Dr A.K Sikri, J.— Leave granted. The appellant herein, after losing in all the fora below, has knocked the doors of this Court by means of the present appeal seeking the benefit of Section 80-P of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). The assessing officer held that deduction in respect of income of cooperative societies under Section 80-P of the Act is not admissible to the appellant as the benefit of deduction, as contemplated under the said provision is, inter alia, admissible to those cooperative societies which carry on business of banking or providing credit facilities to its members. On the contrary, the appellant Society was carrying on the banking business for public at large and for all practical purposes it was acting like a cooperative bank governed by the Banking Regulation Act, 1949, and its operation was not confined to its members but outsiders as well.
2. It may be noted at this stage itself that Section 80-P of the Act provides for certain deduction in respect of incomes of the cooperative societies. A cooperative society is defined by Section 2(19) of the Act. Where the gross total income of such cooperative societies includes any income referred to in sub-section (2) of Section 80-P, the sums specified in sub-section (2) are allowed as deduction in accordance with and subject to the provisions of the said section, while computing the total income of the assessee. The profit exempted is the net profit included in the total income and not the gross profit of the business. Sub-section (2) enlists those sums which are allowed as deductions. Clause (a) of sub-section (2) includes seven kinds of cooperative societies which are entitled to this benefit, and in respect of the cooperative societies engaged in the activities mentioned in those seven classes, the whole of the amount of profits and gains of business attributable to any one or more of such activities is exempted from income by allowing the said income as deduction. We are concerned with sub-clause (i) of clause (a) of sub-section (2) of Section 80-P which enlists a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members.
3. For the sake of better understanding, we reproduce below the aforesaid portion of Section 80-P:
“80-P. Deduction in respect of income of cooperative societies.—(1) Where, in the case of an assessee being a cooperative 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 cooperative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or
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the whole of the amount of profits and gains of business attributable to any one or more of such activities:”
4. Section 80-P was amended by the Finance Act, 2006 with effect from 1-4-2007 and sub-section (4) was inserted thereto. This sub-section (4) reads as under:
“(4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank.
Explanation.—For the purposes of this sub-section—
(a) “cooperative 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 cooperative 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.”
5. As would be seen from the facts hereafter, the appellant is a cooperative society. However, it has been denied the benefit of Section 80-P on the ground that it is a cooperative society of the nature covered by sub-section (4) of Section 80-P and, therefore, becomes disentitled to get the benefit. The question, therefore, is as to whether the appellant is barred from claiming deduction in view of Section 80-P(4) of the Act. In order to ascertain the answer to this question, relevant facts are enumerated hereinbelow:
5.1 The assessee was established on 31-5-1997 initially as a mutually aided cooperative credit society having been registered, under Section 5 of the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995 with Registration No. AMC/RR/DCO/9714 by the Registrar of Mutually Aided Cooperative Societies, Ranga Reddy. As operations of the assessee over the years had increased manifold and as its operations were spread over States of the erstwhile Andhra Pradesh, Maharashtra and Karnataka, the assessee got registered under the Multi-State Cooperative Societies Act, 2002 in terms of the certificate dated 26-7-2005 issued by Office of Central Registrar of Cooperative Societies, Krishi Bhawan, New Delhi.
5.2 The assessee is being assessed to income tax since its inception. It has been claiming exemption under Section 80-P of the Act which was being allowed by the Income Tax Authorities. As per the assessee, in course of its operations, members deposit cash into their accounts with the Society and they withdraw the same. It is claimed that earlier, none of the Income Tax Authorities had pointed out that acceptance of deposits from its members in cash and withdrawal thereof by them in cash would violate the provisions of Sections 269-SS and 269-T of the Act. Sections 269-SS and 269-T of the Act relate to mode of taking or accepting certain loans and deposits and their repayment respectively.
5.3 The assessee as Cooperative Society and assessee under PAN No. AAAAT3952F had filed return of income before the Assistant Commissioner of Income Tax, Circle 9(I), Hyderabad for Assessment Year 2009-2010, for the year ending 31-3-2009 on 30-9-2009 declaring nil income. In the return filed for Assessment Year 2009-2010, year ending with 31-3-2009, the assessee claimed a sum of Rs 4,26,37,081 as deduction under Section 80-P of the Act. Return filed by the assessee was taken up for scrutiny under CASS (Computer Assisted Selection of Cases for Scrutiny) and notice under Section 143(2) of the Act was issued. In response thereto, books of account were produced by the assessee Society and information called for was submitted. The assessing officer had arrived at Rs 19,57,32,920 as the net amount of tax payable by the assessee in terms of his order dated 19-12-2011 by working out as hereunder:
Income returned by the assessee (after claiming deduction under Section 80-P)
Rs Nil
Add: Disallowance under Section 68 as discussed in Paras 2, 2.1 and 2.2 above
Rs 38,53,72,794
Add: Disallowance of deduction claimed under Section 80-P
Rs 4,26,37,817
Total assessed income
Rs 42,80,09,880
Tax thereon
(as per computation form enclosed).
Tax payable
Rs 19,57,32,920
6. It may be pointed out that in the appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], the order of the assessing officer making disallowance under Section 68 of the Act was reversed and that addition was deleted. Therefore, we are not concerned with that aspect of the matter which has attained finality.
7. Insofar as disallowance of deduction claimed under Section 80-P of the Act is concerned, CIT (A) rejected the claim for deduction thereby upholding the order of the assessing officer. While doing so, CIT (A) followed the order of the Income Tax Appellate Tribunal (ITAT) in the case of the appellant itself in respect of Assessment Years 2007-2008 and 2008-2009. CIT (A) quoted the following discussion from the said order 2012 SCC OnLine ITAT 7712 of ITAT: (Citizen Coop. Society Ltd. case 2012 SCC OnLine ITAT 7712, SCC OnLine ITAT paras 22-24)
“22. For Assessment Years 2007-2008 and 2008-2009, we have to consider the amendment brought out to the section with effect from 1-4-2007 by the Finance Act, 2006 whereby Section 80-P(4) was inserted. The amendment clearly barred all the cooperative banks other than primary agricultural credit society or a primary cooperative agricultural and rural development banks from claiming exemption under the section. The primary activity of the Society is to provide banking facilities to its members. The Society is dealing like a bank while accepting deposits from its members. This issue was examined by the Hon'ble ITAT in the assessee's own case while deleting the penalty under Sections 271-D and 271-E. ITAT held as under:
‘If the carrying on banking business is not approved by RBI or the assessee is not having requisite licence to carry out the banking business, the authorities could have taken action against the Society or stop the Society activity. Once the assessee is allowed to carry on the banking business, then the assessee is bound by the relevant provisions of the Banking Regulations Act. The bank for all its banking activities is strictly governed by the Banking Regulation Act, 1949.’
23. The Society is carrying on the banking business and for all practical purpose it acts like a cooperative bank. ITAT observed that the Society is governed by the Banking Regulations Act. Therefore, the Society being a cooperative bank providing banking facilities to members is not eligible to claim the deduction under Section 80-P(2)(i)(a) after the introduction of sub-section (4) to Section 80-P.
24. In view of the above, we are of the opinion that the Society is not eligible to claim deduction under Section 80-P(2)(a)(i). Therefore, we are of the opinion that the assessee is not entitled for deduction under Section 80-P(2)(a)(i) for Assessment Years 2006-2007, 2007-2008 and 2008-2009 and allowed the ground raised by the Revenue and dismiss the ground taken by the assessee on this issue.
5.2 The facts in the present appeal being identical, respectfully following the decision of ITAT in the assessee's own case for the preceding years, the appeal of the assessee is dismissed on the issue of deduction under Section 80-P.”
8. Further appeal to ITAT met the same fate as ITAT also referred to its aforesaid order and dismissed the appeal of the appellant. Undeterred, the appellant approached the High Court in the form of appeal under Section 260-A of the Act. This appeal has been dismissed 2013 SCC OnLine AP 876 by the High Court with the observations that there is no illegality or infirmity in the order passed by ITAT.
9. Referring to the provisions of Section 80-P of the Act, Mr V. Shekhar, learned Senior Counsel appearing for the appellant, made a passionate plea to the effect that the entire purport and objective to enact the said provision was to encourage and promote growth of cooperative sector in the economic life of the country in pursuance of the declared policy of the Government. This is so recognised by various judgments of this Court firmly laying down the rule that a provision for direction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. He referred to the objects for which the assessee Society has been established and submitted that the principal object of the Society is to promote interest of all its members to attain their social and economic betterment through self-help and mutual aid in accordance with the cooperative principles and keeping in view the same the assessee Society can engage in certain specified forms of business stipulated in the objective clause of the Society. The purpose, therefore, was to promote the interest of its members and, therefore, it cannot be said that primary object of the assessee is transaction of banking business.
10. The learned Senior Counsel drew the attention of the Court to Section 5(b) of the Banking Regulation Act, 1949, which defines banking business as under:
“5. (b) “banking” means 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, order or otherwise.”
11. Predicated on the aforesaid definition, the learned Senior Counsel submitted that banking business means accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise which is withdrawable by cheque, draft, order or otherwise. According to him, the assessee was not accepting any money from the public, except its members. Therefore, it was totally wrong on the part of the authorities below to come to a conclusion that the assessee was doing banking business as stipulated in the Banking Regulation Act. It was also argued that in any case the assessee was not authorised and competent to carry on any banking business without possessing a licence from Reserve Bank of India. He, thus, sought to draw the distinction between a cooperative bank and a cooperative society in the following manner:
Cooperative Bank
Cooperative Society
Nature of business
1. As defined in Section 6 of the Banking Regulation Act. 2. Banks are bound to follow the rules, regulations and directions.
1. As per bye-laws of the cooperative society. 2. Society is bound by rules issued by Reserve Bank of India and regulations as specified by (RBI), if any applicable.
Inspection
RBI has the power to inspect accounts and overall functioning of the bank.
Registrar has the power to inspect accounts and overall functioning of the bank.
Part V
Part V of the Banking Regulation Act is applicable to cooperative banks.
Part V of the Banking Regulation Act is not applicable to cooperative societies.
Use of words
The words “bank”, “banker”, “banking” can be used by a cooperative bank.
The words “bank”, “banker”, “banking” cannot be used by a cooperative society.
It was also pointed out that even the Central Board of Direct Taxes (CBDT) vide Circular No. 133/2007 dated 9-5-2007 had clarified that Section 80-P(4) of the Act provides that deduction shall not be allowable to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank. Submission was that since the assessee does not fall within the meaning of cooperative bank as defined in Part V of the Banking Regulation Act, 1949 and Section 80-P(4) will not, therefore, apply to the assessee.
12. Continuing with the aforesaid line of argument, Mr Shekhar further submitted that the courts below ought to have appreciated that purpose of exemption under Section 80-P is to provide employment of as much capital as possible for financing and extending the scope of fundings, etc. The true test for applying deduction under Section 80-P of the Act is whether income earned is attributable to the utilisation of circulating capital of the cooperative society engaged in the activity of business of banking. Once the assessee had earned income from the loans advanced to various members, the income so related to the banking activities is liable for exemption under Section 80-P(2)(a)(i) of the Act. He submitted that this interpretation is supported by various decisions of this Court. For this purpose, he referred to the decision of this Court in CIT v. Bangalore Distt. Coop. Central Bank Ltd. (1998) 6 SCC 129 wherein it was held that interest on government securities and dividends earned by a cooperative society engaged in banking business is eligible for deduction under Section 80-P of the Act, though said income was not earned from the credit facility provided to its members. Also, in CIT v. Nawanshahar Central Coop. Bank Ltd. (2012) 13 SCC 788 this Court held that a cooperative society carrying on a business of banking would be entitled for deduction under Section 80-P of the Act. Plea of the appellant was that if the intention of the legislature was not to grant deduction under Section 80-P(2)(a)(i) to the cooperative societies carrying on the business of providing credit facilities to its members, the said provision would have been deleted from the statute. According to the learned Senior Counsel, the new proviso to Section 80-P(4) which was brought into statute book is applicable only to cooperative banks and not to credit cooperative societies. The intention of the legislature in bringing the cooperative banks into the taxation structure was mainly to bring them on a par with commercial banks.
13. Taking aid of the principle of mutuality, it was submitted that the assessee is a mutual concern. Income derived by it from its operations is distributed among members. The members are entitled to participate in the surplus, thereby creating an identity. Facilities are provided only to members of the Society, who provide funds to it and their identity with the funds and their participation in the surplus arising from the said fund is unmistakably found and thus principles of mutuality will apply. In order to apply principle of mutuality, there must be complete identity between contributors and participators and requirement of law bring (sic being) that contributors of the common fund and participators in the surplus must be an identical body. What is essential is that members of the assessee as a class must be able to participate in the surplus. It is immaterial whether surplus is paid back to the members or is put to reserve with the Society for development and for providing better amenities to the members. There is complete identity between the contributors and the participators of the assessee.
14. On the basis of the aforesaid arguments, Mr Shekhar pleaded that the appellant be held entitled to the benefit of Section 80-P of the Act.
15. In reply, Mr Radhakrishnan, the learned Senior Counsel appearing for the Revenue, submitted that the findings arrived at by the authorities below to the effect that the activity/business of the appellant, in essence, was that of a cooperative bank was based on the material on record and needed no interference. In this behalf he not only relied upon the findings of the Tribunal as per the discussion contained therein, but also submitted that these are findings of fact. The assessing officer scrutinised the bye-laws of the appellants and in particular those bye-laws which deal with the liability of membership, etc. as well as the provisions of the Mutually Aided Cooperative Societies Act, 1995 (Macsa) under which the appellant is registered. The assessing officer found that the Act does not accept a person to be member of more than one cooperative society for the same services. Moreover, Section 19 of Macsa does not accept every cooperative society to be a panacea for all problems facing an entire population in an area and leaves it to the members to decide how big they wish to grow and how much they can handle. After analysing these provisions, the following discussion ensued in the order passed by the assessing officer:
“As per the above provisions governing the conduct of the assessee, the assessee cannot admit nominal members and deal with them. The main activities of the assessee are in violation of the above provisions, as seen under:
(i) As per the information furnished, it was found that the assessee caters to two distinct categories of people.
(ii) The first category is that of resident members or ordinary members.
(iii) The second category is that of nominal members, who make deposits with the assessee for the purpose of obtaining loans, etc.
(iv) This category of persons is neither members nor nominal/associate members.
(v) As noticed, the assessee accepts deposits mostly from the second category and these deposits are mostly kept in FDs.
(vi) With banks to earn maximum returns, a portion of these deposits are utilised to advance gold loans, etc. to members of the first category.
(vii) It is noticed that the assessee has fixed deposits of Rs 54,16,99,504.39 as on 31-3-2007.
Therefore, the fixed deposits in banks are mostly out of funds received as deposits from the second category of persons referred to above.
(viii) As a class, the depositors and borrowers are quite distinct and the activity is finance business and cannot be termed as cooperative activity.
(ix) The assessee is also engaged in the activity of granting loans to general public, etc. which has nothing to do with cooperation amongst members. It is plain business and any willing buyer can utilise the services of the assessee.
(x) As understood, the assessee has not obtained any approval from the Registrar of Societies either to accept deposits from nominal members (who are actually non-members as the provisions of law referred to above) as well as for conducting the business of sale of stamps, etc.
(xi) Therefore, both in form and substance, the activity is in violation of the Cooperative Societies Act and the Cooperative Society Rules.
(xii) Apart from the above, a cooperative credit society is not entitled for deduction under Section 80-P(2)(a)(i) on the income from investment of surplus funds as per decision of ITAT, Hyderabad Bench in ITA No. 1141.Hyd/2007 in the case of SBI Staff Mutually Aided Cooperative Society Ltd.”
16. The learned Senior Counsel submitted that there was a clear finding of the assessing officer, which was consistently approved by the higher authorities as well, that provisions of Section 80-P(2)(i)(a) were grossly violated as the appellant Society was found not dealing with its members only but also with general public as well. On that basis, further submission of Mr Radhakrishnan was that the principle of mutuality was missing in this case, which aspect was also discussed in detail by the assessing officer. He, thus, contended that in view of the aforesaid findings, no case for interference was made out by the appellant.
17. We have considered the submissions of the counsel for the parties with reference to the record of this case.
18. We may mention at the outset that there cannot be any dispute to the proposition that Section 80-P of the Act is a benevolent provision which is enacted by Parliament in order to encourage and promote growth of cooperative sector in the economic life of the country. It was done pursuant to the declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (see Bajaj Tempo Ltd. v. CIT (1992) 3 SCC 78). It is also trite that such a provision has to be construed as to effectuate the object of the legislature and not to defeat it (see CIT v. Mahindra and Mahindra Ltd. (1983) 4 SCC 392). Therefore, it hardly needs to be emphasised that all those cooperative societies which fall within the purview of Section 80-P of the Act are entitled to deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to any one or more of such activities which are mentioned in sub-section (2).
19. Since we are concerned here with sub-clause (i) of clause (a) of sub-section (2), it recognises two kinds of cooperative societies, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members.
20. In Kerala State Coop. Mktg. Federation Ltd. v. CIT (1998) 5 SCC 48, this Court, while dealing with classes of societies covered by Section 80-P of the Act, held as follows:
“6. The classes of societies covered by Section 80-P of the Act are as follows:
(a) engaged in business of banking and providing credit facilities to its members;
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7. We may notice that the provision is introduced with a view to encouraging and promoting growth of cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption.”
21. In CIT v. Punjab State Coop. Bank Ltd. 2008 SCC OnLine P&H 2042, (2008) 300 ITR 24, while dealing with an identical issue, the High Court of Punjab and Haryana held as follows: (SCC OnLine P&H paras 8 & 13)
“8. The provisions of Section 80-P were introduced with a view to encouraging and promoting the growth of the cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The different heads of exemption enumerated in the section are separate and distinct heads of exemption and are to be treated as such. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax, then it has to be seen whether such income fell within any of the several heads of exemption. If it fell within any one head of exemption.… It means that a cooperative society engaged in carrying on the business of banking and a cooperative society providing credit facilities to its members will be entitled for exemption under this sub-clause. The carrying on the business of banking by a cooperative society or providing credit facilities to its members are two different types of activities which are covered under this sub-clause.
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13. So, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provisions of Section 80-P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the legislature wanted to restrict the exemption to a primary cooperative society, it was so made clear as is evident from clause (f) with reference to a milk cooperative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative society.”
The aforesaid judgment of the High Court correctly analyses the provisions of Section 80-P of the Act and it is in tune with the judgment of this Court in Kerala State Coop. Mktg. Federation Ltd. (1998) 5 SCC 48
22. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a cooperative bank. However, if it is a primary agricultural credit society or a primary cooperative agricultural and rural development bank, the deduction would still be provided. Thus, cooperative banks are now specifically excluded from the ambit of Section 80-P of the Act.
23. Undoubtedly, if one has to go by the aforesaid definition of “cooperative bank”, the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative to have a licence from Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a cooperative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of Section 80-P.
24. So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under Section 80-P of the Act is not sub-section (4) thereof. What has been noticed by the assessing officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violation of the provisions of Macsa under which it is formed. It is pointed out by the assessing officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of “nominal members”. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as cooperative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the assessing officer that the activity of the appellant is in violation of the Cooperative Societies Act. Moreover, it is a cooperative credit society which is not entitled to deduction under Section 80-P(2)(a)(i) of the Act.
25. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the assessing officer, our purpose would be served by taking note of the following portion of the discussion:
“As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality:
(i) that no person can earn from him;
(ii) that there a profit motivation;
(iii) and that there is no sharing of profit.
It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20-12-2010]. [Though the bank formed the third party vis-à-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs.]
In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the Society as such the AOP body by the Society is not covered by concept of mutuality at all.”
26. These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a cooperative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80-P of the Act.
27. This appeal, therefore, fails and is hereby dismissed with costs.