IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A.No.82 of 2007 DATE OF DECISION: MARCH 03, 2008 The Commissioner of Income tax-I, Chandigarh .....APPELLANT Versus M/s Punjab State Co-operative Bank Ltd., Sector 17, Chandigarh ....RESPONDENT CORAM: HON'BLE MR.JUSTICE SATISH KUMAR MITTAL HON'BLE MR.JUSTICE RAKESH KUMAR GARG --- Present: Mr. S.K.Garg Narwana, Advocate, for the appellant. .. SATISH KUMAR MITTAL, J. The instant appeal filed by the revenue under Section 260A of the Income Tax Act (hereinafter referred to as `the Act') is directed against the order dated 31.07.2006 passed by the Income Tax Appellate Tribunal, Chandigarh Bench `B' Chandigarh (hereinafter referred to as `the ITAT') in ITA No.550/Chandi/2005 in case of the respondent- assessee for the Assessment Year 1999-2000 by raising the following substantial question of law:- Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that income earned from banking business with `nominal' members is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961? I.T.A.No.82 of 2007 -2- The brief facts of the case are that the respondent-Co- operative Bank (hereinafter referred to as `the assessee') is a registered society under the Punjab Co-operative Societies Act, 1961 (hereinafter referred to as `the Societies Act'). The assessee is a co-operative society carrying on the business of banking and extending the credit facilities to its members and nominal members. The assessee being carrying on the business of banking, claimed exemption under Section 80P(2)(a)(i) of the Act and filed its return of income declaring its income at nil for the Assessment Year 1999-2000. The Assessing Officer vide its order dated 16.10.2002 framed the assessment for the present assessment year under Section 143(2) of the Act whereby the assessee's income was determined at Rs.1,64,79,254/- by also adding interest income to the tune of Rs.68,56,901/- which was derived from the loans advanced to nominal members as income from other sources and disallowed the claim of the assessee that this should be treated as income derived from banking business which is eligible for exemption under Section 80P(2)(a)(i) of the Act. The Assessing Officer held that that this interest income could not be claimed as deduction as the same did not pertain to the banking business being conducted by the assessee with members of the Co-operative Bank, but was earned with the business activity with non-members. The Assessing Officer was of the view that a Co-operative Society engaged in the business of banking is exempt from tax from interest income if it earns the interest by banking activities with its members alone. Aggrieved against the aforesaid order of the Assessing officer, the assessee filed an appeal before the Commissioner of Income I.T.A.No.82 of 2007 -3- Tax (Appeals), who vide its order dated 16.3.2005 deleted the above-said addition while holding that the Co-operative Society engaged in the business of banking was entitled to deduction under Section 80P(2)(a)(i) of the Act. It was held that the banking activity, which was carried on by the assessee with non-share members, who became the nominal members after some time, was the activity of business of banking covered under Section 80P(2)(a)(i) of the Act. The revenue feeling not satisfied with the order of the Commissioner of Income Tax (Appeals) preferred an appeal before the ITAT, who vide its order dated 31.7.2006 dismissed the appeal of the revenue and confirmed the view taken by the Commissioner of Income Tax (Appeals) while holding that the deduction under Section 80P(2)(a) (i) of the Act is available to the assessee as the loans advanced to various loanees was income related to banking activity. Against the said order, the present appeal has been filed by the revenue raising the aforesaid substantial question of law. Learned counsel for the appellant submitted that a Co- operative Society carrying on the business of banking and earning interest income by providing credit facilities only to its members, is entitled to exemption under Section 80P(2)(a)(i) of the Act. If such Society is earning interest income from the credit facilities provided to non- members, the said income is not exempt under the said Clause. Learned counsel submits that the assessee herein has earned interest income by advancing loans to the nominal members who are not the members from the very beginning but were made members just before sanctioning and disbursing of loans to them. According to the learned counsel, such I.T.A.No.82 of 2007 -4- commercial transactions, which do not strictly fall in the fold of co- operative movement, do not entitle the assessee Co-operative Bank to concessional treatment under Section 80P of the Act. The admission of such kind of members just before the advancement of loans was only to satisfy the provisions of statute which is against the spirit of Section 80P which gives special treatment to banking activity with members of co- operative societies. The learned counsel submits that that the nominal members are not the share holders and have no share in the profit of the co-operative society. They are having no voting rights. Therefore, they do not strictly fall under the definition of “member” of the co-operative society as defined under the Societies Act, and any interest income derived from the loans advanced to them will not be exempted under Section 80P of the Act. Learned counsel submits that the purpose of exemption under Section 80P is obviously to engage employment of as much capital as possible for financing and extending the scope of co- operation and not for enabling Co-operative banks to earn tax free income by making investments or extending loans to various commercial entities who are non-share holders. He submits that the interpretation canvassed by the assessee would be contrary to the legislative intent and will be counter-productive. The true test for applying the deduction under Section 80P is whether the income earned is attributable to the utilization of circulating capital of the co-operative society, engaged in the activity of the business of banking, which in every case must depend on the attendant facts and circumstances. Learned counsel submits that the income earned by nationalized and private banks does not rank for such deduction under the Act whereas in the case of co-operative society doing I.T.A.No.82 of 2007 -5- business of banking and earning income from the activities as mentioned under Section 80P does rank for such treatment under the Act i.e. the whole of the amount earned from the business of the banking or credit facilities extended to the members ranks for deduction under Section 80P (2)(a)(i) of the Act. Learned counsel further submits that when a co- operative bank enters into a business dealing with non-members it loses its importance as the co-operative bank and reduces its position to an ordinary bank. In nutshell, learned counsel argued that a harmonious interpretation on the statutory claim of Section 80P of the Act clearly indicates that the entire income of a co-operative society engaged in the business of banking is not exempt but it is to exempt up to the extent that the activities of business of banking for providing credit facilities to its members. We have heard the learned counsel for the appellant and gone through the impugned orders. The provisions of Section 80P of the Act, which are relevant for the decision of this case, are reproduced hereunder:- “80P(1) Where, in the case of an assessee being a co- operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or I.T.A.No.82 of 2007 -6- (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:- (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government; (b) xx xx xx xx (c) xx xx xx xx (d) xx xx xx xx (e) xx xx xx xx (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society I.T.A.No.82 of 2007 -7- carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22. Explanation.-For the purposes of this section, an “urban consumers' co-operative society” means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.” The provisions of Section 80P were introduced with a view to encouraging and promoting growth of co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. The different heads of exemption enumerated in the section are separate and distinct heads of exemption and are to be treated as such. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax, then it has to be seen whether such income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. Clause(a)(i) of sub-section(2) of Section 80P of the Act provides that a co-operative society engaged in (i) carrying on the business of banking or providing credit facilities to its members, shall be entitled for exemption from tax as referred in sub-section(1). Thus sub- clause talks of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. It means that a co- I.T.A.No.82 of 2007 -8- operative society engaged in carrying on the business of banking and a co-operative society providing credit facilities to its members will be entitled for exemption under this sub-clause. The carrying on the business of banking by a co-operative society or providing credit facilities to its members are two different types of activities which are covered under this sub-clause. A society engaged in carrying on the business of banking whether from its members or non-members is entitled for exemption under this sub-clause and a society which is not engaged in carrying on the business of banking but providing credit facilities to its members is also entitled for exemption under this sub-clause because the word “or” used in the section cannot be read as “and”. Therefore, a co-operative society engaged in carrying on the business of banking is earning some income from the business activities of banking whether from its members or non-members, is entitled for exemption under this clause. Learned counsel argued that the word “or” in this sub-clause should be read as “and”. If the said word is read as “and”, then it will provide that a co- operative society engaged in carrying on the business of banking and providing credit facilities to its members, will be entitled for exemption under this clause. If this interpretation is accepted, then there are number of co-operative societies, though who are not engaged in carrying on the business of banking but providing credit facilities to its members and earning interest income, will not be entitled for benefit under this sub- clause, which is not the intention of the legislation. By this sub-clause, the benefit has been provided to the co-operative societies which are engaged in carrying on the business of banking or providing credit facilities to its members. It is not necessary for getting exemption under this clause that a I.T.A.No.82 of 2007 -9- co-operative society engaged in carrying on the business of banking has to earn the interest income only from providing credit facilities to its members. The benefit under this clause cannot be denied to a co-operative banking society engaged in carrying on the business of banking only on the ground that the interest income from the banking activities was not earned from its members. In our opinion, the interest income earned by a co-operative society engaged in carrying on the business of banking from a non-member is also exempt to tax under this sub-clause. The contention of the learned counsel for the appellant cannot be accepted that while reading the word “or” as “and”, the interest income derived by a co- operative society engaged in the business of banking from non-members, is not to exempt to tax under this clause. It is well settled principle of interpretation that the word “or” is normally disjunctive and “and” is normally conjunctive, but at a time they are read as vice-versa to give effect to the manifest intention of the legislation as disclosed from the provisions of the Section. But if the little reading of the whole of the Section or sub-section or a clause is quite clear and there is no ambiguity, then the plain meaning to the section should be given effect and the word “or” should not be read as “and”. In a case the word “or” can be read as “and” if the plain reading of this sub-clause results in absurdity, but this is not a situation in the present case. Therefore, in our view, the ITAT has rightly held that once the assessee had earned interest income from the loans advanced to various loanees, the said income was related to the banking activities, therefore, is liable for exemption under Section 80P(2)(a)(i) of the Act. In that situation, if the assessee received the interest income from the loan I.T.A.No.82 of 2007 -10- advanced to various loanees related to the banking activities, then whether a loanee was the member or not the member of the co-operative society, loses its significance. In our opinion, it has been rightly held that any interest income received by the co-operative society engaged in carrying on the business of banking activities from its members or non- members, is liable for exemption under this sub-clause. This interpretation is supported by various decisions of the Supreme Court and High Courts. The Supreme Court in Commissioner of Income Tax vs. Bangalore Distt. Co-operative Central Bank Ltd. (1998) 233 ITR 282 (SC) has held that the interest on Govt. securities and dividends earned by co-operative society engaged in banking business is eligible for deduction under Section 80P(2)(a)(i) of the Act, though the said income was not earned by the co-operative society from the credit facilities provided to its members. It was held that if the assessee is a co-operative society carrying on the business of banking and if the income in question is attributable to the said activity, there is no doubt that the same is to be deducted from the gross total income. Again, in Commissioner of Income Tax vs. Kartataka State Co-operative Apex Bank, (2001) 251 ITR 194 (SC), it was held that the interest income derived by co-operative bank from investment of funds with Reserve Bank of India or State Bank of India is exempt under Section 80P(2)(a)(i) of the Act, irrespective of the fact that investment is made out of reserve fund or working capital. Again in that case the said income was not derived from the credit facilities provided to its members. Further, in Mehsana District Central Co-operative Bank Ltd. vs. Income Tax Officer, (2001) 251 ITR 522 (SC), the Supreme Court while following the judgment in Commissioner of Income Tax vs. I.T.A.No.82 of 2007 -11- Kartataka State Co-operative Apex Bank (supra) has held that the income earned from utilization of its reserve funds maintained by the assessee bank under Section 67(2) of the Gujarat Co-operative Societies Act, 1961 is exempt to tax under Section 80P(2)(a)(i) of the Act. In that case it was further held that the income received by the co-operative bank as income of rent from lockers given on hire to the customers is also to exempt under Section 80P(2)(a)(i) of the Act. It was also observed that the provision of safe deposit vaults is part of ordinary banking business, therefore, the income derived by the assessee from hiring out of safe deposit vaults is income from banking activities and is deductible under Section 80P(2)(a)(i) of the Act. From this judgment, if an income derived from hiring out of the lockers has been considered as income from the banking activities, then an income derived from the loan advanced to non- members or the nominal members can not be said to be not deductible when the said income is certainly deriving from the banking activities of the assessee. Again, recently the Supreme Court in Commissioner of Income Tax vs. Nawanshahr Central Co-operative Bank Ltd., (2007) 289 ITR 6 (SC) while affirming the judgment of this Court in CIT vs. Karnataka State Co-operative Apex Bank, (2004) 186 CTR (P&H) 459 and following its earlier decision in CIT vs. Ramanathapuram District Co- operative Central Bank Ltd., (2002) 255 ITR 423 (SC) has held that a co- operative bank carrying on the business of banking is statutorily required to place a part of its funds in approved securities, the income arising from such investments is attributable to the business of banking falling under the head “Profits and gains of business” and is deductible under Section I.T.A.No.82 of 2007 -12- 80P(2)(a)(i) of the Act. The Karnataka High Court in Commissioner of Income Tax & Anr. vs. The Grain Merchants Co-operative bank Ltd., (2004) 267 ITR 742 (Kar) has held that rental income received by the assessee-society engaged in the business of banking letting out the premises is an income received by carrying on the business of banking and as such it is entitled for deduction under Section 80P(2)(a)(i) of the Act. It was observed that the reading of clauses (k) and (I) of Section 6(1) of the Banking Regulation Act, 1949 shows that in addition to the business of banking set out in clause (b) of Section of that Act, acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the banking company and also selling/improving or leasing or otherwise dealing with all or any part of the property and rights of the company, also should be treated as a banking business. A contention raised in that case that in view of clause(f) of sub-section (2) of Section 80P, the deduction on account of the rental income should not be given to a co-operative society even though the same is engaged in the business of banking. In this regard, it was held that the society referred to in clause (f) of sub-section (2) of Section 80P must be understood as the society which is not carrying on the banking business or providing credit facilities which is included under clause(a)(i) of sub-section (2) of Section 80P of the Act. Since the assessee in that case was carrying on business of banking, therefore, it was held that the provisions of clause(f) of sub-section (2) of Section 80P cannot control the benefit of exemption extended to the assessee from the payment of tax if the income is derived from the business activities of banking. I.T.A.No.82 of 2007 -13- So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provision of Section 80P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the legislature wanted to restrict the exemption to a primary co-operative society, it was so made clear as is evident from clause (f) with reference to a milk co-operative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk co-operative society. Even otherwise, the contention of the learned counsel for the appellant that a person who subscribes to the share capital of the society only deem to be the member of the society, can not be accepted. The contention of the appellant that if the loan has been advanced to the nominal members who are not the share holders of the society and who became nominal members of the society just before advancing loans on payment of membership fee, can not be deemed to be members of the society. Section 2(g) of the Societies Act defines “Member” as under:- “2.(g) “Member” means a person joining in the application for the registration of a co-operative society and a person admitted to membership after such registration in accordance with this Act, the rules and the bye-laws, and includes a nominal and an associate member and the Government when it subscribes to the share-capital of a society.” According to this definition, the Member also includes a nominal and an associate member. The “nominal member” and “associate member” have also been defined as under:- I.T.A.No.82 of 2007 -14- “2.(ggg) “nominal member” means a person admitted to membership as such after registration in accordance with the bye-laws; (a) “associate member” means a member who holds jointly a share of a co-operative society with others but whose name does not stand first in the share certificate.” Learned counsel for the appellant raised the contention that as per the definition of “Member”, it includes a nominal and an associate member and the Government 'when it subscribes to the share-capital of a society'. His contention is that if a nominal member does not subscribe to the share-capital of a society, he can not become a member of the society. This contention of the learned counsel for the appellant is not acceptable because the words 'when it subscribes to the share-capital of a society' are relating to the Government and not to the nominal and associate members. The associate members have been clearly defined as members who jointly hold a share of a co-operative society with others but whose name does not stand first in the share certificate, whereas nominal members means the persons admitted to membership as such after registration in accordance with the bye-laws. A person can become the nominal member of a co-operative society even according to the bye-laws of the society by paying the membership fees. It is not necessary for becoming the nominal member that he has to subscribe for the share-capital. On the other hand, the Government cannot become a nominal member. It can become a member of the society when it subscribes to the share-capital of the society. Thus, it is not necessary for a nominal member to subscribe to the share-capital. The whole thresh of the revenue is that the loan advanced to