M/S. AMPAR CO-OPERATIVE AGRICULTURE SOCIETY LIMITED,UDUPI vs. INCOME-TAX OFFICER, WARD-1, UDUPI

Date of Hearing : 12.12.2023 Date of Pronouncement : 21.12.2023 O R D E R PER MADHUMITA ROY, JUDICIAL MEMBER:

Both the appeals filed by the assessee are directed against different orders passed by the ld. CIT(A)/NFAC dated 30.6.2023 & 13.7.2023 arising out of the orders dated 12.11.2019 & 20.9.2022 passed by the ld. AO u/s 143(3) of the Income-tax Act,1961 [in short 'the Act'] for the Assessment Years 2017-18 & 2020-21 respectively. Since both the appeals have been preferred by the same assessee and the issues are identical, these are heard analogously and are being disposed of by this common order.

& 796/Bang/2023 M/s. Ampar Co-operative Agriculture Society Ltd., Udupi Page 2 of 13 1. Incorrect additions of expenditures The learned NFAC erred in treating certain expenditures as falling within the ambit of Section 43B, thereby disallowing their deduction merely based on the timing of the payment and not considering their inherent nature related to the appellant's activities. \ 2. Applicability of deduction under Section SOP on enhanced profits The learned NFAC failed to adjudicate upon the appellant's contention that any, enhanced profit, upon adding back the impugned expenses, should still be eligible for deduction under Section 80P(2) of the Income Tax Act, 1961. Without prejudice to ground number 1, it is hereby submitted before the honourable authority that despite any additions to the profits, the inherent and fundamental character of the appellant as a Cooperative society remains undiminished. Consequently, the appellant prays to the honourable authority to grant the deduction of the entire enhanced profits under Section 80P(2), considering its intact cooperative framework.

2.1 Ground No.1 of the assessee’s appeal is not pressed at the time of hearing and therefore, this ground of appeal of the assessee is dismissed as not pressed.

3. With regard to ground No.2, brief facts leading to the case is this that the assessee is a Co-operative Society registered under the Karnataka Co-operative Societies Act, 1959 and the primary object of the assessee is to provide credit facilities to its members by lending loans and accommodating deposits. The assessee has filed its return of income on 28.10.2017 and the assessee also availed the benefit u/s 80P of the Act and consequently claimed deduction for certain profits earned during the relevant period resulting in a total taxable amount of Rs.27,680/-. The assessee was finalized under scrutiny u/s 143(3) of the Act upon making the addition of Rs.1,21,91,240/-, which was further confirmed by the First Appellate Authority in the instant appeal before us. 3.1 The summary of addition made by the ld. AO is as follows: & 796/Bang/2023 M/s. Ampar Co-operative Agriculture Society Ltd., Udupi

Page 3 of 13 Particulars Amount Reason for Relief granted (Rs.) disallowance by NFAC by AO Deduction 91,63,449 Holding that The claim of claimed u/s the assessee is the appellant is 80P(2)(a)(i) not eligible for fully allowed. claim of deduction u/s 80P(2)(a)(i) Provision for 2,30,109 Provisional in Not allowed by interest expense nature NFAC NPA Provision 12,00,000 Provisional in Not allowed by nature and NFAC unascertained liability Provision for 6,00,000 Provisional in Not allowed by Employe nature and NFAC Retirement unascertained Benefit liability Provision for 9,70,000 Provisional in Not allowed by Employee Leave nature and NFAC Encashment unascertained liability

While the NFAC fully granted the deduction claimed u/s 80P(2)(a)(i) of the Act, it did not accord approval to the assessee’s claims pertaining to provisions for interest, NPA, Employee Retirement benefits, and leave encashment. 3.2 The assessee contended that the said interest provision is in line with accounting policies as per the Karnataka Co-operative Societies Act. Specifically, Rule 22 of the said Act mandates the Cooperative Societies to account for interest that has accrued but remains unpaid, treating it as a charge against profit. It was further argued that even assuming that the interest provision is to be added back to the profits of the assessee, such enhanced profits should be subjected to deduction u/s 80P(2)(a)(i) of the Act. 3.3 The ld. NFAC disregarded the claim of the assessee, holding that the provisions of the other Acts will not prevail over the Income Tax Act as far as the taxation is concerned. Further, the ld. NFAC & 796/Bang/2023 M/s. Ampar Co-operative Agriculture Society Ltd., Udupi

Page 4 of 13 failed to adjudicate on the assessee’s contention that the enhanced profits should be subjected to deduction u/s 80P(2)(a)(i) of the Act. 3.4 The below provisions were disallowed by the ld. AO in the assessment order passed u/s 143(3) of the Act: Particulars Amount (Rs.) NPA 12,00,000 Employee Retirement Benefit 6,00,000 Employee Leave encashment 9,70,000 Total 27,70,000 3.5 The assessee contended that the above expenses are to be debited to the Profit & Loss account in conformity with the Generally Accepted Accounting and Auditing Principles. It was further argued that even assuming these expenses are added back to the net profit, the enhanced resultant profit should still qualify for deduction u/s 80P(2) of the Act. 3.6 The ld. NFAC dismissed the claim of the assessee, holding that the said expenses fall within the ambit of Section 43B of the Act. Therefore, such expenses are to be allowed only if the amounts were paid before filing of the tax return. The ld. NFAC did not adjudicate on the assessee’s contention that the enhanced profit should be fully subjected to deduction u/s 80P(2) of the Act. 3.7 Being aggrieved by the order passed by the ld. NFAC u/s 250 of the Act and non-adjudication on certain material issues raised during the appellate proceedings, the assessee now filed this present appeal u/s 253 of the Act before this Tribunal, anticipating a just and equitable determination on the matter.

Page 5 of 13 (2022) 144 taxmann.com 170 (Bang-Trib.), wherein deduction u/s 80P(2)(a)i) of the Act on the income derived by the assessee from providing credit facilities to its members as enhanced by the sum disallowed u/s 40(a)(ia) of the Act was quashed and necessary relief to the assessee was directed. While dealing with the issue, the Hon’ble Bench has been pleased to observe as follows: 4. The deduction under Section 80P is not available for Co-operative banks from A.Y. 2007-08. Section 80P was amended by the Finance Act, 2006, with effect from 1 -4-2007 introducing sub-section (4) to provide that the provisions of the said section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions ‘cooperative bank’, `primary agricultural credit society’ have been taken as per the definition given in Part V of the Banking Regulation Act, 1949 (10 of 1949). The `primary co-operative agricultural and rural development bank’ have also been defined in the act to bring clarity.

5. Further, a new sub-section (viia) has also been inserted in clause (24) of Section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of ‘income’.

“8. In the assessment order, the Assessing authority has clearly stated that the assessee is a Co-operative society and has not obtained any banking license. The business of the assessee is to provide credit facilities to its members. Since the assessee cannot carry on any banking business, the interest on investment is taxable as income from other source. Therefore, the aforesaid facts, which is not in dispute clearly establishes that it is not a Co- operative Bank. Infact, the Revisional Authority also in its order has categorically stated that the assessee is a Co-operative society, which provides credit facilities. Section 80P of the Act deals with the deduction of income of a society. In the case of any assessee being a Co-operative society, the whole of the amounts of profits and gains of business attributable to any of other activities referred to sub-section (2) of Section 80P shall be deducted in computing the total income of the assessee. In other words, the said income is not taxable. It is a benefit given to the Co-operative society. Section 80P(4) was introduced by Finance Act, 2006 with effect from 01.04.2007 excluding the said benefit to a Co-operative Bank. The said provision reads as under:- “(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit & 796/Bang/2023 M/s. Ampar Co-operative Agriculture Society Ltd., Udupi Page 7 of 13 society or a primary co-operative agricultural and rural development bank. (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.” Therefore, the intention of the legislature is clear. If a Co-operative Bank is exclusively carrying on banking business, then the income derived from the said business cannot be deducted in computing the total income of the assessee. The said income is liable for tax. A Cooperative bank as defined under the Banking Regulation Act includes the primary agricultural credit society or a primary co-operative agricultural and rural development bank. The Legislature did not want to deny the said benefits of deduction u/s.80P to a primary agricultural credit society or a primary co-operative agricultural and rural development bank. They did not want to extend the said benefit to a Co-operative bank only which is exclusively carrying on banking business i.e. the purport of this amendment. Therefore, as the assessee is not a Cooperative bank carrying on exclusively banking business and as it does not possess a licence from Reserve Bank of India to carry on business, it is not a Co-operative bank. It is a Cooperative society which also carries on the business of lending money to its members which is covered under Section 80P(2)(a)(i) i.e. carrying on the business of banking for providing credit facilities to its members. The object of the aforesaid amendment is not to exclude the benefit extended under Section 80P(1) to such society. …..”

Page 9 of 13 u/s.40(a)(ia) of the Act and that addition was partly sustained by the CIT(A). It is the plea of the Assessee before the Tribunal, that the said disallowance will only go to increase the income of the Assessee that is eligible for deduction u/s.80P(2)(a)(i) of the Act and deduction on the said enhanced income should be allowed.

Page 10 of 13 “5. In so far as the substantial question of law Nos.5 and 6 are concerned, learned counsel for the Revenue submitted that the ITAT in its Order dated21.12.2012 has recorded the findings, the relevant portion of which is extracted below for ready reference:- 14. Having heard both the parties and having considered their rival contentions, we find that the disallowance u/s 40a (ia) is to be made of the expenses incurred and claimed by the assessee but before the payment of which, the assessee has failed to deduct tax at source. The genuineness of the expenditure is not in dispute. The dispute is whether TDS was to be made before making the payment. Without going into the nature of the transaction, we are inclined to accept the alternate plea of the assessee that the disallowance of the expenditure would automatically enhance the taxable income of the assessee and the assessee is eligible for the deduction u/s 10A of the Income-tax Act on the enhanced income. Thus, this ground of appeal is allowed”.

6. The relevant portion of the Circular No.37/2016 dated 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject:Chapter VI-A deduction on enhanced profits, is quoted hereunder: “The issue of the claim of higher education on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: [i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non- deduction of TDS under law, such disallowance would ultimately increase assessee’s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40[a][ia] of the Act would qualify for deduction under section 80IB of the Act. This view was taken by the courts in the following cases: [a] Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, IT Appeal No.2 of 2011, September 11 2015, Bombay High Court [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking & 796/Bang/2023 M/s. Ampar Co-operative Agriculture Society Ltd., Udupi Page 11 of 13 on which the assessee would be entitled for deduction under section 80-IB of the Act.”

7. Applying the same analogy, it can be held that if deduction u/s. 40[a][ia] of the Act is not allowed, the same would have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s. 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of ‘Commissioner of Income Tax v. Gem Plus Jewellery India Ltd.,’ [2011] 330 ITR 175 [Bom], wherein it is held thus: “13. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards Provident Fund /ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the Assessing Officer to grant the exemption under Section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the Provident Fund/ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and Section 36(v) read with Section 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee.”

& 796/Bang/2023 M/s. Ampar Co-operative Agriculture Society Ltd., Udupi

Page 12 of 13 17. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we hold that the revenue authorities erred in not allowing deduction u/s.80-P(2)(a)(i) of the Act on the income derived by the Assessee from providing credit facilities to its members as enhanced by the sum disallowed u/s.40(a)(ia) of the Act. The claim of the assessee in this regard is accepted and the AO is directed the give necessary relief to the assessee in this regard.

4.1 We do not find any reason to devoid from the stand taken by the Co-ordinate Bench on the identical issue itself and therefore, respectfully relaying upon the same, we allow this appeal preferred by the assessee by directing the ld. AO to grant relief on the enhanced profit as eligible for deduction u/s 80P(2) of the Act.

Order pronounced in the open court on 21st Dec, 2023