INCOME TAX OFFICER, WARD-1(1), C R BUILDING HUBLI vs. THE NATIONALWELFARE URBAN CO-OP CREDIT SOCIETT LIMITED, DHARWAD

The appeal at the instance of the revenue and the CO by the assessee arise out of the ld. CIT(A)’s order dated 24.7.2023 passed u/s 250 of the Income-tax Act,1961 ['the Act' for short]. The relevant assessment year is 2017-18.

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 2 of 9 2. We shall first adjudicate the revenue’s appeal. (AY 2017-18): 3. The grounds raised in revenue appeal reads as follows: a) On the facts and in the circumstances of the case and in law the CIT(A)/NFAC erred in deleting the disallowance u/s 80(P)(2)(a)(i) of the Act of Rs.45,52,542/- without appreciating that the assessee society has violated section 18 of the Karnataka Co-operative Societies Act, 1959 by having more than 15% associate members (other than regular members). b) On the facts and in the circumstances of the case and in law the CIT(A)/NFAC erred in deleting the disallowance u/s 80P(2)(a)(i) of the Act of Rs.45,52,542/- without appreciating the ratio of the decision in the case of Citizen Co-operative Society Limited, Hyderabad Vs. ACIT, Circle (1), Hyderabad in Civil Appeal Number 10245/2017. c) On the facts and in the circumstances of the case and in law the CIT(A)/NFAC erred in deleting the addition u/s 68 of Rs.1,47,17,500/- without appreciating that the assessee society was not authorized to collect specified bank notes from its members. d) On the facts and in the circumstances of the case and in law the CIT(A)/NFAC erred in deleting the addition u/s 68 of Rs.1,47,17,500/- without appreciating that the assessee society has brought into its books the moneys represented by specified bank notes which was not legal tender after 8.11.2016.

3.1 Ground Nos.(a) & (b) relates to the issue of deduction u/s 80P(2) of the Act. Ground Nos.(c) & (d) relates to the issue of addition u/s 68 of the Act amounting to Rs.1,47,17,500/-. We shall adjudicate the above grounds as under: Ground Nos.(a) & (b) (issue of deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.44,52,542/-:- 4. Brief facts in relation to the above grounds are as follows: 4.1 The assessee is a Co-operative Society registered under Karnataka Co-operative Societies Act, 1959. It provides credit facilities to its members and associate members. For the assessment year 2017-18, the return of income was filed on 10.3.2018 declaring

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 3 of 9 Nil income after claiming deduction u/s 80P of the Act amounting to Rs.44,52,642/-. The assessment u/s 143(3) of the Act was completed vide order dated 14.11.2019, wherein the claim of deduction u/s 80P of the Act was denied for the reason that assessee was dealing with non-members (associate members) on large scale compared to its business with regular members. The ld. AO also relied on the judgement of the Hon’ble Apex Court in the case of Citizen Co-operative Credit Society Ltd. Vs. ACIT reported in 397 ITR 1 in support of his conclusion that assessee had failed to comply with the principle of mutuality since substantial business was being carried out with the non-members (associate members). 4.2 Aggrieved, assessee preferred an appeal before the first appellate authority. The ld. CIT(A) decided the issue in favour of the assessee. The ld. CIT(A) relying on the judgement of Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors Vs. CIT reported in 431 ITR 1 (SC) held that if State Act does not prohibit giving credit facilities to non-members/Associate members, deduction u/s 80P of the Act cannot be denied. 4.3 Aggrieved, the revenue has raised the issue in appeal before the Tribunal. The ld. D.R. submitted that the ld. CIT(A) has misinterpreted the judgement of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. Vs. CIT (supra). The ld. D.R. submitted that assessee society has violated section 18 of the Karnataka Co-operative Societies Act, 1959 by having more than 15% of the associate members (other than regular members). Therefore, it was submitted that the principle of mutuality has been lost in this case and assessee is not entitled to deduction u/s 80P(2)(a)(i) of the Act. 4.4 The ld. A.R. on the other hand, submitted that assessee was registered under the Karnataka Co-operative Societies Act, 1959 on 10.2.1995. It was submitted that the amendment to Karnataka Co-

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 4 of 9 operative Societies Act, 1959 in section 18 limiting the admission of associate members not in excess of 15% was effective only from 6.9.2014. It was thus contended that the amendment to section 18 of the Karnataka Co-operative Societies Act will not have application to the case in hand.

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 5 of 9 (4) Save as provided in this section, a nominal or associate member shall have such privileges and rights of a member, as may be specified in the bye-laws of the society.”

5.1 As per the above amendment, w.e.f. 01.06.2014, Co-operative Societies registered under the Karnataka Co-operative Societies Act, 1959, is allowed to have nominal / associate members (non- members) up to 15% of its total membership. In the instant case, as mentioned earlier, the assessee society is providing credit facilities to non-members exceeding 15% of its total membership. Therefore, assessee would not be entitled to deduction under section 80(P)(2)(a)(i) of the Act on income arising from dealing with non- members. 5.2 However, the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., (supra) reported in 431 ITR 1 (SC) had categorically stated that assessee is entitled to proportionate deduction under section 80P(2)(a)(i) of the Act in respect of its income earned from its business from regular members. The relevant finding of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., (supra) reads as follows: “To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, 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 license in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i),

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 6 of 9 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.” (emphasis supplied)

5.3. From the last sentence of the above extracted portion of the Hon’ble Apex Court judgment, it is clear that only profits attributable to non-members alone would not be entitled to deduction under section 80P(2)(a)(i) of the Act. Thereby meaning proportionate deduction is to be allowed in respect of the income arising out of business with the members of the assessee society. In the light of the above said judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., (supra), we restore the issue to the AO to determine the proportionate deduction under section 80P(2)(a)(i) of the Act with regard to the income earned from the assessee’s dealings with its regular members. It is ordered accordingly. Ground Nos.(c) & (d) (Issue of addition of Rs.1,47,17,500/- u/s 68 of the Act:- 6. Brief facts in relation to the above grounds are as follows: 6.1 The AO noticed that assessee had made cash deposit of Rs.1,56,99,251/- of the Specified Bank Notes (SBN) from period 10.11.2016 to 31.12.2016. The AO has made an addition u/s 68 of the Act r.w.s. 115BBE of the Act to the extent of Rs.1,47,17,500/-, after giving credit to the cash in hand of Rs.4,65,485/- as on 8.11.2016. The reason for the ld. AO to make addition u/s 68 of the Act was that assessee society was not authorized to accept the SBNs subsequent to the demonetization announced by virtue of the order of Government of India (Refer Gazette Notification No.2652 dated 8.12.2016). 6.2 Aggrieved, the assessee had filed appeal before the first appellate authority. The assessee had claimed that this money was CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 7 of 9 deposited by its customers in its bank accounts and the ld. AO was provided with party-wise details, the identity of the creditors from whom the amounts is collected etc. The ld. CIT(A) has deleted the addition made u/s 68 of the Act. In taking the above view, the CIT(A) has followed the ITAT order dated 18.2.2022 in case of Bhageeratha Pattina Sahakara Sangha Niyamita Vs. ITO Ward-3 in for the assessment year 2017-18. 6.3 Aggrieved, revenue has filed the present appeal before the Tribunal. The solitary reason for the ld. AO to make the addition u/s 68 of the Act was that as per the Gazette Notification No.2652 dated 8.11.2016 of Government of India, assessee was not the authorized person to collect the SBNs by the RBI. On the facts of the instant case, it is noticed that assessee had stopped collecting the SBNs after the receipt of the Notification dated 14.11.2016 issued by the RBI, which has clearly clarified that assessee Co-operative Society cannot accept the demonetization notes. Section 68 of the Act warrants the assessee to satisfy three conditions namely (i) the identity of the creditor (ii) the creditworthiness of the creditor; and (iii) genuineness of the transaction. In the instant case, assessee had provided all the details of the above amounts detailing the party-wise details, the identity of the creditors, etc. at the time of hearing before AO and CIT(A). In other words, the assessee had furnished the details such as from whom the amounts are collected, where it is accounted and the details of the loans and deposits. Hence, the assessee cannot be made liable u/s 68 of the Act as unexplained credit. The evidence produced by the assessee was rejected only on the basis that assessee was not authorized to collect the SBNs subsequent to 8.11.2016. On identical factual situation, the Bangalore Bench of the Tribunal in the case of Bhageeratha Pattina Sahakara Sangha Niyamita Vs. ITO Ward-3 cited (supra) had held as follows:

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad Page 8 of 9 “I notice that the AO has not doubted the submissions of the Assessee that the above said amount of Rs.24,47,500/- represents collection of money in the Nominal course of carrying on of the business of the assessee i.e. it represents money remitted by the members of the assessee society towards repayment of the loan taken by them and also towards pigmy deposits etc. the ld. A.R. submitted that the assessee has duly recorded in its books of accounts, the transactions of collections of money as well as deposits made into the Bank account. Thus, I notice that the assessee has explained the nature and source of the above said amount of Rs.24,47,500/- which was in turn deposited by the assessee society in its bank account and further, all these transactions have been duly recorded in the books of account. Hence, the above said deposits cannot be considered as “unexplained money” in the hands of the assessee.” 6.4 In the light of the aforesaid reasoning and the order of the Bangalore Bench of the Tribunal in the case cited (supra), we hold that ld. CIT(A) was justified in deleting the addition made u/s 68 of the Act.

CO No.10/Bang/2023 The National Welfare Urban Co-op. Credit Society Ltd., Dharwad