Section 80P(4): To allow deduction AO can enquire into activities of assessee

The Mavilayi Service Co-operative Bank Ltd Vs CIT (Kerala High Court)

In view of the law laid down by the Apex Court in Citizen Co-operative Society v. Assistant Commissioner of Income Tax: AIR 2017 SC 5147, it cannot be contended that, while considering the claim made by an assessee society for deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof, the Assessing Officer has to extend the benefits available, merely looking at the class of the society as per the certificate of registration issued under the Central or State Co -operative Societies Act and the Rules made thereunder. On such a claim for deduction under Section 80P of the IT Act, the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub-section (4) of Section 80P”.

 Moreover, the law laid down by the Division Bench in Chirakkal is not good law, since, in view of the law laid down by the Apex Court in Citizen Co-operative Society, on a claim for deduction under Section 80P of the Income Tax Act, by reason of sub-section (4) thereof, the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub-section (4) of Section 80P of the IT Act.

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

This batch of Income Tax Appeals are listed before the Full Bench, after obtaining orders from the Hontble Acting Chief Justice, based on reference order dated 09.07.2018 of the Division Bench. One of the substantial questions of law raised in these appeals is as to whether the respective assessees are eligible for exemption under Section BOP of the Income Tax Act, 1961, after the introduction of sub-section (4) thereof.

2. Before the Division Bench, the assessees contended that the 155110 is covered by the decision of a Division Bench of this Court in Chirakkal Service Co-operative Bank Ltd. v. Commissioner of Income Tax {(2016) 384 ITR 490 (Ker)]. On the other hand, the Revenue contended that the aforesaid decision was rendered without noticing the decision of yet another Division Bench in Perinthalmanna Service Co-operative Bank Ltd. v. Income Tax Officer and another [(2014) 363 ITR 268 (Ker)], A reading .of the order of reference would show that the learned Senior Counsel/learned counsel for the ‘sessees raised certain grounds to dissuade the Division Bench from referring the issue to a Larger Bench. After considering those contentions and going through the decisions in Perinthalmanna Service Co- operative Bank [363 ITR 268] and Chirakkal Service Co-operative Bank [384 ITR 490], the Division Bench referred the matter to be placed before the Larger Bench, relying on the judgment of the Apex Court in Assistant Commissioner of Income Tax v. Victory Aqua Farm Ltd [(2015) 280 CTR 32 (SC)]. The Division Bench noticed that there is divergence of opinion expressed by the two Division Benches in Perinthalmanna [363 ITR 268] and Chirakkal [384 ITR 490]. In Perinthalmanna the action of the Assessing Officer in having extended the benefit of deduction under Section BOP of the Income Tax Act, by reasons of sub-section (4) thereof, by merely looking at the registration certificate under the Kerala Co-operative Societies Act, 1969 and the nomenclature given by the Department of Co-operative Societies was the subject of suo motu revision and the revisional order was approved by the Division Bench and it was also held that the Assessing Officer has to complete assessment taking clue from the observations made by the Revisional Authority, which will provide an insight to the nature of enquiry and ascertainment of the factual situation. In Chirakkal, the Division Bench did not notice the earlier judgment in Perinthalmanna. After referring to the provisions under the Kerala Co-operatiVe Societies Act and the Banking Regulation Act, 1949 the Division Bench held that the certificate of registration issued by the Department categorising the assessee as Primary Agricultural Credit Society could be relied on solely to grant deduction under Section 80P of the Income Tax Act.

3. Brief facts of the respective Income Tax Appeals, necessary for answering the reference, are as follows;

3.1. ITA No.97 of 2016:- The appellant, which is a Primary Agricultural Credit Society (for brevity ‘PACS’) registered under the Kerala Co-operative Societies Act, 1959 (for brevity ‘the KCS Act’) and the Rules made there under, i.e., the Kerala Co-operative Societies Rules, 1969 (for brevity ‘the KCS Rules’) is an assessee on the rolls of the Income Tax Officer, Ward-1, Kannur. The appellant has filed this appeal under Section 260A of the Income Tax Act, 1961 (for brevity ‘the IT Act’) challenging Annexure—C order dated 31.01.2013 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.255/Coch/2012 for the Assessment Year 2009-2010, arising out of Annexure-A assessment order dated 19.12.2011 of the Income Tax Officer, Ward-1, Kannur and Annexure-B appellate order dated 21.08.2012 of the Commissioner of Income Tax (Appeals)-II, Kozhikode.

3.2. ITA No.135 of 2016:- The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-1, Kannur. The appellant has filed this appeal ‘Under Section 260A of the IT Act challenging Annexure—D order dated 22.04.2013 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.340/Coch/2012, for the Assessment Year 2009-2010, arising out of Annexure-B assessment order dated 15.12.2011 of the Income Tax Officer, Ward-1, Kaiinur and Annexure-C appellate order dated 21.09.2012 of the Commissioner of Income Tax (Appeals)-II, Kozhikode,

3.3. ITA No.3 of 2017:- The respondent, which Is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-3, Thiruvalla. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 19.07.2016 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.191/Coch/2016, for the Assessment Year 2010-2011, arising out of Annexure-A assessment order dated 26.03.2013 of the Income Tax Officer, Ward-3, Thiruvalla and Annexure-B appellate order dated 10.02.2016 of the Commissioner of Income Tax (Appeals), Kottayam.

3.4. ITA No.11 of 2017:- The respondent, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-5, Kottayam. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 17.11.2016 of the Income Tax Appellate Tribunal, Cochin Bench In ITA No.358/Coch/2016, for the Assessment Year 2012-2013, arising out of Annexure-A assessment order dated 13.03.2015 of the Income Tax Officer, Ward-5, Kottayam and Annexure-B appellate order dated 06.06.2016 of the Commissioner of Income Tax (Appeals), Kottayam.

3.5. ITA No.12 of 2017:- The respondent, which is a PACS’is an assessee on the rolls of the Income Tax Officer, Ward-5, Kottayam. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 31.10,2016 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.³⁰⁰/Coch/2016, for the Assessment Year 2012-13, arising out of Annexure-A assessment order dated 19,03.2015 of the Income Tax Officer, Ward-5, Kottayam and Annexure-B appellate order dated 20.01.2016 of the Commissioner of Income Tax (Appeals), Kottayam.

3.6. ITA No.22 of 2017:- The respondent, which is a PACS Is an assessee on the rolls of the Income Tax Officer, Ward-5, Kottayam. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 31.10,2016 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.106/Coch/2016, for the Assessment Year 2012-13, arising out of Annexure-A assessment order dated 13,03.2015 of the Income Tax Officer, Ward-5, Kottayam and Annexure-B appellate order dated 29.01.2016 of the Commissioner of Income Tax (Appeals), Kottayam.

3,7. ITA No.25 of 2017:- The respondent, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-5, Alappuzha. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 18.11.2016 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.360/Coch/2016, for the Assessment Year 2012-13, arising out of Annexure-A assessment order dated 27.03.2015 of the Income Tax Officer, Ward-5_{, Alappuzha and} Annexure-B appellate order dated 02.06.2016 of the Commissioner of Income Tax (Appeals), Kottayam.

3.8. ITA No.26 of 2017:- The respondent, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-5, Alappuzha. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 18.11.2016 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.361/Coch/2016, for the Assessment Year 2012-13, arising out of Annexure-A assessment order dated 27.03.2015 of the Income Tax Officer, Ward-5, Alappuzha and Annexure-B appellate order dated 02.06.2016 of the Commissioner of Income Tax (Appeals), Kottayam.

3.9. ITA No.32 of 2017:- The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-2, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 12.02.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.517/Coch/2014, for the Assessment Year 2010-11; arising out of AnneXure-A assessment order dated 26.03.2013 of the Income Tax Officer, Ward-2, Kannur and Annexure-B appellate order dated 30.09.2014 of the Commissioner of Income Tax (Appeals)-II, Kozhikode.

3.10. ITA No.33 of 2017:- The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-2, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 12.02.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.⁵¹⁶/Coch/2014, for the Assessment Year 2008-09, arising out of Annexure-A assessment order dated 28.03.2013 of the Income Tax Officer, Ward-2, Kannur and Annexure-B appellate order dated 30.09.2014 of the Commissioner of Income Tax (Appeals)-II, Kozhikode.

3.11. ITA No.55 of 2017:- The respondent, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-3, Kottayam. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 22.03.2017 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.58/Coch/2015, for the Assessment Year 2009-10, arising out of Annexure-A assessment order dated 30.12.2011 of the Income Tax Officer, Ward-3, Kottayam and Annexure-B appellate order dated 31.10.2014 of the Commissioner of Income Tax (Appeals)-V, Kochi,

3.12. ITA No.68 of 2017:- The respondent, which is a Multi-State Co-operative Society registered under Section 7 of the Multi-State operative Societies Act, 2002 is an assessee on the rolls of the Income Tax Officer, Ward-4, Kottayam. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 26.05.2017 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.340/Coch/2016, for the Assessment Year 2012-13, arising out of Annexure-A assessment order dated 31.03.2015 of the Income Tax Officer, Ward-4, Kottayam .and Annexure-B appellate order dated 31,05.2016 of the Commissioner of Income Tax (Appeals), Kottayam. 3.13. ITA No.69 of 2017:- The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-1, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02.11.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.339/Coch/2015, for the Assessment Year 2010-11, arising out of Annexure-A assessment order dated 04.03.2013 of the Income Tax Officer, Ward-1, Kannur and Annexure-B appellate order dated 20.03.2015 of the Commissioner of Income Tax (Appeals), Kozhikode.

3.14. ITA No.72 of 2017:– The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-4, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 06.03.2015 of^: the Income Tax Appellate Tribunal, Cochin Bench in ITA No.330/Coch/2012, for the Assessment Year 2009-10, arising out of Annexure-A assessment order dated 21.12.2011 of the Income Tax Officer,. Ward-4, Kannur and Annexure-B appellate order dated 21.09.2012 of the Commissioner of Income Tax (Appeals)-II, Kozhikode.

3.15. ITA No.73 of 2017:-The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-4, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02.11.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.⁵61/Coch/2014, for the Assessment Year 2007-08, arising out of Annexure-A assessment order dated 26.03,2013 of the Income Tax Officer, Ward-4, Kannur and Annexure-B appellate order dated 30.09.2014 of the Commissioner of Income Tax (Appeals), Kozhikode.

3.16, ITA No.74 of 2017:-The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-1, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02,11.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.179/Coch/2015, for the Assessment Year 2008-09, arising out of Annexure-A assessment order dated 07,12,2010 of the Income Tax Officer, Ward-1, Kannur and Annexure-B appellate order dated 03.12.2014 of the Commissioner of Income Tax (Appeals), Kozhikode.

3.17. ITA No.75 of 2017:- The appellant, which is a P,”,c’S Is an assessee on the rolls of the Income Tax .Officer, Ward-4, Kannur, The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02.11.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No.553/Coch/2014, for the Assessment Year 2010-11, arising out of Annexure-A assessment order dated 28.03.2018 of the Income Tax Officer, Ward-4, Kannur and Annexure-B appellate order dated 30,09,2014 of the Commissioner of Income Tax (Appeals), Kozhikode.

3.18. ITA No.76 of 2017:-The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-4, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02.11.2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No,562/Coch/2014, for the Assessment Year 2008-09, arising out of Annexure-A assessment order dated 28.03.2013 of the Income Tax Officer, Ward-4, Kannur and Annexure-B appellate order dated 30.092014 of the Commissioner of Income Tax (Appeals), Kozhikode.

4. The learned Senior for the Counsel/learned counsel assessees would contend that the authorities under the IT Act are neither competent nor postess jurisdiction to resolve the dispute as to whether the assessee is a Primary Agricultural Credit Society or a operatiive Bank, within the meaning assigned to it under the provisions of the Banking Regulation Act, .1949 (for brevity, ‘the BR. Acts), in view of the Explanation provided after clause (ccvi) of Section 5 of the said Act, read with Section 56. The registration certificate of the assessees issued by the Registrar of Co-operative Societies under sub-section (1) of Section 8 of the KCS Act is a conclusive evidence as to the registration of the Society as a Primary Agricultural Credit Society. In such circumstances tnces, if the assessee is having a valid registration under Section 8 of the KCS Act, the authorities under the IT Act have to extend the benefit of deduction provided under Section 80P of the IT Act, by reason of s!ib-section (4) thereof, to such societies. The learned counsel for the assessee in ITA No.68 of 2017; which is a Multi-State Co- operative Society registered under Section 7 of the Multi-State Co- operative Societies Act, 2002 would also raise similar contentions.

For per contra, the learned Senior Counsel/Standing Counsel for Revenue would  contend that deduction under Section 80P of the IT Act, after the duction of sub-section (4) thereof, cannot be allowed to an assess marely on the strength of certificate of registration under Section of the KCS Act and the Assessing Officer has ample power during the course of assessment to examine the eligibility of the assess for such deduction, for each assessment year.

Since , other substantial questions of law have also been raised in the respective Income Tax Appeals, we deem it a appropriate only to answer the question referred to the Full Bench, with reference to the claim for deduction under of Section 80P of the IT Act, by reason of sub-section (4) thereof. Though the learned Senior Counsel/the learned counsel for the assessees and also the learned Standing Counsel for the Revenue raised various contentions on merits, as to the claim made by the respective assessees for deduction under Section 80P of the IT Act, by reason of sub-section (4) thereof, we do not propose to consider those issues In this order.

7. Before proceeding to answer the question referred to the Full Bench, we deem it apposite to refer the relevant provisions under the KCS Act, the KCS Rules, the IT Act and the BR Act.

8. Clause (f) of Section 2 of the KCS Act define ‘Co-operative Society’ or ‘Society’ to mean a Co-operative Society registered or deemed to be registered under the said Act. Clause (1) of Section 2 define ‘member’ to mean a person joining in the application for registration of a Co-operative Society or person admitted to membership after such registration in accordance with the Act, the Rules and the Bye-laws and includes a nominal or associate member. Clause (m) of Section 2 define ‘nominal or associate member’ to mean a member, who possesses only such privileges and right of a member who is subject only to such liabilities of a member as may be specified in the bye-laws.

8.1. Clause (oa) of Section 2 of the KCS Act inserted by the Kerala Co-operative Societies (Second Amendment) Act, 1997, with effect from 29.12.1997, define Primary Agricultural Credit Society’ to mean a Service Co-operative Society, a Service Co^–operative Bank, a Farmers Service Co-operative Bank and a Rural Bank, the principal obiect of which is to undertake agricultural credit activities Clause (oa) was substituted by the Kerala Co-operative Societies (Amendment) Act, 1999, with effect from 01,01,2000, which define ‘Primary Agricultural Credit Society’ to mean a Service Co-operative Society, a Service Co-operative Bank, a Farmers Service Co-operative Bank and a Rural Bank, the principal object of which is to undertake agricultural credit activities and having its area of operation confined to a Village Panchayat or a  Municipality. Clause (oa) was substituted by the Kerala Co-operative Societies (Amendment) Act, 2010, with effect from 28,04.2010, which define ‘Primary Agricultural Credit Society’ to mean a Service Co- operative Society, Service Co-operative Bank, a Farmers’ Service Co-operative Bank and a Rural Bank, the principal obiect of which is to  undertake agricultural credit activities and to provide loans and advances  for agricultural purposes, the rate of interest on such loans and advances shall be fixed by the Registrar and having its area of operation confine to a village Panchavat or Municipality. The first proviso to clause (oa) provides that, the restriction regarding the area of operation shall not apply to societies or banks in existenceatthe commencement of the Kerala Co-operative Societies (Amendment) Act, 1999. The second proviso to clause oa rovides further that if the  above principal object is not fulfilled, such Societies shall lose al characteris cs of a P a Agricultural Credit  Society as specified in the Act- Rules  and Bye-laws,  except the existing staff strength. Clause (oa) of Section 2 of the KCS Act was re-numbered as clause (oaa) by the Kerala Co-operative (Amendment) Act, 2013, with effect from 14,02.2013,

8.2. Chapter II of the KCS Act deals with registration of Co-operative Societies. As per Section 4, subject to the provisions of the Act, a Co-operative Society which has its object the promotion of the  economic interest of its members or the interests of the public in accordance with co-operative  principles, or a society established with the object of facilitatino the operations of such a society, may be registered under the Act. Section 6 deals with application for registration of Co- operative Societies. As per sub-section (1) of Section 6, an application for the registration of a Co-operative Society shall be made to the Registrar in such form. as may be prescribed and the applicant shall furnish to him such information about the society as he may require. As per sub-section (2) of Section (6), every such application shall conform to the requirements enumerated in clauses (a) to (c) of sub-section (2). Clause (a) to sub-section (2) provides that the application shall be accompanied by three copies of the proposed bye –laws of the society. Section 7 of the Act deals with registration. As per sub^–section (1) of Section 7, if the Registrar is satisfied (a) that the application complies with the provisions of Act and the Rules; (b) that the objects of the proposed society are in accordance with Section 4; (c) that the area of operation of the proposed society and the area of operation of another society of similar type do not overlap; (d) that the proposed bye-laws  are not contrary to the provisions of the Act and the Rules; and (e) that the proposed society complies with the requirements of sound business; he may register the society and its bye-laws within a period of 90 days from the date of receipt of the application.

8.3. Section 8 of the KCS Act deals with Registration Certificate. As per sub-section (1) of Section 8, where a Co-operative Society is registered under the Act, the Registrar shall issue a certificate of registration signed and sealed by him, which shall be conclusive evidence that the said society is duly registered under the Act. As per Section 9 of the Act, the registration of a society shall render it a body corporate by the name under which it is registered, having perpetual succession and a common seal and with the power to hold the property, enter into contracts, institute and defend suits and other legal proceedings and to c16 all’ thing necessary for the purposes for which it was constituted. The proviso to Section 9 provides that, the Government and the Registrar shall have power to regulate the working of a society for the economic and social betterment of its members and the general public.

8.4. Section 12 of the KCS Act deals with amendment of bye-laws of a society. As per sub-section (1) of Section 12, no amendment of any bye-laws of a society shall be valid unless such amendment has been registered under the Act. As per sub-section (2) of Section 12, the provisions of Section 7 specifying the conditions to be satisfied before registration of bye-laws of a society by the Registrar shall, mutatis mutandis, apply also to the registration of amendments to bye-laws. As per Section 13, an amendment of the bye-laws of a society shall, unless it is expressed to come into operation on a particular day, come into force on the day on which it is registered.

8.5. Section 15 of the KCS Act deals with cancellation of registration certificates of societies in certain cases, Sub-section (1) of Section 15 deals with cases where the whole of the assets and liabilities of a society are transferred to another society in accordance with the provisions of Section 14; sub-section (2) deals with cases where two or more societies are amalgamated into a new society in accordance with the provisions of Section 14; and sub-section (2) deals with cases where a society is divided into two or more societies in accordance with the provisions of Section 14

9. Chapter II of the KCS Rules deals with registration of Co operative Societies and their bye-laws. Rule 3 deals with application for registration. As per sub rule (1) of Rule 3, every application for registration of a Society under sub-section (1) of Section 6 shall be made in duplicate In Form No.1, accompanied by the documents enumerated in clauses (a) to (e) of sub-rule (1.). Rule 4 deals with registration, As per clause (i) of Rule 4, on receipt of an application under Rule 3, the Registrar shall enter particulars of the application in the register of application to be maintained in Form 10,2, give a serial number to the application, and issue a receipt in acknowledgement thereof. As per clause (ii), the Registrar shall then examine the application and the bye-laws in order to satisfy that the conditions specified in clause (a) to (e) of section 7 and rule 3 are satisfied. As per clause (iii), the Registrar may call for such further information or make such enquiry as he may deem necessary or direct the Chief Promoter to make such modifications in the proposed bye-laws as he may deem fit. The Chief Promoter shall thereupon furnish such information or make such modifications in the proposed bye-laws as the Registrar may direct with the consent of the applicants within a period to be specified by him. As per clause (iv), if the Registrar is satisfied that the proposed Society has complied with the above requirement he may registrar the society and its bye -laws and issue to the society free of cost, a certificate’ of registration^. in Form No.3 ^.signed by himself and bearing his official seal along with a certified copy of the bye-laws as approved and registered by him. The certificate of registration shall contain the registration ‘number of the society and the date of its registration. The Registrar may assign for each District and each class or such class of societies, a code symbol, for giving registration numbers to the societies, When a has been registered, the bye and re the Registrar shall be the registered bye-laws of the society for the time being in force. As per clause (v), if the Registrar is satisfied that the proposed society  will not fulfil the economic interest of the public in accordance with the  Co-operative Principles mentioned in Schedule II of the Act or the registration of the  society will make an adverse effect on the development of co-operative movement or he is satisfied that the objects of the proposed society is against the preamble of the Act, the Registrar shall pass an order of refusal together with the reasons thereof and communicate it by registered post or speed post or such courier services, approved by the High Court of Kerala/Government of Kerala to the Chief Promoter within 15 days of such order,

9.1. Rule 5 of the KCS Rules deals with subject matter of bye-laws. As per sub-rule (1) of Rule 5, the bye-laws of a society shall not be  LontramtiLthgpfalggaapfthgAgLand the fl e and may deal with all or^.any ‘of the matters spetiffed in clauses (a) to (ab) of sub-rule (I) and with such other matters incidental to the organisation of the society and the management of its business, as may be deemed necessary. Sub-rule (2) of Rule 5 deals with credit societies; sub-rule (3) deals with non-credit societies; and sub-rule (4) deals with composite society. Rule 9 of the KCS Rules deals with procedure regarding amendment of bye-laws and Rule 13 deals with amalgamation, transfer of assets and liabilities or division of societies.

9.2. Rule 15 of the KCS Rules deals with classification of societies according to types. As per Rule 15, after the registration of a society the Registrar shall classify the society into one or other of the types enumerated in Rule 15, according to the principal obiect provided in the  bye-laws. As per Note (i) to Rule 15, if any question arises as to the  classification of a society, it shall be referred to the Registrar for decision  and his decision thereon shall be final. As per Note (ii), if the Register alters the classification of a society from one class of society to another or from the sub class thereof to another, he shall issue to the society and the Financing Bank a copy of his order and the society shall fall under that category with effect from the date of that order,

10. Chapter VIA of the IT Act deals with deductions to be made in computing total income. Section 80P of the IT Act deals with deduction in respect of income of Co-operative Societies. As per sub-section (1) of Section 80P, where, in the case of an assessee being a Co-operative Society, the gross total income includes any income referred to in 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. As per sub-section (2) of Section 80P, the sums referred to in sub-section (1) shall be those enumerated in clauses (a) to (0 of sub-section (2).

10.1. As per sub-section (4) of Section 80P of the IT Act, 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. As per Explanation to sub-section (4) of Section 80P, for the purpose of this sub-section,  (a) ‘Cp-operative Bank’ and ‘Primary Agricultural Credit Society’ shall have the meanings respectively assigned to them in part V of the Banking Regulation Act, 1949; (b) ‘Primary Co-operative Agricultural and Rurral 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.

11, As per Section 3 of the BR Act, nothing in the said Act shall I apply to-(a) a Primary Agricultural Credit Society; (b) a Co-operative Land Mortgage Bank; and (c) any other Co-operative Society, except in the manner .and to the extent specified in Part V. Clause (b) of Section 5 define ‘banking’  to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque draft, and order or otherwise. Clause (c) of section 5 define ‘banking’ company to mean any company, which transacts the business of banking in India.

11.1 Part V of the BR Act, deals with application of the said Act to Co-operative Banks. As per Section 56, the provision of the BR Act, as in force for the time being, shall apply to, or in relation to, Co-operative Societies as they apply to, or in relation to banking to subject to the modifications enumerated in clause (a) to (zl) of Section 56, As per clause (a) of Section 56, throughout the BR Act, unless the context otherwise requires-(i) references to a ‘banking company’ or ‘the company’or ‘such company’ shall be construed as’ references to a Co­-operative Bank; and (ii) reference to ‘commencement of this Act’ shall be construed as reference to commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), As per clause (b) of Section 56, in Section 2, the words and figures ‘the Companies Act, 1956 (1 of 1956), and’ shall be omitted.

11,2, As per sub-clause (i) of clause (c) of Section 56 of the BR Act, clauses (cci) to (ccvii), as enumerated in sub-clause (i) of clause (c) shall be inserted in Section 5 of the BR Act, after clause (cc). As per clause (cci), ‘Co-operative Bank’ means a State Co-operative Bank, Central Co-Operative Bank and a Primary Co-operative Bank. As per clause (cciia), to-operative Society’ means a society registered or deemed to have been registered under any central Act, for the time being, in force, relating to Multi-State Co-operative Society or any other Central or State law relating to Co-operative Societies for the time being in force. As per clause (cclv), ‘Primary Agricultural credit Society means a Co-operative Society,- (1) the primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agriculture activities (including the marketing of crops}; and (2) the bye-laws of which do not permit admission of any other  C0-operative society as a member. As per the proviso to sub-clause (2) of clause (cciv), the said sub-clause shall not apply to the admission of a Co-operative Bank as a member by reason of such Co-operative Bank subscribing to the share capital of such Co-operative Society out of funds provided by the State Government for the purpose. Clause (ccv) define ‘Primary Co-operative Bank’ and clause (ccvi) define ‘Primary Credit Society’. As per Explanation to clauses (cciv), (ccv) and (ccvi), if any dispute arises as to the primary object or the principal object of any Co-operative, Society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by the Reserve Bank shall be final.

11.31 As per Clause (d) of Section 56, Section SA of the BR Act was substituted. As per Section SA,  as substituted by clause (d) of Section 56, the BR Act shall override the bye-laws, etc. As per sub-section (1) of Section SA of the BR Act, the provisions of the said Act shall have effect notwithstanding anything to the contrary contained in the bye-laws of a Co-operative Society , or in in any agreement executed by it, or in any resolution passed by it In general meeting, or by its Board of Director or other body entrusted with the management of its affairs, whether the same be registered, executed or passed, as the case may be, before or after the commencement of the Banking laws (Application to Co-operative Societies) Act, 1965 (23 of 1965). As per sub-section (2) of Section SA of the BR Act, any provision contained in the bye-laws, agreement or resolution aforesaid  shall, to the extent to which it is repugnant to the provisions of this Act, become or be Void, as the case may be.

11.4. Similarly, as per clause (f) of Section 56, Section 7 of the BR Act was substituted, Section 7, as substituted by clause (f) of Section 56, deals with use of words ‘bank” ‘banker’ or ‘banking’. As per sub-section (1) of Section 7 of the BR Act, no Co-operative Society other than a Co­-operative Bank shall use as part of its name or in connection with. its business any of the words ‘bank’, ‘banker’, or” ‘banking’, and no Co­-operative Society shall carry on the business of banking in India unless it uses as part of its name at least one of such words, As per sub-section (2) of Section 7, nothing in this section shall apply’ to-(a) a Primary Credit Society, or (b) a Co-operative Society formed for the protection of the mutual interest of Co-operative Banks or Co-operative lands Mortgage Banks or (c) .any Co-operative Society, not being a Primary Credit Society formed by the employees of- (i) a banking company or the state Bank of India or a corresponding new bank or a subsidiary bank of such banking company, State Bank of India or a corresponding new bank; or (ii) a Co-operative Bank or a Primary Credit Society or a Co-operative Land Mortgage Bank,in so far as the words ‘bank’ ‘banker’, or ‘banking’ appear as part of  the name of the employer bank or as the Case may be of the bank, whose subsidiary the employer bank is.

11,5, Section 22 of the BR Act deals with licensing of banking companies. As per sub-clause (i) of clause (o) of Section 56, sub-section (1) and (2) of Section 22 of the BR Act were substituted. As per clause (b) of sub-section (1) of Section 22, as substituted by sub-clause (1) of clause (o) of Section 56, save as hereinafter provided, no Co-operative  Society shall carry on banking business in India unless it is a Co-operative Bank and holds a licence issued in that behalf by the Reserve  Bank, subject to such conditions, if any, as the Reserve Bank may deem fit to impose. The first proviso to sub-section (1) provides that, nothing in this sub-section shall apply to a Co-operative Society, not being a Primary Credit Society or a Co-operative Bank carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), for a perid of one year from such commencement.The second provision to sub-section (1) provides further that nothing in this sub-section shall apply to a Primary Credit Society carrying on banking business on or before the commencement of the Banking Laws (Amendment) Act, 2012, for a period of one year or for such further period not exceeding three years, as the Reserve Bank may, after recording the reasons in writing for so doing,extend.

11.6. As per sub-section (2) of Section 22 of the BR Act, as substituted by sub-clause (i) of clause (0) of Section 56{ every Co­-operative Society carrying on business as Co-operative Bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), shall before the expiry of three months from such commencement,  every Co-operative Bank which comes into existence as a result of the division of any other Co-operative Society carrying on business as a Co-operative Bank or the amalgamation of two or more Co-operative Societies carrying on banking business shall, before the expiry of three months from its so coming into existence, every Primary Credit Society which had become a Primary Co­-operative Bank on or before the commencement of the Banking Laws (Amendment)’ Act,2012 shall’ before the expiry of three months from the date on which it had become a Primary Co-operative Bank and every Co-operative Society shall before commencin banking business in India apply in writing to the Reserve Bank for a licence under this Section.

11.7. As per the proviso, nothing in clause (b) of sub-section (1) of Section 22 of section 22 of the BR Act Shall be deemed to prohibit,- (i) a Co-operative Society carrying on business as a Co-operative Bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965); or (ii) a Co-operative Bank which has come into existence as a result of the division of any other Co-operative Societies carrying on business as a Co^–operative Bank, or the amalgamation of two or more Co-operative Societies carrying on banking business at the commencement of the banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), or at any time there after from carrying on banking business until it is granted a licence in pursuance of this Section or Is, by a notice in writing notified by the Reserve Bank that the licence cannot be granted to it.

12. A reading of the provisions under the KCS Act and the Rules made there under would make it explicitly clear that, a registration certificate issued under sub-section (1) of Section 8 of the KCS Act signed by the Registrar of Co-operative Societies shall be conclusive evidence that such a Society is duly registered under the provisions of that Act. As per Section 9, the registration of a Society shall render it a body corporate by the name under which it is registered, having perpetual succession, etc. However, a reading of Sections 7 and 8 of the KCS Act would show that, at the time of Registration of a society, the Registrar of Co-operative Societies need only confirm that the objects of the proposed society in the proposed bye-laws accompanying the application for registration are in accordance with section 4 of the Act.

As per clause (ii) of Rule 3 of the KCS Rules, on receipt of an application for registration, the Registrar has to examine the application and the bye-laws, In order to satisfy that the conditions specified in clauses (8) to (e) of Section 7 of the KCS Act and Rule 3 of the KCS Rules are satisfied.

13. As per Rule 15 of the KCS Rules, after the registration of a society, the Registrar shall classify the society into one or other of the types enumerated in Rule 15, according to the principal object provided in the bye-laws. As per Note (i) to Rule 15, if any question arises as to the classification pf a society, It shall be referred to the Registrar for decision and his decision thereon shall be final. As per Not (ii), if the Registrar alters the classification of a society from one class to another or from one sub-class to another, he shall issue to the society and the Financing Bank a copy of that order and the society shall fall under that category with effect from the date of that order. When the classification of a Society, as per the provisions of the KCS Act and the Rules made there under, at the time of registration, are solely on the basis of the principal object provided in the bye-laws, it cannot be contended that the Certificate of registration of a society as PACS is a conclusive evidence that the primary object or the principal business undertaken by that society is providing financial accommodation to its members for agricultural purpose or for purpose connected with agriculture activities, and as such, that society is entitled for deduction under Section 80P of the IT Act, by reason sub^–section (4) thereof, merely on the strength of the certificate registration issued under sub- section (1) of section 8 of the KCS Act.

14. As per clause (oa) of Section 2 of the KCS Act, which was later re-numbered as clause (oaa), the principal object of a PACS should be to undertake agricultural credit activities and provide loans and advances for agricultural purposes, at the rate of interest on such loans and advances fixed by the Registrar, and a PACS shall have its area of operation confined to a Village, Panchayat or Municipality, As per the second proviso to the said clause, inserted with effect from 28.04.2010, if the aforesaid principal object is not fulfilled, such societies shall lose all  characteristics of a PACS, as specified in the KCS Act, KCS Rules and the Bye-laws, except the existing staff strength. Therefore, in order to claim the benefit of deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof, the assessee society should be a PACS falling within the definition clause, i.e., clause (oa) of Section 2 of the KCS Act, [which was re^–numbered as clause (oaa) by the Kerala operative Societies (Amendment) Act, 20133 read with clause (cciv) of Section 5 of BR Act inserted by sub-clause (¹) of clause (c) of Section 56. Once the principal Object as per the aforesaid clause is not fulfilled b a PACS for a particular financial ear, such a society will be disentitled from claiming the benefit of deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof. After 28.04.2010, in view of the second proviso to the said clause, such societies shall even loose all characteristics of a PACS, as specified in the KCS Act, KCS Rules and the Bye-laws, except the existing staff strength.

15. In Antony Pattukulangara v. E.N. Appukuttan Nair and Others [2012 (3) KHC 726], in the context of clause (oa) of Section 2 of the KCS Act [which was later renumbered as clause (oaa) by the Kerala Co-operative Societies (Amendment) Act, 2013 with effect from 14,02.2013], a Division Bench of this Court held that, going by the definition clause of ‘Primary Agricultural^,Credit Society’ in order to constitute the Society in that category, the principal activity should be to  undertake agricultural credit activities and provide loans and advances  for agricultural purposes.It is further stated in the second proviso to the said definition clause that if the society does not achieve its objective i,e,. to function like an Agricultural Credit Society it will Jose its identity by virtue of the operation of the said proviso. The Division Bench noticed that the society has taken deposits above Rs.22.22 crores and has made advances above Rs.20.4 crores to non-agricultural sector and advances for agricultural purposes was only insignificant amounts compared to the total lending by the Society. Therefore the society has inceased _{0 be} Prim ary Agricultural Credit Society. at least in the previous Year in which the election was notified, The Division Bench held that, going by the factual position stated as above, it was the duty of the Registrar to order alteration of classification of society in terms of powers conferred on him under Note (ii) of Rule 15 of the KCS Rules, which is not so far done, Probably the Registrar never bothered to find out the operations of the society to justify retention of the identity and that is why the society continues to retain the registration originally obtained, In any case what can be noticed from second proviso to clause (oa) of Section 2 of the KCS Act is that, as and when the society ceases to be a Primary  Agricultural Credit Society, it shall loose that identity Irrespective of whether the Registrar has made changes or not. Paragraphs 3 to 5 of the judgment read thus;

“3 There is no dispute that in this case the Society is one registered as a Primary Agricultural Credit Society in terms of Section 2(oa) of the Act. However, appellant’s case is that the activities of the  Society reflected in the accounts establish beyond doubt that the society has ceased to be a Primary Agricultural Credit Society and is in fact a Primary Credit Society defined under Section 2(ob) of the Act. Counsel relied on Annexure-2 produced in WA No.1023/2012 wherein Deposits and advances are described by the Society in the letter addressed to the Assistant Registrar of Co-operative Societies as follows:

4. It may be noted from the above figures that the society in this case has given very insignificant amounts towards agricultural loan under two categories amounting to only Rs.15.5 lakhs and odd whereas it’s other advances runs above 2004 crores. Most of the loans are funded through public deposits taken by the Society which is above Rs,22,22 crores as seen from the above figures declared by the Society to the Assistant Registrar of Co-operative Societies as on 31.03.2012. Going by the definition clause of Primary Agricultural Credit Society’ n order to constitute the Society in that category the principal activity should be to undertake agricultural credit· activities and provide loans and advances for agricultural purposes. It is further stated in the second proviso to the said definition clause that if the society does not achieve its objective i.e., to function like an Agricultural Credit Society it will loose it’s identity by virtue of the operation of the said proviso. From the operations of the society as evident from the above figures, nobody can dispute that the society can by no stretch of Imagination be treated as primary Agriculture Credit Society. On the other hand, it squarely answers the description of the ‘Primary Credit Society’ as defined under Section 2(ob) of the Act, the principal objective of such society being raising funds to be lent to it’s members. In this case the society has taken deposits above Rs.22.22 crores and has made advances above Rs. 20A. crores to non-agricultural sector and advance is for agricultural purposes is only insignificant amounts compared to the total lending by the Society. Therefore, as rightly contended by the appellent’s counsel, the Society in this case has ceased to be a Primary Agricultural Credit Society at least in the previous year in which the election was notified. There is no need for us to consider whether from the very beginning, the Society functioned in this fashion which could be possible because the society’s area of operation is not known for agriculture operation. In any case the undisputed fact is that after taking registration as Primary Agricultural Credit Society, the Society carries on business as a primary credit society. It may also be noticed from Annexure 6 produced in WA No.1023/2012 which is information furnished to the Appellant by the Public Information officer of the officer of the Assistant Registrar of Co-operative Societies under the Right to Information Act that most of the objectives of the Society covered by various clauses of the Memorandum of Association are not undertaken by the Society. In other words, the operations of the society in accepting massive deposits from members and public and lending the same to non -agriculture operation has made it a Primary Credit Society. probably the camouflage of Primary Credit Society as a ‘Primary Agricultural Credit Society’ is to get the benefit of agricultural credits from Government agencies, Debt waiver for borrowers and also to advance loans at lower rate of interest applicable to agriculture. Obviously the functioning of the Society is in a dubious manner by getting registration under one category and by functioning as a Society of a different category. None of the party respondent Including Society and also the Special Government Pleader could deny the factual position stated above in as much as the Society though registered as Primary Agricultural Credit Society has ceased to be so and it is in fact a Primary Credit Society.

5. Going by the factual position as stated above, it was the duty of the Registrar to order alteration of classification of society in terms of powers conferred on him under note (ii) of Rule 15 of the Rules which is not so far’done. Probably the Registrar of Societies never bothered to find out the operation of the Society to justify retention of the identity and that is why the Society continues to retain the registration originally obtained. In any case what we notice from second proviso to Section 2(oa) is that as and when the society ceases to be a primary Agricultural Credit Society it shall loose that identity irrespective of whether the Registrar has made changes or not. As noted by us above, the procedure to be followed is for the Registrar on information whether obtained by himself or through any other source about the operation of the Society disentitling it to continue to retain it’s registration In the category obtained by it should change it and issue fresh certificate of registration which is not done in this case.”

(underline Supplied)

17. In Thathamangalam Service Co-operative Bank Ltd. and others v. The Income Tax Offficer [judgement by one among us (PRR,J) dated 14.09.2012 in W.P.(C)No.14226 of 2012 and connected cases] this court held that Section 80P of the IT Act provides exemption only in respect of a Primary Agricultural Credit Society as mentioned in sub-section (4) and as such, the status of the society becomes more relevant, a.s defined under the .Banking Regulation Act. However, this may not have much significance to the case in hand, as pointed out in the statement filed by the respondents, that such objective has already been brought about by amending the Kerala Statute as well, incorporating the ‘second proviso’ to the definition of the term ‘Primary Agricultural Credit Society’, as given under Section 2(oa) of the KeraJa Co-operative Societies Act, as per Act 7 of 2010. True,  some of  the petitioners have. obtained a certificate as to the classification/ registration as Primary Agricultural Credit Societies. But, by virtue of the amendment to Section 2(00) of the Kerala Co-operative Societies Act, if the Society does not continue to fulfill the obligation, it will lose the colour and. characteristics of a primary Agriculture Credit Society, except for the purpose of staff strength. Thus it is very much obligatory for the petitioner societies, who claim the status and the benefits of Primary Agricultural Credit Societies, to substantiate that their main object of incorporation is being continued to be fulfilled as well. As such they have to obtain a certificate from the competent authority by producing the relevant facts and figures including the balance sheet, profit and loss accounts etc. that they satisfy the requirements of the ‘second proviso’ to Section. 2{oa) of the Act, to claim the status of Primary Agricultural Credit Societies so as to contend that they stand exempted by virtue of Section 194A(3)(viia)(a) of the IT Act and hence are not required to effect any TDS, As a natural consequence, they are not supposed to comply with the requirements of Section 200(3) of the IT Act as well, if they succeed. Paragraphs 15 to 17 of the judgment read thus;

“15. True, there is a reference to the Banking Regulation Act, 1949,  as given in sub-section (4) of Section BOP of the Income Tax Act. A Society claiming the benefit of exemption under Section 80P has necessarily to satisfy the requirements and specifications of a Primary Agricultural Credit Society as defined under the Banking Regulation Act. But coming to the instant cases and the impugned notices, the position is something else. The cause is not with regard to the claim for exemption, but in respect of all . eged necessity to have effected TDS under Section 194A, in respect of interest on the deposits and also as to the particular of deposits generating interests of more than Rs. 5000/- per year, Sections 194A and 200(3) do not make a reference to the term primary Agricultural Credit Society as defined under the Banking Regulation act; more so since section 194A is applicable to all the persons concerned including the individuals and Body Corporates which takes in a co-operative Society as well, by virtue of the definition of the term ‘person’ under Section 2(31). Section 80P provides exemption only in respect of a Primary Agricultural Credit Society as mentioned in sub-section (4). and as such, the status of the Society becomes more relevant. as defined under the Banking Regulation Act. However, this may not have much significance to the case in hand, as pointed out in the statement filed by the respondents, that such objective has already been brought about by amending the Kerala Statute as well, incorporating the ‘second proviso’ to the definition of the term Primary Agricultural Credit SOCiety, as given under Section 2.{oa) of the Kerala Go-operative SOCieties Act, as per Ad 7 of 2010.

16. True, some of the petitioners have obtained a certificate as to the classification/registration as Primary Agricultural Credit Socities. But, by virtue of the Slrnt;ndment to Section 2(oa) of the Kerala Co-operative Societies Act, if the Society does not continue to fulfill the obligation, it will lose the colour and characteristics of a Primary Agricultural Credit SOciety, except for the purpose of staff strength. Thus, it is very much obligatory for the petitioners Societies, who claim the status and the benefits of Primary Agricultural Credit Societies, to substantiate that their main object of .incorporation is’being continued to be fullfield  ‘as Well. As such, they have to obtain a certificate from the competent authority by producing the relevant facts and figures including the balance sheet, Profit and loss accounts etc. that the Satisfy the requirement of the ‘second revise’ to section 2 (oa) of the Act, to claim the status of Primary Agricultural Credit Socities so as 

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