COMMISSIONER OF INCOME TAX Vs. KOTTAYAM CO OPERATIVE BANK LIMITED
HIGH COURT OF KERALA
COMMISSIONER OF INCOME-TAX
KOTTAYAM CO-OPERATIVE BANK LTD.
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Balakrishna Eradi, J. -
(1.) THE assessee is a co-operative society doing banking business. As part of its business activity the assessee was also conducting kuris--chit funds--since about the year 1959 or so. THE income derived from the conduct of the chit funds was not being subjected to tax till 1969-70. For the assessment year 1969-70 the Income-tax Officer took the view that the assessee's income from the chit fund business did not fall within the scope of Section 80P(2)(a)(i)of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), and subjected to the said income to tax rejecting the assessee's claim for deduction under the aforesaid provision. THE grounds which weighed with the Income-tax Officer for disallowing the assessee's claim for deduction under Section 80P(2)(a)(i) were that the business of conducting the chit fund was not one intended for providing credit facilities but was only in the nature of a saving scheme and that there was no restriction that only members of the society could become subscribers in the chit fund.
(2.) THE assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Ernakulam, contending that the disallowance of his claim for deduction under Section 80P(2)(a)(i) was erroneous and illegal. THE Appellate Assistant Commissioner agreed with the view expressed by the Income-tax Officer that in conducting the chit fund the assessee could not be said to be engaged in providing credit facilities to its members. In the opinion of the Appellate Assistant Commissioner the exemption under Section 80P(2) of the Act would be available only in respect of income derived from the activity of advancing loans to needy persons just as in the case of ordinary banking business, and on this reasoning he dismissed the assessee's appeal.
The assessee thereupon carried the matter in second appeal before the Income-tax Appellate Tribunal, Cochin Bench. The Tribunal scrutinised the rules governing the conduct of the chitty as contained in the chitty " thalavariyola " and found that Clause 2 thereof specifically provided that only the members of the bank could become subscribers of the chitty and that the foreman (assessee) was prohibited from taking any outsiders as subscribers in the chit fund. Accordingly, the Tribunal held that the Income-tax Officer and the Appellate Assistant Commissioner were in error in stating that the chit fund schemes of the assessee-bank were open to outsiders also and in disallowing the assessee's claim for deduction under Section 80P(2)(a)(i) of the Act on that ground. It was further held by the Tribunal that an intention to provide credit facility is clearly discernible in such chit fund schemes and that a chit fund cannot be regarded as a mere saving scheme. Referring to the observation contained in the order of the Appellate Assistant Commissioner that the exemption provided for under Section 80P(2)(a)(i) would be attracted only in cases where an assessee has been engaged " in the activity of advancing loans to needy persons just as a bank does ", the Tribunal held that the words used in the said section do not warrant such a restricted interpretation. In this view the Tribunal allowed the appeal and held that the assessee is entitled to deduction under Section 10P(2)(a)(i) of the Act and directed the Income-tax Officer to modify the assessment in the light of the said finding. On the application of the Commissioner of Income-tax, Kerala, the Tribunal has referred to this court the following question under Section 256(1) of the Act:
" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income derived by the assessee from conducting chit funds was eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961 ?"
Section 80P(2)(a)(i) is in the following terms :
"80P. Deduction in respect of income of co-operative societies.--(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in Sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in Sub-section (1) shall be the following, namely:--
(a) in the case of a co-operative society engaged in--
(i) carrying on the business of banking or providing credit facilities to its members, or......"
(3.) THE assessee before us is a co-operative society. Though its main activity is banking, it has also been conducting chit funds and we are concerned in this case with the income derived by the assessee from the conduct of the chit fund business. THEre is a clear provision in Clause 2 of the chitty " thalavariyola " (rules regulating the conduct of the chitty) that only members of the society can become subscribers of the chitty. In the light of the said clause, the Tribunal rightly held that it was not possible to sustain the view expressed by the Income-tax Officer and by the Appellate Assistant Commissioner that the chit fund scheme was not being conducted by the assessee exclusively for the benefit of its members. What remains to be determind is only whether in conducting the chit fund schemes the assessee could be said to be providing credit facilities to its members. THE nature and incidents of a kuri or chitty transaction has been described in detail in an early Full Bench decision of the Travancore High Court in Bhagavathi Ammal Lakshmi Ammal v. M. Vencatasubba Iyen, 15 T.L.R. 133, 137 (Ker.) [F.B.] in the following terms ;
" For all practical purpose, a chitty may be described shortly as a transaction by which a certain number of persons agree that each shall subscribe a certain sum of money or quantity of paddy by certain periodical instalments and that each, in his turn as determined by lot, should take the whole of the subscribed amount in each drawing. THEre is a kuri or chitty known as Lela Kuri or auction chitty; in this the prize-winner is not determined by casting lots, but the total collection is put up to auction and is paid to the bidder among the subscribers, who offers the largest interest in the shape of discount. Taking the first mentioned class of chitties which appears to be the more general one in vogue (and the transaction in this suit is one of that kind), it seems that, under the arrangement above mentioned, all the subscribers get a return of the amount of their contributions so that the concern is really a mutual benefit fund, and the prize-winner simply gets in his turn a loan of the common money over and above his own contribution and neither the right of the subscribers to the return of their contributions nor to a loan of the fund is made a matter of risk or speculation. No loss appears to be necessarily hazarded, nor any gain made a matter of chance, though some of the subscribers may gain their prizes earlier than others"
Again, in Gunu Narasimha Aiyar v. Muthuswamy Chidambaram, 18 T.L.R. 56 (Ker.) the same High Court observed as follows :
" An ordinary chitty however is essentially a loan transaction in which each subscriber gets a loan from a common fund, only the order of taking the loan is settled by lots and to that extent the getting of interest alone as distinguished from the principal is made to depend on chance. Further the benefit of the loan is given to all alike."
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