Ita/32/2014 Of The Commissioner Of Income Tax v. M/S Karnataka State Co Operative

IN THB HIGH COURT OF KARNATAKA AT BANGALOREDATEKD THIS THE 3[th]DAY OF JUNE 2014 PRESENT THR HON BLE MR. JUSTICE N. KUMAR. AND THR HON’BLE MR. JUSTICK B MANOHAR. ITA No.32 OF 2014 BETWEEN; 1.The Commissioner of Income-Tax,C.R.Building, Queens Road,Bangalore. 2.tThe Income Tax Officer,Ward-3(1), C.R. Building,Queens Road, Bangalore. _ APPKRLLANTS (By Sri.Kamaladhar.G., Advocate) AND: M/s.Karnataka State Co-OperativeHousing Federation Limited,#3, Dewan Madhava Rao Road,Basavanagudl,Bangalore-560 O04.. RESPONDENT (By Sri.B.5.N. Prasad, Advocate) This ITA is filed under Section 260-A of I.T. Act,|1961 arising out of Order dated 30.08.2013 passed inITA.No.274/BANG/2013,.fortheAssessmentYear2009-10 praying to formulate the substantial questions of law stated therein and to allow the appeal and setaside the order passed by the ITAT, Bangalore in ITANo.274/BANG/2013 dated 30.08.2013 and confirm theorder of the Appellate Commissioner confirming theorder passed by the Income Tax, Ward-3(1), Bangalore. This appeal coming on for admission this day,|N,KUMAR, J.delivered the following:- JUDGMENT The revenue has preferred this appeal against the.order passed by the Tribunal holding that the assessee-society1S eligible.fordeductionunder|Section8OP(2)(a)(1) of the Income Tax Act, 1961. — 2 |Theassessee-M/s.KarnatakaStateCo-Operative Housing Federation Limited, which is a Co-Operative Society had filed its return of income for theassessment year 2009-10 on 29.9.2011 admitting totalincome of Rs.18,91,300/-. The case was selected forscrutiny. During the course of assessment proceedings,the assessing Officer noticed that the assessee hadclaimed an amount of Rs.2,30,47,/17/- as deductionunder Section 80P(2)(a)(1) of the Act. The assessee wasasked to explain. The assessee furnished its reply. Aiter considering the reply, the assessing authority heldthat the said deduction is permissible only if the Co-operative Society is engaged in the business of bankingor providing credit facility to its members. The word“member” used in the Co-Operative Societies Act onlyrefers to a person who himself is a member of thesociety. Where another society is a member of theassessee-society, all members of the former do not ipsofactobecome|membersot the.assessee-society.Therefore, relying on the judgment of the Apex Court intheCa SCot U.P.Co-operativeCaneUnions’Federation Limited .vus. CIT(1997) 11 SCC 28disallowed the deduction and brought the said amountTo Tax. | The assessee’s appeal against the said order before the Commissioner of Income Tax(Appeals) came to bedismissed. | In the appeal filed against the said orders before.the Tribunal, the Tribunal held that inU.P. Co- Operative Cane Unions’ Federation Limtited’s casethe Apex Court relied on the judgment of the Apex Court1n Assam Co-Operative Apex Marketing SocietyLimited .vs. CIT (Addl.) [1993/201 ITR 338(SC]|whichlater came to be over ruled by the Apex Court in theCaSCot|KeralaStateCo-OperativeMarketingFederation Limited .vs. Commissioner of Income-Tax (1998) 98 TAXMAN 313(SC)/and therefore, in view ofthe subsequent judgment, the impugned orders were setaside, the appeal was allowed and the deductionclaimed was restored. Aggrieved by the said order, therevenue is in appeal. 3.|Thelearnedcounselforthe|TEVEeETLassailing the impugned order contends that theassessee is a federal society, the membership of whichis not open to individuals. Member also has beendefined under the Act and therefore, a member of a)primary co-operative Society is not a member of theFederal Society and therefore, Section 8OP(2)(a)(i) of the Act is not attracted and the Tribunal was in error in/eranting the relief. (1998) 98 TAXMAN 313(SC)/and therefore, in view ofthe subsequent judgment, the impugned orders were setaside, the appeal was allowed and the deductionclaimed was restored. Aggrieved by the said order, therevenue is in appeal. 3.|Thelearnedcounselforthe|TEVEeETLassailing the impugned order contends that theassessee is a federal society, the membership of whichis not open to individuals. Member also has beendefined under the Act and therefore, a member of a)primary co-operative Society is not a member of theFederal Society and therefore, Section 8OP(2)(a)(i) of the Act is not attracted and the Tribunal was in error in/eranting the relief. 4Per contra, the learned counsel for theassessee submits that the proviso to the definition of aFederal Society makes it clear that the Federal Societycarves out an exception to the general rules andpersons and individuals who were admitted as nominalmembers are treated as members of the Federal Societyalso and therefore, the Tribunal was justified ineranting the relief. Therefore, the substantial questionthat arises for our consideration in this appeal is asunder:-. “Whether the Tribunal was correct inallowingdeductionunderSectionSOP(2)(a)() to assessee federation on|interest income earned from extending|credit facilities to individuals who are|not the direct members of the federation|in violation of the bylaws which provide|for extending facilities only to _ thmember societies?” 5 |In order to appreciate the said contention, it is necessary to look into the relevant provisions. —section S8OP(2)(a)(i1) of the Income Tax Act reads aunder:-. “carrying on the business of bankingor providing credit facilities to _ itmembers,” or section 8OP deals with deduction in respect of income ofco-operative societies. Sub-section(2) deals with various.types of income earned by a co-operative society. Onesuch income is income derived by the Society which isengaged in carrying on the business of banking orproviding credit facilities to its members. Such incomeis exempted from payment of tax and it shall not formpart of income of the Society at all. Now the questionfor consideration is whether the assessee which 1s a'banking federation is carrying on the business ofbanking or providing credit facilities to its members. —The Karnataka Co-Operative Societies Act, 1959, defines a federal society at Section 2(e4) as under:-. “(e4) “ federal society” means a co-operative society, the membership of|which is not open to individuals. Provided that nothing in this clauseShall apply to admission of individuals|as nominal members.” From the atoresaid definition, it is clear that themembership of a federal society is not open toindividuals. It is open only to a co-operative society.However, the proviso carves out an exception andprovides for admission of individuals as nominalmembers. In other words, they are not full tledgedmembers. | similarly, the definition of member sets out thetypes of persons who could be the members of a co-operative society. They are (1) a person joining in theapplication for the registration of a co-operative society;(2) a person admitted to membership aiter suchregistration in accordance with the Act, Rules and the bye-laws; (3) a nominal member and (4) an associatemember. A co-operative society is defined under the Act atsection 2(c) as under:- ‘Co-operative Society’ means asociety registered or deemed to be|registered under this Act” similarly, the definition of member sets out thetypes of persons who could be the members of a co-operative society. They are (1) a person joining in theapplication for the registration of a co-operative society;(2) a person admitted to membership aiter suchregistration in accordance with the Act, Rules and the bye-laws; (3) a nominal member and (4) an associatemember. A co-operative society is defined under the Act atsection 2(c) as under:- ‘Co-operative Society’ means asociety registered or deemed to be|registered under this Act” 6. It is not in dispute that the assessee-The|Karnataka State Co-Operative Housing FederationLimited is a co-operative society registered under theAct. It is a federal society, the membership of which isopen to a co-operative society registered under the Actand not to individuals. However, the proviso makes itclear that if an individual is to be admitted as a member|of a Federal Society it could be done as a nominalmember. The definition of a Member contained under|section 2(f) includes a nominal and an associatedmember. Therefore, in order to attract the benefit ofdeduction in respect of income of a co-operative society,what is required is that the assessee claiming benefit should be carrying on the business of banking or providingcredit facilities to its members. AS an individual could be anominal member both of a federal society and a co-operativesociety and if a federal society extends credit facilities to|such nominal members, the income derived from such.business falls within Sub-Section (2)(a)(i) of Section 80P ofthe Act. Therefore, the assessee would be entitled to the.benefit of deduction. Therefore, the finding recorded by theTribunal that the assessee is entitled to the said benefit is strictly in accordance with law and it cannot be found fault|with. In that view of the matter, we do not see any merit in |this appeal. Therefore, the substantial question of law is|answered in favour of the assessee and against the revenue. T[.Accordingly, the appeal is dismissed. *alb/-. Sd/- JUDGE. Sd/-. JUDGE.