Test of mutuality under section 80P of Income Tax Act?

The Citizens Cooperative Society Ltd vs. ACIT (Supreme Court)

Question of law discussed:  "An assessee cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members if it has carved out a category called ‘nominal members’ covering test of mutuality under section 80P"


Important discussion/ points of the case (for easy reference)

1) Learned counsel explained the nature of business of its client being co-operative society "it was submitted that the assessee is a mutual concern. Income derived by it from its operations is distributed among members. The members are entitled to participate in the surplus, thereby creating an identity. Facilities are provided only to members of the society, who provide funds to it and their identity with the funds and their participation in the surplus arising from the said fund is unmistakably found and thus principles of mutuality will apply. In order to apply principle of mutuality, there must be complete identity between contributors and participators and requirement of law bring that contributors of the common fund and participators in the surplus must be an identical body. What is essential is that members of the assessee as a class must be able to participate in the surplus. It is immaterial whether surplus is paid back to the members or is put to reserve with the society for development and for providing better amenities to the members. There is complete identity between the contributors and the participators of the assessee,"

2) There were arguments against the nature of mutuality in the case of above society and the learned counsel of Revenue states that "  provisions governing the conduct of the assessee, the assessee cannot admit nominal members and deal with them. The main activities of the assessee are in violation of the above provisions as seen under:

(i) As per the information furnished, it was found that the assessee caters to two distinct categories of people.

(ii) The first category is that of resident members or ordinary members.

(iii) The second category is that of nominal members, who make deposits with the assessee for the purpose of obtaining loans etc.

(iv) This category of persons is neither members nor nominal/associate members.

(v) As noticed, the assessee accepts deposits mostly from the second category these deposits are mostly kept in FDs.

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3)    It was further note that that provisions of Section 80P(2)(i)(a) were grossly violated as the appellant Society was found not dealing with its members only but also with general public as well,

4) It was well noted by the learned court that "Therefore, it hardly needs to be emphasised that all those co-operative societies which fall within the purview of Section 80P of the Act are entitled to deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to anyone or more of such activities which are mentioned in sub-section (2)"

5) " Undoubtedly, if one has to go by the aforesaid definition of ‘co-operative bank’, the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a co-operative bank, it is imperative to have a licence from the Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, the Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a co-operative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of Section 80P"

6) And hence learned court observed that "Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act"

For reading full text of the case please refer http://itatonline.org/archives/the-citizens-cooperative-society-ltd-vs-acit-supreme-court-s-80p-test-of-mutuality-an-assessee-cannot-be-treated-as-a-co-operative-society-meant-only-for-its-members-and-providing-credit-facilities/citizen-coopbank-mutuality-80p/

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