Case: The Citizen Co-Operative Society Limited, Through Its Managing Director, Hyderabad Vs. Assistant Commissioner of Income Tax, Circle-9 (1), Hyderabad

credit facilities to its members are two different types of activities which are covered under this sub-clause.xx xx xx13. So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provisions of section 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."22. The aforesaid judgment of the High Court correctly analyses the provisions of Section 80P of the Act and it is in tune with the judgment of this Court in Kerala State Cooperative Marketing Federation Limited (supra).23. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a co-operative bank. However, if it is a primary agriculture credit society or a primary co-operative agriculture and rural development bank, the deduction would still be provided. Thus, co-operative banks are now specifically excluded from the ambit of Section 80P of the Act.24. Undoubtedly, if one has to go by the aforesaid definition of co-operative bank, the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a co-operative bank, it is imperative to have a licence from the Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, the Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a co-operative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of Section 80P.25. So far so good. However, it is significant to point out that the main reason for dis-entitling the appellant from getting the deduction provided under Section 80P of the Act is not sub-section (4) thereof. What has been noticed by the Assessing Officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violations of the provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of nominal members. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co-operative Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction under Section 80P(2)(a)(i) of the Act.26. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion:"As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality;that no person can earn from him;that there a profit motivation;and that there is no sharing of profit.It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third party vis-a-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs]. In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all."27. These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]17. We have considered the submissions of the counsel for the parties with reference to the record of this case.18. We may mention at the outset that there cannot be any dispute to the proposition that Section 80P of the Act is a benevolent provision which isent in order to encourage and promote growth ofcooperative sector in the economic life of thecountry. It was done pursuant to declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (SeeBajaj Tempo Limited, Bombay v. Commissioner of Income Tax, BombayBombay, (1992) 3 SCC 78  ). It is also trite that such a provision has to be construed as to effectuate the object of the Legislature and not to defeat it (SeeCommissioner of Income Tax, Bombay & Ors. v. Mahindra and Mahindra Limited & Ors., (1983) 4 SCC 392  ). Therefore, it hardly needs to be emphasised that all thosesocieties which fall within the purview of Section 80P of the Act are entitled to deduction in respect of any income referred to in(2) thereof. Clause (a) of(2) gives exemption of whole of the amount of profits and gains of business attributable to anyone or more of such activities which are mentioned in(2).19. Since we are concerned here with) of clause (a) of(2), it recognises two kinds ofsocieties, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members.The aforesaid judgment of the High Court correctly analyses the provisions of Section 80P of the Act and it is in tune with the judgment of this Court in Kerala State Cooperative Marketing Federation Limited (supra).23. With the insertion of(4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to abank. However, if it is a primary agriculture credit society or a primaryagriculture and rural development bank, the deduction would still be provided. Thus,banks are now specifically excluded from the ambit of Section 80P of the Act.24. Undoubtedly, if one has to go by the aforesaid definition ofbank, the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of abank, it is imperative to have a licence from the Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, the Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of abank. The appellant, therefore, would not come within the mischief of(4) of Section 80P.25. So far so good. However, it is significant to point out that the main reason forthe appellant from getting the deduction provided under Section 80P of the Act is not(4) thereof. What has beenby the AssessingOfficer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violations of the provisions of the MACSA under which it is formed. It is pointed outby the AssessingOfficer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of nominal members. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed associety. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it isby the AssessingOfficer that the activity of the appellant is in violation of theSocieties Act. Moreover, it is acooperative credit societywhich is not entitled to deduction under Section 80P(2)(a)(i) of the Act.26. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of thevarious courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality;that no person can earn from him;that there a profit motivation;and that there is no sharing of profit.It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [asMD vide his statement dated 20.12.2010]. [Though the bank formed the third partythe assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missingas discussed infurther paragraphs]. In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all.These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as asociety meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act.