Section 80P Deduction – Co-operative Societies – Analysis & Case Laws

1. Section 80P – Deduction for Co-operative Societies

The provisions of Section 80P are reproduced hereunder:

80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(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) a cottage industry, or

(iii) the marketing of agricultural produce grown by its members, or

(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

(v) the processing, without the aid of power, of the agricultural produce of its members, or

(vi) the collective disposal of the labour of its members, or

(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,

the whole of the amount of profits and gains of business attributable to any one or more of such activities :

Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:—

 (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;

 (2) the co-operative credit societies which provide financial assistance to the society;

 (3) the State Government;

 (b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to—

  (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or

 (ii) the Government or a local authority; or

(iii) a Government company as defined in section2(45) of the Companies Act, 2013, or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),

the whole of the amount of profits and gains of such business;

 (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,—

  (i) where such co-operative society is a consumers’ co-operative society, one hundred thousand rupees; and

 (ii) in any other case, fifty thousand rupees.

Explanation.—In this clause, “consumers’ co-operative society” means a society for the benefit of the consumers;

 (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;

 (e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;

 (f) in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22.

Explanation.—For the purposes of this section, an “urban consumers’ co-operative society” means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.

(3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ.

(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.

2. Analysis

A perusal of various provisions of Section 80P indicates that the provisions are meant for deductions in respect of income of the co-operative societies. It is noted that various words /terms used in the section have not been defined in the Act except the definitions of co-operative society, co-operative bank and primary co-operative agricultural and rural development bank. Therefore, other terms used in the section will have to be interpreted by using the common meaning of those words and the interpretations made by various judicial forums such as ITAT, High Courts and the Hon’ble Supreme Court. In order to have a clear and easy understanding of various provisions of the section, the provisions are being discussed in the order it appears in the section.

Definition of Co-operative Society:

The word “Co-operative Society” has been defined in the Act in Section 2(19), which read as under:

“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

Further as per Circular No. 319, dated January 11, 1982 a regional rural bank (to which provisions of the Regional Rural Banks Act, 1976, apply) is deemed as co-operative society.

2.1 Income of banking business [Section 80P(2)(a)(i)]

In the case of a co-operative society providing credit facilities to its members, the whole of the amount of profits and gains from such business are deductible. From the assessment year 2007-08, deduction under Section 80P will not be available to any co-operative bank (even Regional Rural Banks will not be eligible for deduction under Section 80P – Circular No. 6/2010, dated September 20, 2010). A primary agricultural credit society or a primary co-operative agricultural and rural development bank will continue to claim the benefit of deduction under Section 80P. Various terms used in this section has been interpreted by various courts in the following manner:

2.1.1 Meaning of Credit Facilties

• The expression ‘facilities’ used in the provision is an inclusive term of wide import embracing anything which aids or makes easier the performance of a duty – Andhra Pradesh Co-op. Central Land Mortgage Bank Ltd. v. CIT [1975] 100 ITR 472 (AP).
• The expression ‘providing credit facilities’ would comprehend not only the business of lending money on interest but also the business of lending services for guaranteeing payments – CIT v. U.P. Co-op. Cane Union Federation Ltd. [1980] 122 ITR 913 (All.).
• When Section 80P (1)(a)(i) refers to a co-operative society engaged in providing credit facilities to its members, it really refers to a credit society whose primary object is to provide loans or other credit facilities to its members; it does not include any society whose primary object is something other than the provision of loans or other credit facilities, such as a consumer co-operative society – Rodier Mill Employees’ Co-op. Stores Ltd. v. CIT 135 ITR 355 (MAD).

2.1.2 Meaning of Members

• In Section 80P(2)(a)(i) when Parliament has used the expression “members”, it has used it in the normal sense of a member of a co-operative society. The intention was to extend the exemption to co-operative societies directly extending credit facilities to its members. There is nothing in the said provisions to show that the intention was to grant exemption to co-operative societies which were extending credit facilities to the person, who, though not the members of the said society, were members of another co-operative society which was a member of the co-operative society seeking exemption. The meaning of the expression “members” cannot, therefore, be extended to include the members of a primary co-operative society which is a member of the federated co-operative society seeking exemption – P. Co-operative Cane Union Federation Ltd. v. CIT [1999] 237 ITR 574/103 Taxman 376 (SC). In addition to the above judgments which are defined important terms used in section80P (2) (a) (i) the following judgments are also worth noting and must be kept in mind while making the assessment-
• The facility of selling goods on credit to members is an activity of business of selling of goods, of which the credit facility is only an incidence; it will not amount to providing credit facilities in the nature of the business of banking so as to amount to carrying on the business of banking or providing credit facility to its members – CIT v. Co-operative Supply & Commission Shop Ltd. [1993] 204 ITR 713 (Raj.), CIT v. Kerala State Co-operative Marketing Federation Ltd. [1998] 234 ITR 301 (Ker.).
• Conducting chit fund amounts to providing credit facilities – CIT v. Kottayam Co- operative Bank Ltd. [1974] 96 ITR 181 (Ker.).
• Selling goods on hire-purchase basis does not amount to providing credit facilities – CIT v. Madras Autorickshaw Drivers’ Co-operative Society Ltd. [1983] 143 ITR 981 (Mad.).
• Where the assesee-society had been carrying on business of providing facilities to its members for obtaining fertilizers, etc., as also arranging loans from bank by giving certificates about cultivated land,etc., for which certain amount was charged as service charges,such service charges received by the assessee would not be eligible for deduction under Section 80P(2)(a)(i) – CIT v. Anakapalli Co-op. Marketing Society Ltd. (2000) 111 Taxman 702/ 245 ITR 616 (AP).
• If a society regularly earns interest on funds (not required immediately for business purposes), such interest income is taxable under Section 56 under the head “Income from other sources” and not eligible for deduction under Section 80P – Totgars’ Co-operative Sale Society Ltd.v. ITO [2010] 188 Taxman 282 (SC).
• Interest received on income-tax refund is subject to deduction under Section 80P(2)(a) (i) – Maharashtra State Co-operative Bank Ltd. v. CIT [2010] 38 SOT 325 (Mum.)(SB), CIT v. Haryana State Co-operative Apex Bank Ltd. [2010] 322 ITR 404 (Punj. & Har.).

2.2 Cottage industry [Section 80P(2)(a)(ii)]

In the case of a co-operative society engaged in cottage industry, the whole of the amount of profits attributable to such activity are deductible under Section 80P(2)(a) (ii). The Circular No. 722, dated September 19, 1995 issued by CBDT defines the term cottage industry and has laid down various criteria which should be verified before granting the deductions in a case. Para-3 of the circular reads as under :

“What constitutes a “cottage industry” has been the subject- matter of discussion in a number of cases decided by various courts. The term as such does not define in the Act. Based on the ratio of the decision, a co-operative society engaged in cottage industry is required to broadly satisfy the following criteria for availing of the benefits under Section 80P(2)(a)(ii) –

1. Cottage industry is one which is carried on in a small scale with a small amount of capital and a small number of workers and has a turnover which is correspondingly limited;

2. It should not be required to be registered under the Factories Act;

3. It should be owned and managed by the co-operative society;

4. The activities should be carried on by the members of the society and their families [for this purpose, a family would include self, spouse, parents, children, spouses of the children and any other relative who customarily lives with such a member. Outsiders (i.e., persons other than members and their families) should not work for the society. In other words, the co-operative society should not engage outside hired labour. [However, it has certain exceptions];

5. A member of co-operative society means a shareholder of the society;

6. The place of work could be an artisan shareholder’s residence or it could be a common place provided by the co-operative society;

7. The cottage industry must carry on activity of manufacture, production or processing; it should not be engaged merely in trade, i.e., purchase and sale of the same commodity.

Para-4 of the same circular also explains that in the case of a weaver’s society, so long as weaving is done by the members of the society at their residences or at a common place provided by the society, without any outside labour, such a society will be eligible for deduction under Section 80P(2)(a)(ii) even if certain payments have been made to outside agency for dyeing, bleaching, transport arrangements, etc., provided it satisfies all other conditions necessary for availing deduction under Section 80P(2)(a)(ii).

The following important judgments should also be kept in mind before accepting or refusing the claim of the assessee for deduction in this section.

• A cottage industry is one which is carried on by the artisan himself using his own equipment with the help of the members of the family. It is the family unit which provides the labour force. The idea of cottage industry is alien to the idea of industry where hired labour is engaged and the relationship of employer and employee exists – Distt. Co-op. Development Federation Ltd. v. CIT [1973] 88 ITR 330 (All.).
• It has been held by the Kerala High Court that where members of the assessee, a co-operative society, were artisans weaving handloom cloth and workers were carrying out work in thatched shed belonging to the assessee, where looms were kept, the assessee was engaged in a cottage industry and was entitled to relief under Section 80P(2)(a)(ii).
• A co-operative society can be regarded as a family consisting of its members and the premises belonging to the society can be regarded as its home or cottage – CIT v. Chichli Brass Metal Workers Co-op. Society Ltd. [1978] 114 ITR 720 (MP).
• Before it can be said that a co-operative society is engaged in an industry, it is necessary that there must be an activity relating to an industry. An industry obviously implies manufacture of certain articles and it cannot embrace a business of mere purchase and sale of goods – CIT v. Indian Co-operative Union Ltd. [1982] 134 ITR 108 (Delhi).
• An apex society for coir marketing cannot be said to be engaged in regard to any affairs of cottage industry so as to be entitled to deduction under Section 80P(2) (a)(ii) – CIT v. Quilon Central Coir Marketing Co-operative Society Ltd. [1998] 229 ITR 348 (Ker.).
• The assessee-society had the power to direct, supervise and control over the manufacturing of cloth through the primary societies which were the members of the assessee-society. Members of the primary societies ran cottage industries in their houses. In these circumstances, it could not be said that the assessee-society was not engaged in the manufacturing activities carried out by the weavers. The weavers got the raw material, e., yarn through their primary societies, but thereafter weaving charges were paid by the assessee and it purchased the cloths through primary societies- CIT v.Rajasthan Rajya Bunker Sahakari Sangh Ltd. [2002] 24 Taxman 135 (Raj.).
• Expression ‘whole of the amount of profits and gains of business attributable to any one or more of such activities’ indicates that deduction under Section 80P (2) (a) is to be given to the extent of whole of profit attributable to cottage industry without deducting there from any loss arising in any other activity – CIT v. Agency Marketing Co-operative Society Ltd. [1993] 201 ITR 881 (Ori.).

2.3 Marketing of Agricultural Produce [Section 80P(2)(a)(iii)]

The whole of the amount of profits attributable to the marketing of agricultural produce grown by the members of society is deductible under Section 80P (2) (a) (iii). For this clause also the help is to be taken for interpreting the term marketing which is nowhere defined in the Act. The common meaning of the marketing is the effort or the sum total of the activities which are involved or put for taking a particular product or good to the sale point or to the market where it is ultimately sold.

The Courts have held that ‘Marketing’ is an expression of wide import, and it generally means ‘the performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer’. The marketing functions involve exchange functions such as buying and selling physical functions such as storage, transportation, processing and other commercial functions such as standardization, financing, market intelligence, etc. The leading judgments regarding this definition are – CIT v. Karjan Co-op. Cotton Sale Ginning & Pressing Society Ltd. [1981] 129 ITR 821 (Guj.). CIT v. Ryots Agricultural Produce Co-op. Marketing Society Ltd. [1978] 115 ITR 709 (Kar.) and Meenachil Rubber Marketing & Processing Co-operative Society Ltd. v. CIT [1992] 193 ITR 108 (Ker.),

The following judgments are also worth noting:

Ø Manufacture of sugar – Where the assessee, a co-operative society, incorporated for manufacture of sugar, purchased sugarcane from its members as well as non-members as well as a co-operative society and manufactured sugar to sell the same in open market to earn profit, since profit so derived was not on account of marketing of sugarcane of its members but was on account of manufacturing of sugar out of sugarcane purchased on its own account, deduction claimed under Section 80P(2)(a)(iii) would not be available thereon to the assessee society – Kamal Co-op. Sugar Mills Ltd. v. Dy. CIT [1998] 66 ITD 521 (Delhi).

Ø Buying Sugar cane” and “selling sugar” is not “marketing of agricultural produce” “grown by it’s members”:

The Hon. Supreme Court in the case of Assam Co-operative Apex Marketing Society Ltd. v. CIT [1993] 201 ITR 338 wherein the Society engaged in marketing of agricultural produce of its members also had other co-operative societies as its members. Since the agricultural produce marketed by the Society was not produced by the primary marketing Societies, being its members, the assessee society was not held to be entitled to exemption under Section 81(1)(c) [now Section 80P(2)(a)(iii)].

Ø 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 Section 80P(2)(a)(iii).”[Gurdaspur Co-Op. Sugar Mills v.Deputy Commissioner of Income-tax [2009] 122 TTJ 528(ASR)].

Ø Assessee buying surgarcane from agriculturists, crushing same and then selling sugar , was not entitled to deduction under Section 80P(2)(a)(iii) [In favour of revenue] [Assessment year 2003-04] Gurdaspur Co-Op. sugar Mills v.Deputy Commissioner of Income-tax [2009] 122 TTJ 528(ASR).

Ø Poultry farming being an extended form of agriculture, eggs qualify to be treated as ‘agricultural produce’ – CIT v. Mulkanoor Co-op. Rural Bank Ltd. [1988] 173 ITR 629 (AP).

Ø Amount of subsidy received by the assessee from National Co-operative Development Corpn. towards loss incurred on account of price fluctuation qualifies for deduction – CIT v. Punjab State Co-operative Supply & Marketing Federation Ltd. [1989] 46 Taxman 156/ [1990] 182 ITR 58 (Punj. & Har.).

2.4 Purchase of agricultural implements [Section 80P(2)(a)(iv)]

Whole of income from the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purposes of supplying them to its members is deductible under Section 80P(2)(a)(iv). While granting the deduction under this section, the following judgements and points should be kept in mind.

• It is necessary that the assessee must prove that it has purchased certain articles, which means that it has acquired property in certain articles, and those articles have been sold to the members – Vidarbha Co-op. Marketing Society Ltd. v. CIT [1985] 156 ITR 422 Bombay.
• Section 80P (2) (a) (iv) does not require that the supplies shall be made by the co-operative society only to members and to no one else – CIT Guntur Distt. Co-op. Marketing Society Ltd. [1985] 154 ITR 799 (AP). However, deduction is not available under Section 80P (2) (a) (IV) in respect of profit on sale of commodities to non-members – CIT v. Vidarbha Co-operative Marketing Society Ltd. [1995] 212 ITR 327 (Bom.).
• The expression ‘members’ in Section 80P (2) (a) (iv) cannot be restricted to either a member of a primary society or to an agriculturist alone (Apex Society can also claim deduction) – CIT v. Tamil Nadu Co-op. Marketing Federation Ltd. [1983] 144 ITR 744 (Mad.).
• Coal is not an article which can be described as an “article intended for agriculture” – U.P. Co-operative Federation Ltd. v. CIT[1972] 84 ITR 317 (All.).
• It cannot be said that cattle-feed meant for livestock has no connection with agricultural operations and as such is outside the exemption contemplated under Section 80P(2)(a)(iv) – CIT v. Thudialur Co-operative Agricultural Services Ltd. [1997] 143 CTR (Mad.) 362.
• Where the assessee was a co-operative marketing federation registered under the Co-operative Societies Act, and it mainly dealt, inter alia, in general fertilizers, products from mixing units, etc., it would be entitled to deduction in respect of profit from sale of fertilizers to its members – CIT v. Tamil Nadu Co-operative Marketing Federation Ltd. [1999] 151 CTR (Mad.) 232.
• Where the assessee undertook schemes to lift water from rivers known as Lift Irrigation Scheme and the water lifted by the assessee was supplied by it to its members for the purpose of cultivation, water being purchased by the assessee, the assessee would be entitled to deduction in respect of income from Lift Irrigation Scheme – CIT v. Shetkari Sahakari Sakhar Karkhana Ltd. [1999] 107 Taxman 532/238 ITR 983 (Bom.).
• By purchasing different kinds of manures and pesticides and mixing them up for the purpose of selling the same to the small farmers in retail, it cannot be said that the assessee is indulging in any manufacturing activity or processing of goods, so as to disentitle it to exemption under Section 80P(2)(a)(iv) – CIT v. Thudialur Co-operative Agricultural Services Ltd. [1997] 143 CTR (Mad.) 362.

2.5 Processing of agricultural produce [Section 80P(2)(a)(v)]

Income from the processing (without the aid of power) of the agricultural produce of its members is deductible under Section 80P(2)(a)(v). For this section the word “processing” and the “agricultural produce” are important. These terms have not been defined in the Act but have been used in other sections also and therefore, for defining these words help should be taken from the judgements which are given by various Courts while dealing the issues arising in other sections.

The most important point to be taken note is that the processing should be done without the aid of power. The condition of ‘grown’ by its member is not stipulated here as compared to clause (iii). However, in my opinion, the clause requires that the agricultural produce should be grown by the members of the society. Only in that condition the deduction can be claimed. In case the produce is bought from open market and is brought for processing, no deduction should be allowed.

2.6 Collective disposal of labour [Section 80P(2)(a)(vi)]

Income from the activity of collective disposal of the labour of its members is deductible under Section 80P (2) (a) (vi). This section has been introduced mainly for the labour co-operative societies. These societies consist of the persons who are offering their services as labour through it. The labour can be manual or some technical or other similar services. The following judgments also clarify the deduction and should be kept in mind while dealing with the case.

Ø This deduction is available only when the earning of the society is through the utilisation of the actual labour of its members. Thus, a society of engineers engaged in collective disposal of labour of members where actual supervision of work in field is done by paid employees, will not be entitled to exemption, since there is no direct connection between the work executed and the speciality of members of the society as engineers – Nilagiri Engg. Co-op. Society Ltd. v. CIT [1994] 208 ITR 326 (Ori.).

Ø Where not only members but also a large number of non-members were contributing collective disposal of labour and condition laid down in proviso to Section 80P(2)(a)(vi) was not fulfilled, the assessee-society would not be entitled to exemption of its income – Assessing Officer v. Ganesh Co-op. (L&C) Society Ltd. [1998] 67 ITD 436 (Asr.).

The proviso below sub- Section (vi) & (vii) imposes further restriction on the voting rights of the members of the society. It provides that the deduction shall be available only to the societies subject to the conditions that the rules and bye-laws of the society restrict the voting rights to the following classes of its members:

a. Individuals, who contribute their labour;

b. the co-operative credit societies which provide financial assistance to the society; andc.   the State Government.

For this section an important landmark judgment given by the Hon’ble Gujarat High Court i.e. jurisdictional High Court in the case of Gora Vibhag Jungle Kamdar Mandali v. CIT [1986] 161 ITR 658 (Guj.) should be kept in mind while analyzing the claim of the assessee. According to this judgement, if the co-operative society as specified in sub-clause (vi) wants to claim full deduction of the profits made by it, persons other than those falling under the three specified categories can be members of the society, but they should not be given the right to vote and that fact should be clearly borne out from the rules and bye-laws restricting the right to vote only to members specified in the proviso.

2.7 Fishing and allied activities [Section 80P(2)(a)(vii)]

The whole of the profits of a co-operative society engaged in fishing and allied activities are deductible under Section 80P(2)(vii). Fishing and allied activities include the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members. The Proviso regarding restriction of voting rights which has been discussed in the preceding paragraph is also applicable to this sub-clause and, therefore, while allowing the deduction the bye-laws of the societies should be analysed and it should be verified whether the voting rights confirm to the Proviso or not.

Accordingly, the class of members entitled to voting rights should be individuals who carry on the fishing or allied activities, the co-operative credit societies which provide financial assistance to the society and the State Government.

2.8 Primary society engaged in supply of milk, oil seeds, fruits, etc. [Section 80P(2)(b)]

The deductions of the whole of the amounts of profits and gains of a co- operative society is available if the following conditions are satisfied-

1. The co-operative society is a primary society engaged in supplying milk, oil seeds, fruits or vegetables.

2. Milk, oil seeds, fruits or vegetables are grown or raised by its members.

3. Milk, oil seeds, fruits or vegetables are supplied  to the following:

To whom milk, oil seeds, etc. are supplied	Object of the society/company to whom milk, oil seeds, etc. are supplied
A federal co-operative society	It must be engaged in the business of supplying milk, oil seeds, fruits or vegetable as the case may be.
The Government or a local authority	–
A Government company or a statutory corporation	The      company/corporation must be engaged in the business of supplying milk, oil seeds, fruits or vegetables as the case may be.

2.9 Income from other activities [Section 80P(2)(c)]

If a co-operative society is engaged in any other activity (either independently or in addition to those specified in clause (a) or clause (b) then the following amount is deductible under Section 80P(2)(c) :

1. In the case of a consumer co-operative society (i.e., a society for the benefits of consumers): Rs. 1,00,000; and
2. In any other case: Rs. 50,000.

This is a general deduction available to any co-operative society which does not carry any of the activities which are specified. The explanation below this clause also defines the consumer’s co-operative society as a society for the benefit of consumers.

As it is evident from the language of the section that it is a general section and no specific restriction or classification has been made. It only mentions the cases which are to be excluded and, therefore, there is bound to be litigation on the issue. Therefore, the following points/ judgments should also be kept in view while deciding the cases in this clause –

• Though income derived by the assessee co- operative housing society from letting out of shops to persons other than its members is not its primary activity, but being an activity in addition to its primary activity, it would fall within ambit of Section 80P(2)(c), and, therefore, the assessee would be entitled to deduction in respect of profits and gains attributable to the activity of letting out of shops to non-members – CIT v. Ratanabad Co-operative Housing Society Ltd. [1995] 81 Taxman 257/215 ITR 549 (Bom.).
• This rule is applicable in the case of a co-operative society engaged in the business of letting out of building (maybe shops) even if such income is computed under the head “Income from house property” – Film Nagar Co- operative Housing Society Ltd. ITO [2004] 91 ITD 27 (Hyd.) (SC).
• The rule is not applicable if the society is not engaged in the letting out of buildings, where surplus land is given on rent, such income is not subject to deduction under Section 80P(2) (c) – Kottayam District Co-operative Bank Ltd. v. CIT [1988] 172 ITR 443 (Ker.).
• A co-operative bank is legally obliged to invest part of deposit received from its members as reserve fund in Government Securities. Generally such reserve funds cannot be utilized as working capital and the same can be withdrawn only to meet losses or when the bank is wound up. Interest on such Government securities cannot be treated as essential part of banking activity as the same is not part of stock-in-trade or working/ circulating capital. Such interest income is not fully deductible under Section 80P(2)(a)(i), but deduction is available under Section 80P(2)(c) – Madhya Pradesh Co-operative Bank Ltd. v. CIT [1996] 84 Taxman 640 (SC).
• Where the assessee a co-operative society running a sugar mill had not commenced any business of production of sugar and its activities undertaken were pre-operative activities, it was not entitled to deduction under Section 80P(2)(c) – National Co-operative Sugar Mills Ltd. v. CIT [1998] 96 Taxman 352 (Punj. & Har.). Karnal Co-operative Sugar Mills Ltd. v. CIT [1998] 233 ITR 531 (Punj. & Har.).
• A society supplying coal and diesel to its members, who are manufacturers of bricks and tiles, is not a “consumer” co-operative society. A “consumer society” means a registered society which has as its principal object the supply of the requirements of its members for the consumption of such members. Tamil Nadu Brick & Tile Mfrs. Industrial Service Co-operative Society Ltd. v. CIT [2003] 129 Taxman 343 (Mad.).

2.10 Interest/ Dividend Income [Section80P(2)(d)]

The whole of interest and dividend income derived by a co-operative society from its investments in any other co-operative society is deductible under Section 80P(2)(d). The provisions of this clause are very clear and almost all the terms are clearly defined. However, the term ‘whole of interest and dividend’ has been subject matter of litigation. The judgment on the issue indicates that the deduction is for the entire income without adjusting the outgoings. The Hon’ble Courts have held as under :

In Totgars’ Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282 (SC) it was held that the words ‘the whole of the amount of profits and gains of business’ emphasise that the income, in respect of which deduction is sought, must constitute the operational income and not the other income which accrues to the society.

Interest derived by the assessee co-operative sugar mill from its investment in co-operative bank would qualify for deduction in its entirety under Section 80P(2)(d), without adjustment of interest paid by the assessee to the co-operative bank – CIT v. Doaba Co-operative Sugar Mills Ltd. [1998] 96 Taxman 509/230 ITR 774 (Punj. & Har.).

In another judgment of ITAT Chandigarh in the case of ITO Vs. Punjab State Co-operative Milk Producers Federation Ltd.(2010) 3 ITR (Trib.) 586 it has been held that the exemption would only be on the net income there from and not on the entire interest receipts.

Therefore, considering the language of the section and contradictory opinion of the judicial forums, the A.O. should verify whether there is a nexus between the income and the expenditure and in case it is noted that certain expenditure is attributable to the exempt income, the same should be reduced before granting the deduction. Needless to say that the facts in each case should carefully be noted and the A.O. should not be guided merely by the judicial pronouncements.

2.11 Letting of godowns [Section 80P(2)(e)]

The whole of the income derived by a co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities is deductible under Section 80P(2) (e).

For this clause the term godown or warehouses is very important and in a landmark judgment in the case of CIT v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd. [1986] (162 ITR 142) the Hon’ble Gujarat High Court has defined these words. The Court has held that first of all it should be a godown or warehouse which should be let out for the purpose specified in the clause. However, if the godown or warehouse is let for a purpose other than storage, processing or facilitating the marketing of commodities, the income derived there- from by a co-operative society would not be deductible under Section 80P. The judgment is very important and should be kept in mind. The facts of letting out are very important and the A.O. should get the inspection of the let-out property done to ascertain the correct facts.

The judgement of Hon’ble Supreme Court is also important – Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 182 Taxman 287 (SC). While delivering the judgment it has been held by the Hon’ble Court that the deduction is available in respect of income derived from the letting out of godowns and warehouses only where the purpose of letting is storage, processing or facilitating marketing of commodities. In that case the facts revealed that the assessee was storing commodities in its godowns as its own trading stock and, therefore, it was held to be not entitled for claim of deduction under Section 80P(2)(e).

The A.O. should also keep in view the following judgments –

• Commission received by the assessee-society from State Government for stocking its goods in godown, would qualify for deduction under Section 80P(2)(e) – CIT v. Coimbatore District Central Co-op. Supply & Marketing Society Ltd. 1995 Tax LR 1308 (Mad.).
• The commission received by the assessee, a co-operative society, from Food & Civil Supplies Corporation for procurement of paddy and rice and reimbursement of transport charges in relevant assessment year, was not eligible for deduction under Section 80P(2) (e) – Udupi Taluk Agricultural Produce Co-operative Marketing Society Ltd. v. CIT [1987] 166 ITR 365 (Kar.).
• Shops in which wholesale or retail business in cloth is carried on, cannot come within the meaning of ‘godowns’ or ‘warehouses’ – CIT v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd. [1986] 162 ITR 142 (Guj.).
• Amount received for letting of godowns, where incidental services of taking delivery of stock at rail-head and transporting it to godowns are also rendered is wholly exempt – CIT South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117/43 Taxman 328 (SC).
• Where the assessee-co-operative society is appointed the sole agent and entrusted with the handling, distribution and sale of fertilizers and it received commission-cum-incidental charges, it is entitled to exemption only on that part of its income which is attributable to storage of fertilizers in its godowns – CIT v. J & K Co-operative Supply & Marketing Federation Ltd. [1993] 204 ITR 289 (J & K).
• Deduction under Section 80P(2)(e) is available only in respect of income from letting out of storage and if the assessee uses storage only for marketing, deduction is not permissible – CIT v. Haryana State Co-op. Supply & Marketing Federation Ltd. [2011] 201 Taxman 169 (Punj. & Har.).

2.12 Interest on securities/property income [Section 80P(2)(f)]

The whole amount of any income by way of interest on securities or any income from house property chargeable under section 22,in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees.

2.13 Computation of deduction [Section 80P(3)]

This section provides that the deduction under Section80P shall be computed after reducing the gross total income by certain sections mentioned therein. Accordingly deduction under Section 80P in respect of business income of a co-operative society shall be available with reference to income after claiming deduction under sections   80HH, 80HHB, 80HHC, 80HHD, 80I 80-IA, 80J and 80JJ

2.14 Withdrawal of Deduction for Co-operative Banks [Section 80P(4)]

The deduction under Section 80P is not available for Co-operative banks from A.Y. 2007-08. It has been explained by the Finance Minister while moving the amendment that the co-operative banks were functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore Section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said 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. The expressions ‘co-operative bank’, `primary agricultural credit society’ have been taken as per the definition given in Part V of the Banking Regulation Act, 1949 (10 of 1949). The `primary co-operative agricultural and rural development bank’ have also been defined in the act to bring clarity. The definitions as per BR Act are given in the Appendix to the Act which are clear and self explanatory.

Further, a new sub-section (viia) has also been inserted in clause (24) of Section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of ‘income’.

The CBDT vide Circular No. 6/2010 [F.No. 173(3)/44/2009-IT (A-I)] dated 20-9-2010 has also issued a circular for the sake of clarity the circular is reproduced as under

“Section 80P of the Income-tax Act, 1961 provides for a deduction from the income of co-operative societies referred to in that section.

As Regional Rural Banks (RRB) are basically corporate entities (and not co-operative societies), they were considered to be not eligible for deduction under Section 80P when the section was originally introduced. However, as Section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be co-operative society for the purposes of the Income-tax Act, 1961, in order to make such banks eligible for deduction under Section 80P, CBDT issued a beneficial Circular No. 319 dated 11-1-1982, which stated that for the purpose of Section 80P, a Regional Rural Bank shall be deemed to be a co-operative society.

Section 80P was amended by the Finance Act, 2006, with effect from 1 -4-2007 introducing sub-section (4), which laid down specifically that the provisions of Section 80P will not apply to any co-operative bank other than a Primary Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank. Accordingly, deduction under Section 80P was no more available to any Regional Rural Bank from assessment year 2007-08 onwards.

An OM dated 25-8-2006 addressed to RBI was issued by the Board clarifying that Regional Rural Banks would not be eligible for deduction under Section 80P of the Income-tax Act, 1961 from the assessment year 2007-08 onwards.

It has been bought to the notice of the Board that despite the amended provisions, some Regional Rural Banks continue to claim deduction under Section 80P on the ground that they are co-operative societies covered by Section 80P(1) read with Boards Circular No. 319 dated 11-1-1982.

It is, therefore, reiterated that Regional Rural Banks are not eligible for deduction under Section 80P of the Income-tax Act, 1961 from the assessment year 200 7-08 onwards. Further more, the Circular No. 319 dated 11-1-1982 deeming any Regional Rural Bank to be co-operative society stands withdrawn for application with effect from assessment year 2007-08.

The field officers may take note of this position and take remedial action, if required.”

All urban Co operative credit society and Pat-Pedhis are defined by virtue of provisions of [Note :Part V contains amendment in definition ] – Section 5(ccii), 5(ccv) and 5(ccvi) of Banking Regulation Act, 1949. Further, Section 5A of Banking regulation Act, 1949 overrides Bye laws of the co op credit society 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 co-operative bank.

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 ‘co-operative bank’ under Section 12(1) of the Maharashtra Co-operative Society Act, 1960 as per the registration certificate issued by the Assistant Registrar, Co-operative Society, Mumbai. Once the urban Co operative credit society and Pat-Pedhis are classified as Bank then they are not eligible 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.

Further, 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) of income Tax Act, 1961. The said view is supported by Kerala State Co-operative Agricultural Rural Development Bank Ltd. Vs. The Assistant Commissioner of Income-tax, Circle-1(2), Trivandrum vide ITA No. 506/Coch/2010 & S.P. No.67/Coch/2010 For AY 2007-08.(unreported but available on internet).

Since the amendment is recent, not many decisions are available on the subject. The issue has not yet been decided by any High Court and only the ITAT cases are available.

The most detailed decisions are in the cases of Kerala State Co-operative Agricultural Rural Development Bank Ltd. Vs. The ACIT and Vidisha Bhopal Kshetriya Gramin Bank, Vidisha VS. ACIT. The gist of the leading judgments on this issue is as under:

i) Citizen Co-op. Society Ltd. VS. Addl CIT

Assessee co-operative society was providing banking and credit facilities to its members only. It was found that certain activities carried on by assessee were not as per requirements of principles of co-operative society and that assessee was also engaged in activity of bill discounting and providing accommodation cheques by taking cash from members. In view of aforesaid facts, assessee was held not entitled to deduction under Section 80P. Further it was also held that assessee society being a co-operative bank providing banking facilities to members was not eligible to claim the deduction under Section 80P(2)(i)(a) after introduction of sub-section (4) to Section 80P.–[2012] 24 taxmann. com 347 (HYD.)

ii) Vidisha Bhopal Kshetriya Gramin Bank, Vidisha VS. ACIT

Assessee was a regional rural bank engaged in banking and financing activity. It claimed deduction under Section 80P. Assessing Officer rejected assessee’s claim holding that assessee was neither a Primary Agricultural Credit Society (PACS) nor Primary co-operative Agricultural and Rural Development Bank (PCARDB). It was noted from records that range of assessee’s activities were not confined to one taluk but was extended to entire district and, thus, in view of Explanation to Section 80P(4), assessee was not PCARDB. Further primary object as well as activities of assessee were not confined to agricultural purposes but other purposes also and, hence, assessee could not be regarded as PACS. In view of above facts, the impugned order of Assessing Officer rejecting assessee’s claim was upheld by ITAT.– [2012] 24 taxmann.com 278 (INDORE) / [2012] 54 SOT 51 (INDORE).

iii) DCIT VS. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd.

The Hon’ble bench considered the provisions of Section 80P of the Income-tax Act, 1961, read with sections 5(b), 5(cci) and 5(ccv) of the Banking Regulation Act, 1949 related to deductions for Income of co-operative societies for Assessment years 2007-08 to 2009-10. The Assessee was a society engaged in business of providing credit facilities to its members by granting loans for purposes like business, housing, vehicles, etc. Section 80P deduction was denied by Assessing Officer in view of amendment brought into Section 80P whereby co-operative banks were excluded from purview of Section 80P with effect from 1-4-2007. Held that since on facts none of assessee’s aims and objects allowed assessee to accept deposits of money from public for purpose of lending or investment, it could not be said that principle business of assessee was banking business and , therefore, assessee could not be regarded as a primary co-operative bank and, hence, was not entitled to deduction under Section 80P(2)(a)(i). –[2012] 23 taxmann.com 313 (PANAJI) / [2012] 137 ITD 163 (PANAJI) / [2012] 149 TTJ 356 (PANAJI)

iv) Kekri Sahakari Bhumi Vikas Bank Ltd. VS. Income-tax Officer

In view of amendment to Section 80P vide Finance Act, 2006 with effect from 1-4-2007, from assessment year 2007-08 onwards, an assessee would be eligible for relief there under only if it falls within two categories of co-operative banks allowed by Section 80-P(4), i.e., ‘primary agricultural co-operative society’ and ‘primary co-operative agricultural and rural development bank’. Assessee was a co-operative society, formed under Rajasthan State Co-operative Societies Act, 2001 – It filed its return claiming exemption under Section 80P(2)(a)(i). Relying upon amended provisions of Section 80P, Assessing Officer rejected assessee’s claim holding that it was engaged in financing activities even other than purely agricultural activities. In order to claim deduction, assessee was required to show that its principal business consisted of providing financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including marketing of crops) and the aforesaid requirement had to be satisfied by assessee independently for each year, as there could well be a change in profile of its lending activities with time. In view of facts stated under heading – ‘Deductions – Income of co-operative socieites’ and, further having regard to fact that area of operation of assessee-society exceeded ‘a taluk’, there was no basis to consider assessee as being a primary co-operative agricultural and rural development bank as defined in Section 80P, so as to be entitled for tax benefit there under on its income.[In favour of revenue] –[2012] 22 taxmann.com 63 (JP.) / [2012] 54 SOT 64 (JP).

v) Kerala State Co-operative Agricultural Rural Development Bank Ltd. Vs. The ACIT-(I.T.A. No. 506/Coch/2010 & S.P. No.67/Coch/2010)

The above decision is unreported but can be downloaded from web from ITAT.NIC.IN. The decision is most comprehensive and detailed one on the issue. Hon’ble members have discussed all the provisions of the I.T.Act, BR Act and the NBARD Act which are relevant for the section and have decided the issue. It would be better if the complete decision is read to understand the issue. However, for the sake of brevity, the important paragraphs of the order are reproduced as under-

“4.5 Here it may be pertinent to state that the NBARD Act was enacted by the Parliament in the year 1981 to establish a bank known as `National Bank for Agricultural and Rural Development’ (`NBARD’ hereinafter), for promoting and regulating credit and other facilities for the promotion and development of agriculture, including agricultural small scale industries and other allied economic activities in the rural areas with a view to promote integrated rural development. The terms `agriculture’ and `rural development’ stand defined per ss. 2(a) and 2(q) thereof respectively in very broad and comprehensive terms. It provides loans and advances, by way of re-finance, to inter alia, state co-operative banks for financing agricultural operations and growing of crops; marketing and distribution of inputs necessary for agricultural or rural development; in fact, any activity for the promotion of or in the field of agricultural and rural development, besides also, commercial and trade activities in the rural sector. The same are repayable on demand or on the expiry of fixed periods not exceeding 18 months. It also provides long-term financial assistance to, among others, state co-operative banks, by way of refinancing, for promotion of agricultural and rural development. Section 2(v) of the NBARD Act defines the `state land development bank’ as the principal co-operative society in a State which has, as its primary object, the providing of long-term finance for agricultural development. The Notes on Clauses to Finance Bill, 2006, vide clause 19 thereof, clarifies that the deduction under Section 80P, which is qua the income of co-operative societies engaged in, inter alia, carrying on the business of banking or providing credit facilities to its members (s. 80P(2) (a)(i)), is withdrawn for all co-operative banks except primary agricultural credit society and primary co-operative agricultural and rural development bank. As such, but for these two primary units, all the co-operative societies, as covered under Section 80P(2)(a)(i), shall no longer (effective A. Y. 2007-08) be eligible for deduction under Section 80P.

4.6 Continuing further, as would be self-evident, the definition of a `co-operative bank’ does not enlist the condition of the conduct of the `business of banking’ as the criterion for a co-operative society to be a co-operative bank. In fact, it is not even stated as one of the qualifying activities; the sole and defining activity that qualifies a co-operative society to be a co-operative bank, be it at the primary, district or state level, is the financing of its members, rendering the conduct of the `business of banking’, even if so, irrelevant. Clause (viia) stands inserted [by Finance Act, 2006 (w.e.f. 1/4/2007)] in Section 2(24) of the Act, defining `income’ inclusively, to include the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members. Two things, thus, bear mention; firstly, the amendment only impacts co-operative societies and, secondly, only those in the business of banking, which is construed broadly so as to include provision of credit facilities to the constituents.

Now, without doubt, the said profits and gains would even otherwise, i.e., independent of the amendment, qualify to be `income’ assessable as business income u/c IV-D under Section 28(i) r/w s. 2(24)(i). The only purpose that the amendment therefore serves, is to delineate such income of the specified entities (i.e., co-operative societies) separately and, further, clarify that for the purposes of the Act the `financing of its constituents’ is to be considered as integral to banking, i.e., as a part of the business of banking. That is, qua the underlying economic activity generating the income, financing forms part of banking, or at least as far as the specified entities, being co-operative societies, are concerned.

In view of the obtaining legal position, as discerned from the reading of the applicable laws, i.e., the BR Act and the NBARD Act, in conjunction with which the relevant provisions of the Act are to be read, and the judicial precedents brought to our notice, we are of the clear view that the assessee is a `co-operative bank’ and, consequently, hit by the provision of s. 80P(4), so that the deduction provided by the said section would not be available to it from A.Y. 2007-08 onwards and, accordingly, stood rightly denied the impugned claim in its assessment for the year. So, however, we also clarify that to the extent the assessee is (also) or is acting (also) as a `state land development bank’, which too falls within the purview of the NBARD Act, exigible for financial assistance from NBARD, the assessee’s claim merits acceptance, and it would be entitled to deduction under Section 80P(2)(a)(i) on the income relatable to its lending activities as such a bank. The matter is, therefore, remitted to the file of the AO for a consideration of this aspect of the matter and adjudication as per law on factual verification and determination, pass a speaking order, after allowing reasonable opportunity to the assessee to establish its claims, the onus for which is only on it. We decide accordingly.’’

2.15 Provision of Section 80A(5):

From A.Y.2003-04 onwards the deduction under Section 80P is not available unless it is claimed in the return of income by virtue of amended provision of Section 80A(5).

2.16 Other Relevant Judgments :

The following judgments are also worth keeping a note –

• Deduction is on net computed income and not on gross profits – Co-operative society is entitled to deduction of exemption from income-tax payable by it only on its net profits and gains – Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT [1993] 203 ITR 1027 (SC).
• Unabsorbed losses/depreciation should first be set off – Deduction under Section 80P should be allowed after set off of unabsorbed loss and unabsorbed depreciation of earlier years – CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 91 Taxman 214/224 ITR 604 (SC).
• Where income is partly exempt and partly taxable, proportionate share of expenses should only be allowed against taxable part – Where a co-operative society was earning income which was partly taxable and partly entitled to special deduction, proportionate share of expenses attributable to earning income which was entitled to deduction should be deducted in computing such income – Kota Co-operative Marketing Society Ltd. v. CIT [1994] 207 ITR 608 (Raj.), CIT v. Rajasthan Rajya Sahkari Upbhokta Sangh [1995] 215 ITR 448 (Raj.).
• Other activities – A society is not disentitled from claiming exemption only because it also carries on the activities, income from which is not exempt – CIT v. Nagpur Zilla Krishi Audyogik Sahakari Sangh Ltd. [1994] 75 Taxman 399/209 ITR 481 (Bom.).
• Mutual concern – If a co-operative society is a mutual concern, exemption can be claimed on the principle of mutuality – CIT Standing Conference of Public Enterprises [2010] 186 Taxman 142 (Delhi).
• No disallowance can be made under Section 14A in respect of income on which deduction is allowed under Section 80P – [2012] 23 com312 (DELHI) / [2012] 209 TAXMAN 252 (DELHI) / [2012] 252 CTR 374 (DELHI) Commissioner of Income-tax VS. Kribhco.
• Deduction under Section 80P(2)(e) is available only in respect of income from letting out of storage and if assessee used storage only for marketing, deduction is not permissible- Commissioner of Income-tax, Panchkula VS. Haryana State Co-op. Supply & Marketing Federation Ltd -[2011] 12 com330 (PUNJ. & HAR.) / [2011] 201 TAXMAN 169 (PUNJ. & HAR.
• Deduction under Section 80P(2)(d) would be allowed to assessee after excluding expenditure attributable to earning of eligible income- Punjab State Co-operative Milk Producer’s Federation Ltd. VS. Commissioner of Income-tax-II- [2011] 12 com471 (PUNJ. &       HAR.) / [2011] 201 TAXMAN 138 (PUNJ. & HAR.) (MAG.) / [2011] 245 CTR 432 (PUNJ. & HAR.) / [2011] 336 ITR 495 (PUNJ. & HAR.)
• Assessee-society was not entitled to deduction under Section 80P(2)(d) in respect of interest received on advances provided to its member co-operative societies- Punjab State Co-operative Milk Producers Federation Ltd. VS. Commissioner of Income-tax.- [2012] 20 com834 (PUNJ. &  HAR.) / [2011] 336 ITR 501 (PUNJ. & HAR.)
• Unabsorbed losses of earlier years are to be set off before allowing deduction under Section 80P- Shahbad Co-operative Sugar Mills Ltd. VS. Deputy Commissioner of Income-tax. [2012] 20 com789 (PUNJ. & HAR.) / [2011] 336 ITR 222 (PUNJ. & HAR.)
• Assessee-society claimed deduction of income from marketing produce of farmers without showing that said produce was grown by members-farmers. The court held that there was an amendment to Section 80P(2)(a)(iii) vide Income-tax (2nd Amendment) Act, 1998 which operates from 1-4-1968 in terms of which word ‘of’ has been substituted by ‘grown by’. Thus, deduction in respect of income from marketing of agricultural produce ‘of members’ was no longer available to assessee unless produce was grown by members of society -[2011] 196 TAXMAN 401 (PUNJ. & HAR.) / [2010] 8 com131 (PUNJ. & HAR.) Punjab State Co-operative Supply & Marketing Federation Ltd. VS. Union of India.
• Concept of mutuality why not applicable : 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. [Sri Laxminarayana Swamy Co-Operative Society Ltd. Income-tax Officer [2010] 4 ITR(TRIB.) 27 (BANG.)][ Totgar’s Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) ; 229 CTR 209].

3.Inputs on Important Factual areas

During the course of scrutiny, the assessing officer should carefully examine the factual aspects first and on the basis of those facts the decision should be taken. Unless, there is a direct judgment of the jurisdictional High Court or the Hon’ble Supreme Court and the department has accepted the same the A.O. should take the decision without getting influenced by the judicial pronouncement. The following important points should be examined during the course of scrutiny.

1. Whether the assessee which has claimed deduction under Section 80P is a co-operative society or not as per the definition given in the act (section 2(19)). The society should be registered under the Co-operative Society Act, 1912 or with some other agency in the state.

2. Whether the deduction has been claimed in the return of income filed or not? This is applicable from A.Y.2003-04 onwards.

3. Examine the memorandum of association, the articles of association, the Income-tax Returns filed with the Department, the status of the business indicated in such returns.

4. Examine the byelaws and other documents explaining the rules and regulations of the society so as to clearly understand the purpose and the nature of business done by it.

5. Examine the list of the members of the society and verify whether the members have been made as per the byelaws of the society or not.

6. Certain deductions in clause-2(a)(i), 2(a)(ii), 2(a)(iii), 2(a) (iv) and 2(a)(v) are available only on income arising out of the transactions with the members. Whereas clause-2(a)(vi) and 2(a)(vii), there is no such restriction of income being generated amongst the members. However, there are restrictions in clause-2(a)(vi) & (vii) on voting rights given to the members. Therefore, the AO has to carefully examine these facts.

7. What business activity being done by the society? Whether the business activity is in accordance or authorized by the byelaws or not?

8. If the assessee is a co-operative bank, it is not entitled for deduction under Section 80P(a)(i) from A.Y.2007- 08 onwards.

9. Note whether there is any income other than the authorized activity or income other than the activity amongst the members or the activity which is not covered by the provisions of Section 80P. In case there is some other activity only the proportionate deduction has to be allowed.

10. Actual conduct of business activity should be examined by calling various records so as to verify whether it is actually being done in the manner indicated in the byelaws or the activities have been camouflaged to look as the genuine activity.

4. Drafting of assessment orders

Following points should be taken care of while framing the assessment order

1. The most important point is marshelling of facts correctly and clearly. The facts on the basis of which the decision is to be taken should clearly come out from the order. The reader should be able to understand the facts without much difficulty.

2. The clauses or items of the byelaws which are being relied while disallowing particular claim should be clearly mentioned. As a matter of practice, the relevant clause should be reproduced so that there is no confusion at the appellate stage.

3. Any other fact which is being relied while disallowing the claim of the assessee should also be clearly brought out and details should be provided. Needless to say if the A.O. has collected any fact which has not been confronted to the assessee, the same should be brought to notice of the assessee and after giving due opportunity and sufficient time to the assessee, the decision should be taken. The fact that proper opportunity has been given should be clearly mentioned in the order by giving the relevant facts such as date of show cause notice, etc.

4. It has been observed that the AOs rely on judicial pronouncements or the case laws without mentioning the correct facts and linking the facts with the judgments. It is advised that the help of the judicial pronouncement should be taken to understand the issue and taking the rational decision. While drafting the order, an attempt should be made, as far as possible, to rely on facts. Unnecessary reliance on the case laws should be avoided at the level of the Assessing Officer.

5. At the cost of repetition it would be prudent to mention and remind the A.O. to clearly mention the basic facts such as date of filing of return, status, nature of business, conformity with the byelaws of the society, date of issue of notice under Section 143(2), etc. in the assessment order.

6. Deduction under Section 80P in respect of business income of a co-operative shall be available with reference to income after claiming deduction under Sections 80HHB, 80HHC, 80HHD and 80-IA.

—————–

Author-Shelley Jindal, CIT (ITAT)-I, Ahmedabad

(Republished With Amendments)