Deposits in Co-operative Societies: Insights on Section 11(5) Compliance

Understanding Deposits in Co-operative Societies Under Section 11(5) of the Income Tax Act

The revenue authorities frequently deny the acceptance of deposits made in co-operative societies as eligible under Section 11(5). The following analysis elaborates on relevant judicial pronouncements to clarify this matter.

Requirements of Section 11(5)

Section 11(5) outlines the permissible forms and methods for investing or depositing funds referred to in clause (b) of sub-section (2). Specifically, Section 11(5)(iii) states:

"Deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank)."

To qualify for an eligible investment or deposit, two main requirements must be met:

1. Deposit in Any Account:

   • The deposit can be made in various account types, which may include Current, Savings, or Term Deposits.

2. Co-operative Society Engaged in Banking:

   • The second requirement asserts that the society involved must operate as a banking business.

Regulatory Context of Co-operative Societies

Co-operative societies are not subject to the provisions of the Banking Regulation Act, 1949; instead, they are regulated by the Registrar of Co-operative Societies in each State and are permitted to transact only with their members.

Judicial Interpretations

Several court cases have explored the definition and scope of co-operative societies in relation to banking.

Case Study 1: State Bank of India Staff Co-operative Society Ltd. v. Income-tax Officer [1998] 233 ITR 104 (MAD.)

In this case, the Hon'ble High Court ruled that:

• The term "a co-operative society engaged in carrying on the business of banking" refers specifically to certain co-operative societies. Such societies are not required to be classified as banking companies under the Banking Regulation Act, 1949.
• The court emphasized that a co-operative society, when engaged in activities such as lending to members, accepting deposits, and raising loans, qualifies as part of the business of banking.

Case Study 2: Maharashtra Arogya Mandal v. Income-tax [2009] 28 SOT 26 (Pune) (URO)

The Hon'ble ITAT Pune Bench addressed the following question:

“Did the learned CIT(A) erroneously determine that the deposits with Dr. Dada Gujar Co-operative Patsanstha Ltd. were not in compliance with section 11(5)(iii), thus violating section 13(1)(d)?”

The Hon'ble Bench stated:

• Following the High Court’s conclusion that credit societies engaged in monetary transactions involving members are recognized as operating in the banking sector, the exemption under Section 11 should not be denied.
• The CIT(A)'s assertion that "co-operative society" should be restricted to societies resembling banks was dismissed as unfounded.
• The Bench referenced the earlier case of State Bank of India Employees Credit Co-operative Society, affirming that a credit society, even if it does not resemble a bank, can still be engaged in the business of banking, given its focus on lending and accepting deposits from members.

Conclusion

As established by the above judicial interpretations, deposits with co-operative societies comply with Section 11(5) of the Income Tax Act, 1961. If an investment is found to meet the criteria of Section 11(5)(iii), the implications of Section 13(1)(d) would not apply, thus providing an avenue for specific exemptions under the Act.