The Commissioner Of Income Tax-I, Chandigarh v. M/S Punjab State Co-Operative Bank Ltd.,Sector 17, Chandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH I.T.A.No.82 of 2007 DATE OF DECISION: MARCH 03, 2008 The Commissioner of Income tax-I, Chandigarh .....APPELLANT Versus M/s Punjab State Co-operative Bank Ltd.,Sector 17, Chandigarh ....RESPONDENT CORAM:HON'BLE MR.JUSTICE SATISH KUMAR MITTALHON'BLE MR.JUSTICE RAKESH KUMAR GARG --- Present:Mr. S.K.Garg Narwana, Advocate,for the appellant... SATISH KUMAR MITTAL, J. The instant appeal filed by the revenue under Section 260Aof the Income Tax Act (hereinafter referred to as `the Act') is directedagainst the order dated 31.07.2006 passed by the Income Tax AppellateTribunal, Chandigarh Bench `B' Chandigarh (hereinafter referred to as`the ITAT') in ITA No.550/Chandi/2005 in case of the respondent-assessee for the Assessment Year 1999-2000 by raising the followingsubstantial question of law:- Whether on the facts and circumstances of the case, theHon'ble ITAT was right in law in holding that income earnedfrom banking business with `nominal' members is eligible fordeduction under section 80P(2)(a)(i) of the Income-tax Act,1961? I.T.A.No.82 of 2007 -2- The brief facts of the case are that the respondent-Co-operative Bank (hereinafter referred to as `the assessee') is a registeredsociety under the Punjab Co-operative Societies Act, 1961 (hereinafterreferred to as `the Societies Act'). The assessee is a co-operative societycarrying on the business of banking and extending the credit facilities toits members and nominal members. The assessee being carrying on thebusiness of banking, claimed exemption under Section 80P(2)(a)(i) of theAct and filed its return of income declaring its income at nil for theAssessment Year 1999-2000. The Assessing Officer vide its order dated 16.10.2002 framedthe assessment for the present assessment year under Section 143(2) ofthe Act whereby the assessee's income was determined atRs.1,64,79,254/- by also adding interest income to the tune ofRs.68,56,901/- which was derived from the loans advanced to nominalmembers as income from other sources and disallowed the claim of theassessee that this should be treated as income derived from bankingbusiness which is eligible for exemption under Section 80P(2)(a)(i) of theAct. The Assessing Officer held that that this interest income could not beclaimed as deduction as the same did not pertain to the banking businessbeing conducted by the assessee with members of the Co-operative Bank,but was earned with the business activity with non-members. TheAssessing Officer was of the view that a Co-operative Society engaged inthe business of banking is exempt from tax from interest income if it earnsthe interest by banking activities with its members alone. Aggrieved against the aforesaid order of the Assessingofficer, the assessee filed an appeal before the Commissioner of Income I.T.A.No.82 of 2007 -3- Tax (Appeals), who vide its order dated 16.3.2005 deleted the above-saidaddition while holding that the Co-operative Society engaged in thebusiness of banking was entitled to deduction under Section 80P(2)(a)(i)of the Act. It was held that the banking activity, which was carried on bythe assessee with non-share members, who became the nominal membersafter some time, was the activity of business of banking covered underSection 80P(2)(a)(i) of the Act. Aggrieved against the aforesaid order of the Assessingofficer, the assessee filed an appeal before the Commissioner of Income I.T.A.No.82 of 2007 -3- Tax (Appeals), who vide its order dated 16.3.2005 deleted the above-saidaddition while holding that the Co-operative Society engaged in thebusiness of banking was entitled to deduction under Section 80P(2)(a)(i)of the Act. It was held that the banking activity, which was carried on bythe assessee with non-share members, who became the nominal membersafter some time, was the activity of business of banking covered underSection 80P(2)(a)(i) of the Act. The revenue feeling not satisfied with the order of theCommissioner of Income Tax (Appeals) preferred an appeal before theITAT, who vide its order dated 31.7.2006 dismissed the appeal of therevenue and confirmed the view taken by the Commissioner of IncomeTax (Appeals) while holding that the deduction under Section 80P(2)(a)(i) of the Act is available to the assessee as the loans advanced to variousloanees was income related to banking activity. Against the said order, thepresent appeal has been filed by the revenue raising the aforesaidsubstantial question of law. Learned counsel for the appellant submitted that a Co-operative Society carrying on the business of banking and earning interestincome by providing credit facilities only to its members, is entitled toexemption under Section 80P(2)(a)(i) of the Act. If such Society isearning interest income from the credit facilities provided to non-members, the said income is not exempt under the said Clause. Learnedcounsel submits that the assessee herein has earned interest income byadvancing loans to the nominal members who are not the members fromthe very beginning but were made members just before sanctioning anddisbursing of loans to them. According to the learned counsel, such I.T.A.No.82 of 2007 -4- commercial transactions, which do not strictly fall in the fold of co-operative movement, do not entitle the assessee Co-operative Bank toconcessional treatment under Section 80P of the Act. The admission ofsuch kind of members just before the advancement of loans was only tosatisfy the provisions of statute which is against the spirit of Section 80Pwhich gives special treatment to banking activity with members of co-operative societies. The learned counsel submits that that the nominalmembers are not the share holders and have no share in the profit of theco-operative society. They are having no voting rights. Therefore, they donot strictly fall under the definition of “member” of the co-operativesociety as defined under the Societies Act, and any interest incomederived from the loans advanced to them will not be exempted underSection 80P of the Act. Learned counsel submits that the purpose ofexemption under Section 80P is obviously to engage employment of asmuch capital as possible for financing and extending the scope of co-operation and not for enabling Co-operative banks to earn tax free incomeby making investments or extending loans to various commercial entitieswho are non-share holders. He submits that the interpretation canvassedby the assessee would be contrary to the legislative intent and will becounter-productive. The true test for applying the deduction under Section80P is whether the income earned is attributable to the utilization ofcirculating capital of the co-operative society, engaged in the activity ofthe business of banking, which in every case must depend on theattendant facts and circumstances. Learned counsel submits that theincome earned by nationalized and private banks does not rank for suchdeduction under the Act whereas in the case of co-operative society doing I.T.A.No.82 of 2007 -5- I.T.A.No.82 of 2007 -5- business of banking and earning income from the activities as mentionedunder Section 80P does rank for such treatment under the Act i.e. thewhole of the amount earned from the business of the banking or creditfacilities extended to the members ranks for deduction under Section 80P(2)(a)(i) of the Act. Learned counsel further submits that when a co-operative bank enters into a business dealing with non-members it losesits importance as the co-operative bank and reduces its position to anordinary bank. In nutshell, learned counsel argued that a harmoniousinterpretation on the statutory claim of Section 80P of the Act clearlyindicates that the entire income of a co-operative society engaged in thebusiness of banking is not exempt but it is to exempt up to the extent thatthe activities of business of banking for providing credit facilities to itsmembers. We have heard the learned counsel for the appellant and gonethrough the impugned orders. The provisions of Section 80P of the Act, which are relevantfor the decision of this case, are reproduced hereunder:- “80P(1) Where, in the case of an assessee being a co-operative society, the gross total income includes anyincome referred to in sub-section (2), there shall bededucted, in accordance with and subject to the provisionsof this section, the sums specified in sub-section (2), incomputing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be thefollowing, namely:-following, namely:- (a) in the case of a co-operative society engaged in- (i)carrying on the business of banking or providingcredit facilities to its members, orcredit facilities to its members, or (ii)a cottage industry, or I.T.A.No.82 of 2007 -6- (iii)the marketing of agricultural produce grown by itsmembers, or members, or (iv)the purchase of agricultural implements, seeds,livestock or other articles intended for agriculturefor the purpose of supplying them to its members,orlivestock or other articles intended for agriculturefor the purpose of supplying them to its members,or (v)the processing, without the aid of power, of theagricultural produce of its members, oragricultural produce of its members, or (vi)the collective disposal of the labour of itsmembers, or members, or (vii) fishing or allied activities, that is to say, thecatching, curing, processing, preserving, storing ormarketing of fish or the purchase of materials andequipment in connection therewith for the purposeof supplying them to its members,catching, curing, processing, preserving, storing ormarketing of fish or the purchase of materials andequipment in connection therewith for the purposeof supplying them to its members, the whole of the amount of profits and gains of businessattributable to any one or more of such activities :Provided that in the case of a co-operative societyfalling under sub-clause (vi), or sub-clause (vii), therules and bye-laws of the society restrict the votingrights to the following classes of its members, namely:- (f) in the case of a co-operative society, not being ahousing society or an urban consumers' society or a society I.T.A.No.82 of 2007 -7- carrying on transport business or a society engaged in theperformance of any manufacturing operations with the aidof power, where the gross total income does not exceedtwenty thousand rupees, the amount of any income by wayof interest on securities or any income from house propertychargeable under section 22. Explanation.-For the purposes of this section, an “urbanconsumers' co-operative society” means a society for thebenefit of the consumers within the limits of a municipalcorporation, municipality, municipal committee, notifiedarea committee, town area or cantonment.” The provisions of Section 80P were introduced with a view I.T.A.No.82 of 2007 -7- carrying on transport business or a society engaged in theperformance of any manufacturing operations with the aidof power, where the gross total income does not exceedtwenty thousand rupees, the amount of any income by wayof interest on securities or any income from house propertychargeable under section 22. Explanation.-For the purposes of this section, an “urbanconsumers' co-operative society” means a society for thebenefit of the consumers within the limits of a municipalcorporation, municipality, municipal committee, notifiedarea committee, town area or cantonment.” The provisions of Section 80P were introduced with a view to encouraging and promoting growth of co-operative sector in theeconomic life of the country and in pursuance of the declared policy ofthe Government. The different heads of exemption enumerated in thesection are separate and distinct heads of exemption and are to be treatedas such. Whenever a question arises as to whether any particular categoryof an income of a co-operative society is exempt from tax, then it has tobe seen whether such income fell within any of the several heads ofexemption. If it fell within any one head of exemption, it would be freefrom tax notwithstanding that the conditions of another head ofexemption are not satisfied and such income is not free from tax underthat head of exemption. Clause(a)(i) of sub-section(2) of Section 80P ofthe Act provides that a co-operative society engaged in (i) carrying on thebusiness of banking or providing credit facilities to its members, shall beentitled for exemption from tax as referred in sub-section(1). Thus sub-clause talks of a co-operative society engaged in carrying on the businessof banking or providing credit facilities to its members. It means that a co- I.T.A.No.82 of 2007 -8- operative society engaged in carrying on the business of banking and aco-operative society providing credit facilities to its members will beentitled for exemption under this sub-clause. The carrying on the businessof banking by a co-operative society or providing credit facilities to itsmembers are two different types of activities which are covered under thissub-clause. A society engaged in carrying on the business of bankingwhether from its members or non-members is entitled for exemptionunder this sub-clause and a society which is not engaged in carrying onthe business of banking but providing credit facilities to its members isalso entitled for exemption under this sub-clause because the word “or”used in the section cannot be read as “and”. Therefore, a co-operativesociety engaged in carrying on the business of banking is earning someincome from the business activities of banking whether from its membersor non-members, is entitled for exemption under this clause. Learnedcounsel argued that the word “or” in this sub-clause should be read as“and”. If the said word is read as “and”, then it will provide that a co-operative society engaged in carrying on the business of banking andproviding credit facilities to its members, will be entitled for exemptionunder this clause. If this interpretation is accepted, then there are numberof co-operative societies, though who are not engaged in carrying on thebusiness of banking but providing credit facilities to its members andearning interest income, will not be entitled for benefit under this sub-clause, which is not the intention of the legislation. By this sub-clause, thebenefit has been provided to the co-operative societies which are engagedin carrying on the business of banking or providing credit facilities to itsmembers. It is not necessary for getting exemption under this clause that a I.T.A.No.82 of 2007 -9- I.T.A.No.82 of 2007 -9- co-operative society engaged in carrying on the business of banking hasto earn the interest income only from providing credit facilities to itsmembers. The benefit under this clause cannot be denied to a co-operativebanking society engaged in carrying on the business of banking only onthe ground that the interest income from the banking activities was notearned from its members. In our opinion, the interest income earned by aco-operative society engaged in carrying on the business of banking froma non-member is also exempt to tax under this sub-clause. The contentionof the learned counsel for the appellant cannot be accepted that whilereading the word “or” as “and”, the interest income derived by a co-operative society engaged in the business of banking from non-members,is not to exempt to tax under this clause. It is well settled principle ofinterpretation that the word “or” is normally disjunctive and “and” isnormally conjunctive, but at a time they are read as vice-versa to giveeffect to the manifest intention of the legislation as disclosed from theprovisions of the Section. But if the little reading of the whole of theSection or sub-section or a clause is quite clear and there is no ambiguity,then the plain meaning to the section should be given effect and the word“or” should not be read as “and”. In a case the word “or” can be read as“and” if the plain reading of this sub-clause results in absurdity, but this isnot a situation in the present case. Therefore, in our view, the ITAT has rightly held that oncethe assessee had earned interest income from the loans advanced tovarious loanees, the said income was related to the banking activities,therefore, is liable for exemption under Section 80P(2)(a)(i) of the Act. Inthat situation, if the assessee received the interest income from the loan I.T.A.No.82 of 2007 -10- advanced to various loanees related to the banking activities, thenwhether a loanee was the member or not the member of the co-operativesociety, loses its significance. In our opinion, it has been rightly held thatany interest income received by the co-operative society engaged incarrying on the business of banking activities from its members or non-members, is liable for exemption under this sub-clause. Thisinterpretation is supported by various decisions of the Supreme Court andHigh Courts. The Supreme Court in Commissioner of Income Taxvs.-Bangalore Distt. Cooperative Central Bank Ltd.(1998) 233 ITR 282(SC) has held that the interest on Govt. securities and dividends earned byco-operative society engaged in banking business is eligible for deductionunder Section 80P(2)(a)(i) of the Act, though the said income was notearned by the co-operative society from the credit facilities provided to itsmembers. It was held that if the assessee is a co-operative society carryingon the business of banking and if the income in question is attributable tothe said activity, there is no doubt that the same is to be deducted from thegross total income. Again, in Commissioner of Income Taxvs. KartatakaState Co-operative Apex Bank, (2001) 251 ITR 194 (SC), it was held thatthe interest income derived by co-operative bank from investment offunds with Reserve Bank of India or State Bank of India is exempt underSection 80P(2)(a)(i) of the Act, irrespective of the fact that investment ismade out of reserve fund or working capital. Again in that case the saidincome was not derived from the credit facilities provided to its members. Further, in Mehsana District Central Co-operative Bank Ltd.vs. Income Tax Officer, (2001) 251 ITR 522 (SC), the Supreme Courtwhile following the judgment in Commissioner of Income Taxvs. I.T.A.No.82 of 2007 -11- Further, in Mehsana District Central Co-operative Bank Ltd.vs. Income Tax Officer, (2001) 251 ITR 522 (SC), the Supreme Courtwhile following the judgment in Commissioner of Income Taxvs. I.T.A.No.82 of 2007 -11- Kartataka State Co-operative Apex Bank(supra) has held that the incomeearned from utilization of its reserve funds maintained by the assesseebank under Section 67(2) of the Gujarat Co-operative Societies Act, 1961is exempt to tax under Section 80P(2)(a)(i) of the Act. In that case it wasfurther held that the income received by the co-operative bank as incomeof rent from lockers given on hire to the customers is also to exemptunder Section 80P(2)(a)(i) of the Act. It was also observed that theprovision of safe deposit vaults is part of ordinary banking business,therefore, the income derived by the assessee from hiring out of safedeposit vaults is income from banking activities and is deductible underSection 80P(2)(a)(i) of the Act. From this judgment, if an income derivedfrom hiring out of the lockers has been considered as income from thebanking activities, then an income derived from the loan advanced to non-members or the nominal members can not be said to be not deductiblewhen the said income is certainly deriving from the banking activities ofthe assessee. Again, recently the Supreme Court in Commissioner ofIncome Taxvs. Nawanshahr Central Co-operative Bank Ltd., (2007) 289ITR 6 (SC) while affirming the judgment of this Court in CITvs.Karnataka State Co-operative Apex Bank, (2004) 186 CTR (P&H) 459and following its earlier decision in CITvs. Ramanathapuram District Co-operative Central Bank Ltd.,(2002) 255 ITR 423 (SC) has held that a co-operative bank carrying on the business of banking is statutorily requiredto place a part of its funds in approved securities, the income arising fromsuch investments is attributable to the business of banking falling underthe head “Profits and gains of business” and is deductible under Section I.T.A.No.82 of 2007 -12- 80P(2)(a)(i) of the Act. The Karnataka High Court in Commissioner of Income Tax& Anr.vs. The Grain Merchants Co-operative bank Ltd., (2004) 267 ITR742 (Kar) has held that rental income received by the assessee-societyengaged in the business of banking letting out the premises is an incomereceived by carrying on the business of banking and as such it is entitledfor deduction under Section 80P(2)(a)(i) of the Act. It was observed thatthe reading of clauses (k) and (I) of Section 6(1) of the BankingRegulation Act, 1949 shows that in addition to the business of banking setout in clause (b) of Section of that Act, acquisition, construction,maintenance and alteration of any building or works necessary orconvenient for the purpose of the banking company and alsoselling/improving or leasing or otherwise dealing with all or any part ofthe property and rights of the company, also should be treated as abanking business. A contention raised in that case that in view of clause(f)of sub-section (2) of Section 80P, the deduction on account of the rentalincome should not be given to a co-operative society even though thesame is engaged in the business of banking. In this regard, it was held thatthe society referred to in clause (f) of sub-section (2) of Section 80P mustbe understood as the society which is not carrying on the bankingbusiness or providing credit facilities which is included under clause(a)(i)of sub-section (2) of Section 80P of the Act. Since the assessee in thatcase was carrying on business of banking, therefore, it was held that theprovisions of clause(f) of sub-section (2) of Section 80P cannot controlthe benefit of exemption extended to the assessee from the payment of taxif the income is derived from the business activities of banking. I.T.A.No.82 of 2007 -13- I.T.A.No.82 of 2007 -13- So, in our view, if the income of a society is falling withinany one head of exemption, it has to be exempted from taxnotwithstanding that the condition of other heads of exemption are notsatisfied. A reading of the provision of Section 80P of the Act wouldindicate the manner in which the exemption under the said provisions issought to be extended. Whenever the legislature wanted to restrict theexemption to a primary co-operative society, it was so made clear as isevident from clause (f) with reference to a milk co-operative society that aprimary society engaged in supplying milk is entitled to such exemptionwhile denying the same to a federal milk co-operative society. Even otherwise, the contention of the learned counsel for theappellant that a person who subscribes to the share capital of the societyonly deem to be the member of the society, can not be accepted. Thecontention of the appellant that if the loan has been advanced to thenominal members who are not the share holders of the society and whobecame nominal members of the society just before advancing loans onpayment of membership fee, can not be deemed to be members of thesociety. Section 2(g) of the Societies Act defines “Member” as under:- “2.(g)“Member” means a person joining in the applicationfor the registration of a co-operative society and a personadmitted to membership after such registration in accordancewith this Act, the rules and the bye-laws, and includes anominal and an associate member and the Government whenit subscribes to the share-capital of a society.” According to this definition, the Member also includes anominal and an associate member. The “nominal member” and “associatemember” have also been defined as under:- I.T.A.No.82 of 2007 -14- “2.(ggg) “nominal member” means a person admitted tomembership as such after registration in accordance with thebye-laws; (a) “associate member” means a member who holds jointly ashare of a co-operative society with others but whose namedoes not stand first in the share certificate.” Learned counsel for the appellant raised the contention thatas per the definition of “Member”, it includes a nominal and an associatemember and the Government 'when it subscribes to the share-capital of asociety'. His contention is that if a nominal member does not subscribe tothe share-capital of a society, he can not become a member of the society.This contention of the learned counsel for the appellant is not acceptablebecause the words 'when it subscribes to the share-capital of a society' arerelating to the Government and not to the nominal and associate members.The associate members have been clearly defined as members who jointlyhold a share of a co-operative society with others but whose name doesnot stand first in the share certificate, whereas nominal members meansthe persons admitted to membership as such after registration inaccordance with the bye-laws. A person can become the nominal memberof a co-operative society even according to the bye-laws of the society bypaying the membership fees. It is not necessary for becoming the nominalmember that he has to subscribe for the share-capital. On the other hand,the Government cannot become a nominal member. It can become amember of the society when it subscribes to the share-capital of thesociety. Thus, it is not necessary for a nominal member to subscribe to theshare-capital. The whole thresh of the revenue is that the loan advanced tothe nominal members, who are not holding the share-capital, cannot be I.T.A.No.82 of 2007 -15- I.T.A.No.82 of 2007 -15- termed to be the loan advanced to the members and any income derivedfrom such loanees would not be deductible for exemption under Section80P(2)(a)(i) of the Act because the said income is not derived by the co-operative bank from the credit facilities provided to its members. In ourview, a nominal member who has become a member of the society afterits registration on payment of the prescribed fees as per the bye-laws ofthe society, will also be considered as a member of the society as per thedefinition given under the Societies Act. Therefore, in the facts andcircumstances of the case, it makes no difference whether the income isderived from the loan advanced to the nominal members or members orotherwise to a third party because every income of interest derived by aco-operative banking society from the banking business activity is toexempt under Section 80P(2)(a)(i) of the Act. In view of the aforesaid discussion, we do not find any meritin this appeal as in our opinion, no substantial question of law is arisingfrom the impugned order passed by the ITAT. Dismissed. (SATISH KUMAR MITTAL) JUDGE March 03, 2008 (RAKESH KUMAR GARG)vkg JUDGE Refer to Reporter