APPLICABILITY OF INCOME TAX ON CO OPERATIVE CREDIT SOCIETY & PAT PEDHIS W.E.F. A.Y.2007-08

R.B.POPAT. B.COM, F.C.S,F.C.A. Mob No.-09769259566/09322272512.

1. The provision of section 2(24)(viia)-Definition of Income in Income tax Act, 1961 :

2(24)(viia)-the profits and gains of any business of banking (including providing

credit facilities) carried on by a co-operative society with its members;

2. The provision of Section 80P(2)(a)(i) of Income in Income tax Act, 1961 :

80P(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…

3. The provision of section 80P(4) in Income tax Act, 1961 :

80P(4)- The 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.

Explanation.— For the purposes of this sub-section,—

(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);

(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.

4. Meaning of Co Operative Credit Society under Income Tax Act: Section 2(19) of IT

Act,1961:

“Co-operative Society” means a co-operative society registered under the Co-

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operative Societies Act, 1912 (2 of 1912), or under any other law for the time

being in force in any State for the registration of co-operative societies.

5. Definition of Co operative bank as per Section 2(10) of Maharashtra Co operative

Socities Act,1960 :

Section 2(10) of Maharashtra Co operative Societies Act,1960 defines "co-

operative bank" means a society which is doing the business of banking as

defined in clause (b) of sub-section (1) of section 5 of the Banking Companies

Act, 1949 and includes any society which is functioning or is to function as 7 [an

Agriculture and Rural Development Bank] under Chapter XI];

6. Banking defined in section 5(1)(b) of Banking regulation Act,1949 :

"banking" means the accepting, for the purpose of lending or investment, of

deposits of money from the public, repayable on demand or otherwise, and

withdrawal by cheque, draft, or otherwise;

7. In addition to Banking business Banks can do the following business as defined under

Section 6 of B R Act,1949 [ ITO Vs. Kerala State co op bank ltd.2012(27) Taxmann.com

96(cochin) :

Section 6 of the Banking Regulation Act reads as follows:

6. Forms of business in which banking companies may engage –

(1) In addition to the business of banking, a banking company may engaged in any

one or more of the following forms of business, namely:-

(a) The borrowing, raising or taking up of money, the lending or advancing of money

either upon or without security; drawing, making, accepting, discounting, buying,

selling, collecting and dealing in bills of exchange, hoondees, promissory notes,

coupons, draft, bills of lading, railway receipts, warrants, debentures, certificates,

scrips and other instructions, and securities whether transferable or negotiable or

not; the granting and issuing of letters of credit, traveller's cheques and circular

notes; the buying selling and dealing in bullion and specie; the buying and selling

of foreign exchange including foreign bank notes; the acquiring, holding, issuing

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on commission, underwriting and dealing in stock, funds, shares, debentures,

debenture stock, bonds, obligations, securities and investments of all kinds; the

purchasing and selling of bonds, scrips or other forms of securities on behalf of

constituents or others, the negotiating of loans and advances; the receiving of all

kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise;

the providing of safe deposit vaults; the collecting and transmitting of money and

securities;

(b) Acting as agents of any Government or local authority or any other person or

persons; the carrying on of agency business of any description including the

clearing and forwarding of goods, giving of receipts and discharges and

otherwise acting as an attorney on behalf of customers, but excluding the

business of a [Managing Agent or Secretary and Treasurer] of a company;

(c) Contracting for public and private loans and negotiating and issuing the same;

(d) The effecting, insuring, guaranteeing, underwriting, participating in managing

and carrying out of any issue, public or private, of State, municipal or other

loans or of shares, stock, debentures or debenture stock of any company,

corporation or association and the lending of money for the purpose of any

such issue;

(e) Carrying on and transacting every kind of guarantee and indemnity business;

(f) Managing, selling and realizing any property which may come into the

possession of the company in satisfaction or part satisfaction of any of its

claims;

(g) Acquiring and holding and generally dealing with any property or any right, title

or interest in any such property which may form the security or part of the

security for any loans or advances or which may be connected with any such

security;

(h) Undertaking and executing trusts;

(i) Undertaking the administration of estate as executor, trustee or otherwise;

(j) Establishing and supporting or aiding in the establishment support of

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associations, institutions, funds, trusts, and conveniences calculated to benefit

employees or ex-employees of the company or the dependents or connections

of such persons; granting pensions and allowances and making payments

towards insurance; subscribing to or guaranteeing moneys for charitable or

benevolent objects or for any exhibition or for any public general or useful

object;

(k) The acquisition, construction, maintenance and alteration of any building or

work necessary or convenient for the purposes of the company;

(l) Selling, improving, managing, developing, exchanging, leasing, mortgaging,

disposing of or turning into account or otherwise dealing with all or any part of

the property and rights of the company;

(m) Acquiring and undertaking the whole or any part of the business of any person

or company, when such business is of a nature enumerated or described in

this sub-section;

(n) Doing all such other things as are incidental or conducive to the promotion or

advancement of the business of the company;

(o) Any other form of business which the Central Government may, by notification

in the Official Gazette, specify as a form of business in which it is lawful for a

banking company to engage.

(2) No banking company shall engage in any form of business other than those

referred to in sub-section (1)."

8. Licensing of Existing Primary (Urban) Co-operative Credit societies :

In terms of sub-section (2) of Section 22 of the Banking Regulation Act, 1949 (As

Applicable to Cooperative Societies), the primary (urban) cooperative banks

existing in the country as on March 1, 1966, (when some banking laws were

applied to UCBs), were required to apply to the Reserve Bank of India. They were

given three months to obtain a licence to carry on banking business. Similarly, a

primary credit society which becomes a primary (urban) cooperative bank by

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virtue of its share capital and reserves reaching Rs. one lakh (Rs.1,00,000) and

above was to apply to the Reserve Bank of India for a licence within three months

from the date on which its share capital and reserves reach Rs. one lakh

(Rs.1,00,000).

The existing unlicensed “primary” (urban) cooperative banks “can carry on

banking business” till they are refused a licence by the Reserve Bank of India.

(SOURCE : Brochure explaining RBI role and functions in brief under the title

Urban Bank Department of RBI.

Note : Please also refer point no. 4 of page 15 of Banking regulation Amendment

Bill No. 18 of 2011 introduced in the loksabha, which provides that if the licence

is not renewed by the RBI then they have to shut their business. All urban Co

operative credit society and Pat-Pedhis by virtue of provisions of [emphasis

supplied –

Note : [Part V contains amendment in definition - vide Section 5(ccii),5(ccv)

and 5(ccvi) of Banking Regulation Act, 1949] whose principal business of a

primary credit society is the transaction of banking business and When its paid

up capital and reserves attain the level of Rs.1 lakh, a primary credit society

“automatically” becomes a primary cooperative bank.

The Hon Tribunal in the case of DCIT v. Ankush Rao Ingle [2010] 3 taxmann.com 55

(Hyd. - ITAT) with respect to meaning of ‘Cooperative bank' shall have the meaning

assigned to in it Part V of the Banking Regulation Act, 1949 (10 of 1949).

(a) Vide para 7 of Citizen Co-operative Society Ltd. v. Additional Commissioner of

Income-tax *, Range 9, Hyderabad [2010] 8 TAXMANN.COM 27 (HYD) The

assessee’s counsel contention is that once the share capital and reserves exceed

Rs. 1 lakhs “the society has to transform itself into Cooperative Bank”.

9. Banking Regulation overrides Bye laws of the society :

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Section 5A of Banking regulation Act,1949 overrides Bye laws of the co op credit

society.

However, Co operative Banks in India are registered under the Co-operative

Societies Act. The cooperative bank is also regulated by the RBI. They are governed

by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act,

1965.

10. Co operative credit socities enjoy cheque facility of other banks for their client as

apparent from Para 23 of Master Circular of RBI / 2012-13/67-UBD.BPD. (PCB). MC. No.

10/ 12.05.001 / 2012-13 dated July 2, 2012 [ ALSO REFER : Central Bank Of India Cheque

Collection Policy (Reviwed and Updated as on 31.01.2012)]: [ Even prior to A .Y.2007-08]

[ Note : The Cheque Collection Policy of the Bank was first formulated in 2005 and is

preferably reviewed annually, as per the guidelines issued by Reserve Bank of India

(RBI), from time to time].

Para 23. Collection of account payee cheques – Prohibition on crediting proceeds to

third party account.

Banks should not collect ‘account payee’ cheques for any person other than the

payee constituent. Where the drawer/ payee instructs the bank to credit the

proceeds of collection to any account other than that of the payee, the instruction

being contrary to the intended inherent character of the ‘account payee’ cheque,

banks should ask the drawer/ payee to have the cheque or the account payee

mandate thereon withdrawn by the drawer. This instruction will also apply with

respect to the cheque drawn by a bank payable to another bank.

However, with a view to mitigating difficulties faced by members of co-operative

credit societies in collection of account payee cheques, collecting banks may

consider collecting account payee cheques drawn for an amount not exceeding `

50,000 to the account of their customers who are co-operative credit societies if the

payees of such cheques are the constituents of such co-operative credit societies.

While collecting the cheques as aforesaid, banks should obtain a clear undertaking

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in writing from the co-operative credit societies concerned that, upon realization,

the proceeds of the cheques will be credited only to the account of the member of

the co-operative credit society who is the payee named in the cheque. This shall,

however, be subject to the fulfillment of the requirements of the provisions of

Negotiable Instruments Act, 1881, including Section 131 thereof. The collecting bank

shall subject the society to the usual KYC norms and enter into an agreement with

the society that the KYC documents in respect of the society’s customers are

preserved in the society's records and are available to the bank for scrutiny. The

collecting banks should, however, be aware that in the event of a claim by the true

owner of the cheque, the rights of the true owner of the cheque are not in any

manner affected by these instructions and banks will have to establish that they

acted in good faith and without negligence while collecting the cheque in question.

11. Meaning of primary object or principal business : (Judicial view)

(a) The Hon. Tribunal the case of Gurdaspur Co-Op. Sugar Mills v. Deputy Commissioner

of Income tax (2009) 122 TTJ 522 (ASR) with respect to primary activity have held

as under :

The assessee in this case is buying sugarcane from the agriculturists, crushing the

same and then selling the sugar. The benefit of deduction under s. 80P (2)(a)(iii ) is

available to a co-operative society , which is engaged in the marketing of agricultural

produce grown by its members. On similar facts, the Hon'ble Punjab & Haryana High

Court in the case of Karnal Co-operative Sugar Mills Ltd. v. CIT [2001] 170 CTR (P&H)

590 : [2002] 253 ITR 659 (P&H) has held as under :

"………….assessee processed the sugarcane. It manufactured and sold sugar. The

product which was sold in the market did not belong to the members. Sugar had not

been described as an agricultural produce in the Act. Thus, it could not be said that

the petitioner was marketing an agricultural produce. The society was incorporated

for the primary purpose of manufacturing sugar. Thus, its basic activity was

production of sugar. It was engaged in manufacturing and not marketing. Since, it

was the admitted position that the petitioner was using power and even paying

excise duty, it was not entitled to the special deduction under s. 80P (2)( a )( iii ).

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Submitted with respect that subsequent decision of P&H HC in the case of

Budhewal Co-op. Sugar Mills Ltd. v. Commissioner of Income-tax [2009] 184

TAXMAN 165 (PUNJ. & HAR.) needs to be reviewed as provision of deductions needs

to be construed strictly as held by Hon. Supreme Court in the case of Vemareddy

Kumaraswami Reddy v. State of Andhra Pradesh 2006 (2) SCC 670 their Lordships of

Hon’ble Supreme Court affirmed the principle of construction and held that when

the language of the statute is clear and unambiguous court cannot make any

addition or subtraction of words.

Further, If the language of the statute is plain and capable of one and only one

meaning, that obvious meaning is to be given to the said provision. Rules of

interpretation are applied only if there are ambiguities when the purpose of

interpretation is to ascertain the intention of the law i.e. mens legis, it is based on

assertion by adopting plain meaning of the statute in the absence of any ambiguity.

(b) The Hon. Tribunal in the case of Muzaffar Nagar District Co-operative Development

Federation Ltd. v. Assistant Commissioner of Income-tax (2010) 195 TAXMAN

46(DELHI) (MAG) with respect to the primary activity of the assessee was to arrange

direct supply of fertilizers from the few concerns to its members. It claimed

deduction under section 80P in respect of transport income which was not

permissible under 80P(2)(e).

12. The meaning of “providing credit facility” and “attributable” :

The expression ‘providing credit facility’ does take its colour from the activity of

banking.[ Addl. CIT v. U.P. Co-operative Cane Union [1978] 114 ITR 70 (All.)].

The words ‘providing credit facilities’ occurring in section 80P(2)(a)(i), should be

constituted as similar to, or akin to the ‘carrying on the business of banking’ , the

preceding clause in the same sub-section. The words ‘providing credit facilities to its

members’ mean providing credit by way of loans and not selling goods on credit -

Kerala Co-operative Consumers’ Federation Ltd. v. CIT [1988] 170 ITR 455 (Ker.).

The word 'attributable' was considered by the Supreme Court in Cambay Electric

Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84 holding that, "the expression

'attributable to' is certainly wider in import than the expression 'derived from'." It

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was also held that by using the expression 'attributable to', the legislature

intended to cover receipts from sources other than the actual conduct of business.

[emphasis supplied : respectfully submitted that attributable should be akin to word

credit facilities as rightly held by Ker HC in 170 ITR 455 and All. HC in [1978] 114 ITR

70 ].

13. The intention of “explanation” [emphasis supplied – provided under section 80P(4)] is to

supplant the main provision :

The Supreme Court in case of S. Sundaram Pillai v. V. R. Pattabiraman AIR 1985 SC

582 observed as follows (referred in case of ITO Vs. D. Manoharlal Kothari 236 ITR

357, 376):

"Thus, from a conspectus of the authorities referred to above, it is manifest that the

object of an Explanation to a statutory provision is -

(a) To explain the meaning and intendment of the Act itself,

(b) Where there is any obscurity or vagueness in the main enactment, to clarify the

same so as to make it consistent with the dominant object which it seems to

subserve,

(c) To provide an addition support to the dominant object of the Act in order to

make it meaningful and purposeful,

(d) An Explanation cannot in any way interfere with or change the enactment or any

part thereof but where some gap is left which is relevant for the purpose of the

Explanation, in order to suppress the mischief and advance the object of the Act, it

can help or assist the court in interpreting the true purport and intendment of the

enactment, and

(e) It cannot, however, take away a statutory right with which any person under a

statute has been clothed or set at naught the working of an Act by becoming a

hindrance in the interpretation of the same."

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14. The meaning of word “means” as occurring in Section 80P(4) :

The Hon. Supreme Court in West Bengal State Warehousing Corporation vs.

Indrapuri Studio Pvt. Ltd. (in C.A. No. 3865 of 2006 dated 19.10.2010) wherein the

apex court held that the use of the word 'means' in a definition signifies a hard-and-

fast definition.

15. Meaning of “rural branches” as occurring in Section 80P(4):

Rural Branches are such of the Branches located in a Village where the “population

in the Village as a unit” is less than 10000. [The Kodungallur Town Co-op Bank Ltd.,

H.O., Kodungallur Vs. The Assistant Commissioner of Income-tax, Circle-2(1), Trichur

680664.] (available on indiakanoon.org)

Note: The meanings explained vide para 4 to 11 are relevant only for classifying

Income for taxing purpose under particular heads of income under the Income Tax

Act, 1961.

16. C o-operative credit society is engaged in the Banking business : ( Judicial view)

(a) The Hon Bombay High Court (NAGPUR BENCH) in the case of Hinganghat Nagri

Sahakari Path Sanstha Maryadit ... Applicant. Versus Ashok Keshavrao Fukat ...

Respondent. Criminal Application No. 712 of 2007, decided on 27-3-2008. [Citation :

2008 (2) Bom.C.R.(Cri.) 629 ] with respect to Suit under Section 138 of IPC for

dishonor of cheque vide para 8 & 9 observed as under and eye opening facts cited

by the Hon. Judge vide para 10 and expressed anguish vide para 12 as under :

Para 8 : Perusal of the above provision shows that the provisions of section 44-A will

apply in its application in inclusive manner to a co-operative society and includes a

Co-operative Bank. Definition of Co-operative Bank under section 2(10) of the

Societies Act reads thus :

"Co-operative Bank means a society which is doing the business of banking as

defined in Clause (b) of sub-section (1) of section 5 of the Banking Companies Act,

1949 and includes any society which is functioning or is to function as a Co-

operative Agriculture and Rural Multipurpose Development Bank under Chapter XI."

A Co-operative Society thus doing the business of banking as defined in Clause (b) of

section 5 of The Banking Regulation Act, 1949, is covered by this definition. It is

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clarified at this stage that the previous name of the Banking Companies Act, 1949

was changed as Banking Regulation Act 1949 by the Banking Laws (Application to

Co-operative Societies) Act, 1965 (23 of 1965), section 11 with effect from 1.3.1966.

It further appears that in section 2(10) of the Societies Act despite the above

amendment the mention of "Banking Companies Act, 1949" continues, which is

wrong.

Para 9 : Section 5(b) of the Banking Regulation Act, 1949 reads thus :

banking means the accepting, for the purpose of lending or investment, of deposits

of money from the public, repayable on demand or otherwise, and withdrawal by

cheque, draft, order or otherwise;"

In the light of the above provision, I have absolutely no doubt that the

applicant/credit society falls within the ambit of section 44-A of the Societies Act.

Consequently, section 44-A has full application against the applicant/appellant.

Para 10 : In the instant case, the loan was admittedly below Rs. One lac. From the

admitted finding of facts recorded in para 11 of the impugned judgment, it appears

that the respondent/accused had paid Rs. 40,800/- on the principal loan amount of

Rs. 10,680/- covering the period from October 1997 till July 2006, which, in my

opinion, is clear cut violation of the provision of section 44-A of the Societies Act.

Thus, having taken an amount of Rs. 10,680/- by way of loan in October 1997, the

respondent/accused had paid Rs. 40,800/- by July 2006, i.e. within a period of 8 ½

years, i.e. almost four times of the principal amount disbursed to him. In my

opinion, the applicant/appellant has clearly acted in contravention of the provisions

of section 44-A and, therefore, there was no legally enforceable liability against the

accused at the instance of the applicant/appellant.

Para 12 : Agriculture is the mainstay of rural economy and empowerment of

agriculturists. A balanced view of the development in the national economy requires

to be taken into consideration to protect the interests of the farmers and to shield

them from the exploitation by money-lenders, bankers and even the co-operative

societies doing banking business with the farmers. The co-operative movement in

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the State of Maharashtra, which always has been described as a progressive State,

was formed for helping the farmers in distress. The movement was never advanced

for sucking the blood of the farmers. This is a case where I find that the applicant-

society has behaved with the respondent in a most cruel manner by recovering

the amount almost four times the principal amount. The Co-operative Societies

themselves appear to have forgotten their obligation to help farmers of the

Vidarbha region where there has been a spate of suicides. This Court is unable to

shut its eyes to such happenings in the co-operative movement. The

applicant/appellant has thus clearly violated the provisions of section 44-A of the

Societies Act and in the light of the above discussion there was no legally

enforceable liability against the respondent/accused, as required by the provisions

of section 138 of the Negotiable Instruments Act, as amended.

(b) The Hon. Kerala high court in the case of Muhammed Usman vs Registrar Of Co-

Operative ... on 29 November, 2002 Equivalent citations: AIR 2003 Ker 299, 2003

116 Comp Cases 505 Ker has categorically distinguished primary co operative bank

and primary co operative society and defined their principal business as under :

(available on indiakanoon.org)

The difference between a primary co-operative bank and a primary credit society

is only in the case of paid up share capital and reserve. As far as a primary

cooperative bank is concerned the same shall not be less than one lakh of rupees

and in the case of a primary credit society it shall be less than one lakh of rupees.

It is significant to note that the primary object or principal business of both shall

be the transaction of banking business. It has also to be specifically noted that both

definitions expressly exclude a primary agricultural credit society. The legislative

intention of. such a specific exclusion is clear from the Act itself. The primary

agricultural credit society is permitted to provide financial accommodation only to

its members and that too for agricultural purposes and purposes connected with

agricultural activities; whereas coming to co-operative banks and primary credit

societies, those societies are intended to engage in the transaction of banking

business. The only common factor is that all such societies are co-operative

societies.

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(c) The Hon'ble Madras High Court in the case of SBI Staff Co-operative Society Ltd. v.

ITO (1998) 144 CTR (Mad) 240 : (1998) 234 ITR 104 (Mad) to justify that Patsanstha

(credit institution) is a co-operative society engaged in the business of banking and,

therefore, the investment in the said Patsanstha (credit society) is covered by the

provision of Section 11(5)(iii) of the Act. (available on indiakanoon.org)

(d) In the case of Addl. CIT vs. U. P. Co-operative Cane Union (1978) 114 ITR 70 (All) the

Division Bench of the Allahabad High Court had occasion to consider an activity of a

co-operative society with reference to the exemption of its income in terms of s. 81

of the IT Act. A particular co-operative society, in that case, had engaged itself in the

business of providing credit facility. In that context the Division Bench held thus :

(available on indiakanoon.org)

"A person or a society may not be a banker in that wide sense yet he may be

providing credit facilities which is a part of a banking business. The expression

"providing credit facility" thus takes its colour from the activity of banking. In order

that a banking or providing of credit facility may constitute a business, it is necessary

that these activities must be the chief source of income. A person who 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 banking or providing credit facilities."

(e) For the purposes of the Act, the financing of its constituents is considered as integral

to banking, considering the same in a broad manner in relation to a co-operative

society, even as clarified by the tribunal in the case of Kerala State Co-op. Agrl. Rural

Development Bank vs. Asstt. CIT (2011) 139 TTJ (Coch) 585 (refer para 4.6).

(available on indiakanoon.org)

(f) In the case of Kerala Co-op. Consumers Federation Ltd. v. CIT 170 ITR 456 (1988)

Kerala - the High Court field that providing credit facilities occurring in Section

80P(2)(a)(i) should be construed similar to carrying on the business of banking.

(g) The Hon. Tribunal in the case of Citizen Co-op. Society Ltd. v.Additional

Commissioner of Income-tax, Range-9, Hyderabad* [2012] 24 taxmann.com 347

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(Hyd.) with respect to comment on banking business and denial of 80P(2)(a)(i) vide

para 23 to 25 have held as under :

Para 23. The Society is carrying on the Banking business and for all practical purpose

it acts like a co-op bank. The ITAT observed that the society is governed by the

Banking Regulations Act. Therefore the Society being a co-op bank providing

banking facilities to members is not eligible to claim the deduction u/s 80P(2)(i)(a)

after the introduction of sub-section (4) to section 80P.

Para 24. In view of the above we are of the opinion that the society is not eligible to

claim deduction u/s 80P(2)(a)(i). Therefore we are of the opinion that the assessee

is not entitled for deduction u/s 80P(2)(a)(i) for assessment year 2006-07, 2007-08 &

2008-09 and allowed the ground raised by the revenue and dismiss the ground

taken by the assessee on this issue.

Para 25. Thus, the issue relating to the disallowances of deduction u/s 80P(2)(a)(i), is

decided in favour of the revenue.

17. Legal fiction in terms enacted for the purpose of a “particular Act” is normally restricted to

that Act and cannot be extended to cover another Act :

A legal fiction must be carried to its logical conclusion and not to an illogical length.

Kindly refer: CIT Vs. Elphinstore Spinning & Weaving Mills Co. (1960) 40 ITR 142,

154(SC); Rajputana Trading Co. Ltd V. CIT (1969) 72 ITR 2S6(SC); Dr. Baliram Waman

Biray V. Justice B. Lentin (1989) 176 ITR 1,27(SC); CED v. Krishna Kumari Devi (1988)

173 ITR 561,565 (All); Gulab Chand Motilal v. CIT (1988) 174 ITR 117,122 (M.P.); CST

v. Mohanlal Anil Kumar (1984) 57 STC 145 -149 (Bom).

18. Provisions relating to concessions are ordinarily expected to be rigidly interpreted :

The Hon‟ble Apex Court rendered in the case of Union of India v. Wood Papers

Ltd (AIR 1991 SC 2049) and the decision of Hon‟ble Andhra Pradesh High Court

rendered in the case of CIT v. Anakapalli Co-operative Marketing Society

Ltd., [(2000) 245 ITR 616 (AP)], wherein it was held that the provisions relating to

concessions are ordinarily expected to be rigidly interpreted.

19. Concept of mutuality explained with examples :

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Concept mutuality applies always with society to members of the society excluding

the transaction of business, profession, vocation etc. and not with third party and

also not with members to members.

e.g.(1) One lady members selling papad, aachar etc. only to other members of the

society then income from sale of papad aachar is taxable in her hand as she is

carrying on business or may even be vocation.

(2) Chartered accountant writing books, filing returns, doing audit of same society

wherein he is member, then professional fees charged by him is taxable in his hand.

(3) Society buys 10000 kg of pulses at most competitive rates and distributes / sales

among members at less than 20% market price and still earns (say) 20% then the

transaction is business and mutuality concept do not apply and society will be liable

to pay tax on 20% earning.

(4) Rent received form Telephone tower installed on building of CHS Ltd. is taxable

as income from house property in the hands of CHS Ltd.

Citation: (a) Satyam Shivam Sundaram Cooperative Society Ltd. in ITA No.516 to 514

M/2004 (b) Pinto Park View Cooperative Housing Society Ltd. in ITA Nos.5859-

5894/M/2003.(c ) M/s.Kamlesh Real Estates Pvt. Ltd. ITA No. 1451/M/2010.

(5) Rent received from Advertisement hoarding installed on building of CHS Ltd. is

taxable as income from other sources in the hands of CHS Ltd.

Citation : (a) Mukherjee Estate P. Ltd. Vs CIT (2000) 244 ITR 1 (CAL. H.C.)/ [2000] 113

TAXMAN 313 (CAL.HC.).

(6) Signage rent, parking rent, terrace rent is taxable as income from other sources.

[ [2012] 19 taxmann.com 36 (ITAT-Delhi)].

(7) Giving money (providing loan) at higher rate than the rate of borrowing is

banking business only, concept of mutuality do not apply whenever profit motive is

there. (except law gives specific exemption – but the same is certainly in violation of

Article 14 & 16 of the constitution of India as against the other person in similar trade

who are liable to tax merely because they are influenced by the other law of the land

though such law in fact is subordinate yet not superior to the Constitution of India).

15

(8) The main intention of mutuality is to create a pool to discharge common

obligation’s of members e.g. common – property tax, passage electricity charges,

watchmen, garden, water expenses with respect to housing society and not to carry

on business, profession or vocation. Therefore, contribution towards common pool is

neither considered as income nor such spending is considered as expense for the

purpose of income tax on mutuality principle. [ please refer Para 16(b)].

20. Concept of mutuality why not applicable to Co Operative Credit Socities : (judicial view)

(a)There is no aspect of mutuality in the case of the assessee registered under the Co-

operative Societies Act as one of the objectives of a co-operative society will be to

make profits and declare dividends to its members. In the case of a mutual concern,

there is no room for such intention of making profit and distribute the same among

the members.[ Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) ;

229 CTR 209].

(b)The Hon. Andha Pradesh high Court in the case of CIT Vs. Secunderabad Cricket Club

(2012) 21 Taxmann.com 54 (A.P. HC.) vide Para 34 with respect to any transaction of

business nature having an motive of profit than the concept of mutuality do not

apply and transaction would be liable to Income tax.

Para 34 ………The ratio therein is that, if an incorporated entity is engaged in trade,

the profit from it, even if they are transactions with members, would be taxable and

the principle of mutuality would have no application.

21. When section 80P(2)(i) &80P(4) applies read with section 2(24)(viia)from A.Y. 2007-08.:

in the case of a co-operative society engaged in carrying on business of banking

(emphasis supplied – “with”) [when emphasis supplied word “to” becomes

redundant ] its members [80P(2)(a)(i)]

or

The co operative credit society is engaged in carrying on providing credit facilities to

its members. [80P(2)(a)(i)]

16

[emphasis supplied - Conjunction “or” appearing is to be read as “and” [The natural

meaning of the words of the section is that one or the other prescribed activity i.e

business of banking or providing credit facility (which otherwise are akin)must be

adopted in every case of co operative society. Here, modification of language is to

meet the intention by making main object and intention of the statute clear instead

making it nullity ] because the intention of the legislature is starting with the phrase :

“in the case of a co-operative society engaged in” - activity “A” or Activity “B” .

Here, activity “B” is akin to activity “A” (Please read Paras 9,13&14 supra ) Further,

Act is to read as whole and in such a way as to give effect to its purpose ].

And if it is not

a primary agricultural credit society or

a primary co-operative agricultural and rural development bank.[exception to section

80P(4)].

Then the income is not exempt under section 80P read with section 2(24)(viia).

22. Denial of 80P(2)(a)(i) or Withdrawal of Section 80P benefit to Urban Co Operative credit

societies vide Section 80P(4) read with section 2(24)(viia) of IT Act : (Legal view)

(a)The deduction earlier allowable under section 80P in the case of a co-operative

society engaged in carrying on the business of banking (co-operative banks) has been

withdrawn from the Assessment Year 2007-08 barring in the case of a primary

agricultural credit society or a primary co-operative agricultural and rural

development bank.

“Explanation” provided under section 80P(4) For the purposes of this subsection,—

( i ) “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);

( ii ) “primary co-operative agricultural and rural development bank” means a

society having its area of operation confined to a taluk (emphasis supplied -

location) and the “principal object” of which is to provide for long-term credit for

agricultural and rural development activities.] (emphasis supplied-activities).

17

(b) Regional Rural Banks are not eligible for deduction under section 80P of the Income-

tax Act, 1961 from the assessment year 2007-08 onwards [Circular No.6/2010 [F.No.

173(3)/44/2009-IT (A-I)] dated 20-9-2010]. [ Vidisha Bhopal Kshetriya Gramin Bank,

Vidisha v.Assistant Commissioner of Income-tax*[2012] 24 taxmann.com 278 (Indore

- Trib.)].

(c)Vide Para 13.7 S. 80P : Business income of co-operative societies carrying on the

business of banking or providing credit facilities to its members was eligible for

deduction from total income u/s.80 P. Effective from A.Y. 2007-08, this deduction

will not be available to co-operative banks, other than primary agricultural societies

or primary co-operative agricultural rural co-operative banks. Consequently, the

definition of ‘Income’ has been amended in S. 2(24)(viia) to include profits of the

business of banking (including primary credit facilities) carried on by co-operative

societies with its members. Therefore, the benefit of exemption on the basis of

mutuality principle cannot be claimed by such society. (Source BCA website Subject :

Income Tax Law Month-Year : May 2006 Author/s : P. N. Shah Chartered

Accountant Topic : Amendments in the Income-tax Act ).

(d)Income arising from the business of banking or providing credit facilities to its

members, cottage industries or marketing of agricultural produce grown by its

members, etc. However, the deduction is not available to a cooperative bank other

than a primary agricultural credit society and a primary cooperative agricultural and

rural development bank from A.Y.2007-08. Eligible Tax Payers : Co-operative

societies [ Source : F.No. 149/124/2006-TPL(Pt.) Department of Revenue Central

Board of Direct Taxes Tax Policy & Legislation Division].

(e) The Hon. Tribunal in the case of The Citizen Co-op. Society Ltd. PAN:

AAAAT3952F Vs. Addl. Commissioner of Income-tax, Range-9, Hyderabad ITA

No. 1049/Hyd/2011 - A.Y. 2007-08 & ITA No. 1201/Hyd/2011 - A.Y. 2008-09 on 0 2

July, 2012 vide Para 22 & 23 have held as under[2012] 24 taxmann.com 347 (Hyd.) :

Para 22. For assessment year 2007-08 & 2008-09, we have to consider the

amendment brought out to the section with effect from 0 1/04/2007 by Finance Act,

18

2006 whereby section 80P(4) was inserted. The amendment clearly barred all the

co-operative banks other than primary agricultural credit society or a primary

co-operative agricultural and rural development banks from claiming exemption

under the section. The primary activity of the society is to provide banking facilities

to its members. The Society is dealing like a bank while accepting deposits from its

members. This issue was examined by the Hon'ble ITAT in the assessee own case

while deleting the penalty u/s 27 1D and 27 1E. The Hon'ble ITAT held as under.

" If the carrying on banking business is not approved by the RBI or the assessee is not

having requisite license to carry out the banking business, the authorities could

have taken action against the society or stop the Society activity. Once the

assessee is allowed to carry on the banking business, then the assessee is bound by

the relevant provisions of the Banking Regulations Act. The bank for all its banking

activities is strictly governed by the Banking Regulations Act 1949"

Para 23. The Society is carrying on the Banking business and for all practical purpose it

acts like a co-op bank. The ITAT observed that the society is governed by the Banking

Regulations Act. Therefore the Society being a co-op bank providing banking

facilities to members is not eligible to claim the deduction u/s 80P(2)(i)(a) after the

introduction of sub section (4) to section 80P.

23. Denial of 80P(2)(a)(i) or Withdrawal of Section 80P benefit to Urban Co Operative credit

societies vide Section 80P(4) read with section 2(24)(viia) of IT Act : (Judicial View)

(a)The Hon Tribunal in the case of Kerala State Cooperative Agricultural Rural

Development Bank [2011] 10 taxmann.com 145 (Cochin - ITAT) (also available on

internet) is not entitled to deduction u/s 80P(2)(a)(i) and have held that The Assessee

is a ‘cooperative bank’ and, consequently, hit by the provision of section 80P(4), so

that deduction provided by section 80P would not be available to it from A.Y. 2007-

08 onwards and, accordingly, stood rightly denied.

(b)Kekri Sahakari Bhumi Vikas Bank Ltd., Vs The ITO, Ward - 2, ITA No. 764/JP/2011

A.Y.2007-08. [2012] 22 taxmann.com 63 (JP.)].

19

(c) The Sundergarh District Ltd,Mahantypara,Sundergarh ITANo.425/CTK/2010 AY 07-08.

(available on indiakanoon.org)

(d) In theses case the assessee filed revised return and reversed the claim of 80P(2)(a)(i)

: The Kannur Dist. Co-op Bank Ltd., 545A, Jila Bank Building, Kannur, I.T.A. No.

323/Coch/2010, A.Y.2007-08. (available on indiakanoon.org)

(e)The Citizen Co-op. Society Ltd. PAN: AAAAT3952F Vs. Addl. Commissioner of

Income-tax, Range-9, Hyderabad ITA No. 1049/Hyd/2011 - A.Y. 2007-08 & ITA No.

1201/Hyd/2011 - A.Y. 2008-09 on 0 2 July, 2012. [2012] 24 taxmann.com 347 (Hyd.)

(available on indiakanoon.org)

(f) Cuttack Central Co-Operative Bank Ltd., Nimchouri, Cuttack. PAN: AAABC 0373 Q Vs.

Asst.Commissioner of Income tax, Circle 2(2), Cuttack. Assessment year 2009-10.

I.T.A.No. 182/CTK/2012 [assessee is a co-operative society carrying on business of

banking ]. (available on indiakanoon.org)

24. Denial of 80P(2)(a)(i) benefit to Regional rural bank : (judicial view)

(a)M/s.Vidisha Bhopal Kshetriya Gramin Bank, Appellant vs. ACIT3(1), Vidisha

Bhopal Respondent I.T.A.No. 215 & 216/Ind/2011 A.Y. : 2007-08&2008-09 Date of

pronouncement : 18.06.2012 *[2012] 24 taxmann.com 278 (Indore - Trib.)] (available

on indiakanoon.org).

25. Denial of Section 80P even to Federation of Co operative Societies :

Federation doing Banking Activities with co operative credit societies or Pat Pedhi’s

who are its members and located in urban area is also not entitled for benefit

provided under section 80P of the Income Tax Act,1961, from Assessment Year 2007-

08 by virtue of Section 80P(4) read with section 2(24)(viia) both of income Tax Act,

1961. The said view appears in Kerala State Co-operative Agricultural Rural

Development Bank Ltd., Statue, Trivandrum-695001. Vs. The Assistant

Commissioner of Income-tax, Circ le-1(2) , Trivandrum vide ITA No.

506/Coch/2010 & S.P. No.67/Coch/2010 For A.Y. 2007-08. [also available on

internet) - [2011] 10 taxmann.com 145 (Cochin - ITAT)].

26. Denial of 80P(2)(a)(i) when Banking license is cancelled by RBI :

20

The Hon. Tribunal Mumbai denied 80P(2)(i) when Banking license for A.Y. 2005-06

was cancelled by RBI in the case of Apex Urban Co. Op. Bank Of Maharashtra & Goa

Ltd. Vs.ITO (1)(1)(3) [(2012) 134 ITD 118].

27. The following judgements needs to be reviewed [ taxability by virtue of 80P(4)] in view of

the above and explanation given hereunder in each case:

(a) The judgement of Hon Tribunal in the case of M/s. Yeswanthpur Credit Co-operative

Society Ltd., 61, 7th Main, 8thCross, Gokula, 1st Stage, 2nd Phase, Yeshwanthpur,

Bengaluru-560 022. Vide I.T.A. No.737/Bang/2011 (Assessment Year : 2007-08) dated

11 April, 2012 The Hon. Tribunal in above referred case has observed as under :

(available on indiakanoon.org)

“If the intention of the legislature was not to grant deduction under section 80P(2)(a)

(i) to cooperative societies carrying on the business of providing credit facilities to its

members, then this section would have been deleted…..”

The above judgement respectfully needs to be reviewed in view of not looking in to

Main proviso as well as exception provided by Section 80P(4) read with Section 2(24)

(viia) w.e.f. A.Y. 2007-08. Vide explanation to Section 80P(4) which overrides Section

80P, as the intention of the legislature is to grant deduction to restricted type of

Primary co operative credit societies operating in Taluk areas and not to all co

operative credit socities.

(b) The Khamano Primary Cooperative Agricultural Development Bank Ltd., Sirhind,

Khamano Mandi Gobindgarh PAN No. AABCT3146N Vs The ITO, ITA No.

798/Chd/2011 Assessment Year: 2007-08 (available on indiakanoon.org), in which

lower authorities rightly invoked Section 80P(4) read with section 2(24)(viia), but

Hon. Tribunal allowed benefit of 80P(2)(a)(i) by following Madras High Court

Judgement [188 ITR 671] or [1991] 56 TAXMAN 92 (MAD) which refers to A.Y. 1972-

73 to 1974-75 and also Allahabad HC judgement [258 ITR 594 (All)] or [2002] 125

TAXMAN 767 (ALL.) which refers to Assessment years 1975-76 and 1976-77. The law

21

has undergone change from A.Y 2007-08, therefore the judgement needs to be

reviewed.

(c) The Vasavi Credit Co-operative Society Ltd., No. 108/1, Sri Kanika parameshwari

Temple Compound, Malleswaram, 8th Cross, Bangalore - PAN No.AAAJV0152C. ITA

No.46/Bang/2011 (Asst. Year - 2007-08) [Date of Pronouncement : 29-12-2011] in

the said order apparent error is there of consideration of Assessment year for

applicability of section 80P(4) vide para 8 the observation cum order is as under :

(available on indiakanoon.org)

Para 8 : Having heard both the parties and having considered the rival contentions,

we find that the sub. Sec. (4) of sec. 80P has been introduced w.e.f 1/4/2007 whereby

co-operative banks other than primary agricultural credit society or primary co-

operative agricultural and rural Developments banks have been denied the provisions

of sec. 80P of the Income-tax Act. The relevant financial year of the assessee before

us is 2006-07 which ends on 31.3.2007. As the provisions of sub sec. 4 of sec. 80P

comes into effect from 1/4/2007, it is clear that the said provision is not applicable

to the assessee. In view of the same, the findings of the CIT(A) though on a different

footing has to be upheld that the assessee is entitled for deduction u/s 80P on its

entire income.

(c) The Income-tax Officer, Ward 1(4) v. Jankalyan Nagri Sahakari Pat Sanstha Ltd.*

[2012] 24 taxmann.com 127 (Pune) in the said order fact is that the society is

engaged in providing credit facility to its members. However, in view of explanation

and intention vide several para herein above the judgment needs to be reviewed.

(d) ACIT, Mehsana Circle, (Appellant) Vs. Dediyasan Industrial Co. Mehsana Credit

Society Ltd. H-1A, Dediyasan GIDC, Modhera Road, Mehsana (Respondent) PAN No.

AAAAD1041M I.T.A. No 1293/Ahd/2012- A.Y.:-2008-09 in the said order fact is that

the society is engaged in providing credit facility to its members. However, in view

of explanation and intention vide several para herein above the judgment needs to

be reviewed. [ Para 7.2 as per india kanoon.org is contradictory to give benefit].

28. Interest earned on surplus fund is taxable under the head Income from other sources :

22

(a) When surplus fund is invested to earn interest income of Rs.5,82,761/- received

from Bilagi Sugar Mills Ltd. principle of mutuality do not apply and the same is

taxable under section 56 and benefit of section 80P(2)(a)(i) or section 80P(2)(a)(ii) of

the act is not available. [Shree Siddeshwar Souhardhana Sahakari Niyamit, Tq. Bilagi,

District: Bagalkot-587116. ITA No.652/Bang/2011. Date of order 29.11.2011. (Asst.

Year 2007-08)]. (available on indiakanoon.org)

(b)Identically also held in Sri Laxminarayana Swamy Co-Operative Society Ltd. v.

Income-tax Officer [2010] 4 ITR (TRIB.) 27 (BANG) [ASSESSMENT YEARS 2004-05 TO

2006-07] APRIL 22, 2010.

(c) Identically also held in D.C.I.T., Circle-33, National Coal Development

Corporation Staff Cooperative Credit Society Ltd., Kolkata. ITA No.1564/Kol/2011

[ASSESSMENT YEARS 2008-09] (available on indiakanoon.org)

[All followed Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) ;

229 CTR 209].

29. The following judgements ( Taxability of interest on surplus fund ) needs to be reviewed :

(a) The Hon. Tribunal in the case of The AC IT, Vs. The Punjab State Cooperative Circle

2(1), Agriculture Development Bank Ltd., Chandigarh PAN No. AABFA9402A ITA No.

742/Chd/2011 Assessment Year: 2008-09 with respect to income of Rs. 2,12,46,106/-

arising out of surplus funds in reserve accounts held as eligible for deduction u/s

80P(2)(a)(i). The said judgement needs to be reviewed in view of the Hon. SC in

Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) ; 229 CTR 209].

(b)In the case of D.C.I.T., Circle-33, National Coal Development Corporation Staff

Cooperative Credit Society Ltd., Kolkata. ITA No.1564/Kol/2011 [ASSESSMENT YEARS

2008-09] The Hon Tribunal Attention was not drawn to Section 80P(4) read with

section 2(24)(viia). Hence, The said Judgement respectfully needs to be reviewed

partially in view of the Hon. SC in Totgar's Co-operative Sale Society Ltd. v. ITO

[2010] 322 ITR 283 (SC) ; 229 CTR 209].

23

30. Status of Co Operative Society for Tax Audit purpose, Return filing & for Issuance of notice

u/s 133(6) :

The status of co operative society and Bank for the purpose of section 44AB is that of

Artificial Juridical Person. A society constituted under the Co-operative Societies Act

is an artificial juridical person and so much so it answers the definition of ‘person’. .

M.V. Rajendran V. ITO 260 ITR 442 Ker. HC or [2003] 128 TAXMAN 385 (KER.HC).

31. Is it necessary for Pat pedhi or co op credit society required to file return :

Therefore, every society will have to file its return and the same would be subject to

scrutiny by the department. The Assessing Officer is, therefore, free to call for books

of account to convince himself about the correctness of the return filed. Therefore,

books of account of the society and its transactions are subject to scrutiny by the

Assessing Officer in the normal course. M.V. Rajendran V. ITO 260 ITR 442 Ker. HC or

[2003] 128 TAXMAN 385 (KER.HC). [ In view of above ITR – 6 needs to be filed by

corporate entity which is called artificial juridical person ].

32. Time limit for submission of Tax Audit report :Whether obtaining of audit report and furnishing a copy thereof before completion

of assessment is sufficient compliance with provisions of section 44AB –Yes Mathura

Zila Sahkari Bank Ltd. v. Deputy Commissioner of Income-tax [2004] 4 SOT 248

(AGRA).

33. Whether Co Op. Credit Socities are immune from issue of notice under section 133(6)?:

In view of Karnataka Bank Ltd. v. Secretary, Government of India [2002] 255 ITR 508/

123 taxman 219 (SC) that it is not a condition for the issuance of a notice under

section 133(6) that any proceedings should be pending against the person with

respect to whom the information is called for. [ Mattul Service Co-operative Bank Ltd.

v. Income-tax Officer (CIB), Kozhikode [2010] 186 TAXMAN 409 (KER.HC) Pinarayi

Service Co-operative Bank Ltd.v. Income-tax Officer (CIB)* , Kozhikode [2009] 184

TAXMAN 138 (KER.)].

34. Whether Co Op. Credit Socities are immune from issue of notice under section 147/148?:

Merely because the assessee-society is engaged prima facie in banking activities

does not disentitle the assessing authority from issuing the impugned notice

24

under section 147/148 and calling in question, the taxability/deductibility of the

aforesaid interest income of as 'income from other sources' unless such interest

income is shown to be 'profits and gains from business' of banking society.

[ Pushtikar Laghu Vyaparik Pratishthan Bachat Evam Sakh Sahkari Samiti Ltd.

v.Union of India* [2012] 17 taxmann.com 131 (Raj.)].

35. Applicability of Section 44AB of income Tax Act,1961 to Co Operative Credit Socities :

Once it is held to be Bank then turnover or gross receipt if exceeds Rs. 100

lakh/Rs. 25 Lakh then the Tax audit is compulsory and failure to get accounts

audited would attract penalty under section 271B of Income tax Act, 1961.

36. Whether Co operative credit societies are excluded from definition of AOP :

The "Co-operative societies" are specifically exempted from the definition of

"Association of Persons" in section 40(ba), meaning thereby the Income-tax Act does

not debar deduction of payment of interest to the members of a co-operative society

[Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam

Cooperative Bank Ltd.* [2011] 13 taxmann.com 190 (Visakhapatnam)].

37. Commission earned by co operative credit society or pat pedhi is also taxable :

(a) LIC commission received by assessee is the receipt of Service charge by assessee

from LIC is not eligible for deduction u/s. 80P(2)(a)(i) of the I.T. Act. [The Mumbai

Agnishaman Dal Sahakari Patpedhi Ltd. Byculla Mumbai – 400 008 Vs. CIT - ITA No.

364/Mum/2009 A.Y. 2005-06].

(b) Assessee society received commission of Rs. 4,23,720/- from Maru Sales on

account of goods purchased by members is not eligible for deduction u/s. 80P(2) of

I.T. Act. [The Mumbai Agnishaman Dal Sahakari Patpedhi Ltd. Byculla Mumbai – 400

008 Vs. CIT - ITA No. 364/Mum/2009 A.Y. 2005-06].

38. Rental Income earned by Employee co operative credit society or pat pedhi is also taxable:

Rental Income received by assessee is Income from house Property and is not

entitled to benefit of section 80P(2)(a)(i). The ITO Ward 10(4), Hyderabad Vs. South

Central Railway Employees Credit Coop. Society Ltd., Secunderabad. ITA

No.469/H/2010 [ Assessment year : 2006-07].

25

Similar view in ITO Vs. Kerala State co op bank ltd. 2012 (27) Taxmann.com

96(cochin).

39. Whether interest paid to members by Co operative credit society is allowed under section

36(1)(iii) or section 37(1) :

"Co-operative societies" are specifically exempted from the definition of "Association

of Persons" in section 40(ba), meaning thereby the Income-tax Act does not debar

deduction of payment of interest to the members of a co-operative society [Assistant

Commissioner of Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam

Cooperative Bank Ltd.* [2011] 13 taxmann.com 190 (Visakhapatnam)].

Suppose, a person, say Mr. X, approaches the assessee-society for availing a loan of

say, Rs. 1,00,000. Let us assume that he is required to purchase shares worth Rs.

5,000 from the share capital of the assessee-society. In that case, Mr. X will pay Rs.

5,000 to the assessee-society and the assessee-society will given a loan of Rs.

1,00,000 to Mr. X. In effect, Mr. X would receive a net amount of Rs. 95,000 only

from the assessee-society. Similarly, the net amount which go out of the coffers of

the assessee-society is also Rs. 95,000 only. However, the assessee-society would

charge interest at applicable rate on the loan amount of Rs. 1,00,000, even though

the net amount received by Mr. X is only Rs. 95,000, i.e., that the assessee-society is

collecting interest, not only on Rs. 95,000,being net cash out flow from its coffers,

but also on the amount of Rs. 5,000 given by Mr. X as Share capital. At the end of the

year, the assessee-society may determine the amount of interest payable on the

share capital out of the surplus. In the above said example, the assessee-society

would pay interest on the amount of Rs. 5,000 given as share capital.

[emphasis supplied: 1. Share capital carries dividend and not interest. 2. In case of co

operative credit society/bank normally first appropriate or deduct share capital

money and disburse net amount of loan only ].

40. Tax-neutral amalgamation or demerger provision for co operative Bank :

The Finance Act 2006 is amended to provide for tax-neutral amalgamation or

demerger of co-operative banks. Hence, the amalgamated or resulting co-operative

bank will be able to set off and carry forward the unabsorbed loss or accumulated

depreciation of the amalgamating or demerged co-operative bank.

26

Deduction in respect of any provision for bad and doubtful debts is also allowable

now under section 36(1)(viia).

Netting of Bad debts principle laid down.

Guide line laid down by RBI for W/O Bad debts would apply Section 43D.

Interest on NPA taxable only if credited to P&L A/C Section 43D.

Section 44DB dealing with special provision for computing deductions in case of

business reorganisation of co-operative banks.

Capital gain is tax neutral for both the banks and shareholders vide section 47( vica)

and Section 47(vicb).

Section 72AB, dealing with provisions relating to carry forward and set off of

accumulated loss and unabsorbed depreciation in business reorganisation of co-

operative banks, is inserted.

41. Classification of co op bank (credit society) for section 36(1)(viia) :

Co-operative bank, in our view, would be classified as a "non-scheduled bank" for the

purpose of sec. 36(1)(viia) of the Act. [The Kodungallur Town Co-op Bank Ltd., H.O.,

Kodungallur Vs. The Assistant Commissioner of Income-tax, Circle-2(1), Trichur

680664.] (available on indiakanoon.org)

42. Deduction in respect of any provision for bad and doubtful debts to be allowed in case of

co-operative banks section 36(1)(viia) :

(a) Section 36(1)(viia), deduction of an amount not exceeding seven and one-half per

cent of the total income (computed before making any deduction under the said

clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate

average advances made by the rural branches of a scheduled bank or a non-

scheduled bank computed in the prescribed manner is allowed as deduction in the

computation of income of such banks. ‘Scheduled bank’, as defined in the

Explanation to clause (viia) of sub-section (1) of section 36, does not include a co-

operative bank. Since profits of co-operative banks are taxable after withdrawal of

deduction available to a co-operative society engaged in carrying on the business of

banking under section 80P, such co-operative banks are allowed deduction with

effect from the assessment year 2007-08 under clause (viia) of sub-section (1) of 27

section 36 in respect of any provision for bad and doubtful debts as its profits have

become taxable.

43. C ontingent unaccrued liability is not allowable as deduction :

The Hon‟ble Apex Court rendered in the case of Indian Molasses Co. P. Ltd. V. CIT (37

ITR 66 at page 76) held that contingent unaccrued liability is not allowable as

deduction.

44. Netting of bad debts principle laid down under section 36(1)(viia):

The Hon. Tribunal in the case of The Kannur Dist. Co-op Bank Ltd., 545A, Jila

Bank Building, Kannur, ITA No. 323/Coch/2010 and Vide para 9 it is observed that :

“During the year under consideration, the assessee created net provision of Rs.7.35

crores, i.e., it created a new provision for bad and doubtful debts to the tune of

Rs.35.27 crores and also wrote back a sum of Rs.27.92 crores from out of the opening

balance of Provision for bad and doubtful debts. The assessee claimed a sum of

Rs.35.27 crores under section 36(1)(viia) of the Act. However the AO took the view

that the net amount of Provision for bad and doubtful debts debited to the Profit and

Loss account, i.e., Rs.7.35 crores (Rs.35.27 crores less Rs.27.92 crores) should be

treated as the provision for bad and doubtful debts, for the purpose of sec. 36(1)

(viia) of the Act.”

Vide para 9.1 it is ordered as under :

“ If the assessee has created a new provision say Rs. 23000/- on a particular asset

and by fully reversing say Rs. 16000/- the opening balance of provision relating to

other asset, then the net accretion i.e. Rs. 23000- Rs. 16000=Rs. 7000/- should only

be treated as new provision” That is netting theory will be applied here..

45. Section 40a(ia) equally applies to Co operative Credit Societies & Pat Pedhis :

(a) In the case of M/s. Yeswanthpur Credit Co-operative Society Ltd., 61, 7th Main,

8thCross, Gokula, 1st Stage, 2nd Phase, Yeshwanthpur, Bengaluru-560 022. Vide

I.T.A. No.737/Bang/2011 (Assessment Year : 2007-08) dated 11 April, 2012 The Hon.

28

Tribunal in above referred case has observed as under : (available on

indiakanoon.org)

Vide Para 2 : Assessing Officer denied the assessee's claim for deduction u/ 80P(2)(a)

(i) of the Act to the extent of Rs.51,90,360 holding that the assessee is carrying on

banking activities which was hit by the amended provisions in section 80P(4) of the

Act which became applicable in the relevant period. The Assessing Officer also made

a disallowance of Rs.4,37,727 under section 40a(ia) of the Act.

(b) In the case of The Vasavi Credit Co-operative Society Ltd., No. 108/1, Sri Kanika

parameshwari Temple Compound, Malleswaram, 8th Cross, Bangalore - PAN

No.AAAJV0152C. ITA No.46/Bang/2011 (Asst. Year - 2007-08) [Date of

Pronouncement : 29-12-2011] (available on indiakanoon.org)

Vide para 2 : In this appeal, the Revenue is aggrieved by the order of the CIT(A)

in allowing the deduction u/s 80P(2)(a)(i) of Rs.1,06,65,205/- which is the entire

income of the assessee which includes disallowance of Rs.50,00,305/- u/s 40(a)(ia)

of the Income-tax Act, though the said disallowance was confirmed by him.

46. Special provision under section 43D for public financial institutions is also extended to co-

operative banks [W.E.F. A.Y.2007-08]:

Under section 43D it has been provided that in the case of a public financial

institution or a scheduled bank or a State Financial Corporation or a State Industrial

Investment Corporation, the income by way of interest in relation to such

categories of bad or doubtful debts as may be prescribed having regard to the

guidelines issued by the Reserve Bank of India in relation to such debts, shall be

chargeable to tax in the previous year in which it was credited by such institutions or

bank or corporation to its profit and loss account for that year or, in the year in which

it is actually received by that institution or bank or corporation, whichever is earlier.

The Finance Act, 1999 had substituted section 43D with effect from April 1, 2000 with

a view to improve the viability of the Housing Finance Companies and to provide a

boost to the housing sector. The Act amends section 43D so as to extend its

29

provisions to a public company whose main object is carrying on the business of

providing long-term finance for construction or purchase of houses in India for

residential purposes and which is registered in accordance with the Housing Finance

Companies Directions, 1989 given under section 30 and section 31 of the National

Housing Bank Act, 1987.

The Act provides that in the case of such a company, the income by way of interest in

relation to such categories of bad or doubtful debts, as may be prescribed having

regard to the guidelines issued by the National Housing Bank in relation to such

debts, shall be chargeable to tax in the previous year in which it was credited by the

company to its profit and loss account or, as the case may be, in which it is actually

received by that company, whichever is earlier. Clause (d) of the Explanation to

section 43D defines the expression ‘scheduled bank’ by reference to Explanation (ii)

to section 36(i)(viia). The definition of ‘scheduled bank’ after the amendment (as

discussed above) will include scheduled co-operative banks. Thus, the amendment to

the definition of ‘scheduled banks’ as it appears in section 36 will also have the effect

of making the provisions of section 43D applicable to scheduled co-operative banks.

47. Interest on NPA not credited or debited in P&L A/C, Section 43D do not apply:

(a) The Hon Tribunal in the case of Karnavati Co-op. Bank Ltd. v. Deputy Commissioner

of Income-tax, Circle-11* [2012] 17 taxmann.com 239 (Ahd.) have held that the

assessee, a co-operative bank, was following mercantile system of accounting. It had

neither credited in the profit and loss account nor offered for taxation the amount of

interest that had accrued on non-performing assets (NPA). and ( i) that the said

amount of interest was neither debited to borrower's account nor credited to the

interest income, and (ii) that even the interest was not shown under 'suspense-

account'. The same shall not attract section 43D of Income tax Act,1961 and it would

be wrong in adding accrued interest on NPA to income of assessee.

(b) Identical view in ITA No 511 of 2010, The Durga Cooperative Urban Bank Ltd

Vijayawada on 10.03.2011 [A.Y. 2007-08].

48. Interest Income pending recovery beyond six month will not form part of income :

30

Vide Para 28 of The Citizen Co-op. Society Ltd. PAN: AAAAT3952F Vs. Addl.

Commissioner of Income-tax, Range-9, Hyderabad ITA No. 1049/Hyd/2011 - A.Y.

2007-08 & ITA No. 1201/Hyd/2011 - A.Y. 2008-09 on 0 2 July, 2012.

An interest of Rs. 1,26,29,963/- on account of interest receivable on the loans

advanced which are pending recovery for more than 6 months. According the

judgment of Supreme Court in the case of UCO Bank Vs. CIT (237 ITR 889) (SC)

wherein held that interest credited to the suspense account and NPAs is to be

excluded from the income.

49. Special provision for computing deductions in the case of business reorganisation of co-

operative banks (Section 44DB) :

Special provision for computing deductions in the case of business reorganisation of

co-operative banks is inserted with effect from April 1, 2008. Under section 32

(Depreciation), section 35D (Amortisation of preliminary expenses), section 35DD

(Amortisation of amalgama-tion and demerger expenses) or section 35DDA

(Amortisation of VRS payments) shall, in a case where business reorganisation of a

co-operative bank has taken place during the financial year, be allowed in accordance

with the provisions of this section.

The amount of deduction allowable to the predecessor co-operative bank under

section 32, section 35D, section 35DD or section 35DDA shall be determined in

accordance with the following formula :

A×B

C

where A = the amount of deduction allowable to the predecessor co-operative bank

if the business reorganisation has not taken place;

B = the number of days comprised in the period beginning with the 1st day of the

financial year and ending on the day immediately preceding the date of business

reorganisation; and

C = the total number of days in the financial year in which the business

reorganisation has taken place.

31

Similarly, the amount of deduction allowable to the successor-co-operative bank

under section 32, section 35D, section 35DD or section 35DDA shall be determined in

accordance with the following formula:

A×B

C

where A = the amount of deduction allowable to the successor co-operative bank if

the business reorganisation has not taken place;

B = the number of days comprised in the period beginning with the date of business

reorganisation and ending on the last day of the financial year; and

C = the total number of days in the financial year in which the business

reorganisation has taken place.

In a case where an undertaking of the predecessor co-operative bank entitled to the

deduction under the provisions of section 35D, section 35DD or section 35DDA is

transferred before the expiry of the period specified therein to a successor co-

operative bank on account of business reorganisation, the provisions of these

sections will apply to the successor co-operative bank in the financial years

subsequent to the year of business reorganisation as they would have applied to the

predecessor co-operative bank, as if the business reorganisation has not taken place.

For the purpose of this section, definition of different connotations has also been

provided under sub-section (5) of this section.

(a) ‘amalgamated co-operative bank’ means—

(i) a co-operative bank with which one or more amalgamating co-operative banks

merge; or

(ii) a co-operative bank formed as a result of merger of two or more amalgamating

co-operative banks;

(b) ‘amalgamating co-operative bank’ means—

(i) a co-operative bank which merges with another co-operative bank; or

(ii) every co-operative bank merging to form a new co-operative bank;

32

(c) ‘amalgamation’ means the merger of an amalgamating co- operative bank or

banks with an amalgamated co-operative bank, in such manner that—

(i) all the assets and liabilities of the amalgamating co-operative bank or banks

immediately before the merger (other than the assets transferred, by sale or

distribution on winding up, to the amalgamated co-operative bank) become the

assets and liabilities of the amalgamated co-operative bank;

(ii) the members holding seventy-five per cent or more voting rights in the

amalgamating co-operative bank become members of the amalgamated co-

operative bank; and

(iii) the shareholders holding seventy-five per cent or more in value of the shares in

the amalgamating co-operative bank (other than the shares held by the

amalgamated co-operative bank or its nominee or its subsidiary, immediately

before the merger) become shareholders of the amalgamated co-operative

bank;

(d) ‘business reorganisation’ means the reorganisation of business involving the

amalgamation or demerger of a co-operative bank;

(e) ‘co-operative bank’ shall have the meaning assigned to it in clause (cci) of section

5 of the Banking Regulation Act, 1949 (10 of 1949);

(f) ‘demerger’ means the transfer by a demerged co-operative bank of one or more

of its undertakings to any resulting co-operative bank, in such manner that—

(i) all the assets and liabilities of the undertaking or undertakings immediately

before the transfer become the assets and liabilities of the resulting co-

operative bank;

(ii) the assets and the liabilities are transferred to the resulting co-operative bank at

values (other than change in the value of assets consequent to their revaluation)

appearing in its books of account immediately before the transfer;

(iii) the resulting co-operative bank issues, in consideration of the transfer, its

membership to the members of the demerged co-operative bank on a

proportionate basis;

33

(iv) the shareholders holding seventy-five per cent or more in value of the shares in

the demerged co-operative bank (other than shares already held by the

resulting bank or its nominee or its subsidiary immediately before the transfer),

become shareholders of the resulting co-operative bank, otherwise than as a

result of the acquisition of the assets of the demerged co-operative bank or any

undertaking thereof by the resulting co-operative bank;

(v) the transfer of the undertaking is on a going concern basis; and

(vi) the transfer is in accordance with the conditions specified by the Central

Government, by notification in the Official Gazette, having regard to the

necessity to ensure that the transfer is for genuine business purposes;

(g) ‘demerged co-operative bank’ means the co-operative bank whose undertaking

is transferred, pursuant to a demerger, to a resulting bank;

(h) ‘predecessor co-operative bank’ means the amalgamating co-operative bank or

the demerged co-operative bank, as the case may be;

(i) ‘successor co-operative bank’ means the amalgamated co-operative bank or the

resulting bank, as the case may be;

(j) ‘resulting co-operative bank’ means —

(i) one or more co-operative banks to which the undertaking of the demerged co-

operative bank is transferred in a demerger; or

(ii) any co-operative bank formed as a result of demerger.”

Thus, in the year of reorganization the deductions under section 32, section

35D, section 35DD or section 35DDA are allowable to both ‘successor co-

operative bank’ and ‘predecessor co-operative bank’ in the ratio of number of

days and in the financial years subsequent to the year of business

reorganisation. The provisions of these sections will apply to the successor co-

operative bank as they would have applied to the predecessor co-operative

bank, as if the business reorganisation has not taken place.

50. Capital gains on amalgamation and demerger of co-operative banks :

34

Clauses (vica) and (vicb) under section 47 are inserted and section 49 is amended to

make the business reorganization of co-operative banks, as covered by section 44DB,

tax neutral for both the banks and shareholders.

51. Carry forward and set-off of accumulated losses and unabsorbed depreciation

allowance(Section 72AB) :

Carry forward and set-off of accumulated losses and unabsorbed depreciation

allowance in business reorganisation of co-operative banks New section 72AB on

similar line as was section 72AA, is inserted by the Finance Act, 2006, with effect

from the assessment year 2007-08 which provides for provisions relating to carry

forward and set-off of accumulated losses and unabsorbed depreciation allowance in

business reorganisation of co-operative banks. Under this provision, successor co-

operative bank shall, in a case where the amalgamation has taken place during the

previous year, be allowed to set off the accumulated loss and the unabsorbed

depreciation, if any, of the predecessor co-operative bank as if the amalgamation has

not taken place, and all the other provisions of the Act relating to set-off and carry

forward of loss and allowance for depreciation shall apply accordingly. Sub-sections

(2) to (7) read as under :

“(2) The provisions of this section shall apply if—

(a) the predecessor co-operative bank—

(i) has been engaged in the business of banking for three or more years; and

(ii) has held at least three-fourths of the book value of fixed assets as on the date of

the business reorganisation, continuously for two years prior to the date of

business reorganisation;

(b)The successor co-operative bank—

(i)holds at least three-fourths of the book value of fixed assets of the predecessor

co-operative bank acquired through business reorganisation, continuously for a

minimum period of five years immediately succeeding the date of business

reorganisation;

(ii) continues the business of the predecessor co-operative bank for a minimum

period of five years from the date of business reorganisation; and

35

(iii) fulfils such other conditions as may be prescribed to ensure the revival of the

business of the predecessor co-operative bank or to ensure that the business

reorganisation is for genuine business purpose.

(3) The amount of set off of the accumulated loss and unabsorbed depreciation, if

any, allowable to the assessee being a resulting co-operative bank shall be,—

(i) the accumulated loss or unabsorbed depreciation of the demerged co-operative

bank if the whole of the amount of such loss or unabsorbed depreciation is

directly relatable to the undertakings transferred to the resulting co-operative

bank; or

(ii) the amount which bears the same proportion to the accumulated loss or

unabsorbed depreciation of the demerged co-operative bank as the assets of the

undertaking transferred to the resulting co-operative bank bears to the assets of

the demerged co-operative bank if such accumulated loss or unabsorbed

depreciation is not directly relatable to the undertakings transferred to the

resulting co-operative bank.

(4) The Central Government may, for the purposes of this section, by notification in

the Official Gazette, specify such other conditions as it considers necessary, other

than those prescribed under sub-clause (iii) of clause (b) of sub-section (2), to

ensure that the business reorganisation is for genuine business purposes.

(5) The period commencing from the beginning of the previous year and ending on

the date immediately preceding the date of business reorganisation, and the

period commencing from the date of such business reorganisation and ending

with the previous year shall be deemed to be two different previous years for the

purposes of set off and carry forward of loss and allowance for depreciation.

(6) In a case where the conditions specified in sub-section (2) or notified under sub-

section (4) are not complied with, the set off of accumulated loss or unabsorbed

depreciation allowed in any previous year to the successor co-operative bank shall

be deemed to be the income of the successor co-operative bank chargeable to tax

for the year in which the conditions are not complied with.

(7) For the purposes of this section,—

36

(a) ‘accumulated loss’ means so much of loss of the amalgamating co-operative bank

or the demerged co-operative bank, as the case may be, under the head ‘Profits

and gains of business or profession’ (not being a loss sustained in a speculation

business) which such amalgamating co-operative bank or the demerged co-

operative bank, would have been entitled to carry forward and set off under the

provisions of section 72 as if the business reorganisation had not taken place;

(b) ‘unabsorbed depreciation’ means so much of the allowance for depreciation of

the amalgamating co-operative bank or the demerged co-operative bank, as the

case may be, which remains to be allowed and which would have been allowed to

such bank as if the business reorganisation had not taken place;

(c) the expressions ‘amalgamated co-operative bank’, ‘amalgamation’, ‘business

reorganisation’, ‘co-operative bank’, ‘demerged co-operative bank’, ‘demerger’,

‘predecessor co-operative bank’, ‘successor co-operative bank’ and ‘resulting co-

operative bank’ shall have the meanings respectively assigned to them in section

44DB.”

52. Exemption for interest payable by scheduled banks to non-resident, etc., under section

10( 15 ) is not extended to co-operative banks [W.E.F. A.Y.2007-08]:

Item (fa) of sub-clause (iv) of clause (15) of section 10 provides for exemption of

interest payable by a scheduled bank to a non-resident or to a person who is not

ordinarily resident within the meaning of sub-section (6) of section 6 on deposits

in foreign currency where the acceptance of such deposits by the bank is

approved by the Reserve Bank of India. For the purposes of this item, the

expression ‘scheduled bank’ has the meaning assigned to it in clause (ii) of the

Explanation to clause (viia) of sub-section (1) of section 36. The existing

provisions contained in the Explanation to clause (viia) of sub-section (1) of

section 36 does not include co-operative banks. However, the definition of

‘scheduled bank’ after the amendment will include scheduled co-operative

banks. The referral definition of ‘scheduled bank’ presently occurring in the

Explanation to the aforesaid item (fa) does not allow exemption of interest

payable to a non-resident or a not ordinarily resident by a co-operative bank. In

order to continue with this position, the definition of ‘scheduled bank’ in its pre-

37

amended form in clause (ii) of Explanation to clause sub-section (1) of section 36

is being substituted for the existing Explanation in the aforesaid item (fa) to

ensure that the scope of the exemption allowed under the aforesaid item (fa) is

not changed.

53. Whether co operative credit society or any assessee be asked to prove source of source :

The assessee can be asked to prove the source of the credit but not the source of

the source as held in CIT Vs. Orissa Corporation Pvt. Ltd. (1986) 159 ITR 79(SC).

54. Applicability of Section 194A(3) of Income Tax Act, 1961 to Co Operative Credit Societies :

Co-operative society, made payment of interest on deposits received from its

members, in view of provisions of section 194A(3)(v), it was not required to

deduct tax at source while making said payments [Assistant Commissioner of

Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam Cooperative Bank Ltd

[2011] 13 taxmann.com 190 (Visakhapatnam)].

55. The [2011] 13 taxmann.com 190 (Visakhapatnam) requires reconsideration in view of :

(a) Section 194A(3)(viia) applies to such income credited or paid in respect of

deposits (other than time deposits made on or after the 1st day of July, 1995)

with a banking company to which the Banking Regulation Act, 1949 (10 of 1949)

applies (including any bank or banking institution referred to in section 51 of that

Act);

(b) Assessee to produce necessary certificates showing that it was a ‘Primary credit

co-operative society ’, to avail benefit of exemption under section 194A(3)(viia) -

Held, yes [Kadirur Vanitha Co-operative Society Ltd.* v.Income-tax Officer, Kannur

[2011] 196 TAXMAN 418 ( Ker.HC)].

(c) The benefit of non deduction of tax on Interest is only conferred to the

following which is covered under explanation to section 80P(4) of the Income

tax Act,1961.

Section 194(3)(viia) applies to such income credited or paid in respect of,—

38

(i) deposits with a primary agricultural credit society or a primary credit

society or a co-operative land mortgage bank or a co-operative land development

bank;

(ii) deposits (other than time deposits made on or after the 1st day of July,

1995) with a co-operative society, other than a co-operative society or bank

referred to in sub-clause (i), engaged in carrying on the business of banking;]

56. Applicability of Section 269SS of Income Tax Act, 1961 to Co Operative Credit Societies’ :

(a)Vide Para 5.20 of the Citizen Co-operative Society Ltd. v. Additional

Commissioner of Income-tax *, Range 9, Hyderabad [2010] 8 TAXMANN.COM 27

(HYD) The meaning of the word ‘banking company’ is explained in Explanation 1

to the said section. According to the Explanation (1) any company to which the

Banking Regulation Act 1949 applies. Sub-section (1) of section 5 defines the work

‘banking company’ to mean ‘any company which transacts business of bank in

India’. Section 56 of the Act substitutes the word ‘company’ by the ‘Cooperative

society ’. Therefore, even a cooperative society for which the provisions of

section 56 apply shall be a banking company.

Further, section 9 of the Multi State Cooperative Act, 2002 mentions that any

society registered under the Multi State Cooperative Act shall be a body

corporate by its name. Therefore it is a body corporate by its name. Therefore it

is a body corporate within the meaning of the provisions of Multi State

Cooperative Societies Act, 2002. In view of the above, the assessee is a banking

company for the purposes of the Banking Regulation Act 1949 and hence the

provisions of section 269SS have no application.

(b)Further, vide para 8 in the case of [ Salgaon Sanmitra Sahakari Pathpedhi Ltd. v.

Additional Commissioner of Income-tax, Ward-17(3),Mumbai. - [12

Taxmann.com 246 (2011)] the assessee society was classified as 'cooperative

bank' [ to argue that Section 269SS do not apply to bank] under section 12(1) of

the Maharashtra Cooperative Society Act, 1960 as per the registration certificate

issued by the Assistant Registrar, Cooperative Society, Mumbai. (Emphasis

39

supplied- to save skin under section 269SS they classified themselves as Bank

therefore section 80P(4) read with section 2(24)(viia) would apply).

(c) However, Section 269SS Provided that the provisions of this section shall not

apply to any loan or deposit taken or accepted from, or any loan or deposit taken

or accepted by,—

(a) …….;

(b) any banking company, post office savings bank or co-operative bank ;

(c) ……….. ;

(d) ………… ;

(e) …………. :

40[Provided further that the provisions of this section shall not apply to any loan

or deposit where the person from whom the loan or deposit is taken or accepted

and the person by whom the loan or deposit is taken or accepted are both having

agricultural income and neither of them has any income chargeable to tax under

this Act.]

Explanation.—For the purposes of this section,—

41[(i)“banking company” means a company to which the Banking Regulation Act, 1949

(10 of 1949), applies and includes any bank or banking institution referred to in

section 51 of that Act ;]

(ii)“co-operative bank” shall have the meaning assigned to it in Part V of the

Banking Regulation Act, 1949 (10 of 1949) ;

(iii) “loan or deposit” means loan or deposit of money.]

(d) The Hon. Kerala High Court in the case of M.V.Rajendran V. ITO 260 ITR 442

Ker. HC in operating part of the order have with respect to applicability of

Section 269SS have opined as under :

If co-operative banks and co- operative societies are allowed to maintain

deposits beyond the scrutiny of the Income-tax Department, then the societies

will become safe havens for hoarding black-money in the country which is

opposed to public policy. Besides this, the statutory authorities vested with the

responsibility to levy tax on income will be prevented from achieving their

40

objective and that will defeat the very purpose of the Income-tax Act. The

Supreme Court of India will upholding section 269SS of the Income-tax Act in the

case of Asst. Director of Inspection (Investigation)v. Kumari A. B. Shanthi [2002]

255 ITR 258 held as follows (headnote) :

“The object of introducing section 299SS is to ensure that a taxpayer is not

allowed to give false explanation for his unaccounted money, or if he makes

some false entries, he shall not escape by giving false explanation for the same.

During search and seizure, unaccounted money is unearthed and the taxpayer

would usually give the explanation that he had borrowed or received deposits

from his relatives or friends and it is easy for the so-called lender also to

manipulate his records to suit the plea of the taxpayer. The main object of

section 269SS was to curb this menace of making false entries in the account

books and later giving an explanation for the same.”

57. Taxability of Dividend received from Co Op.Credit society/ Pat Pedhi etc. by

Individual :

Dividend received from a Co Operative credit society / Pat Pedhi etc. by an

Individual will be taxable as income from other sources. Since dividend

distribution Tax u/s 115-O of IT Act, 1961 is abolished w.e.f. 01.06.2011 on Co

Operative credit society / Pat Pedhi etc. (which is banking Company) vide

Finance Act 2011.

58. Whether proportionate expenses be disallowed vide section 14A on allowing

deduction under Section 80 of chapter VIA :

It has been uniformly and consistently held that in the absence of express

language to the contrary, deduction if allowed does not mean that the said

income ceases to be part of the total income. [CIT vs M/S Kribhco on 18 July,

2012 ITA NO. 444/2011 (Del. HC) (available on indiakanoon.org) followed

Cambay Electric Supply Industrial Co. Ltd. vs. Commission of Income Tax, Gujarat-

II, [1978] 113 ITR 84 (SC) and Distributors (Baroda) Private Limited versus Union

of India and Others, (1985) 155 ITR 120(SC) ].

41

59. As per Section 80A(5), assessee must claim benefit, if not claimed, no benefit

shall be allowed.

60. There should be no discrimination in tax system with similar type of activities carried-on

by different class of person :

In absence of any requirement in law that 'medical care' services must be provided

by doctors, similar services provided by non-doctors e.g., qualified psychologists,

etc. could also be 'medical care' and, accordingly, exempt from service tax - [2012]

22 taxmann.com 187 (ECJ)[ foreign Court judgment].

The Bom.H.C, vide Para 22 sub para 13 in the case of Star Television News Ltd. Vs.

UOI (2009) 184 Taxman 400 with respect to discrimination have quoted The Hon.

Supreme Court : in EP. Royappa v. State of Tamil Nadu [1974] 4 SCC 3 it was held

that the basic principle which informs both articles 14 and 16 is equality and

inhibition against discrimination, this Court further observed as under :

‘From a positivistic point of view, equality is antithetic to arbitrariness. In fact,

equality and arbitrariness are sworn enemies; one belongs to the rule of law in a

republic while the other, to the whim and caprice of an absolute monarch. Where

an act is arbitrary it is implicit in it that it is unequal both according to political logic

and constitutional law and is, therefore, violative of article 14, and if it affects any

matter relating to public employment, it is also violative of article 16. Articles 14 and

16 strike at arbitrariness in State action and ensure fairness and equality of

treatment.’ (p. 85)

Analysis of Author : The above judgment brings to light that there should be no

discrimination in tax system with similar type of activity carried-on by different class

of people.

In an exactly reverse situation with respect to Bank liable to Income tax, the credit

society (pat pedhi) providing credit facility to it’s members or deemed as primary co

operative bank once paid up capital and reserves exceed Rs. 1/- lakh (one lakh only)

read with section 2(24)(viia) and Section 80P(4) both of IT Act,1961 are also liable to

income tax.

61. Concealment Penalty whether leviable on m aking of wrong claim under section 80P :

42

Making of wrong claim under section 80P is not at par with concealment or giving of

inaccurate information, which may call for levy of penalty under section 271(1)( c ).

[2010] 322 ITR 73 (PUNJ. & HAR.).

62. P enalty for a failure to carry out a statutory obligation :

The hon'ble apex court in the case of Hindustan Steel Limited vs. State of

Orissa (1972) 83 ITR 26 (SC), penalty for a failure to carry out a statutory obligation

will not ordinarily be imposed even where it is legal to do so, unless the defaulter

acts in conscious disregard of its obligations.

63. Conclusion :

1. Income tax is payable by the following as Bank :

(a) Any urban Co Op. Credit Society or

(b) Urban Pat Pedhi’s or

(c) Federation of Co operative Societies or

(d) Regional Rural Bank or

(e) Employee/staff Co operative credit societies.

Because, Section 80P(4) read with Section 2(24)(viia)[ Definition of Income ]

are overriding over Section 80P , w.e.f. A.Y. 2007-08.

(f) When Banking license is cancelled by RBI for AY 2005-06.

2. Meaning of primary object or principal business.

3. Co op. Credit society held as carrying on Banking Business.

4. Banking Regulation overrides Bye laws of the society.

5. Co op. Credit society allowed to use cheque issue facility and cheque clearing

facility of other Banks for their clients as per RBI guide lines.

6. Legal fiction enacted in the act applies to the said act only.

7. Status of co operative credit society is not an AOP but Artificial Juridical Person.

8. Rent earned by Employee co operative credit society or Pat Pedhi is also taxable

as Income from House Property.

9. Bad debts claim u/s 36(1)(viia) is on the basis of netting off theory.

10. Interest on NPA not credited or debited in P&L A/C, Section 43D do not apply.

11. Interest Income pending recovery beyond six month will not form part of

income.43

12. Section 40a(ia) would be applicable for non deduction of TDS by Co Op.Credit

Societies & Pat Pedhi’s..

13. Section 44AB would be applicable to Bank.

14. Section 44DB permits deductions in case of business reorganization of Bank.

15. Commission earned by co operative credit society or Pat Pedhi is also taxable.

16. Section 47 vide Clauses (vica) and (vicb) permits business reorganization of Bank

Tax neutral.

17. Interest Income on surplus fund is taxable under Section 56 of the Income Tax

Act, 1961.

18. Section 72AB permits carry forward and set-off of accumulated losses and

unabsorbed depreciation allowance in business reorganization of Bank.

19. 80A(5) : Benefit of deduction must be claimed in order to avail the same.

20. Assessee need not be asked to prove the source of source.

21. Notice under section 133(6) can be issued to Bank or even any person.

22. Notice under section 147/148 can be issued to Bank or even any person.

23. In view of Section 194A(3)(viia) interest on TDS is applicable.

24. Section 269SS though do apply to Bank, must be made applicable, as observed

by SC.

25. Other Income Tax provision as applicable to bank would apply.

26. Dividend received from Co operative credit Society / Pat Pedhi by an individual

is taxable as income from other sources w.e.f. 01.06.2011.

27. Proportionate expenses not to be disallowed on allowing chapter VIA benefit.

28. Discrimination in tax system with respect to similar activities is violative of

Article 14 & 16 of Constitution of India.

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