Tax on Bank Interest of Co-Op Society, Club or Mutual Association

R.B.POPAT B.COM,F.C.S,F.C.A.

1. Interest earned from investment in Co-operative & other banks:

It is known fact that societies are earning interest income from investments such as F.D., etc. with co-operative & other banks. In the computation of total income, the assesses wrongly claim the said interest income as deduction u/s. 80P(2)(d) of the Income tax Act, 1961.

2. In this regard, the provisions with regard to allowing deduction in respect of interest income earned by a co-operative society are contained in section 80P(2)(d) of the Income tax Act, 1961, which read as under :

“in respect of any income by way of interest or dividends derived by the co­operative society from its investments with any other co-operative society, the whole of such income”

As quoted above, the provisions of I.T. Act does not extend the deduction further i.e. interest received from the investments made with co-operative banks.

Therefore, the assessee must be asked to show cause as to why the interest income received of Rs………… from co-operative bank should not be disallowed and added tack to the total income of the assessee in view of the provision of Section 80P(2)(d) of I.T. Act, 1961. The assessee must be given an opportunity being heard in this regard on ……………….

3. In response to the same, the assessee’s representative will attended and filed submission dated ………….. and offer theri explanation. The explanation offered by the assessee has to be been carefully perused and considered but will not be found tenable as discussed below.

3.1 The provisions of section 80P (2) (d) state that:

“In respect of any income by way of interest or dividends derived by the Co­operative society from its investments with any other co-operative society the whole of such income”

The plain reading of the above provision, it is clear that the section refers to interest and dividends earned from investments in another co-operative society only. Thus, this deduction cannot be extended to the interest income earned from the investment in any co-operative bank.

3.2 It is well-settled rule of interpretation that the Legislative mandate should be so read that no word used by the Parliament should be rendered nugatory. If the word “co operative society” is to read as “Co operative bank” the same would render the entire provision redundant, otiose and nugatory, an outcome which the Parliament could surely not have intended. It has also been further clarified in Oswal Agro Mills case reported in 1993 (66) ELT 37 (S.C.) that “where the words of the statute are plain and clear, there is no room for applying any of the principles of interpretation which are merely presumption in cases of ambiguity in the statute. The Court would interpret them as they stand. The object and purpose has to be gathered from such words themselves. Words should not be regarded as being surplus nor be rendered otiose”.

3.2.1 So far as the principle of interpretation applicable to a taxing statute is concerned, we can do no better than to quote the by now classic words of Rowlatt, J., in Capce Brandy Syndicate v. IRC [1921] 1 KB 64 :

“… In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.” (p. 71)

The principle laid down by Rowlatt, J., has also been time and again approved and applied by the Supreme Court in different cases including the one Hansraj Gordhandas v. H.H. Dave, Assistant Collector of Central Excise & Customs AIR 1970 SC 755 at p. 759.

3.3 Further, the conditions or restrictions contemplated by one statute having a different object and purpose should not be lightly and mechanically imported and applied to a fiscal statute for non-levy of excise duty, thereby causing a loss of revenue. [See; Medley Pharmaceuticals Limited v. Commissioner of Central Excise and Customs, Daman – (2011) 2 SCC 601 = 2011 (263) ELT 641 (SC) and Commissioner of Central Excise, Nagpur v. Shree Baidyanath Ayurved Bhavan Limited – 2009 (12) SCC 419 = 2009 (237) ELT 225 (SC)].

3.3.1 The Hon. Supreme court in the case of Southern Technologies Ltd. v. Joint Commissioner of Income-tax* , Coimbatore [2010] 187 TAXMAN 346 (SC) with respect to RBI direction over provisions under Income tax vide para 21 have held as under :

Para 21. It needs to be emphasized that the said 1998 Directions are only Disclosure Norms. They have nothing to do with computation of Total Taxable Income under the Income-tax Act or with the accounting treatment. The said 1998 Directions only lay down the manner of presentation of NPA provision in the balance sheet of an NBFC.

3.4 Provisions relating to concessions are ordinarily expected to be rigidly interpreted :

The Hon’ble Apex Court rendered in the case of Union of India v. Wood Papers Ltd (AIR 1991 SC 2049) and the decision of Hon’ble Andhra Pradesh High Court rendered in the case of CIT v. Anakapalli Co-operative Marketing Society Ltd., [(2000) 245 ITR 616 (AP)], wherein it was held that the provisions relating to concessions are ordinarily expected to be rigidly interpreted.

3.5 The Hon Supereme court in the case of Thalappalam Ser. Co Op Bank ltd & Ors vs. State Of Kerala & Ors vide civil Appeal No. 9017 of 2013(arising out of SLP(C) No. 24290 of 2019 on definition of public authority under section 2(h) of The Right to information Act, 2005 have discussed at length about accountability and transparency in co operative societies in general and formation of Public information officer which has no application over judgement on fiscal statute like Income Tax because one word occurring in different sections of the Act can have different meaning, if the object of the two sections are different and when both operate in different fields. In view of judgement of Hon Supreme Court in the case of Southern Technologies Ltd. v. Joint Commissioner of Income-tax* , Coimbatore [2010] 187 TAXMAN 346 (SC) and also in view of judgement of Hon Supreme Court in the case of Medley Pharmaceuticals Limited v. Commissioner of Central Excise and Customs, Daman – (2011) 2 SCC 601 = 2011 (263) ELT 641 (SC) and in view of judgement of Hon Supreme Court in the case of Commissioner of Central Excise, Nagpur v. Shree Baidyanath Ayurved Bhavan Limited – 2009 (12) SCC 419 = 2009 (237) ELT 225 (SC)].

3.6 Even if some other similarly situated persons have been granted some benefit inadvertently or by mistake, such order does not confer any legal right on the petitioner to get the same relief. (Vide Chandigarh Administration & Anr Vs. Jagjit Singh & Anr., AIR 1995 SC 705; Smt Sneh Prabha Vs. State of U.P. & Ors., AIR 1996 SC 540; Jalandhar Improvement Trust Vs. Sampuran Singh, AIR 1999 SC 1347; State of Bihar & Ors. Vs. Kameshwar Prasad Singh & Anr., AIR 2000 SC 2306; Union of India & Ors. Vs. Rakesh Kumar, AIR 2001 SC 1877; Yogesh Kumar & Ors. Vs. Government of NCT Delhi & Ors., AIR 2003 SC 1241; Union of India & Anr. Vs. International Trading Company & Anr., AIR 2003 SC 3983; M/s Anand Button Ltd. Vs. State of Haryana & Ors., AIR 2005 SC 565; K.K. Bhalla Vs. State of M.P. & Ors., AIR 2006 SC 898; and Maharaj Krishan Bhatt & Anr. Vs. State of Jammu & Kashmir & Ors., (2008) 9 SCC 24).

4. Vide submission dated 09/11/2015, the assessee had submitted as below:

“The term co-operative society has been defined in the Act in section 2(19) which read as :

Co-operative society means a society registered under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any state for the _*registration of co-operative societies – A regional rural bank to which provisions of the Regional Rural Bank Act, 1976 apply, is also defined as co-operative society.”

Further, all the co-operative banks are registered under Co-operative Societies Act, 1912 or under any other law for the time being in force in any state for the registration for co-operative societies. In short; the provisions of various acts, governing co-operative societies are applicable to co-operative banks since these banks are also co-operative societies within the meaning of these various acts governing co-operative societies. It will be observed that the co-operative bank fall within the definition of the term co-operative society. Thus, interest received by co-operative society from co-operative bank is nothing but interest received from co­operative society. “”

5. However, the assessee’s above submission is not factual. Even this definition, as contained in section 2(19) of the Income tax Act, 1961, speaks only of “Co-operative Society” and not a “”Co-operative Bank.” The assessee further submitted that a regional rural bank to which provisions of Regional Rural Bank Act, 1976, apply is also defined as co-operative society. However, even this contention of the assessee cannot come to the rescue of the assessee for the reason that the interest is not earned from the Regional Rural Bank but ordinary Co-operative bank. As submitted by the assessee in the submission dated 09/11/2015, the above referred interest income of Rs…………. was derived from its investment in the following banks.

a) NKGSB Co-operative Bank Ltd., b) Dombivali Nagari Sahakari Bank Ltd.,

c) The Saraswat Co-operative Bank Ltd., d) The TJSB Sahakari Bank Ltd.,

e) The Maharashtra State Co-op. Bank Ltd. f) Abhyudaya Co op Bank Ltd.

All these five banks are neither Co-operative Societies nor be Regional Rural Banks governed under Regional Rural Development Bank, 1976.

5.1 The very basis of functioning of any co-operative society would be the principle of mutuality. If we go through the principle of mutuality, the three important basic conditions of the Principle are as under:

1) There must be a complete identity between the contributors and participators.

2) The actions of the participators and contributors must be in furtherance of the mandate of the association.

3) There must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves.

However, all the above conditions are not satisfied in the, case of interest earned from co­operative banks by the co operative society (assessee).

5.2 There is an element of profiteering in the activities of co-operative society while earning interest at higher rates the surplus therefore will form part of its general reserve fund, even if the same is distributed as dividend even then the principle of mutuality is not satisfied as held by The Hon. Supreme Court in the case of CIT vs. Kumbakonam Mutual Benefit Fund Ltd., 53 ITR 241 (SC) wherein it was held that if the profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. Further, in a very recent land mark judgment in the case of M/s. Bangalore Club vs. Commissioner of Income tax, The Hon’ble Supreme Court of India has gone into minute details for deciding the nature/character of “Principle of Mutuality”, under which the tax exemption has been claimed by various Societies. The Honorable Supreme Court held that “in our opinion, unlike the surplus amount’ itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee (Bangalore Club) from the member banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club”. In this case, the surplus funds in the hands of the assessee were placed at the disposal of the corporate members viz. the banks, with the sole motive to earn interest, which brings in the commerciality element and thus, the interest so earned by the assessee has to be treated as a revenue receipt, exigible to tax. The facts of this case are similar to the facts of the instant case of………………….. Co-operative Housing Society Ltd or Cooperative consumer society or co operative credit society or Employee co operative Credit Societies Ltd had placed its surplus fund at the disposal of the co-operative banks, with sole motive to earn interest, which brings in the commerciality of the element. Therefore, the interest so earned by it has to be treated as the revenue receipt, taxable under the Income tax Act, 1961.

6. The Hon’ble Supreme Court in Totgar’s Cooperative Sale Society Ltd. v ITO 322 ITR 283 held that interest on deposits were not business income but income from other sources and the society was not entitled to special deduction u/s 80P(2). The finding of the Hon’ble Supreme Court reads as follows:-

“The words “the whole of the amount of profits and gains of business” in section 80P (2) of the Income-tax Act, 1961, emphasise that the income in respect of which deduction is sought by a cooperative society must constitute the operational income and not the other income which accrues to the society.

7. The Hon’ble Apex Court in the case of Banglore Club V CIT [2013] 29 taxmann.com 29 (SC) w.r.t. interest earned from member bank have denied mutuality benefit and have held vide para 25 to 28 as under :

Para 25: ……..The interest earned from fixed deposits kept with non- member banks was offered for taxation and the tax due was paid. Therefore, we are required to examine the case of the assessee, in relation to the interest earned on fixed deposits with the member banks, on the touchstone of the three cumulative conditions, enumerated above.

Para 26……as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the member banks used such deposits to advance loans to their clients. Hence, in the present case, with the funds of the mutuality, member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the ‘privity of mutuality’, and consequently, violating the one to one identity between the contributors and participators as mandated by the first condition. Thus, in the case before us the first condition for a claim of mutuality is not satisfied.

Para 27… As aforesaid, the second condition demands that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club, which is not the case here. In the instant case, the surplus funds were not used for any specific service, infrastructure, maintenance or for any other direct benefit for the member of the club. These were taken out of mutuality when the member banks placed the same at the disposal of third parties, thus, initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality. This contract lacked the degree of proximity between the club and its member, which may in a distant and indirect way benefit the club, nonetheless, it cannot be categorized as an activity of the club in pursuit of its objectives. It needs little emphasis that the second condition postulates a direct step with direct benefits to the functioning of the club. For the sake of argument, one may draw remote connections with the most brazen commercial activities to a club’s functioning. However, such is not the design of the second condition. Therefore, it stands violated.

Para 28. The facts at hand also fail to satisfy the third condition of the mutuality principle i.e. the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. This principle requires that the funds must be returned to the contributors as well as expended solely on the contributors. True, that in the present case, the funds do return to the club. However, before that, they are expended on non- members i.e. the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, in our opinion, snaps the link of mutuality and thus, breaches the third condition.

Since all the three conditions are not satisfied Interest earned by assessee-club on fixed deposits from its member banks would not be exempt from tax on basis of doctrine of mutuality.

8. Judgements needs to be call back or appealed against or to be reviewed:

8.1 The Hon. Gujarat High court in the case of Surat Vankar Sahakari Sangh Ltd. v. Assistant Commissioner of Income-tax [2016] 72 taxmann.com 169 (Gujarat) has talked about only interest received from co operative society but gave judgement by approving Tribunal view that interest received from Co Operative Bank which amounts to granting unwanted benefit vide para 8.1 of the order which is as under:

Para 8.1…. In our opinion, the learned Tribunal was right in law in allowing deduction under Section 80P(2)(d) of the Income- tax Act, 1961. in respect of interest of RS. 4,00,919 on account of interest received from Nawanshaln Central Co-operative Bank without adjusting the interest paid to the hank. Therefore, the reference is answered against the Revenue in the affirmative and in favour of the assessee.’

Note: Further, the judgement in the case of State Bank of India (SBI) Vs. Commissioner of Income-tax [2016] 72 taxmann.com 64 (Gujarat-HC) was not brought to the notice of the Hon. Court.

8.2 The Hon ITAT Mumbai in the case of Lands End Co-operative Housing Society Ltd Vs. ITO ward-16(1)(3) Mumbai, I.T.A. No. 3566/Mum/2014 decided for Assessment Year: 2009-10 on 15.01.2016.

Before The Hon Tribunal learned AR has talked about only “co operative society including co operative bank” with respect to interest earned by Co Operative housing society/Mutual Association from Co Operative Bank. Therefore, it amounts to playing with word beyond the law framed by the parliament, restricting benefit only to interest earned from any other co operative society. Therefore, The Hon. ITAT granted benefit to interest received from bank in concluding part of the order which is impliedly a deviation and erroneous, therefore needs to be reconsidered and reviewed or appealed against based on legal position laid down vide para 2 to Para 7 hereinabove.

8.3 The Hon Punjab &n Haryana High Court in the case of CIT v. Doaba Co-op. Sugar Mills Ltd. [1998] 96 TAXMAN 509 (PUNJ. & HAR.) the facts of the case are as under :

“…..the assessee has paid interest to Jalandhar Central Co-operative Bank and has also received interest from the said co-operative bank, thereby showing that the assessee has on the aggregate paid interest to the bank…”

The Hon. High Court has in operative part of the order talked about only co operative society and granted benefit to interest received from bank in concluding part of the order which is impliedly a deviation and erroneous therefore does not form a precedent based on legal position laid down vide para 2 to Para 7 herein above.

9. Case laws relied upon:

9.1 The Hon. Bombay High Court in the case of CIT Vs. Common Effluent Treatment Plant (Thane Belapur) Association [2010] 192 Taxman 238 (Bombay-HC) Vide para 27 with respect to interest received by association from Bank have held as under:

Para 27……With respect, it must be pointed out that the mere fact that the funds which are invested in a fixed deposit with the bank are funds which originated from the contributions made by the members of the assessee cannot conclude the question as regards the taxability of the receipts on account of interest obtained from the investment of these funds. These receipts must partake of the character of income from other sources and would be exigible to tax.

9.2 The Hon. Gujarat High Court in the case of State Bank of India (SBI) Vs. Commissioner of Income-tax [2016] 72 taxmann.com 64 (Gujarat-HC) vide para 17 with respect to interest received by co operative society from Bank have held as under:

Para17……. insofar as the provisions of the Income Tax Act are concerned, under section 80P(2)(d) thereof, it is only the income by way of interest or dividends derived by a co operative society from its investments with any other co operative society which is required to be deducted while computing the total income of the assessee.

9.3 The Hon. ITAT Mumbai in the case of Bandra Shiv Samruddhi CHS Ltd. ITA No. 1073/M/2012 for the A.Y 2005-06 – order dated 19.04.2013 Vide para 6 & Para 7 have dismissed the appeal filed by the appellant by denying 80P(2)(d) benefit and taxed bank interest as income from other sources.

10. Conclusion:

In view of the above, it is clear that a co-operative bank is a urban commercial bank and does not fall under the purview of a “Co-operative Society” referred in section ’80P(2)(d) of the Income tax Act, 1961. In the present case, the assessee has earned interest income from such co-operative bank of Rs……………. The same has been claimed as deduction u/s. 80P(2)(d) of the Act. In view of the above discussion, the deduction u/s. 80P(2)(d) of the Act, of Rs…………. claimed by the assessee is not allowed as the provisions relating to concessions are ordinarily expected to be rigidly interpreted and therefore added to the total income of the assessee.

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(Republished with Amendments by Team Taxguru)