VAIBHAV CO-OPERATIVE CREDIT SOCIETY ,MUMBAI vs. PRINCIPLE CIT-27 , MUMBAI

This appeal by assessee is directed against the order of the Principal Commissioner of Income Tax (for short ‘PCIT”) dated 28.03.2023 u/s.263of the 1) That on the facts and circumstances of the case and in law, the order passed by the Learned Principal Commissioner of Income-tax (PCIT), u/s. 263 of the Income Tax Act, 1961 ('the Act') setting aside the assessment framed u/s. 143(3) of the Act as erroneous and prejudicial to the interest of the revenue is without jurisdiction, bad in law and void ab-initio. 2) The Learned PCIT conveniently ignored the fact that the Hon'ble tribunal in the assessee’s own case (ITA No. 5819 / Mum / 2014 and Mum/2014) dismiss the stand of Revenue and allowed the deduction under section 80P (2) (a) (i) of Income Tax Act 1961 being a credit cooperative society for the Assessment Year 2010-11, (Hon'ble ITAT order was placed on record during the course of hearing with PCIT). 3) Learned PCIT given the direction deduction allowed 80P(2)(a)(i)/80P(2)(d) amounting to Rs.4,19,19,263/- is erroneous and prejudicial to the interests of the Revenue within the meaning of Sec. 263 of the Income-tax Act, 1961 and, as the Assessing Officer failed to conduct proper inquiries, investigation and examination, the assessment order is set aside. 4) The assessee, as per grounds of appeal, essentially challenges the foundation of jurisdiction assumed by the Pr.CIT under s.263 of the Act and contends that the subject assessment order framed under s. 143(3) of the Act passed by the AO cannot be termed as erroneous and prejudicial to the interest of the Revenue which is a condition precedent for usurpation of revisional jurisdiction. 5) The learned PCIT had not consider/or continently ignored orderof jurisdictional high court in the case of the Pr. Commissioner of Income Tax vs Quepem Urban Co-operative Credit Society and The Hon'ble Supreme Court of India in case of The Mavilayi Service Cooperative Bank Ltd vs Commissioner of Income Tax (Calicut) (Civil Appeal No.7343-7350 of 2019)

3 Vaibhav Co-operative Credit Society which are squarely applicable to assesseewhile passing reversionary order under section 263 of income tax act 1961the order 6) The Learned PCIT heavily relied on the Hon'ble Supreme Court order in the case of citizen cooperative society but failed to consider that facts of the assessee are completely different hence ratio of Citizen cooperative society is not applicable to assessee. 7) The Learned PCIT while passing the revisionary order under section 263 had not given any explanation how it satisfied the twin conditions that scrutiny assessment order passed under section 143(3) of Income Tax Act 1961 is an order erroneous and prejudicial to the interest of the revenue. 8) The order appeal against is bad in Law and against the principle of natural justices and tax jurisprudence. 9) The order appeal against is based on surmises and conjectures. 10) The appellant craves leave to add, amend, alter and vary any grounds of appeal either before or at the time of hearing of the appeal. 11) Each ground of appeal is distinct and separate.

2. Brief facts of the case are that the assessee is a Cooperative Credit Societyhas filed its return of income for the year under consideration on 28.09.2018 by declaring total income of Rs. NIL after claiming deduction u/s. 80P of Rs. 4,19,19,263/-.The assessee is a society accepting deposits and giving loans only to its members. The society gives various types of loans viz term loans against hypothecation or mortgage, vehicle loans, personal loans, housing loans, education loans, overdraft against FD or NSC or LIC, etc. only to its members. Case of the assessee was selected for limited scrutiny as per assessment order to verify investments/ advances/ loans and deduction from total income under chapter VI- A.

3. It was a categorical finding of AO as per para 5.2 of the assessment order that assessee deposited certain sum out of the surplus funds of the society in 4 Vaibhav Co-operative Credit Society cooperative banks as per details in para 5.1 of the assessment order. It was also held by AO that investment of funds in bank by the assessee is in the nature of income from other sources andan addition of Rs. 2,02,25,849/- was made on account of interest income from deposit with co-op banks and loans given to non- Members and claimed exempt u/s. 80P (2) (d) of the Act.

4. We have carefully gone through the order of AO, order of Ld. PCIT u/s. 263 of the Act and submissions of the assessee. We observed that Ld. PCIT has relied on the decision of Citizen Cooperative Society vs. ACIT, Hyderabad, wherein, the Hon’ble Apex Court, had dealt with section 80P (2) (a) (i) of the Act vis a vis section 80P (4). For the sake of better understanding and ready reference, the provisions of section 80P are reproduced herein below: - Deduction in respect of income of co-operative societies. 80P. (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 (ii) A cottage industry, or (iii) The marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) The processing, without the aid of power, of the agricultural produce of its members, or (vi) The collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, The whole of the amount of profits and gains of business attributable to any one or more of such activities:

5 Vaibhav Co-operative Credit Society Provided that in the case of a co-operative society falling under sub-clause (vi), or sub- clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely: — (1) The individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) The co-operative credit societies which provide financial assistance to the society; (3) The State Government; (b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to— (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii) The Government or a local authority; or (iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public), The whole of the amount of profits and gains of such business; (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed, — (i) Where such co-operative society is a consumers' co-operative society, one hundred thousand rupees; and (ii) In any other case, fifty thousand rupees. Explanation. —in this clause, "consumers' co-operative society" means a society for the benefit of the consumers; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income; (e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22.

6 Vaibhav Co-operative Credit Society Explanation. —For the purposes of this section, an "urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. (3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80- IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ. (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation. —for the purposes of this sub-section, — (a) "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); (b) "Primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.

5. In view of above provisions, it is crystal clear without discussing any judicial pronouncements for the time being that as per section 80P (2) (a) (i) of the Act, transactions of the assessee with its members are exempted. Certainly, relying on various judicial pronouncements and principal of mutuality transactions carried out with known members and general public are not entitled for the benefit of section 80P(2)(a)(i) of the Act.

7 Vaibhav Co-operative Credit Society business. In this case, assessee is neither a cooperative bank nor a cooperative society possessing a license from the RBI to do banking business.

6. In view of the above and for the reasons stated hereinabove, the present appeal deserves to be dismissed and is accordingly dismissed, answering the question against the Revenue and in favour of the Assessee.”

[2021] 123 taxmann.com 161 (SC) Mavilayi Service Co-operative Bank Ltd.v.CIT, Calicut “Section 80P being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the revenue in the present case by adding the word 'agriculture' into section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e., engaged in lending money to members of the public, which have a licence in this 9 Vaibhav Co-operative Credit Society behalf from the RBI. Clearly, therefore, once section 80P (4) is out of harm's way, the assessee is entitled to the benefit of the deduction contained in section 80P (2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members; profits attributable to such loans obviously cannot be deducted. [Para 45]. It must also be mentioned here that 'nominal members' are 'members' as defined under the Kerala Act. Considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P (2)(a)(i). [Para 46]. The above material would clearly indicate that the limited object of section 80P (4) is to exclude co-operative banks that function at par with other commercial banks i.e., which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. [Para 39]. What is important to note is that, the expression 'providing credit facilities to its members' does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P (2)(a)(i) must be contrasted with section 80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a 'primary' society engaged in supplying milk etc. thereby defining which kind of society is entitled to deduction, unlike the provisions contained in section 80P(2)(a)(i). Also, the proviso to section 80P(2), when it speaks of sub-clauses (vi) and (vii), further restricts the type of society which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in section 80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members do not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be