M/s. Sri Sai Datta Mutual Aided Co-operative Credit Society Vs Asst. (ITAT Hyderabad)
The AO and CIT(A) have considered the ordinary members and nominal members are different class of members. AO accepts that ordinary members are having mutuality but he denies the same with reference to nominal members. The principle of mutuality cannot be denied simply because there are two categories of members as per the bye-laws of the society. What is important to decide is the class of contributors and the class of participators, rather than classification of members. In this case, the class of contributors and class of participators are identical. Even though the bye-laws characterizes two types of members, the ‘original members’ being the founder members, others are called ‘nominal members’ but as seen from the order of the AO itself and the clause-9 extracted in the assessment order, it indicates that membership is given to any individual who is competent to contact and who expresses his willingness to practice the co-operative principles and function in accordance with by-laws. Both the ordinary members and nominal members do come under the definition as per the clase-4(iv) and the negative restrictions are not applicable either to the ordinary member or to the nominal member. Even under clause-4(iv), member means a person who has been a member of the society at the time of application for registration (or) person duly admitted to the membership of the society under the APMACS Act, 1995 after registration. The nominal members are also admitted under the by-laws. These are people admitted after the society was registered. Therefore, there may be a separate classification / nomenclature but they have all the rights and duties of any other member. It may be true that the by-laws restrict the voting rights and participation in the general body meetings, but in practice, there is no such difference being followed under the Co-operative Law. Unless a person become a member, he cannot transact with the society or its members. The society transactions are restricted to the Members and no general public is involved with it. Consequently, it cannot be stated that assessee is dealing with third parties, who are not members.
There is no distinction between ordinary members and nominal members and just because categorized as nominal members, they cannot be treated as ‘non-members’. If assessee’s transactions are with non-members, who are not members of the society, principles of mutuality do not apply. But in this case, even a nominal member is also admitted to the membership as per clause-9 and he has all the rights of any other member. The ordinary members are those members who are available at the time of registration and that cannot be considered as a restriction because at the time of formation of any society or an organization, only few members join at the time of incorporation whereas the by-laws permit admission of further members in the course of its activity, be it a business or not business. Thus, we are of the opinion that there is no definition between the transaction of members and nominal members and only when the transactions are with non-members, the principles of mutuality can be invoked or denied. A nominal member cannot be treated as a non-member and so the transactions of nominal members cannot be treated as transactions of non-members.
For the reasons stated above, we are of the opinion that the distinction sought to be made by the AO and CIT(A) is arbitrary and artificial. Therefore, we agree that assessee is covered by the principle of mutuality and its income will be exempt on that concept.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-Kurnool, dated 24-03-2016. The issue in this appeal is whether assessee is entitled for benefit of mutuality.
2. This appeal was filed with a delay of 11 days. The reason given for the delay was that the appeals were sought to be filed by way of post but unfortunately, they were sent to the old address of the Tribunal at Shapur House, Adarsh Nagar, Hyderabad and the appeal papers were duly returned due to wrong address. Subsequently, correct address was ascertained and it was duly sent to the correct address. Considering the delay of 11 days which should be condoned as there is sufficient cause. After discussing with DR, we are of the opinion that there is a sufficient cause for non-filing of the appeal in time. Accordingly, the delay in filing the appeal is condoned and appeal memo is admitted to be heard on merits.
3. Briefly stated, assessee is a mutually aided co-operative society, having registered with the District Registrar of Co operatives, Anantapur. Assessee filed total income at NIL, claiming deduction U/s. 80P of the Act of Rs. 40,03,672/-. In the course of scrutiny assessment, it was the contention of assessee that it is a mutually aided co-operative society and the activities of the society are confined to Members only who are making deposits and availing loans and surplus if any is distributed among the Members only. In the course of assessment proceedings, AO asked the clarifications, examined the by-laws and noticed that there are two categories of Members – Ordinary Members and Nominal Members and the transactions with non-Members being third parties is not entitled for deduction either U/s. 80P or under the concept of mutuality. Accordingly, he denied the benefit and restricted it to an amount of Rs. 40,300/- U/s. 80P(2) of the Act. In addition to the above issue, AO noticed that assessee has paid honorarium to its directors to an extent of Rs. 20,76,200/- and since TDS was not deducted, the said amount was also disallowed U/s. 40(a)(ia) of the Act. Third issue raised by the AO is with reference to interest earned on deposits to an extent of Rs. 17,01,964/-. Relying on the principles laid down by the Hon’ble Supreme Court in the case of M/s. Totgars Co-operative Sale Society Limited [322 ITR 283] (SC) he brought the above amount to tax under the head ‘income from other sources’.
4. Before the Ld.CIT(A), assessee submitted the following facts :
i. The assessee is a Mutually Aided Co-operative Credit Society registered under the APMACC Societies Act, 1995 in the year 2001;
ii. The assessee is formed initially by 15 members and admitted hundred of members into the society;
iii. The main object of the society is under the ‘Concept of Mutuality’ where the members can deposit amounts into the society and avail loans from the society. In other words, a single member can deposit his amount and if required he can avail loan from the society. In other words, a single member can deposit his amount and if required he can avail loan from the society subject to terms and conditions of the society;
iv. It is a mandatory provision in the bye-laws of the society for the intending borrowers from the society become members of the society by contributing admission fees and share capital;
v. In the process of deposits made by the members for which interest is paid by the society and the loans extended by the society to its members and the receipt of interest on such loans constitute the main heads of expenses and income of the society;
vi. After meeting all the administration expenses including sitting fees and honorarium paid to the members, the resulting surplus is distributed among all the members of the society as dividends in the ratio of the capital contributed by the members;
vii. Like other members the working members who are known as directors who have contributed their capital initially and periodically have also availed loans from the society;
viii. The society is distributing the surplus amount among all the members irrespective of depositors or borrowers depending upon the amount of share capital contributed by the members;
ix. The learned assessing officer has not given the cognizance for the concept of mutuality and made the following additions which are completely unjustified.
a) Honorarium paid to members for the services rendered by them throughout the year in collecting deposits from members, extending loans to members and primarily to recover the loans effectively without losing any principal amount of the trusted members of the society. As the society has complied with the following three mutual principles of mutuality, the Learned Assessing Officer should have given the benefit of mutuality to the Society. The three conditions, the existence of which establishes the doctrine of mutuality are:
a) The identity of the contributors to the fund and the recipients from the fund.
b) The treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and
c) The impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
4.1. With reference to the treatment of income on bank deposits, it was submitted that these interests were earned in the course of its activities with the members and following the principles laid down by various decision including the jurisdictional High Court, the income is business income and cannot be brought to tax under the head ‘other sources’.
4.2. Coming to the disallowance U/s. 40(a)(ia) of the Act on the honorarium paid, it was submitted that honorarium was paid to 15 directors for all the 12 months and this amount is not covered by the provisions of Section 194J as it is not a professional fees and they are not directors of a ‘company’ but of a society.
5. Ld.CIT(A) rejected the contentions stating as under:
