• Jan
  • 15
  • 2012

Income Tax on Co Operative Credit Society & Pat Pedhis

 R. B. POPAT. B.COM, F.C.S, F.C.A.

1. 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-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.

2.  Licensing of Existing Primary (Urban) Co-operative Credit societies/Banks :

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 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.

(a)    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).

(b)   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”.

3.    Meaning of primary activity :

(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)(ii ) 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 ).

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).

4.    Banking Regulation overrides Bye laws of the society :

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

5.  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 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.

6.  Co-operative credit  society engaged in the business of banking : ( Judicial view)

(a)  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.

(b)   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 :

“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.”

7.  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).

8. Status of Co Operative Society for Tax Audit purpose & 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.  M.V. Rajendran V. ITO 260 ITR 442 Ker. HC or [2003] 128 TAXMAN 385 (KER.HC), Mattul Service Co-operative Bank Ltd. v. Income-tax Officer  (CIB), Kozhikode [2010] 186 TAXMAN 409 (KER.HC)

9. 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)].

10.    Concept of mutuality why not applicable to Co Operative Credit Socities:

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].

11.    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;

12.  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…

13.  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 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 ].

                       Note: The above meanings are relevant only for classifying Income for taxing   purpose under particular heads of income under the Income Tax Act, 1961.

14.    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.]

15.   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.

16.  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 sub-section,—

                      ( 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).

       (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].

(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 02 July, 2012 vide Para 22 & 23 have held as under :

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, 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.

17.  The intention of explanation 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.”

18.  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.)].

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

(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. 

(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 02 July, 2012.

(f)     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 

19. The following judgements needs to be reviewed 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 :

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

20.    Denial of Section 80P even for 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, Circle-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)].

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

                 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].

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

(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)].

(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]  

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

23. The following judgements needs to be reviewed in view of the Para 16 above:

(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].

24.  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].

25. 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].

26. 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 they first appropriate or deduct share capital money and disburse net amount of loan only ].

27. 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.

Deduction in respect of any provision for bad and doubtful debts is also allowable now under section 36(1)(viia) (refer point no.21).

Netting of Bad debts principle laid down (refer point no.22).

Guide line laid down by RBI for W/O Bad debts would apply Section 43D (refer point no.23).

Interest on NPA taxable only if credited  to P&L A/C  Section 43D (refer point no.24).

Section 44DB dealing with special provision for computing deductions in case of business reorganisation of co-operative banks  (refer point no.25).

Capital gain is tax  neutral for both the banks and shareholders vide section 47(vica) and Section 47(vicb) (refer point no.26).

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. (refer point no.27).

28. Deduction in respect  of any provision for bad and doubtful debts to be allowed in case of co-operative banks section 36(1)(viia) :

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

29. 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..

30. 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 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.

31. 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].

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

             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 02 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.

33. 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 :

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.

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:

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;

(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;

(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.

34. Capital gains on amalgamation and demerger of co-operative banks :

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.

35. 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

(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,—

(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.”

36. 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-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.

37.  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.

38. 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).

39. 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.

40. 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 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.)].

41. 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)].

42. 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,—

(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;]

43. 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 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 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.”

44.              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.

45.                As per Section 80A(5), assessee must claim benefit, if not claimed, no benefit shall be allowed. 

46. Conclusion :

1. Income tax is payable by the following as Bank :

(a)    Any urban Co Op. Credit Society or

(b)   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 (Para 16).

2. Status of co operative credit society is not an AOP but Artificial Juridical Person.

3. Rent earned by Employee co operative credit society or Pat Pedhi is also taxable as Income from House Property.

4. Bad debts claim u/s 36(1)(viia) is on the basis of netting off theory.

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

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

7. Section 44AB would be applicable to Bank.

8. Section 44DB permits deductions in case of business reorganization of Bank.

9. Commission earned by co operative credit society or Pat Pedhi is also taxable.

10. Section 47 vide Clauses (vica) and (vicb) permits business reorganization of Bank Tax neutral.

11. Interest Income on surplus fund is taxable under Section 56 of the Income Tax     Act, 1961.

12. Section 72AB permits carry forward and set-off of accumulated losses and unabsorbed depreciation allowance in business reorganization of Bank.

13. 80A(5) : Benefit of deduction must be claimed in order to avail the same.

14. Assessee need not be asked to prove the source of source.

15. Notice under section 133(6) can be issued to Bank or even any  person.

16. Notice under section 147/148 can be issued to Bank or even any  person.

17. In view of Section 194A(3)(viia) interest on TDS is applicable.

18. Section 269SS though do apply to Bank, must be made applicable, as observed by SC.

19. Other Income Tax provision as applicable to bank would apply.

20. 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.


One Response to “Income Tax on Co Operative Credit Society & Pat Pedhis”

  1. Arvind Patel says:

    We are our surplus fund invest in othere co.op.bank, T.D.S Applicable in interest

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