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CASE LAW

Rahul Bansal (Finalist) (35929 Points)

31 January 2010

Entitlement of a Primary Co-operative Credit Society to exemption under section 80P of IT Act, 1961 - A primary agricultural co-operative credit society is not a co-operative bank and therefore, not entitled to any deduction under section 80P(2)(a)(i) as a bank; but as it is a primary co-operative credit society, it may be entitled to some deductions on the income earned by it from its transactions with its members - Sridharpur Co-operative Bank v. ITO [ITA Nos. 779 & 780/Kol/08]

Determination of nature of renovation expenses incurred on a leased premises - In order to claim deduction of an expenditure as revenue which otherwise gives enduring advantage, the onus is on assessee to prove that the ownership of the property even during subsistence of lease, vests with the lessor and the assessee enjoyed the benefit of reduced license fee - The Living Room Designers v. ITO [ITA No. 996/Mum/2008]

Derivatives will also fall within meaning of ‘commodity’ used in section 43(5) of IT Act, 1961 - If it is held that the transaction in derivatives does not fall in section 43(5), it will make clause (d) and Explanation thereto below section 43(5) introduced by Finance Act, 2005 to be redundant - Shree Capital Services Ltd. v. ACIT [ITA No. 1294 (Kol) of 2008]

Transfer pricing - Where an assessee has followed one of standard methods of determining arm’s length price [ALP], such a method cannot be discarded in preference over transactional profit methods, unless revenue authorities are able to demonstrate fallacies in application of standard methods - Assistant Commissioner of Income-tax, Circle 2 v. MSS India (P.) Ltd. - [2009] 32 SOT 132 (PUNE) [IT APPEAL NO. 393 (PUNE) OF 2007]

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Rahul Bansal (Finalist) (35929 Points)
Replied 31 January 2010

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v c garg (partner) (21 Points)
Replied 23 February 2010

pl. provide any case law regarding tds u/s195 if there is remittance for sharing of cost with 5% markup.

R.B.POPAT (PRACTICING C.A.) (55 Points)
Replied 16 April 2012

APPLICABILITY OF INCOME TAX ON CO OPERATIVE CREDIT SOCIETY & PAT PEDHIS W.E.F. A.Y.2007-08

R.B.POPAT. B.COM,F.C.S,F.C.A. Mob No.-09769259566/09322272512.

Meaning of Co Operative Credit Society under Income Tax Act: Section 2(19) of IT Act,1961:

“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.

Licensing of Existing Primary (Urban) Co-operative Credit societies/Banks :

In terms of sub-section (2) of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), the primary (urban) cooperative banks existing in the country as on March 1, 1966, (when some banking laws were applied to UCBs), were required to apply to the Reserve Bank of India. They were given three months to obtain a licence to carry on banking business. Similarly, a primary credit society which becomes a primary (urban) cooperative bank by virtue of its share capital and reserves reaching Rs. one lakh (Rs.1,00,000) and above was to apply to the Reserve Bank of India for a licence within three months from the date on which its share capital and reserves reach Rs. one lakh. The existing unlicensed primary (urban) cooperative banks can carry on banking business till they are refused a licence by the Reserve Bank of India.(SOURCE : Brochure explaining RBI role and functions in brief under the title Urban Bank Department of RBI)

Note : Please also refer point no. 4 of page 15 of Banking regulation Amendment Bill No. 18 of 2011 introduced in the loksabha, which provides that if the licence is not renewed by the RBI then they have to shut their businress.

The Hon Tribunal in the case of DCIT v. Ankush Rao Ingle [2010] 3 taxmann.com 55 (Hyd. - ITAT) with respect to meaning of 'Cooperative bank' shall have the meaning assigned to In it Part V of the Banking Regulation Act, 1949 (10 of 1949)

All urban Co operative credit society and Pat-Pedhis by virtue of provisions of [emphasis supplied - Note : [Part V contains amendment in definition - vide Section 5(ccii),5(ccv) and 5(ccvi) of Banking Regulation Act, 1949] 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 cooperative bank.

Vide para 7 of Citizen Co-operative Society Ltd. v. Additional Commissioner of Income-tax *, Range 9, Hyderabad [2010] 8 TAXMANN.COM 27 (HYD) The assessee’s counsel contention is that once the share capital and reserves exceed Rs. 1 lakhs the society has to transform itself into Cooperative Bank.

Banking Regulation overrides Bye laws of the society :

Section 5A of Banking regulation Act,1949 overrides Bye laws of the co op credit society.

Withdrawal of Section 80P for Urban Co Operative credit societies vide Section 80P(4) read with section 2(24)(viia) of IT Act :

(a) The deduction earlier allowable under section 80P in the case of a co-operative society engaged in carrying on the business of banking (co-operative banks) has been withdrawn from the assessment year 2007-08 barring in the case of a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Explanation provided under section 80P(4)For the purposes of this sub-section,—

( i ) “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);

( ii ) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk (emphasis supplied -location) and the “principal object” of which is to provide for long-term credit for agricultural and rural development activities.] (emphasis supplied-activities).

Vide Para 13.7 S. 80P : Business income of co-operative societies carrying on the business of banking or providing credit facilities to its members was eligible for deduction from total income u/s.80 P. Effective from A.Y. 2007-08, this deduction will not be available to co-operative banks, other than primary agricultural societies or primary co-operative agricultural rural co-operative banks. Consequently, the definition of ‘Income’ has been amended in S. 2(24)(viia) to include profits of the business of banking (including primary credit facilities) carried on by co-operative societies with its members. Therefore, the benefit of exemption on the basis of mutuality principle cannot be claimed by such society. (Source BCA website Subject : Income Tax Law Month-Year : May 2006 Author/s : P. N. Shah Chartered Accountant Topic : Amendments in the Income-tax Act )

The Hon Tribunal in the case of Kerala State Cooperative Agricultural Rural Development Bank is not entitled to deduction u/s 80P(2)(a)(i) and have held that The Assessee is a ‘cooperative bank’ and, consequently, hit by the provision of section 80P(4), so that deduction provided by section 80P would not be available to it from A.Y. 2007-08 onwards and, accordingly, stood rightly denied [2011] 10 taxmann.com 145 (Cochin - ITAT) and Kekri Sahakari Bhumi Vikas Bank Ltd., Vs The ITO, Ward - 2, ITA No. 764/JP/2011 A.Y.2007-08.

Income arising from the business of banking or providing credit facilities to its members, cottage industries or marketing of agricultural produce grown by its members, etc. However, the deduction is not available to a cooperative bank other than a primary agricultural credit society and a primary cooperative agricultural and rural development bank from A.Y.2007-08. Eligible Tax Payers : Co-operative societies [ Source : F.No. 149/124/2006-TPL(Pt.) Department of Revenue Central Board of Direct Taxes Tax Policy & Legislation Division].

Meaning of primary activity :

The Hon. Tribunal the case of Gurdaspur Co-Op. Sugar Mills v.Deputy Commissioner of Income tax (2009) 122 TTJ 522 (ASR) with respect to primary activity have held as under :

The assessee in this case is buying sugarcane from the agriculturists, crushing the same and then selling the sugar. The benefit of deduction under s. 80P (2)( a )( iii ) is available to a co-operative society , which is engaged in the marketing of agricultural produce grown by its members. On similar facts, 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 s. 80P (2)( a )( iii ).

Submitted with respect that subsequent decision of P&H HC in the case of Budhewal Co-op. Sugar Mills Ltd. v. Commissioner of Income-tax [2009] 184 TAXMAN 165 (PUNJ. & HAR.) needs to be reviewed as provision of deductions needs to be construed strictly as held by Hon. Supreme Court in the case of Vemareddy Kumaraswami Reddy v. State of Andhra Pradesh 2006 (2) SCC 670 their Lordships of Hon’ble Supreme Court affirmed the principle of construction and held that when the language of the statute is clear and unambiguous court cannot make any addition or subtraction of words.

Further, If the language of the statute is plain and capable of one and only one meaning, that obvious meaning is to be given to the said provision. Rules of interpretation are applied only if there are ambiguities when the purpose of interpretation is to ascertain the intention of the law i.e. mens legis, it is based on assertion by adopting plain meaning of the statute in the absence of any ambiguity.

The Hon. Tribunal in the case of Muzaffar Nagar District Co-operative Development Federation Ltd. v. Assistant Commissioner of Income-tax (2010) 195 195 TAXMAN 46(DELHI) (MAG) with respect to the primary activity of the assessee was to arrange direct supply of fertilizers from the few concerns to its members. It claimed deduction under section 80P in respect of transport income which was not permissible under 80P(2)(e).

Withdrawal of Section 80P even for Federation of Co operative Societies :

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) both of income Tax Act, 1961. The said view appears in Kerala State Co-operative Agricultural Rural Development Bank Ltd., Statue, Trivandrum-695001. 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. [also available on internet - [2011] 10 taxmann.com 145 (Cochin - ITAT)].

Concept of mutuality why not applicable to Co Operative Credit Socitie’s:

There is no aspect of mutuality in the case of the assessee registered under the Co-operative Societies Act as one of the objectives of a co-operative society will be to make profits and declare dividends to its members. In the case of a mutual concern, there is no room for such intention of making profit and distribute the same among the members.[ Sri Laxminarayana Swamy Co-Operative Society Ltd. v. Income-tax Officer [2010] 4 ITR(TRIB.) 27 (BANG.)][ Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC) ; 229 CTR 209].

Status of Co Operative Society for Tax Audit purpose, Issuance of notice under Section 133(6) :

The status of co operative society and Bank for the purpose of section 44AB is that of Artificial juridical person. M.V.Rajendran V. ITO 260 ITR 442 Ker. HC or [2003] 128 TAXMAN 385 (KER.), Mattul Service Co-operative Bank Ltd. v. Income-tax Officer * (CIB), Kozhikode [2010] 186 TAXMAN 409 (KER.)

Whether Co operative credit societies are excluded from definition of AOP :

The "Co-operative societies" are specifically exempted from the definition of "Association of Persons" in section 40( ba ), meaning thereby the Income-tax Act does not debar deduction of payment of interest to the members of a co-operative society [Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam Cooperative Bank Ltd.* [2011] 13 taxmann.com 190 (Visakhapatnam)].

Whether interest paid to members by Co operative credit society is allowed under section 36(1)(iii) or section 37(1) :

"Co-operative societies" are specifically exempted from the definition of "Association of Persons" in section 40(ba), meaning thereby the Income-tax Act does not debar deduction of payment of interest to the members of a co-operative society [Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam Cooperative Bank Ltd.* [2011] 13 taxmann.com 190 (Visakhapatnam)].

Suppose, a person, say Mr. X, approaches the assessee-society for availing a loan of say, Rs. 1,00,000. Let us assume that he is required to purchase shares worth Rs. 5,000 from the share capital of the assessee-society. In that case, Mr. X will pay Rs. 5,000 to the assessee-society and the assessee-society will given a loan of Rs. 1,00,000 to Mr. X. In effect, Mr. X would receive a net amount of Rs. 95,000 only from the assessee-society. Similarly, the net amount which go out of the coffers of the assessee-society is also Rs. 95,000 only. However, the assessee-society would charge interest at applicable rate on the loan amount of Rs. 1,00,000, even though the net amount received by Mr. X is only Rs. 95,000, i.e., that the assessee-society is collecting interest, not only on Rs. 95,000,being net cash out flow from its coffers, but also on the amount of Rs. 5,000 given by Mr. X as Share capital. At the end of the year, the assessee-society may determine the amount of interest payable on the share capital out of the surplus. In the above said example, the assessee-society would pay interest on the amount of Rs. 5,000 given as share capital.

Applicability of Section 44AB of income Tax Act,1961 to Co Operative Credit Socitie’s :

Once it is held to be Bank then turnover or gross receipt if exceeds Rs. 60 lakh/Rs. 15 Lakh then the Tax audit is compulsory and failure to get accounts audited would attract penalty under section 271B of Income tax Act, 1961.

Whether Co Operative Credit Socitie’s immune from issue of notice under section 133(6)?:

In view of Karnataka Bank Ltd. v. Secretary, Government of India [2002] 255 ITR 508/ 123 taxman 219 (SC) that it is not a condition for the issuance of a notice under section 133(6) that any proceedings should be pending against the person with respect to whom the information is called for.

Applicability of Section 194A(3) of Income Tax Act, 1961 to Co Operative Credit Socitie’s:

Co-operative society, made payment of interest on deposits received from its members, in view of provisions of section 194A(3)(v), it was not required to deduct tax at source while making said payments [Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam v. Visakhapatnam Cooperative Bank Ltd.* [2011] 13 taxmann.com 190 (Visakhapatnam)].

The [2011] 13 taxmann.com 190 (Visakhapatnam) requires reconsideration in view of :

Section 194A(3)(viia) applies to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);
Assessee to produce necessary certificates showing that it was a ‘Primary credit co-operative society ’, to avail benefit of exemption under section 194A(3)(viia) - Held, yes [Kadirur Vanitha Co-operative Society Ltd.* v.Income-tax Officer, Kannur [2011] 196 TAXMAN 418 ( Ker.HC)].

As specified (supra) the benefit of non deduction of tax on Interest is only conferred to the following which is covered under explanation to section 80P(4) of the Income tax Act,1961.

Section 194(3)(viia) applies to such income credited or paid in respect of,—

(a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank;

(b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking;]

Applicability of Section 269SS of Income Tax Act, 1961 to Co Operative Credit Socitie’s:

Vide Para 5.20 of the Citizen Co-operative Society Ltd. v. Additional Commissioner of Income-tax *, Range 9, Hyderabad [2010] 8 TAXMANN.COM 27 (HYD) The meaning of the word ‘banking company’ is explained in Explanation 1 to the said section. According to the Explanation (1) any company to which the Banking Regulation Act 1949 applies. Sub-section (1) of section 5 defines the work ‘banking company’ to mean ‘any company which transacts business of bank in India’. Section 56 of the Act substitutes the word ‘company’ by the ‘Cooperative society ’. Therefore, even a cooperative society for which the provisions of section 56 apply shall be a banking company. Further, section 9 of the Multi State Cooperative Act, 2002 mentions that any society registered under the Multi State Cooperative Act shall be a body corporate by its name. Therefore it is a body corporate by its name. Therefore it is a body corporate within the meaning of the provisions of Multi State Cooperative Societies Act, 2002. In view of the above, the assessee is a banking company for the purposes of the Banking Regulation Act 1949 and hence the provisions of section 269SS have no application.

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 'cooperative bank' [ to argue that Section 269SS do not apply to bank] under section 12(1) of the Maharashtra Cooperative Society Act, 1960 as per the registration certificate issued by the Assistant Registrar, Cooperative Society, Mumbai. (Emphasis supplied- to save skin under section 269SS they classified themselves as Bank therefore section 80P(4) read with section 2(24)(viia) obviously would apply).

However, Section 269SS Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by,—

(a) …….;

(b) any banking company, post office savings bank or co-operative bank ;

(d) ………… ;

(e) …………. :

⁴⁰[Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.]

Explanation.—For the purposes of this section,—

⁴¹[(i) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act ;]

(ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ;

(iii) “loan or deposit” means loan or deposit of money.]

The Hon. Kerala High Court in the case of M.V.Rajendran V. ITO 260 ITR 442 Ker. HC in operating part of the order have with respect to applicability of Section 269SS have opined as under :

If co-operative banks and co- operative societies are allowed to maintain deposits beyond the scrutiny of the Income-tax Department, then the societies will become safe havens for hoarding black-money in the country which is opposed to public policy. Besides this, the statutory authorities vested with the responsibility to levy tax on income will be prevented from achieving their objective and that will defeat the very purpose of the Income-tax Act. The Supreme Court of India will upholding section 269SS of the Income-tax Act in the case of Asst. Director of Inspection (Investigation) v. Kumari A. B. Shanthi [2002] 255 ITR 258 held as follows (headnote) :

“The object of introducing section 299SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he makes some false entries, he shall not escape by giving false explanation for the same. During search and seizure, unaccounted money is unearthed and the taxpayer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so-called lender also to manipulate his records to suit the plea of the taxpayer. The main object of section 269SS was to curb this menace of making false entries in the account books and later giving an explanation for the same.”

Amendment made by finance Act 2007 w.r.t. applicability of other provisions applicable to banks are also made applicable to Co Op Bank :

The Finance Act 2007 is amended to provide for tax-neutral amalgamation or demerger of co-operative banks.

Hence, the amalgamated or resulting co-operative bank will be able to set off and carry forward the unabsorbed loss or accumulated depreciation of the amalgamating or demerged co-operative bank.

New section 44DB dealing with special provision for computing deductions in case of business reorganisation of co-operative banks is inserted. Similarly, section 72AB, dealing with provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation in business reorganisation of co-operative banks, is inserted. Deduction in respect of any provision for bad and doubtful debts is also allowable now under section 36(1)(viia).

Deduction in respect of any provision for bad and doubtful debts to be allowed in case of co-operative banks section 36(1)(viia) :

Section 36(1)(viia), deduction of an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under the said clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of a scheduled bank or a non-scheduled bank computed in the prescribed manner is allowed as deduction in the computation of income of such banks. ‘Scheduled bank’, as defined in the Explanation to clause (viia) of sub-section (1) of section 36, does not include a co-operative bank. Since profits of co-operative banks are taxable after withdrawal of deduction available to a co-operative society engaged in carrying on the business of banking under section 80P, such co-operative banks are allowed deduction with effect from the assessment year 2007-08 under clause (viia) of sub-section (1) of section 36 in respect of any provision for bad and doubtful debts as its profits have become taxable.

Special provision for computing deductions in the case of business reorganisation of co-operative banks (Section 44DB) :

Special provision for computing deductions in the case of business reorganisation of co-operative banks is inserted with effect from April 1, 2008. As per section 44DB the deduction under section 32, section 35D, section 35DD or section 35DDA shall, in a case where business reorganisation of a co-operative bank has taken place during the financial year, be allowed in accordance with the provisions of this section. The amount of deduction allowable to the predecessor co-operative bank under section 32, section 35D, section 35DD or section 35DDA shall be determined in accordance with the following formula :

	A×	B
	A×	C

where A = the amount of deduction allowable to the predecessor co-operative bank if the business reorganisation has not taken place;

B = the number of days comprised in the period beginning with the 1st day of the financial year and ending on the day immediately preceding the date of business reorganisation; and

C = the total number of days in the financial year in which the business reorganisation has taken place.

Similarly, the amount of deduction allowable to the successor-co-operative bank under section 32, section 35D, section 35DD or section 35DDA shall be determined in accordance with the following formula:

	A×	B
	A×	C

where A = the amount of deduction allowable to the successor co-operative bank if the business reorganisation has not taken place;

B = the number of days comprised in the period beginning with the date of business reorganisation and ending on the last day of the financial year; and

C = the total number of days in the financial year in which the business reorganisation has taken place.

In a case where an undertaking of the predecessor co-operative bank entitled to the deduction under the provisions of section 35D, section 35DD or section 35DDA is transferred before the expiry of the period specified therein to a successor co-operative bank on account of business reorganisation, the provisions of these sections will apply to the successor co-operative bank in the financial years subsequent to the year of business reorganisation as they would have applied to the predecessor co-operative bank, as if the business reorganisation has not taken place. For the purpose of this section, definition of different connotations has also been provided under sub-section (5) of this section.

(a) ‘amalgamated co-operative bank’ means—

(i) a co-operative bank with which one or more amalgamating co-operative banks merge; or

(ii) a co-operative bank formed as a result of merger of two or more amalgamating co-operative banks;

(b) ‘amalgamating co-operative bank’ means—

(i)a co-operative bank which merges with another co-operative bank; or

(ii) every co-operative bank merging to form a new co-operative bank;

(c)‘amalgamation’ means the merger of an amalgamating co- operative bank or banks with an amalgamated co-operative bank, in such manner that—

(i)all the assets and liabilities of the amalgamating co-operative bank or banks immediately before the merger (other than the assets transferred, by sale or distribution on winding up, to the amalgamated co-operative bank) become the assets and liabilities of the amalgamated co-operative bank;

(ii)the members holding seventy-five per cent or more voting rights in the amalgamating co-operative bank become members of the amalgamated co-operative bank; and

(iii)the shareholders holding seventy-five per cent or more in value of the shares in the amalgamating co-operative bank (other than the shares held by the amalgamated co-operative bank or its nominee or its subsidiary, immediately before the merger) become shareholders of the amalgamated co-operative bank;

(d)‘business reorganisation’ means the reorganisation of business involving the amalgamation or demerger of a co-operative bank;

(e) ‘co-operative bank’ shall have the meaning assigned to it in clause (cci) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(f) ‘demerger’ means the transfer by a demerged co-operative bank of one or more of its undertakings to any resulting co-operative bank, in such manner that—

(i)all the assets and liabilities of the undertaking or undertakings immediately before the transfer become the assets and liabilities of the resulting co-operative bank;

(ii)the assets and the liabilities are transferred to the resulting co-operative bank at values (other than change in the value of assets consequent to their revaluation) appearing in its books of account immediately before the transfer;

(iii)the resulting co-operative bank issues, in consideration of the transfer, its membership to the members of the demerged co-operative bank on a proportionate basis;

(iv)the shareholders holding seventy-five per cent or more in value of the shares in the demerged co-operative bank (other than shares already held by the resulting bank or its nominee or its subsidiary immediately before the transfer), become shareholders of the resulting co-operative bank, otherwise than as a result of the acquisition of the assets of the demerged co-operative bank or any undertaking thereof by the resulting co-operative bank;

(v)the transfer of the undertaking is on a going concern basis; and

(vi)the transfer is in accordance with the conditions specified by the Central Government, by notification in the Official Gazette, having regard to the necessity to ensure that the transfer is for genuine business purposes;

(g)‘demerged co-operative bank’ means the co-operative bank whose undertaking is transferred, pursuant to a demerger, to a resulting bank;

(h)‘predecessor co-operative bank’ means the amalgamating co-operative bank or the demerged co-operative bank, as the case may be;

(i)‘successor co-operative bank’ means the amalgamated co-operative bank or the resulting bank, as the case may be;

(j)‘resulting co-operative bank’ means —

(i) one or more co-operative banks to which the undertaking of the demerged co- operative bank is transferred in a demerger; or

(ii)any co-operative bank formed as a result of demerger.”

Thus, in the year of reorganization the deductions under section 32, section 35D, section 35DD or section 35DDA are allowable to both ‘successor co-operative bank’ and ‘predecessor co-operative bank’ in the ratio of number of days and in the financial years subsequent to the year of business reorganisation. The provisions of these sections will apply to the successor co-operative bank as they would have applied to the predecessor co-operative bank, as if the business reorganisation has not taken place.

Carry forward and set-off of accumulated losses and unabsorbed depreciation allowance(Section 72AB) :

Carry forward and set-off of accumulated losses and unabsorbed depreciation allowance in business reorganisation of co-operative banks New section 72AB on similar line as was section 72AA, is inserted by the Finance Act, 2007, with effect from the assessment year 2007-08 which provides for provisions relating to carry forward and set-off of accumulated losses and unabsorbed depreciation allowance in business reorganisation of co-operative banks. Under this provision, successor co-operative bank shall, in a case where the amalgamation has taken place during the previous year, be allowed to set off the accumulated loss and the unabsorbed depreciation, if any, of the predecessor co-operative bank as if the amalgamation has not taken place, and all the other provisions of the Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly. Sub-sections (2) to (7) read as under :

“(2) The provisions of this section shall apply if—

(a) the predecessor co-operative bank—

(i) has been engaged in the business of banking for three or more years; and

(ii) has held at least three-fourths of the book value of fixed assets as on the date of the business reorganisation, continuously for two years prior to the date of business reorganisation;

(b)The successor co-operative bank—

(i)holds at least three-fourths of the book value of fixed assets of the predecessor co-operative bank acquired through business reorganisation, continuously for a minimum period of five years immediately succeeding the date of business reorganisation;

(ii)continues the business of the predecessor co-operative bank for a minimum period of five years from the date of business reorganisation; and

(iii)fulfils such other conditions as may be prescribed to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business reorganisation is for genuine business purpose.

(3) The amount of set off of the accumulated loss and unabsorbed depreciation, if any, allowable to the assessee being a resulting co-operative bank shall be,—

(i)the accumulated loss or unabsorbed depreciation of the demerged co-operative bank if the whole of the amount of such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting co-operative bank; or

(ii)the amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged co-operative bank as the assets of the undertaking transferred to the resulting co-operative bank bears to the assets of the demerged co-operative bank if such accumulated loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting co-operative bank.

(4) The Central Government may, for the purposes of this section, by notification in the Official Gazette, specify such other conditions as it considers necessary, other than those prescribed under sub-clause (iii) of clause (b) of sub-section (2), to ensure that the business reorganisation is for genuine business purposes.

(5) The period commencing from the beginning of the previous year and ending on the date immediately preceding the date of business reorganisation, and the period commencing from the date of such business reorganisation and ending with the previous year shall be deemed to be two different previous years for the purposes of set off and carry forward of loss and allowance for depreciation.

(6) In a case where the conditions specified in sub-section (2) or notified under sub-section (4) are not complied with, the set off of accumulated loss or unabsorbed depreciation allowed in any previous year to the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which the conditions are not complied with.

(7) For the purposes of this section,—

(a)‘accumulated loss’ means so much of loss of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, under the head ‘Profits and gains of business or profession’ (not being a loss sustained in a speculation business) which such amalgamating co-operative bank or the demerged co-operative bank, would have been entitled to carry forward and set off under the provisions of section 72 as if the business reorganisation had not taken place;

(b) ‘unabsorbed depreciation’ means so much of the allowance for depreciation of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, which remains to be allowed and which would have been allowed to such bank as if the business reorganisation had not taken place;

(c) the expressions ‘amalgamated co-operative bank’, ‘amalgamation’, ‘business reorganisation’, ‘co-operative bank’, ‘demerged co-operative bank’, ‘demerger’, ‘predecessor co-operative bank’, ‘successor co-operative bank’ and ‘resulting co-operative bank’ shall have the meanings respectively assigned to them in section 44DB.”

Exemption for interest payable by scheduled banks to non-resident, etc., under section 10(15) is not extended to co-operative banks :

Item (fa) of sub-clause (iv) of clause (15) of section 10 provides for exemption of interest payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident within the meaning of sub-section (6) of section 6 on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India. For the purposes of this item, the expression ‘scheduled bank’ has the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36. The existing provisions contained in the Explanation to clause (viia) of sub-section (1) of section 36 does not include co-operative banks. However, the definition of ‘scheduled bank’ after the amendment will include scheduled co-operative banks. The referral definition of ‘scheduled bank’ presently occurring in the Explanation to the aforesaid item (fa) does not allow exemption of interest payable to a non-resident or a not ordinarily resident by a co-operative bank. In order to continue with this position, the definition of ‘scheduled bank’ in its pre-amended form in clause (ii) of Explanation to clause sub-section (1) of section 36 is being substituted for the existing Explanation in the aforesaid item (fa) to ensure that the scope of the exemption allowed under the aforesaid item (fa) is not changed. The amendments will take effect retrospectively, from April 1, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.

Special provision under section 43D for public financial institutions is also extended to co-operative banks :

Under section 43D it has been provided that in the case of a public financial institution or a scheduled bank or a State Financial Corporation or a State Industrial Investment Corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in which it was credited by such institutions or bank or corporation to its profit and loss account for that year or, in the year in which it is actually received by that institution or bank or corporation, whichever is earlier. The Finance Act, 1999 had substituted section 43D with effect from April 1, 2000 with a view to improve the viability of the Housing Finance Companies and to provide a boost to the housing sector. The Act amends section 43D so as to extend its provisions to a public company whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is registered in accordance with the Housing Finance Companies Directions, 1989 given under section 30 and section 31 of the National Housing Bank Act, 1987. The Act provides that in the case of such a company, the income by way of interest in relation to such categories of bad or doubtful debts, as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it was credited by the company to its profit and loss account or, as the case may be, in which it is actually received by that company, whichever is earlier. Clause (d) of the Explanation to section 43D defines the expression ‘scheduled bank’ by reference to Explanation (ii) to section 36(i)(viia). The definition of ‘scheduled bank’ after the amendment (as discussed above) will include scheduled co-operative banks. Thus, the amendment to the definition of ‘scheduled banks’ as it appears in section 36 will also have the effect of making the provisions of section 43D applicable to scheduled co-operative banks. The amendments will take effect retrospectively from April 1, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.

Capital gains on amalgamation and demerger of co-operative banks :

Clauses (vica) and (vicb) under section 47 are inserted and section 49 is amended to make the business reorganization of co-operative banks, as covered by section 44DB, tax neutral for both the banks and shareholders.

Conclusion :

Income tax payable by Co Op.credit Credit Society or Pat Pedhi’s or Federation of Co operative Socities as Bank w.e.f. Ay 2007-08.
Status of co operative credit society is not an AOP but Artificial Juridical Person.
Section 44AB would be applicable to Bank.
Notice under section 133(6) can be issued to Bank or even any person.
In view of Section 194A(3)(viia) interest on TDS is applicable.
Section 269SS though do apply to Bank, must be made applicable, as observed by SC.
Other Income Tax provision as applicable to bank would apply.