The provisions of Section 80P are reproduced hereunder:
80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely :—
(a) in the case of a co-operative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of agricultural produce grown by its members, or
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural produce of its members, or
(vi) the collective disposal of the labour of its members, or
(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,
the whole of the amount of profits and gains of business attributable to any one or more of such activities :
Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:—
(1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;
(2) the co-operative credit societies which provide financial assistance to the society;
(3) the State Government;
(b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to—
(i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or
(ii) the Government or a local authority; or
(iii) a Government company as defined in section2(45) of the Companies Act, 2013, or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),
the whole of the amount of profits and gains of such business;
(c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,—
(i) where such co-operative society is a consumers’ co-operative society, one hundred thousand rupees; and
(ii) in any other case, fifty thousand rupees.
Explanation.—In this clause, “consumers’ co-operative society” means a society for the benefit of the consumers;
(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;
(e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;
(f) in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22.
Explanation.—For the purposes of this section, an “urban consumers’ co-operative society” means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.
(3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ.
(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
Explanation.—For the purposes of this sub-section,—
(a) “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(b) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.
A perusal of various provisions of Section 80P indicates that the provisions are meant for deductions in respect of income of the co-operative societies. It is noted that various words /terms used in the section have not been defined in the Act except the definitions of co-operative society, co-operative bank and primary co-operative agricultural and rural development bank. Therefore, other terms used in the section will have to be interpreted by using the common meaning of those words and the interpretations made by various judicial forums such as ITAT, High Courts and the Hon’ble Supreme Court. In order to have a clear and easy understanding of various provisions of the section, the provisions are being discussed in the order it appears in the section.
Definition of Co-operative Society:
The word “Co-operative Society” has been defined in the Act in Section 2(19), which read as under:
“co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies
Further as per Circular No. 319, dated January 11, 1982 a regional rural bank (to which provisions of the Regional Rural Banks Act, 1976, apply) is deemed as co-operative society.
In the case of a co-operative society providing credit facilities to its members, the whole of the amount of profits and gains from such business are deductible. From the assessment year 2007-08, deduction under Section 80P will not be available to any co-operative bank (even Regional Rural Banks will not be eligible for deduction under Section 80P – Circular No. 6/2010, dated September 20, 2010). A primary agricultural credit society or a primary co-operative agricultural and rural development bank will continue to claim the benefit of deduction under Section 80P. Various terms used in this section has been interpreted by various courts in the following manner:
In the case of a co-operative society engaged in cottage industry, the whole of the amount of profits attributable to such activity are deductible under Section 80P(2)(a) (ii). The Circular No. 722, dated September 19, 1995 issued by CBDT defines the term cottage industry and has laid down various criteria which should be verified before granting the deductions in a case. Para-3 of the circular reads as under :
“What constitutes a “cottage industry” has been the subject- matter of discussion in a number of cases decided by various courts. The term as such does not define in the Act. Based on the ratio of the decision, a co-operative society engaged in cottage industry is required to broadly satisfy the following criteria for availing of the benefits under Section 80P(2)(a)(ii) –
1. Cottage industry is one which is carried on in a small scale with a small amount of capital and a small number of workers and has a turnover which is correspondingly limited;
2. It should not be required to be registered under the Factories Act;
3. It should be owned and managed by the co-operative society;
4. The activities should be carried on by the members of the society and their families [for this purpose, a family would include self, spouse, parents, children, spouses of the children and any other relative who customarily lives with such a member. Outsiders (i.e., persons other than members and their families) should not work for the society. In other words, the co-operative society should not engage outside hired labour. [However, it has certain exceptions];
5. A member of co-operative society means a shareholder of the society;
6. The place of work could be an artisan shareholder’s residence or it could be a common place provided by the co-operative society;
7. The cottage industry must carry on activity of manufacture, production or processing; it should not be engaged merely in trade, i.e., purchase and sale of the same commodity.
Para-4 of the same circular also explains that in the case of a weaver’s society, so long as weaving is done by the members of the society at their residences or at a common place provided by the society, without any outside labour, such a society will be eligible for deduction under Section 80P(2)(a)(ii) even if certain payments have been made to outside agency for dyeing, bleaching, transport arrangements, etc., provided it satisfies all other conditions necessary for availing deduction under Section 80P(2)(a)(ii).
The following important judgments should also be kept in mind before accepting or refusing the claim of the assessee for deduction in this section.
The whole of the amount of profits attributable to the marketing of agricultural produce grown by the members of society is deductible under Section 80P (2) (a) (iii). For this clause also the help is to be taken for interpreting the term marketing which is nowhere defined in the Act. The common meaning of the marketing is the effort or the sum total of the activities which are involved or put for taking a particular product or good to the sale point or to the market where it is ultimately sold.
The Courts have held that ‘Marketing’ is an expression of wide import, and it generally means ‘the performance of all business activities involved in the flow of goods and services from the point of initial agricultural production until they are in the hands of the ultimate consumer’. The marketing functions involve exchange functions such as buying and selling physical functions such as storage, transportation, processing and other commercial functions such as standardization, financing, market intelligence, etc. The leading judgments regarding this definition are – CIT v. Karjan Co-op. Cotton Sale Ginning & Pressing Society Ltd. [1981] 129 ITR 821 (Guj.). CIT v. Ryots Agricultural Produce Co-op. Marketing Society Ltd. [1978] 115 ITR 709 (Kar.) and Meenachil Rubber Marketing & Processing Co-operative Society Ltd. v. CIT [1992] 193 ITR 108 (Ker.),
The following judgments are also worth noting:
Ø Manufacture of sugar – Where the assessee, a co-operative society, incorporated for manufacture of sugar, purchased sugarcane from its members as well as non-members as well as a co-operative society and manufactured sugar to sell the same in open market to earn profit, since profit so derived was not on account of marketing of sugarcane of its members but was on account of manufacturing of sugar out of sugarcane purchased on its own account, deduction claimed under Section 80P(2)(a)(iii) would not be available thereon to the assessee society – Kamal Co-op. Sugar Mills Ltd. v. Dy. CIT [1998] 66 ITD 521 (Delhi).
Ø Buying Sugar cane” and “selling sugar” is not “marketing of agricultural produce” “grown by it’s members”:
The Hon. Supreme Court in the case of Assam Co-operative Apex Marketing Society Ltd. v. CIT [1993] 201 ITR 338 wherein the Society engaged in marketing of agricultural produce of its members also had other co-operative societies as its members. Since the agricultural produce marketed by the Society was not produced by the primary marketing Societies, being its members, the assessee society was not held to be entitled to exemption under Section 81(1)(c) [now Section 80P(2)(a)(iii)].
Ø The Hon’ble Punjab & Haryana High Court in the case of Karnal Co-operative Sugar Mills Ltd. v. CIT [2001] 170 CTR (P&H) 590 : [2002] 253 ITR 659 (P&H) has held as under :
……………… assessee processed the sugarcane. It manufactured and sold sugar. The product which was sold in the market did not belong to the members. Sugar had not been described as an agricultural produce in the Act. Thus, it could not be said that the petitioner was marketing an agricultural produce. The society was incorporated for the primary purpose of manufacturing sugar. Thus, its basic activity was production of sugar.
It was engaged in manufacturing and not marketing. Since, it was the admitted position that the petitioner was using power and even paying excise duty, it was not entitled to the special deduction under Section 80P(2)(a)(iii).”[Gurdaspur Co-Op. Sugar Mills v.Deputy Commissioner of Income-tax [2009] 122 TTJ 528(ASR)].
Ø Assessee buying surgarcane from agriculturists, crushing same and then selling sugar , was not entitled to deduction under Section 80P(2)(a)(iii) [In favour of revenue] [Assessment year 2003-04] Gurdaspur Co-Op. sugar Mills v.Deputy Commissioner of Income-tax [2009] 122 TTJ 528(ASR).
Ø Poultry farming being an extended form of agriculture, eggs qualify to be treated as ‘agricultural produce’ – CIT v. Mulkanoor Co-op. Rural Bank Ltd. [1988] 173 ITR 629 (AP).
Ø Amount of subsidy received by the assessee from National Co-operative Development Corpn. towards loss incurred on account of price fluctuation qualifies for deduction – CIT v. Punjab State Co-operative Supply & Marketing Federation Ltd. [1989] 46 Taxman 156/ [1990] 182 ITR 58 (Punj. & Har.).
Whole of income from the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purposes of supplying them to its members is deductible under Section 80P(2)(a)(iv). While granting the deduction under this section, the following judgements and points should be kept in mind.
Income from the processing (without the aid of power) of the agricultural produce of its members is deductible under Section 80P(2)(a)(v). For this section the word “processing” and the “agricultural produce” are important. These terms have not been defined in the Act but have been used in other sections also and therefore, for defining these words help should be taken from the judgements which are given by various Courts while dealing the issues arising in other sections.
The most important point to be taken note is that the processing should be done without the aid of power. The condition of ‘grown’ by its member is not stipulated here as compared to clause (iii). However, in my opinion, the clause requires that the agricultural produce should be grown by the members of the society. Only in that condition the deduction can be claimed. In case the produce is bought from open market and is brought for processing, no deduction should be allowed.
Income from the activity of collective disposal of the labour of its members is deductible under Section 80P (2) (a) (vi). This section has been introduced mainly for the labour co-operative societies. These societies consist of the persons who are offering their services as labour through it. The labour can be manual or some technical or other similar services. The following judgments also clarify the deduction and should be kept in mind while dealing with the case.
Ø This deduction is available only when the earning of the society is through the utilisation of the actual labour of its members. Thus, a society of engineers engaged in collective disposal of labour of members where actual supervision of work in field is done by paid employees, will not be entitled to exemption, since there is no direct connection between the work executed and the speciality of members of the society as engineers – Nilagiri Engg. Co-op. Society Ltd. v. CIT [1994] 208 ITR 326 (Ori.).
Ø Where not only members but also a large number of non-members were contributing collective disposal of labour and condition laid down in proviso to Section 80P(2)(a)(vi) was not fulfilled, the assessee-society would not be entitled to exemption of its income – Assessing Officer v. Ganesh Co-op. (L&C) Society Ltd. [1998] 67 ITD 436 (Asr.).
The proviso below sub- Section (vi) & (vii) imposes further restriction on the voting rights of the members of the society. It provides that the deduction shall be available only to the societies subject to the conditions that the rules and bye-laws of the society restrict the voting rights to the following classes of its members:
a. Individuals, who contribute their labour;
b. the co-operative credit societies which provide financial assistance to the society; andc. the State Government.
For this section an important landmark judgment given by the Hon’ble Gujarat High Court i.e. jurisdictional High Court in the case of Gora Vibhag Jungle Kamdar Mandali v. CIT [1986] 161 ITR 658 (Guj.) should be kept in mind while analyzing the claim of the assessee. According to this judgement, if the co-operative society as specified in sub-clause (vi) wants to claim full deduction of the profits made by it, persons other than those falling under the three specified categories can be members of the society, but they should not be given the right to vote and that fact should be clearly borne out from the rules and bye-laws restricting the right to vote only to members specified in the proviso.
The whole of the profits of a co-operative society engaged in fishing and allied activities are deductible under Section 80P(2)(vii). Fishing and allied activities include the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members. The Proviso regarding restriction of voting rights which has been discussed in the preceding paragraph is also applicable to this sub-clause and, therefore, while allowing the deduction the bye-laws of the societies should be analysed and it should be verified whether the voting rights confirm to the Proviso or not.
Accordingly, the class of members entitled to voting rights should be individuals who carry on the fishing or allied activities, the co-operative credit societies which provide financial assistance to the society and the State Government.
The deductions of the whole of the amounts of profits and gains of a co- operative society is available if the following conditions are satisfied-
1. The co-operative society is a primary society engaged in supplying milk, oil seeds, fruits or vegetables.
2. Milk, oil seeds, fruits or vegetables are grown or raised by its members.
3. Milk, oil seeds, fruits or vegetables are supplied to the following:
| To whom milk, oil seeds, etc. are supplied | Object of the society/company to whom milk, oil seeds, etc. are supplied |
| A federal co-operative society | It must be engaged in the business of supplying milk, oil seeds, fruits or vegetable as the case may be. |
| The Government or a local authority | – |
| A Government company or a statutory corporation | The company/corporation must be engaged in the business of supplying milk, oil seeds, fruits or vegetables as the case may be. |
If a co-operative society is engaged in any other activity (either independently or in addition to those specified in clause (a) or clause (b) then the following amount is deductible under Section 80P(2)(c) :
This is a general deduction available to any co-operative society which does not carry any of the activities which are specified. The explanation below this clause also defines the consumer’s co-operative society as a society for the benefit of consumers.
As it is evident from the language of the section that it is a general section and no specific restriction or classification has been made. It only mentions the cases which are to be excluded and, therefore, there is bound to be litigation on the issue. Therefore, the following points/ judgments should also be kept in view while deciding the cases in this clause –
The whole of interest and dividend income derived by a co-operative society from its investments in any other co-operative society is deductible under Section 80P(2)(d). The provisions of this clause are very clear and almost all the terms are clearly defined. However, the term ‘whole of interest and dividend’ has been subject matter of litigation. The judgment on the issue indicates that the deduction is for the entire income without adjusting the outgoings. The Hon’ble Courts have held as under :
In Totgars’ Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282 (SC) it was held that the words ‘the whole of the amount of profits and gains of business’ emphasise that the income, in respect of which deduction is sought, must constitute the operational income and not the other income which accrues to the society.
Interest derived by the assessee co-operative sugar mill from its investment in co-operative bank would qualify for deduction in its entirety under Section 80P(2)(d), without adjustment of interest paid by the assessee to the co-operative bank – CIT v. Doaba Co-operative Sugar Mills Ltd. [1998] 96 Taxman 509/230 ITR 774 (Punj. & Har.).
In another judgment of ITAT Chandigarh in the case of ITO Vs. Punjab State Co-operative Milk Producers Federation Ltd.(2010) 3 ITR (Trib.) 586 it has been held that the exemption would only be on the net income there from and not on the entire interest receipts.
Therefore, considering the language of the section and contradictory opinion of the judicial forums, the A.O. should verify whether there is a nexus between the income and the expenditure and in case it is noted that certain expenditure is attributable to the exempt income, the same should be reduced before granting the deduction. Needless to say that the facts in each case should carefully be noted and the A.O. should not be guided merely by the judicial pronouncements.
The whole of the income derived by a co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities is deductible under Section 80P(2) (e).
For this clause the term godown or warehouses is very important and in a landmark judgment in the case of CIT v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd. [1986] (162 ITR 142) the Hon’ble Gujarat High Court has defined these words. The Court has held that first of all it should be a godown or warehouse which should be let out for the purpose specified in the clause. However, if the godown or warehouse is let for a purpose other than storage, processing or facilitating the marketing of commodities, the income derived there- from by a co-operative society would not be deductible under Section 80P. The judgment is very important and should be kept in mind. The facts of letting out are very important and the A.O. should get the inspection of the let-out property done to ascertain the correct facts.
The judgement of Hon’ble Supreme Court is also important – Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 182 Taxman 287 (SC). While delivering the judgment it has been held by the Hon’ble Court that the deduction is available in respect of income derived from the letting out of godowns and warehouses only where the purpose of letting is storage, processing or facilitating marketing of commodities. In that case the facts revealed that the assessee was storing commodities in its godowns as its own trading stock and, therefore, it was held to be not entitled for claim of deduction under Section 80P(2)(e).
The A.O. should also keep in view the following judgments –
The whole amount of any income by way of interest on securities or any income from house property chargeable under section 22,in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees.
This section provides that the deduction under Section80P shall be computed after reducing the gross total income by certain sections mentioned therein. Accordingly deduction under Section 80P in respect of business income of a co-operative society shall be available with reference to income after claiming deduction under sections 80HH, 80HHB, 80HHC, 80HHD, 80I 80-IA, 80J and 80JJ
The deduction under Section 80P is not available for Co-operative banks from A.Y. 2007-08. It has been explained by the Finance Minister while moving the amendment that the co-operative banks were functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore Section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions ‘co-operative bank’, `primary agricultural credit society’ have been taken as per the definition given in Part V of the Banking Regulation Act, 1949 (10 of 1949). The `primary co-operative agricultural and rural development bank’ have also been defined in the act to bring clarity. The definitions as per BR Act are given in the Appendix to the Act which are clear and self explanatory.
Further, a new sub-section (viia) has also been inserted in clause (24) of Section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of ‘income’.
The CBDT vide Circular No. 6/2010 [F.No. 173(3)/44/2009-IT (A-I)] dated 20-9-2010 has also issued a circular for the sake of clarity the circular is reproduced as under
“Section 80P of the Income-tax Act, 1961 provides for a deduction from the income of co-operative societies referred to in that section.
As Regional Rural Banks (RRB) are basically corporate entities (and not co-operative societies), they were considered to be not eligible for deduction under Section 80P when the section was originally introduced. However, as Section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be co-operative society for the purposes of the Income-tax Act, 1961, in order to make such banks eligible for deduction under Section 80P, CBDT issued a beneficial Circular No. 319 dated 11-1-1982, which stated that for the purpose of Section 80P, a Regional Rural Bank shall be deemed to be a co-operative society.
Section 80P was amended by the Finance Act, 2006, with effect from 1 -4-2007 introducing sub-section (4), which laid down specifically that the provisions of Section 80P will not apply to any co-operative bank other than a Primary Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank. Accordingly, deduction under Section 80P was no more available to any Regional Rural Bank from assessment year 2007-08 onwards.
An OM dated 25-8-2006 addressed to RBI was issued by the Board clarifying that Regional Rural Banks would not be eligible for deduction under Section 80P of the Income-tax Act, 1961 from the assessment year 2007-08 onwards.
It has been bought to the notice of the Board that despite the amended provisions, some Regional Rural Banks continue to claim deduction under Section 80P on the ground that they are co-operative societies covered by Section 80P(1) read with Boards Circular No. 319 dated 11-1-1982.
It is, therefore, reiterated that Regional Rural Banks are not eligible for deduction under Section 80P of the Income-tax Act, 1961 from the assessment year 200 7-08 onwards. Further more, the Circular No. 319 dated 11-1-1982 deeming any Regional Rural Bank to be co-operative society stands withdrawn for application with effect from assessment year 2007-08.
The field officers may take note of this position and take remedial action, if required.”
All urban Co operative credit society and Pat-Pedhis are defined by virtue of provisions of [Note :Part V contains amendment in definition ] – Section 5(ccii), 5(ccv) and 5(ccvi) of Banking Regulation Act, 1949. Further, Section 5A of Banking regulation Act, 1949 overrides Bye laws of the co op credit society whose principal business of a primary credit society is the transaction of banking business and when its paid up capital and reserves attain the level of Rs. 1 lakh, a primary credit society automatically becomes a primary co-operative bank.
Further, vide para 8 in the case of [Salgaon Sanmitra Sahakari Pathpedhi Ltd. v. Additional Commissioner of Income-tax, Ward-17(3),Mumbai. – [12 Taxmann.com 246 (2011)] the assessee society was classified as ‘co-operative bank’ under Section 12(1) of the Maharashtra Co-operative Society Act, 1960 as per the registration certificate issued by the Assistant Registrar, Co-operative Society, Mumbai. Once the urban Co operative credit society and Pat-Pedhis are classified as Bank then they are not eligible for benefit provided under Section 80P of the Income Tax Act,1961, from Assessment Year 2007-08 by virtue of Section 80P(4) read with Section 2(24)(viia) both of income Tax Act, 1961.
Further, Federation doing Banking Activities with co operative credit societies or Pat Pedhi’s who are its members and located in urban area is also not entitled for benefit provided under Section 80P of the Income Tax Act,1961, from Assessment Year 2007-08 by virtue of Section 80P(4) read with Section 2(24)(viia) of income Tax Act, 1961. The said view is supported by Kerala State Co-operative Agricultural Rural Development Bank Ltd. Vs. The Assistant Commissioner of Income-tax, Circle-1(2), Trivandrum vide ITA No. 506/Coch/2010 & S.P. No.67/Coch/2010 For AY 2007-08.(unreported but available on internet).
Since the amendment is recent, not many decisions are available on the subject. The issue has not yet been decided by any High Court and only the ITAT cases are available.
The most detailed decisions are in the cases of Kerala State Co-operative Agricultural Rural Development Bank Ltd. Vs. The ACIT and Vidisha Bhopal Kshetriya Gramin Bank, Vidisha VS. ACIT. The gist of the leading judgments on this issue is as under:
i) Citizen Co-op. Society Ltd. VS. Addl CIT
Assessee co-operative society was providing banking and credit facilities to its members only. It was found that certain activities carried on by assessee were not as per requirements of principles of co-operative society and that assessee was also engaged in activity of bill discounting and providing accommodation cheques by taking cash from members. In view of aforesaid facts, assessee was held not entitled to deduction under Section 80P. Further it was also held that assessee society being a co-operative bank providing banking facilities to members was not eligible to claim the deduction under Section 80P(2)(i)(a) after introduction of sub-section (4) to Section 80P.–[2012] 24 taxmann. com 347 (HYD.)
ii) Vidisha Bhopal Kshetriya Gramin Bank, Vidisha VS. ACIT
Assessee was a regional rural bank engaged in banking and financing activity. It claimed deduction under Section 80P. Assessing Officer rejected assessee’s claim holding that assessee was neither a Primary Agricultural Credit Society (PACS) nor Primary co-operative Agricultural and Rural Development Bank (PCARDB). It was noted from records that range of assessee’s activities were not confined to one taluk but was extended to entire district and, thus, in view of Explanation to Section 80P(4), assessee was not PCARDB. Further primary object as well as activities of assessee were not confined to agricultural purposes but other purposes also and, hence, assessee could not be regarded as PACS. In view of above facts, the impugned order of Assessing Officer rejecting assessee’s claim was upheld by ITAT.– [2012] 24 taxmann.com 278 (INDORE) / [2012] 54 SOT 51 (INDORE).
iii) DCIT VS. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd.
The Hon’ble bench considered the provisions of Section 80P of the Income-tax Act, 1961, read with sections 5(b), 5(cci) and 5(ccv) of the Banking Regulation Act, 1949 related to deductions for Income of co-operative societies for Assessment years 2007-08 to 2009-10. The Assessee was a society engaged in business of providing credit facilities to its members by granting loans for purposes like business, housing, vehicles, etc. Section 80P deduction was denied by Assessing Officer in view of amendment brought into Section 80P whereby co-operative banks were excluded from purview of Section 80P with effect from 1-4-2007. Held that since on facts none of assessee’s aims and objects allowed assessee to accept deposits of money from public for purpose of lending or investment, it could not be said that principle business of assessee was banking business and , therefore, assessee could not be regarded as a primary co-operative bank and, hence, was not entitled to deduction under Section 80P(2)(a)(i). –[2012] 23 taxmann.com 313 (PANAJI) / [2012] 137 ITD 163 (PANAJI) / [2012] 149 TTJ 356 (PANAJI)
iv) Kekri Sahakari Bhumi Vikas Bank Ltd. VS. Income-tax Officer
In view of amendment to Section 80P vide Finance Act, 2006 with effect from 1-4-2007, from assessment year 2007-08 onwards, an assessee would be eligible for relief there under only if it falls within two categories of co-operative banks allowed by Section 80-P(4), i.e., ‘primary agricultural co-operative society’ and ‘primary co-operative agricultural and rural development bank’. Assessee was a co-operative society, formed under Rajasthan State Co-operative Societies Act, 2001 – It filed its return claiming exemption under Section 80P(2)(a)(i). Relying upon amended provisions of Section 80P, Assessing Officer rejected assessee’s claim holding that it was engaged in financing activities even other than purely agricultural activities. In order to claim deduction, assessee was required to show that its principal business consisted of providing financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including marketing of crops) and the aforesaid requirement had to be satisfied by assessee independently for each year, as there could well be a change in profile of its lending activities with time. In view of facts stated under heading – ‘Deductions – Income of co-operative socieites’ and, further having regard to fact that area of operation of assessee-society exceeded ‘a taluk’, there was no basis to consider assessee as being a primary co-operative agricultural and rural development bank as defined in Section 80P, so as to be entitled for tax benefit there under on its income.[In favour of revenue] –[2012] 22 taxmann.com 63 (JP.) / [2012] 54 SOT 64 (JP).
v) Kerala State Co-operative Agricultural Rural Development Bank Ltd. Vs. The ACIT-(I.T.A. No. 506/Coch/2010 & S.P. No.67/Coch/2010)
The above decision is unreported but can be downloaded from web from ITAT.NIC.IN. The decision is most comprehensive and detailed one on the issue. Hon’ble members have discussed all the provisions of the I.T.Act, BR Act and the NBARD Act which are relevant for the section and have decided the issue. It would be better if the complete decision is read to understand the issue. However, for the sake of brevity, the important paragraphs of the order are reproduced as under-
“4.5 Here it may be pertinent to state that the NBARD Act was enacted by the Parliament in the year 1981 to establish a bank known as `National Bank for Agricultural and Rural Development’ (`NBARD’ hereinafter), for promoting and regulating credit and other facilities for the promotion and development of agriculture, including agricultural small scale industries and other allied economic activities in the rural areas with a view to promote integrated rural development. The terms `agriculture’ and `rural development’ stand defined per ss. 2(a) and 2(q) thereof respectively in very broad and comprehensive terms. It provides loans and advances, by way of re-finance, to inter alia, state co-operative banks for financing agricultural operations and growing of crops; marketing and distribution of inputs necessary for agricultural or rural development; in fact, any activity for the promotion of or in the field of agricultural and rural development, besides also, commercial and trade activities in the rural sector. The same are repayable on demand or on the expiry of fixed periods not exceeding 18 months. It also provides long-term financial assistance to, among others, state co-operative banks, by way of refinancing, for promotion of agricultural and rural development. Section 2(v) of the NBARD Act defines the `state land development bank’ as the principal co-operative society in a State which has, as its primary object, the providing of long-term finance for agricultural development. The Notes on Clauses to Finance Bill, 2006, vide clause 19 thereof, clarifies that the deduction under Section 80P, which is qua the income of co-operative societies engaged in, inter alia, carrying on the business of banking or providing credit facilities to its members (s. 80P(2) (a)(i)), is withdrawn for all co-operative banks except primary agricultural credit society and primary co-operative agricultural and rural development bank. As such, but for these two primary units, all the co-operative societies, as covered under Section 80P(2)(a)(i), shall no longer (effective A. Y. 2007-08) be eligible for deduction under Section 80P.
4.6 Continuing further, as would be self-evident, the definition of a `co-operative bank’ does not enlist the condition of the conduct of the `business of banking’ as the criterion for a co-operative society to be a co-operative bank. In fact, it is not even stated as one of the qualifying activities; the sole and defining activity that qualifies a co-operative society to be a co-operative bank, be it at the primary, district or state level, is the financing of its members, rendering the conduct of the `business of banking’, even if so, irrelevant. Clause (viia) stands inserted [by Finance Act, 2006 (w.e.f. 1/4/2007)] in Section 2(24) of the Act, defining `income’ inclusively, to include the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members. Two things, thus, bear mention; firstly, the amendment only impacts co-operative societies and, secondly, only those in the business of banking, which is construed broadly so as to include provision of credit facilities to the constituents.
Now, without doubt, the said profits and gains would even otherwise, i.e., independent of the amendment, qualify to be `income’ assessable as business income u/c IV-D under Section 28(i) r/w s. 2(24)(i). The only purpose that the amendment therefore serves, is to delineate such income of the specified entities (i.e., co-operative societies) separately and, further, clarify that for the purposes of the Act the `financing of its constituents’ is to be considered as integral to banking, i.e., as a part of the business of banking. That is, qua the underlying economic activity generating the income, financing forms part of banking, or at least as far as the specified entities, being co-operative societies, are concerned.
In view of the obtaining legal position, as discerned from the reading of the applicable laws, i.e., the BR Act and the NBARD Act, in conjunction with which the relevant provisions of the Act are to be read, and the judicial precedents brought to our notice, we are of the clear view that the assessee is a `co-operative bank’ and, consequently, hit by the provision of s. 80P(4), so that the deduction provided by the said section would not be available to it from A.Y. 2007-08 onwards and, accordingly, stood rightly denied the impugned claim in its assessment for the year. So, however, we also clarify that to the extent the assessee is (also) or is acting (also) as a `state land development bank’, which too falls within the purview of the NBARD Act, exigible for financial assistance from NBARD, the assessee’s claim merits acceptance, and it would be entitled to deduction under Section 80P(2)(a)(i) on the income relatable to its lending activities as such a bank. The matter is, therefore, remitted to the file of the AO for a consideration of this aspect of the matter and adjudication as per law on factual verification and determination, pass a speaking order, after allowing reasonable opportunity to the assessee to establish its claims, the onus for which is only on it. We decide accordingly.’’
From A.Y.2003-04 onwards the deduction under Section 80P is not available unless it is claimed in the return of income by virtue of amended provision of Section 80A(5).
The following judgments are also worth keeping a note –
During the course of scrutiny, the assessing officer should carefully examine the factual aspects first and on the basis of those facts the decision should be taken. Unless, there is a direct judgment of the jurisdictional High Court or the Hon’ble Supreme Court and the department has accepted the same the A.O. should take the decision without getting influenced by the judicial pronouncement. The following important points should be examined during the course of scrutiny.
1. Whether the assessee which has claimed deduction under Section 80P is a co-operative society or not as per the definition given in the act (section 2(19)). The society should be registered under the Co-operative Society Act, 1912 or with some other agency in the state.
2. Whether the deduction has been claimed in the return of income filed or not? This is applicable from A.Y.2003-04 onwards.
3. Examine the memorandum of association, the articles of association, the Income-tax Returns filed with the Department, the status of the business indicated in such returns.
4. Examine the byelaws and other documents explaining the rules and regulations of the society so as to clearly understand the purpose and the nature of business done by it.
5. Examine the list of the members of the society and verify whether the members have been made as per the byelaws of the society or not.
6. Certain deductions in clause-2(a)(i), 2(a)(ii), 2(a)(iii), 2(a) (iv) and 2(a)(v) are available only on income arising out of the transactions with the members. Whereas clause-2(a)(vi) and 2(a)(vii), there is no such restriction of income being generated amongst the members. However, there are restrictions in clause-2(a)(vi) & (vii) on voting rights given to the members. Therefore, the AO has to carefully examine these facts.
7. What business activity being done by the society? Whether the business activity is in accordance or authorized by the byelaws or not?
8. If the assessee is a co-operative bank, it is not entitled for deduction under Section 80P(a)(i) from A.Y.2007- 08 onwards.
9. Note whether there is any income other than the authorized activity or income other than the activity amongst the members or the activity which is not covered by the provisions of Section 80P. In case there is some other activity only the proportionate deduction has to be allowed.
10. Actual conduct of business activity should be examined by calling various records so as to verify whether it is actually being done in the manner indicated in the byelaws or the activities have been camouflaged to look as the genuine activity.
Following points should be taken care of while framing the assessment order
1. The most important point is marshelling of facts correctly and clearly. The facts on the basis of which the decision is to be taken should clearly come out from the order. The reader should be able to understand the facts without much difficulty.
2. The clauses or items of the byelaws which are being relied while disallowing particular claim should be clearly mentioned. As a matter of practice, the relevant clause should be reproduced so that there is no confusion at the appellate stage.
3. Any other fact which is being relied while disallowing the claim of the assessee should also be clearly brought out and details should be provided. Needless to say if the A.O. has collected any fact which has not been confronted to the assessee, the same should be brought to notice of the assessee and after giving due opportunity and sufficient time to the assessee, the decision should be taken. The fact that proper opportunity has been given should be clearly mentioned in the order by giving the relevant facts such as date of show cause notice, etc.
4. It has been observed that the AOs rely on judicial pronouncements or the case laws without mentioning the correct facts and linking the facts with the judgments. It is advised that the help of the judicial pronouncement should be taken to understand the issue and taking the rational decision. While drafting the order, an attempt should be made, as far as possible, to rely on facts. Unnecessary reliance on the case laws should be avoided at the level of the Assessing Officer.
5. At the cost of repetition it would be prudent to mention and remind the A.O. to clearly mention the basic facts such as date of filing of return, status, nature of business, conformity with the byelaws of the society, date of issue of notice under Section 143(2), etc. in the assessment order.
6. Deduction under Section 80P in respect of business income of a co-operative shall be available with reference to income after claiming deduction under Sections 80HHB, 80HHC, 80HHD and 80-IA.
Author-Shelley Jindal, CIT (ITAT)-I, Ahmedabad
(Republished With Amendments)
