIA of the Act. Therefore he computed the gross income and interest income from other than the regular members such as investment income and held that 10.86% is to be disallowed. Accordingly the total claim of Rs. 19,97,173 was disallowed to the extent of 10.86% thereof amounting to Rs. 2,16,892. Accordingly the deduction claimed by the assessee of Rs. 19,97,173, interest from co-operative bank of Rs. 12,05,115 was only disallowed to the extent of Rs. 2,16,892. 5. It was also found that assessee has earned the profit of Rs. 4,36,689 from fertilisers & PDS. It was held that tis profit is not from coope....
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.... entitled to deduction only to the balance percentage. Therefore he worked out disallowance at 10.86% of the total deduction claimed u/s. 80P of Rs. 19,97,173 amounting to Rs. 2,16,892. 11. I find that the claim of the assessee is that Rs. 1,84,022 is received as interest on reserve fund. Such reserve fund is required to be maintained according to the provisions of Karnataka Co-operative Societies, Act, 1959 and Rules. Therefore such interest income is considered as business income of the assessee and no proportionate disallowance could have been made. 12. With respect to other interest income, it was submitted that same is also business income of the assessee. It was further stated that the decision of the Hon'ble Karnataka High Court in 329 ITR 74 would not apply to the facts of the case. 13. On careful consideration, I find that the issue is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC)[12-01-2021]wherein it has been held as under:- "11. Having hea....
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....ciety; (3) the State Government; (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 hund....
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....lation 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." 12. The relevant provisions of the Banking Regulation Act, 1949, insofar as it has bearing on the facts of these cases are also set out as follows: "3. Act to apply to co-operative societies in certain cases.- Nothing in this Act shall apply to- (a) a primary agricultural credit society; (b) a co-operative land mortgage bank; and (c) any other co-operative society, except in the manner and to the extent specified in Part V." "56. Act to apply to co-operative societies subject to modifications.-The provisions of this Act, as in force for the time being, shall apply to, or in relation to, co-operative societies as they apply to, or in relation to, banking companies subject to the following modifications, namely:- (a) throughout this Act, unless the context otherwise requires,- (i) references to a "banking company" or....
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.... State Government for the purpose; (ccv) "primary co-operative bank" means a cooperative society, other than a primary agricultural credit society,- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose; (ccvi) "primary credit society" means a co-operative society, other than a primary agricultural credit society,- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-cl....
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....y Agricultural Credit Society as specified in the Act, Rules and Bye-laws except the existing staff strength. ** ** ** (ob) "Primary Credit Society" means a society other than an apex or central society which has as its principal object the raising of funds to be lent to its members; (oc) "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; Provided that no Primary Co-operative Agricultural and Rural Development Bank shall be registered without the bifurcation of assets and liabilities of the existing societies having the area of operation in more than one Taluk and the societies shall restrict their operation in the area of the respective society on such bifurcation." "3. Registrar.- (1)The Government may appoint a person to be the Registrar of Co-operative Societies for the State. (2) The Government may by general or special order confer on any person all or any of the powers of the Registrar under this Act. 4. Societies which....
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....for registration and the authority concerned shall comply with such directions. 8. Registration certificate.- (1)Where a co-operative society is registered under this Act, the Registrar shall issue a certificate of registration signed and sealed by him, which shall be conclusive evidence that the said society is duly registered under this Act. (2) Notwithstanding anything contained in sub-section (1), where the Registrar is satisfied that the original registration certificate is irrecoverably lost and the duplicate certificate could not be issued as the files or records regarding the registration of the co-operative society was lost, after registration, the Registrar shall issue a certificate stating the registration number and date of registration of a cooperative society, on the basis of the details available in the audit certificate and the records available with the Registrar, signed and sealed by him, which shall be conclusive proof that the said society is duly registered and it shall be treated as a certificate of registration." Rules "15. Classification of societies according to types.- After the registration of a society the Registrar sh....
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.... to members for producing new types seedlings. 10. Purchase and maintenance of newly innovated machines and Implements like power tillers, tractors etc for letting out to members or others. 11. Purchase and distribution of better breeds of cattle, goats, poultry etc to members 12. Formation and functioning of Farmers Club for farmers. 13. Provide short-term, medium-term, long-term loans and loans approved as per special scheme of Registrar, NABARD or such agencies to members of society. 14. To promote the habit of thrift, self-sufficiency, mutual help etc. among members and formulation and implementation of schemes relating to it. Mobilisation of various types of deposits from members. 15. Provide financial and technical help for self-employed to do the business profitably. 16. Perform all the banking operations as per the rules prevailing from time to time. 17. To construct or hire and receive rent in advance for any building and material alteration for the smooth functioning of bank. Purchase of assets with the prior approval of Registrar. 18. To let out own buildings of bank to others. 19. ....
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....houses or purchase, renovate houses or for acquiring land. 37. To formulate and implement new schemes like aquariums, children's park, resorts etc and to take new initiatives to attract tourist. 38. To construct godowns for various purposes of banks and collection of agricultural products. 39. To accept financial assistance for Central Government, State Government, NCDC and other governmental or semi-governmental agencies. 40. To establish a library in the society. 41. To set up small scale industries unit. 42. To be a partner or leader in the consortium scheme or other schemes suggested by Central or State Government or Co-Operative Department or to formulate complete other schemes with their approval. 43. To provide microfinance loans like Linkage loans, cash credits and other short term loans like Muttathe Mulla etc to self-help groups and Kudumbasrees." 15. It is important to note that though the main object of the primary agricultural society in question is to provide financial assistance in the form of loans to its members for agricultural and related purposes, yet, some of the objects go well beyond,....
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....uce, so that if agricultural produce is bought from other agriculturists by members but not produced by such member itself, such produce would not qualify for deduction. 18. Shortly after this judgment, a three-Judge Bench in Kerala State Cooperative Marketing Federation Ltd. v. CIT [1998] 98 Taxman 313/231 ITR 814 (SC) overruled the aforesaid judgment. The question which arose before the Court in this case was the identical question that arose in Assam Cooperative Apex Marketing Society Ltd. (supra), the avatar of the provision, however, having changed to section 80P(2) (a)(iii) of the Income-tax Act. This Court, after setting out the classes of societies covered by section 80P, then held: "7. We may notice that the provision is introduced with a view to encouraging and promoting growth of cooperative 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 cooperative society is exemp....
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....f 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 cooperative society it was so made clear as is evident from clause (f) referred to above with reference to a milk cooperative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative 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 cooperative society does not have any marketing facilities it can certainly become a member of an apex society which may market the produce of its members. It was submitted on behalf of the Department that the member societies themselves do not raise the agricultural produce. The societies only market the produce raised by their members and do not themselves raise agricultural produce. The language adopted in Section 80-P(2)(a)(iii) with which we are concerned ....
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....authorities concurrent holding that the society is carrying on banking business and for all practical purposes acts like a co-operative bank, this Court then held as follows: "18. We may mention at the outset that there cannot be any dispute to the proposition that section 80-P of the Act is a benevolent provision which is enacted by Parliament in order to encourage and promote growth of cooperative sector in the economic life of the country. It was done pursuant to the declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (see Bajaj Tempo Ltd. v. CIT [1992] 3 SCC 78]). It is also trite that such a provision has to be construed as to effectuate the object of the legislature and not to defeat it (see CIT v. Mahindra and Mahindra Ltd. [1983] 4 SCC 392. Therefore, it hardly needs to be emphasised that all those cooperative societies which fall within the purview of section 80-P of the Act are entitled to deduction in respect of any income referred to in subsection (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to any one ....
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....f banking and a cooperative society providing credit facilities to its members will be entitled for exemption under this subclause. The carrying on the business of banking by a cooperative society or providing credit facilities to its members are two different types of activities which are covered under this sub-clause. ** ** ** 13. So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provisions of section 80-P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the legislature wanted to restrict the exemption to a primary cooperative society, it was so made clear as is evident from clause (f) with reference to a milk cooperative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative society." The aforesaid judgment of the High Court correctly analyses the provisions of section 80-P of the Act and it is in tune with the judgment of ....
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....ositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as cooperative 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 Cooperative Societies Act. Moreover, it is a cooperative credit society which is not entitled to deduction under section 80-P(2)(a)(i) of the Act. 25. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the assessing officer, our purpose would be served by taking note of the following portion of the discussion: "As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality: (i) that no person can earn from him; (ii) that there a profit....
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....l 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 cooperative 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 cooperative 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). 22. However, considering that the learned Senior Advocate appearing for the Revenue argued that the concurrent findings of fact in that case were that most of the business of the assessee was conducted illegally with nominal members, who could not be members of such society under the A....
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.... 162-163) 25. An illuminating discussion is to be found in the dissenting judgment of Justice A.P. Sen in Dalbir Singh v. State of Punjab [1979] 3 SCR 1059. Since the dissenting judgment refers to a principle of general application, not refuted by the majority, it is worth setting out this part of the judgment as follows: "With greatest respect, the majority decision in Rajendra Prasad case does not lay down any legal principle of general applicability. A decision on a question of sentence depending upon the facts and circumstances of a particular case, can never be regarded as a binding precedent, much less "law declared" within the meaning of Article 141 of the Constitution so as to bind all courts within the territory of India. According to the well-settled theory of precedents every decision contains three basic ingredients: "(i) findings of material facts, direct and inferential. An inferential finding of facts is the inference which the Judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the combined effect of....
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....nd the registration of a society and arrive at a conclusion that the society in question is carrying on illegal activities. On this score alone, the Full Bench's understanding of this judgment has to be faulted and is set aside. 27. However, this does not conclude the issue in the present case. We now turn to the proper interpretation of section 80P of the Income-tax Act. Firstly, the marginal note to section 80P which reads "Deduction in respect of income of cooperative societies" is important, in that it indicates the general "drift" of the provision. This was so held by this Court in K.P. Varghese v. ITO [1981] 7 Taxman 13/131 ITR 597 as follows: "9. This interpretation of sub-section (2) is strongly supported by the marginal note to Section 52 which reads "Consideration for transfer in cases of understatement". It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins, M.R. in Bushel v. Hammond [1904] 2 KB 563 to show what the section is dealing with. It cannot control the interpretation....
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....in such returns, etc. This exercise had not been undertaken at all." 31. The learned Additional Solicitor General relied upon the second proviso to section 2(oaa) of the Kerala Act, and argued that given the fact that the principal object in most, if not all, of the Appellants before us has not been fulfilled, these Appellants have lost all characteristics of being primary agricultural credit societies. In answer to this submission, learned counsel for the Appellants cited the following judgments, namely, Asstt. CIT v. A.K. Menon [1995] 5 SCL 319 (SC) (paragraph 4); Titan Medical Systems (P.) Ltd. v. Collector of Customs 2003 taxmann.com 2027 (SC) (paragraph 12); and Vadilal Chemicals Ltd. v. State of Andhra Pradesh 2006 taxmann.com 2217 (SC) (paragraphs 20 to 23), for the proposition that it is the RBI alone under the Banking Regulation Act, 1949, and the Registrar alone under the Kerala Act who can look into questions as to whether a primary agricultural credit society is, or is not, a co-operative bank, and whether a society's classification as primary agricultural credit society ought to continue or be re-classified as a co-operative bank. Neither argument applies ....
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.... providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. 34. Seventhly, section 80P(1)(c) also makes it clear that section 80P is concerned with the co-operative movement generally and, therefore, the moment a co-operative society is registered under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in subclause (c). The reach of sub-clause (c) is extremely wide, and would include co-operative societies engaged in any activity, completely independent of the activities mentioned in subclauses (a) and (b), sub....
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....them." 38. A clarification by the CBDT, in a letter dated 9-5-2008, is also important, and states as follows: "Subject: Clarification regarding admissibility of deduction under section 80P of the Income-tax Act, 1961. ** ** ** 2. In this regard, I have been directed to state that subsection( 4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co-operative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949. 3. In part V of the Banking Regulation Act, "Co-operative Bank" means a State Co-operative bank, a Central Cooperative Bank and a primary Co-operative bank. 4. Thus, if the Delhi Co-op Urban T & C Society Ltd. does not fall within the meaning of "Co-operative Bank" as defined in part V of the Banking Regulation Act, 1949, subsection( 4) of section 80P will not apply in this case. 5. Issued with the approval of Chairman, Central Board of Direct Taxes." 39. Th....
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.... "The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. "It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso". Therefore it is to be construed harmoniously with the main enactment. (Per Das, C.J.) in Abdul Jabar Butt v. State of Jammu & Kashmir [1957] SCR 51, 59. Bhagwati, J., in Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax [1955] 2 SCR 483, 493 said: "It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other." Lord Macmillan in Madras & Southern Maharatta Railway Co. v. Bezwada Mun....
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....at naught the real object of the main enactment, unless the words of the proviso are such that it is its necessary effect." 43. Another two-Judge Bench in J.K. Industries Ltd. v. Chief Inspector of Factories & Boilers [1996] 89 Taxman 321 (SC) then declared: "33. A proviso to a provision in a statute has several functions and while interpreting a provision of the statute, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without reference to the proviso and if the same is found to be ambiguous only then recourse may be had to examine the proviso as has been canvassed before us. On the other hand an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially. 34. A proviso qualifies the generality of the main enactment by providing an exception and taking out ....
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....dar Singh v. State of U.P. [AIR 1959 SC 1012]. The law is trite. A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. 'Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context' (Thompson v. Dibdin [1912 AC 533]). If the rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause, the stand we have taken is sound. To expand the enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction." 45. To sum up, therefore, the ratio decidendi of Citizen Coop....
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....) of the Cooperative Societies Act. The said provision reads as under: "2. (n) 'Member' means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to 'members' anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;"" Considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i). 47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows: "59. Restrictions on loans.- (1) A society shall not make a loan to any person or a society other than a member: Pro....