Deposits with Co-operative Society by a Charitable Trust under Section 11(5) of Income Tax Act, 1961

Often, the revenue authorities refuse to accept the deposits with a co-operative society as deposits in compliance with Section 11(5). The following analysis of the judicial pronouncement would clarify the situation:

1 Section 11(5) provides that forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) will be inter alia as under:

Section 11(5)(iii): “Deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).”

This section lays down two requirements to qualify for a eligible investment/deposit:

1.1 Deposit in any account

The deposit can be in any account i.e. Current, Savings, Term Deposit etc.

1.2  Co-operative society engaged in carrying on the business of banking

The second requirement of section 11(5)(iii) is that society should be engaged in business of banking

1.3 Provisions of the Banking Regulation Act, 1949 are not applicable upon co-operative societies and these are regulated by the Registrar of Co-operative Societies of each State. Further these societies deal with its members only. Hon’ble courts had occasions in past to deal such issues:

1.3.1 State Bank of India Staff Co-operative Society Ltd. v. Income-tax Officer [1998] 233 ITR 104 (MAD.) Hon’ble High court held:

The term “a co-operative society engaged in carrying on the business of banking” refers to a particular kind of cooperative society and it need not necessarily be a banking company or a company to which the provisions of the Banking Regulation Act, 1949, are made applicable. It is true that with respect to co-operative societies, the provisions of the Banking Regulation Act, 1949, had not been made applicable and they are not banks. But the specific portion, namely, the second limb of the section has to be given its meaning, which would definitely mean that a co-operative society engaged in or carrying on the business of banking, falls within the definition of credit institution. The attempt on the part of the petitioners to read the second limb of the definition section, as if it was subject to the first limb of the provision, could not be appreciated and it could not be sustained. The terms contained in the definition section with respect to co-operative society has to be given full textual meaning and it has got a special significance and meaning. A co-operative society which undertakes the business of banking, such as lending money to its members or accepting deposits or raising loans from the financial or banking institutions and advancing the same to its members, is definitely engaged in the business of banking.”

 1.3.2 Maharashtra Arogya Mandal v. Income-tax [2009] 28 SOT 26 (Pune) (URO) ITAT PUNE BENCH ‘B’:

Following was the question before the Hon’ble Bench:

“The learned CIT(A) erred in holding that the deposits with Dr. Dada Gujar Co-operative Patsanstha Ltd. were not covered under section 11(5)(iii) and hence, the assessee trust had violated the provisions of section 13(1)(d)”

Hon’ble Bench, while dealing with the issue in a lucid manner, held:

“Once the Hon’ble High Court comes to a conclusion that a credit society engaged in the business of receiving monies from and lending monies to its members is to be treated as a co-operative society engaged in the business of banking, it cannot be open to us to decline the exemption under section 11 on the ground that investments/deposits made by the assessee in a credit society engaged in the business of accepting deposits from and giving loans to its members are not covered by the scope of section 11(5)(iii). 

Learned CIT(A) has raised an objection that since the expression ‘co-operative society’ finds place along with the expression ‘a scheduled bank’, the meaning of ‘co-operative society engaged in the business of banking’ must stand restricted to only such co-operative societies as are somewhat similar to banks, if not banks. We see no substance in this objection. In the case of State Bank of India Employees Credit Co-operative Society, it was note-worthy that in the relevant definition clause i.e., definition of “credit institution” under section 2(5A), the expression ‘co-operative society engaged in carrying on the business of banking’ appeared along with the expression ‘a banking company to which the Banking Regulation Act, 1949 applies. Yet their Lordships came to the conclusion that a credit society dealing with members only can be said to be in the business of banking. These two expressions are two distinct limbs of the definition and must be given meaning accordingly. The common thread, if at all be necessary, between the two expressions is the business of banking, which, in the esteemed opinion of the Hon’ble Madras High Court, includes business of giving loans to members only.

In view of the above law, the deposit with a Co-operative Society is in compliance with Section 11(5) of the Income Tax Act, 1961. Once the investment is found compliant of Section 11(5)(iii), the question of the applicability of Section 13(1)(d) does not arise.