ORDER
B.K. Haldar, Accountant Member
1. This is an appeal tiled by the assessee against the order of the learned Commissioner of Income-tax (Appeals)-IV, Hyderabad dated 31.12.2004 for the assessment year 2002-03.
2. The appellant has taken as many as 8 grounds in the grounds appeal. However, the basic grievance of the appellant is disallowance of exemption under Section 80P(2)(a)(i) of the Income-ax Act, 1961 in respect of income of Rs. 1,98,982/- derived from services rendered by the appellant co-operative bank to non-members.
3. During the assessment proceedings, the Assessing Officer noted that the assessee co-operative bank derived income from non-members for rendering following services:
1) Facilitating non-members to purchase DDs;
2) Facilitating non-members to open savings account;
3) Facilitating non-members to discount their cheques;
4) Facilitating non-members to purchase pay orders etc.
The income received from the above services were in the form of commission on OBC, Commission on CDD, Commission on pay orders, commission on Demand Drafts, Commission on Daily Deposits and Miscellaneous income from non-members. The Assessing Officer, therefore, asked the appellant to show cause as to why income received from non-members for the services rendered by the appellant should not be taxed. The assessee contended that the income was received from non-members during the course of carrying on of normal banking activity as per provisions of Section 5 & 6 of the Banking Regulation Act, 1949 and, therefore, the appellant was entitled to exemption of the above income as per provisions of Section 80P(2(a)(i) of the Act. The Assessing Officer, however, held that such income received from non-members is not exempt under Section 80P(2)(a)(i) of the Act. Reliance was placed on the following decisions:
1) CIT v. U.P. Co-operative Cane Union Federation Ltd. 122 ITR 913 (All.)
2) C.I.T. v. U.P. Co-operative Cane Union Federation 217 ITR 231 (All.)
3) U.P. Co-operative Cane Union Federation Ltd. v. CIT 237 ITR 574 (SC)
4. The Assessing Officer held that the transaction conducted by the assessee with non-members is akin to the transaction carried on by other banks with their, clients and as other banks are paying tax on such income, co-operative banks are also required to pay tax on such income.
4.1 Details of such income were called for by the Assessing Officer and the appellant could file the break up only for the month of March 2002. The Assessing Officer therefore, worked out the quantum of income, which is not exempt under Section 80P(2)(a)(i) on proportionate basis as under:
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Proportionate
Sl. Abstract Total Members Non- %age Receipt from
No. Members non-members
for the entire
year
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1 Commission on 6,589 0 62.00 100.00 6589
OBC
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2 Commission on 109,356 0 321.00 100.00 109356
CDO
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3 Commission on 31,367 - 2442.00 100.00 31367
Pay orders
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4 Commission on 11,899 0 1748.00 100.00 11899
Demand Drafts
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5 Commission Daily 15,984 776 576.00 42.60 6809
Deposits
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6 Misc. Income 1,78.289 14,639 12666.50 46.39 82,708
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248728
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5. Aggrieved by the above, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals)-IV, Hyderabad who confirmed the finding of the Assessing Officer. In addition to the contentions raised before the Assessing Officer, the appellant contended before the learned Commissioner of Income-tax (Appeals) that a co-operative society is entitled to exemption of the sum i.e. the whole amount of profit and gains of business attributable to “carrying on business of banking or providing credit facilities to its members”. As the conjunction ‘or’ has been used between the expression “carrying on of the business of banking” and “providing credit facilities to its members”, the business of banking need not necessarily be carried on with the members of the appellant society for availing of the exemption. This contention of the appellant was also not accepted by the learned Commissioner (Appeals) on the ground that the intention of the legislature was to exempt the income derived by the co-operative society from the business activities specified in the section and that the exemption was granted in consonance with the principle of mutuality applicable to such incomes. As the principle of mutuality does ‘not apply to the impugned income, it was held by him that the appellant is not entitled to deduction under Section 80P of such income. Aggrieved by the above, the assessee has filed the present appeal before the Tribunal.
6. We have heard both the parties at length and the submissions made by the learned Counsel of the assessee and the learned Departmental Representative which also are available on record. However, the basic issue that we have to decide is as to whether the conjunction ‘or’ between the two expressions i.e. “carrying on the business of banking” and “providing credit facilities to its members” is to be read as ‘and’. That is to say, as to whether banking business has to be carried on by the appellant only with its members so that profits and gains from such activity can be claimed as exempt under Section 80P(2)(a)(i) of the Act. The Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. v. ITO 251 ITR 522 held that income earned from utilization of reserve funds for statutory reserves under Section 67(2) of the Gujarat Co-operative Societies Act, 1961 was eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961. From this it can be inferred that to be eligible for exemption under sc. 80P(2)(a)(i), a co-operative bank need not deal only with its members. Also if we peruse Section 80P, it becomes apparent that exemption under the section has not been granted on the principle of mutuality alone. As such, separate exemption provision is not required for receipts that satisfy the principle of mutuality. Such receipts are not income and are outside the scope of Section 4 of the Act. Revenue has not been able to show as to why the conjunction ‘or’ should be read as ‘and’. Exemption is allowed to co-operative credit societies under Section 80P(2)(a)(i). Admittedly such societies do not carry on Banking Business. When two expressions are segregated by the conjunction ‘or’, each become, a separate entity by itself and the principle of ejusdem generis cannot be applied. Thus, we are unable to accept the contention of Revenue that income attributable to Banking business carried on by cooperative societies is exempt under Section 80P(2)(a)(i) only when such activities are limited to its members. We find support for our above finding from the observations of various High Courts narrated here under.
7. The Hon’ble Andhra Pradesh High Court in the ase of CIT v. Maddi Sudarsanam 174 ITR 659, had the occasion to explain the purport of the expression “office or employment of profit” as used in Section 10(14) of the Act. The Court held:
Section 10(14) does not use the expression “”office of profit.” The expression used is “office or employment of profit”. The expression “of profit” qualifies only “employment”, and, in our opinion does not qualify “office”.
The expression used in Sc. 80P(2)(a)(i) is similar to the expression considered by the High Court in this case.
8. The Hon’ble Gujarat High Court in the case of C.I.T. v. Baroda Peoples Co-op. Bank Ltd. 280 ITR 282 has decided the issue which is the subject matter of appeal before us. In paras 49 to 51 of the judgment, the Hon’ble Court has held as under:
Section 80P(2)(a)(i) of the Act permits a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members to claim deduction of the whole of the amount of profits and gains of business attributable to such activity, viz., business of banking or providing credit facilities to its members. On a plain reading, it becomes apparent that the two activities are distinct and separate activities. The first activity, viz., carrying on the business of banking connotes a larger activity than the activity of providing credit facilities to its members. The latter is restricted qua the members of the society while the former is wide enough to take within its sweep as its potential customers both members and non-members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression ” business of banking” ignores the word “or” which occurs between the two phrases. There is no warrant for reading the word “or” as ” and”. Once the Legislature has used the term “or”, the logical consequence that flows from the contextual setting is that it provides for an alternative, a different distinct activity.
In the case of Kerala State Co-operative Marketing Federation Ltd. v. CIT the apex court was called upon to resolve a controversy in the context of Section 80P(2)(a)(iii) of the Act but after reproducing the entire section at page 819 it was observed as under:
We may notice that the provision is introduced with a view to encouraging and promoting the growth of the co-operative 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 co- operative society is exempt from tax what has to be seen is whether the 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.
Therefore, while examining a case wherein a co-operative society claims deduction under Section 80P(2)(a)[i) of the Act. one has to bear in mind the object with which the provision is introduced, viz., to encourage and promote growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. The apex court has also stated that if a question arises as to whether any particular category of income of a co-operative society is exempt from tax what has to be seen is whether the income falls within any of the several heads because each would be a separate and distinct head and merely because conditions for deduction under one head are not satisfied that does not necessarily mean that an assessee is not entitled to deduction under another head wherein the conditions stand fulfilled. Hence the contention on behalf of the Revenue that the first activity, namely, business of banking, has to take colour from the second activity, namely, providing credit facilities to members, does not merit acceptance.
It may be noted that the Hon’ble Gujarat High Court has taken into consideration, the Apex Court’s decision reported in 251 ITR 522.
9. In this view of the matter, we are of the considered opinion that for being eligible to claim exemption under Section 80P(2)(a)(i), a co-operative bank need not carry on the business of banking only with is members. Income attributable to banking activities carried on with non-members will also be entitled to exemption under this section.
10. In the result, the appeal of the assessee is allowed to the above extent.