Co-op Credit Society Wins Tax Deduction, Court Distinguishes from Co-op Bank

For a comprehensive understanding, check out the original judgement of the court order here."

Case Name:

Commissioner of Income Tax Vs Nilgiris Co-Operative Marketing Society Ltd. (High Court of Madras)

Tax Case (Appeal) No.758 of 2016

Key Takeaways

1. Co-operative credit societies providing facilities only to members are eligible for deductions under Section 80P(1) (of Income Tax Act, 1961) and (2).

2. Section 80P(4) (of Income Tax Act, 1961), which limits deductions, applies only to co-operative banks, not credit societies.

3. The distinction between a co-operative credit society and a co-operative bank is crucial for tax deduction eligibility.

Issue

Is the Nilgiris Co-operative Marketing Society Ltd., as a co-operative credit society, eligible for tax deduction under Section 80P (of Income Tax Act, 1961), or does it fall under the restrictions applicable to co-operative banks in Section 80P(4) (of Income Tax Act, 1961)

Facts

- The assessee is the Nilgiris Co-operative Marketing Society Ltd.

- The Society claimed its income was not liable for assessment as it's a co-operative credit society, not a co-operative bank.

- The case arose from a notice served by the Assessing Officer under Section

143(2) of the Income Tax Act.

- The Society provides credit facilities only to its members, not to the general public.

Arguments

Revenue's Argument:

- The Tribunal should have limited its scrutiny to whether the assessee qualifies as a 'Co-operative Bank' under Section 80P(4) (of Income Tax Act, 1961).

- The Tribunal's observations went beyond the scope of examining the issue under Section 80P (of Income Tax Act, 1961).

Assessee's Argument:

- As a co-operative credit society providing facilities only to members, it's entitled to deductions under Section 80P(1) (of Income Tax Act, 1961) and (2).

- It doesn't qualify as a co-operative bank, so Section 80P(4) (of Income Tax Act, 1961) restrictions don't apply.

Key Legal Precedents

The judgment doesn't cite specific case laws but refers to:

- Section 80P (of Income Tax Act, 1961)

- Section 5(b) of the Banking Regulation Act, 1949

- Tamil Nadu Co-operative Societies Act, 1983 and its predecessor, the Tamil Nadu Co-operative Societies Act, 1961

Judgement

The High Court ruled in favor of the Nilgiris Co-operative Marketing Society Ltd., concluding:

1. The Society is a co-operative credit society, not a co-operative bank.

2. It's entitled to the deduction under Section 80P(1) (of Income Tax Act, 1961) and (2) of the Income Tax Act.

3. Section 80P(4) (of Income Tax Act, 1961) restrictions don't apply as they're limited to co-operative banks.

4. The appeal by the Revenue was rejected.

FAQs

Q1: What's the main difference between a co-operative credit society and a co-operative bank?

A1: A co-operative credit society provides services only to its members, while a co-operative bank can accept deposits from and provide services to the general public.

Q2: Why is this distinction important for tax purposes?

A2: It determines eligibility for tax deductions under Section 80P (of Income Tax Act, 1961). Co-operative credit societies are eligible for certain deductions that co-operative banks are not.

Q3: What is Section 80P (of Income Tax Act, 1961) about

A3: It deals with deductions in respect of income of co-operative societies, specifying which types of societies are eligible for deductions and under what circumstances.

Q4: Does this judgment apply to all co-operative credit societies?

A4: While it sets a precedent, each case would be judged on its specific facts. However, it provides a clear interpretation of how Section 80P (of Income Tax Act, 1961) should be applied to co-operative credit societies versus co-operative banks.

This Tax Case Appeal is preferred by the Revenue under Section 260A (of Income Tax Act, 1961), calling in question the correctness of the common order passed by the Income Tax Appellate Tribunal, 'C' Bench, Chennai , in I.T.A.No.584/MDS/2013 on its Bench.

The Substantial Questions of Law raised in these Tax Case Appeals are as follows:-

(i) Whether in the facts and under the circumstances of the case, the Tribunal was right holding that the assessee society engaged in selling of agricultural produce of the members is eligible for the benefit of section 80P(2)(a)(i) (of Income Tax Act, 1961) in respect of the interest received from members?

(ii) Whether in the facts and under the circumstances of the case, the Tribunal was right in holding that the assessee is eligible for deduction under seciton 80P(2)(a)(i) when it is not a cooperative society engaged in the business of banking or providing credit facilities to its members?

2. In this case, the Assessee is a Co-operative Marketing Society. Pursuant to a notice served on it by the Assessing Officer under Section 143(2) (of Income Tax Act, 1961), the Assessee has made a claim that its income is not liable to suffer any assessment it being a Co-operative Credit Society, but not a Co-operative Bank.

3. Section 80P (of Income Tax Act, 1961) deals with all aspects relating to deduction in respect of income of Co-operative Societies. Sub-section (1) thereof clearly spelt out that in case of an Assessee being a Co- operative Society, the gross total income of it includes any income referred to under sub-section (2), there shall be deduction in accordance with and subject to the provisions of the said Section, the sums specified in sub-section (2) in computing the total income of the Assessee. The sums referred to in sub-section (1) have been clarified in sub-section (2). With regard to a Co-operative Society carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to such activities, becomes the total income of such a society. If, thus a Co-operative Society is providing facilities to its members alone then the income generated thereby is not liable to be taken into account and shall be deducted from its gross total income. Sub-section (4) of Section 80P (of Income Tax Act, 1961) has however, provided that the provisions of Section 80P (of Income Tax Act, 1961) shall not apply in relation to any Co-operative Bank other than a Primary Agricultural Credit Society or Primary Co-operative Agricultural and Rural Development Bank. In other words sub-section (4) of Section 80P (of Income Tax Act, 1961) gets attracted only to such Co-operative Societies which fall within the ambit of the expression 'Co-operative Bank'.

Therefore, the whole question which is required to be examined in the present cases is whether the Assessee falls within the ambit and four corners of the expression 'Co-operative Bank' or it is merely a credit society which is carrying on its business by making available credit facilities to its members.

4. If we spare a look at the provisions of Tamil Nadu Co- operative Societies Act, 1983 henceforth called as Co-operative Societies Act, 1983 as well as its immediate predecessor namely Tamil Nadu Co-operative Societies Act, 1961, which have provided for the registration of Co-operative Societies. Under Section 4 of the 1983 Act, a society can be registered which has as its objects of promotion of the economic interests or general welfare of its members in accordance with the Co-operative Principles or a society established with the object to facilitate the operations of such society by the society registered under the Act with limited or unlimited liability. Thus if a society is interested in extending certain credit facilities on the basis of Co-operative Principles, such a credit society is liable to be registered under the provisions of the 1983 Act as well as its predecessor 1961 Act. As is now made out such societies essentially render certain services or facilities for purposes of the benefit and promotion of the welfare of its members. In other words the basic theme behind the formation of such a society and its registration is to promote the objectives for which it is established for the benefit of its members only. In contrast to the above principles, if we examine the expression 'banking' as defined in Section 5(b) of the Banking Regulation Act, 1949 the distinction between a 'Co-operative Credit Society' and a 'Co-operative Society' carrying on banking business becomes imminently clear. The expression 'banking' has been defined in the following terms by the Banking Regulation Act, 1949.

"(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."

Thus, banking means accepting of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise and such acceptance of money is intended for the purpose of lending or investment by itself. Therefore, the crucial expression relevant for making one answer the description of banking is that it is capable of accepting money from the general public but not necessarily confined to its members. Any such activity carried on by anybody requires, apart from licensing, to answer the regulatory domain prescribed under the 1949 Act. Even a Co-operative Bank which carries on banking activity requires to be regulated by the provisions of the 1949 Act. Section 80P(4) (of Income Tax Act, 1961) therefore is clearly attracted to such an institution. But not to credit society. Even while dealing with a Co-operative Bank sub-section (4) has taken care to ensure that the Primary Agricultural Credit Societies and Primary Co- operative Agricultural and Rural Development Banks are kept out of the purview of the said provision. Sub-section (4) of Section 80P (of Income Tax Act, 1961) therefore, in its application is confined to Co-operative Banks only. In the instant case the Assessee being, a Co-operative Credit Society which in turn is providing for certain credit facilities to its members alone but not to the general public at large and which also does not receive monies by way of deposit from the general public, it does not answer the description of a Co-operative Bank. Consequently, the main provision contained under sub-section (i) of Section 80P (of Income Tax Act, 1961) gets attracted and consequently the Assessee is entitled to seek the deduction which has been provided for under Section 80P (of Income Tax Act, 1961).

5. Sri.T.R.Senthilkumar, learned Standing Counsel for the Income Tax Department, however, is certainly right to a certain extent in his criticism about the reasoning assigned by the Tribunal in the impugned order. We see some force behind the submission of the learned Standing Counsel. The learned Standing Counsel contended that the Tribunal ought to have confined its scrutiny as to whether the Assessee answers the expression 'Co-operative Bank' or not, for it to fall within the four corners of the provision contained in sub-section (4) of Section 80P (of Income Tax Act, 1961) so that it will not be in a position to derive the benefit of the main part contained under Sub-Section (1) and (2). Instead of confining its scrutiny the Tribunal has made certain observations which fall out side the purview while examining the issue in the perspective of Section 80P (of Income Tax Act, 1961) and to that extent, the order of the Tribunal does warrant interference.

6. However, in view of our concurrence that the Assessee is a mere Co-operative Credit Society but not a Co-operative Bank, we are of the view that the order passed by the Assessing Officer as well as the Appellate Authority and the conclusion arrived at by the Tribunal are not erroneous and hence there is no merit in these appeals and accordingly the appeal stands rejected. No costs.

(N.R.R.,J) (A.S.M., J) 02.11.2016

NOOTY. RAMAMOHANA RAO, J

AND

ANITA SUMANTH, J.

TAX CASE (Appeal) No.758 of 2016

02.11.2016