LENYADRI SAHAKARI PATHPEDHI MARYADIT,MUMBAI vs. ITO, WARD-27(2)(1), MUMBAI, VASHI

The Hon’ble CIT(A) erred in upholding the addition of Rs.2,69,320/- being estimated interest income in respect of certain NPA loan transactions, which addition being not justified and may kindly be deleted. 4. The Hon’ble CIT(A) erred in upholding the addition of Rs.28,28,825/- as estimated interest income, on the basis of assumed average rate of interest, ignoring the explanation of the appellant that different types of loans carry different rates of interest and such estimation of interest is not called for, particularly when the book results are not rejected u/s 145(3) of the I. T. Act, 1961. 5. The appellant craves leave to add, alter, amend and/or vary any of the above grounds of appeal at any time before the decision of the appeal.” 2. Rival submissions of both the parties have been heard and the record perused.The learned Authorised Representative (ld. AR) of the assessee submits that the assessee is a cooperative credit society registered under the Maharashtra Cooperative Societies Act. The object of the assessee society is to provide credit facilities to its members. The assessee, while filing its return of income, claimed deduction under section 80P(2)(a)(i) of Rs. 1.64 crore and declared nil income. The Assessing Officer (AO), while framing the assessment order, disallowed commission paid to daily deposit agents of Rs. 22,40,531/-, disallowed interest income on loans to members of Rs. 2,69,320/-, and estimated interest income on loans to members at Rs. 28,28,825/-/-. Thus, the AO made an aggregate disallowance of Rs. 53,38,676/-.The assessee is eligible for such deduction under section 80P(2)(a)(i)on account of income from its various activities. In such circumstances, the disallowance of any expenses / determination of any estimated interest income from members will not arise in the course of the assessee carrying on its activities.

On specific disallowance of commission paid to daily deposit agents Rs. 22,40,531/-, which is subject matter of ground no. 2. The ld AR of the assessee submits that assessee has incurred commission expenses of Rs. 22,40,531/- for commissions paid to daily deposit commission agents. The daily deposit agents collect daily deposits from members, who are usually small vegetable vendors, shopkeepers, etc., in the range of Rs. 100/-, Rs. 200/-, etc., by visiting the members' premises. The daily deposit agents are given small handheld machines. These machines record the collection and generate receipts/reports. KYC (know your clients) documents of all agents are kept with the assessee. This is a normal practice for the appellant Co-op Credit Society. The AO/ ld CIT(A) have erred in disputing this regular business expenditure. TDS has been deducted from such commission payments. All these facts were brought on record. A statement showing PAN, names, address, and party-wise details of commission expense, address, and TDS details was submitted before the AO. The commission expenses of Rs. 22,40,531/-, are genuine expenditure incurred by the appellant in the course of its banking business and duly supported by details, audited financial statements of the appellant, may be allowed. In support of ground No. 3 which relates to addition of Rs.2,69,320/- as interest income. The ld AR of the assessee submits that the addition of Rs. 2,69,320/- is separately made as estimated interest in respect of loans on which interest is not received by the assessee. The details of such loan transactions are recorded at para- 12 at page No. 9 to 12 of the assessment order. During the assessment proceedings, the assessee in response to the show cause notice dated. 22.02.2021, explained that all these loans are categorised as non- performing assets (NPA). The assessee society has initiated legal action against the members, and till the time the Court decided on the issue, interest could not be charged on such NPA transactions. The AO and the ld CIT(A) has not considered the explanation and has made an addition of Rs. 2,69,320/- as estimated interest income. Such an addition is not justified. In support of ground No. 4 which relates to addition of Rs. 28,28,825/- as interest income by estimating interest based on the assumed average rate of interest, the ld AR of the assessee submits that the AO has further made an addition of Rs. 28,28,825/- as interest income, by erroneously estimating such interest based on an assumed average rate of interest. The assessee explained that different types of loans like housing loans, mortgage loans, personal loans, loans against deposits, overdraft/ cash credit facilities, etc. have differential rates of interest, such facts were ignored. The calculating interest on ad hoc basis @ 15% per cent on all loans is not justified. The AO in para no. 13.2 to 13.5 at page no. 18 and 19, without any discussion, simply made an addition of Rs. 28,28,825/- on account of estimated interest income in the computation of income. Uniform rate of interest cannot be charged for different categories of loans. The activities of the assessee have been accepted Tribunal while allowing deduction under section 80P(2)(d) in AY 2010-11 & 2012-13 in ITA No. 4221 &3793/ Mum /2014 and in ITA no.3371 & 3942 /Mum/2015 respectively. The adoption of ad hoc interest rate of 15% is not justified. The books of accounts of the assessee were audited. The book results are not rejected by the AO under section 145(3). In the absence of rejection of books of accounts, estimation of any income is not justified. The ld AR of the assessee prayed for deleting all three disallowances/ additions. To support his submission, the learned AR of the assessee relied upon the following decision.  PCIT vs Ettumanoor Service Co-operative Bank Ltd. 437 ITR 305 (Kerala) [2021]  Sharavathi Pathina Sahakara Sangha Niyamitha vs ITO 144 taxmann.com 170 (Bangalore-Trib.)  CBDT Circular No. 37/2016 (F. No. 279/Misc./140/2015/ITJ) dtd. 02.11.2016. 4. On the other hand, the learned Senior departmental representative (Sr DR) for the Revenue supported the order of the lower authorities on all three grounds of appeal. The ld Sr DR for the revenue submits that in para-6 of assessment order, the AO while issuing show cause notice find that onperusal of ITR reveals that there are 13 (thirteen) members of assessee Society and the assessee also have shown 2858 members. Thus, there are two types of members in the assessee-society. The assessee- society is carrying on the banking business for public at large and for all practical purposes it was acting like a co-operative bank governed by the Banking Regulation Act, 1949, and its operation was not confined to its members but outsiders as well. Further as per para-9 of assessment order, the AO recorded that from the list of thirteen members in theITR and list of 2858 members to whom loans given, it is clear that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of 'nominal members'. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the assessee was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. The activity of the assessee is that of finance business and cannot be termed as co-operative society. It is also found that the assessee is engaged in the activity of granting loans to general public as well. All such activities are carried out without any approval from the Registrar of the Societies. The assessee is a cooperative credit society which is not entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act. The case laws relied by the assessee are based on different facts and are not applicable on the facts leading to the various disallowances in the present appeal. 5. In short rejoinder submissions, the ld AR of the assessee submits that the activities of the assessee have been accepted Tribunal in appeal for AY in AY 2010-11 & 2012-13 (supra) while allowing deduction under section 80P(2)(d). The issue in the year under consideration is different, which is confined to commission expenses and addition of ad-hoc interest. 6. We have considered the rival submissions of both the parties and have gone through the orders of the lower authorities. Ground No. 1 is general and needs no specific adjudication. Ground No. 2 relates to disallowance of commissions expenses of Rs. 22,40,531/-. We find that the AO made disallowance of commission expenses by taking view that despite allowing opportunity the assessee failed to furnish complete details and other relevant documentary evidences. The assessee failed to discharge its onus and for the want of evidence the commission expenses were disallowed. We find that before ld CIT(A) the assessee contended that such commission was paid to daily deposit collection agents. TDS was made while making payment of such commissions. The assessee filed complete party wise details and contended that commission was paid for the purpose of business. The assessee also filed application for admission of additional evidence under Rule 46A of Income Tax Rules-1962.The application for filing additional evidence was not accepted by ld CIT(A) by holding that such details were available with the assessee. Merely TDS was made on such payment will not establish performance of work. The ld CIT(A) held that the claim of assessee remained unsubstantiated. Before us, the ld AR of the assessee vehemently submitted that complete statement showing PAN, names, address, party-wise details of commission expense, address, and TDS details was submitted, the commission expenses of Rs. 22,40,531/-, are genuine expenditure incurred by the appellant in the course of its banking business and duly supported by details, audited financial statements of the appellant. We find that business activities have been accepted by ld CIT(A) while allowing deduction under section 80P(2)(a)(i). In our considered view, the action ld CIT(A) in not admitting additional evidence was not justified, particularly when it was relevant qua the issue before him. Since, the evidence filed by assessee has not been examined and considered by lower authorities, therefore, considering the relevancy of such evidence, we admitted such additional evidence filed during the first appellate stage and restore the issue back to the file of jurisdictional AO (JAO) to consider such evidence and pass order afresh in accordance with law. In the result, ground No. 2 of the appeal is allowed for statistical purpose. 7. Ground No. 3 relates to addition of Rs. 2,69,320/- as estimated income. The AO made this addition as per his finding in para 12 of assessment order. The AO noted that the assessee has not charged interest from 23 members (parties). The AO worked out that total loan of Rs. 17,95,471/- was given to such members. The AO estimated interest @ 15% per annum and worked out addition of Rs. 2,69,320/-. Before ld CIT(A) the assessee stated that loan was very old and the assessee has initiated legal action and interest will be treated on conclusion of legal proceedings. The ld CIT(A) held that no documentary evidence is filed about legal proceedings and that the by-laws of the assessee do not expressly prohibits from charging interest on non-performing asset (NPA) loans during legal proceedings. Before us, the ld AR of the assessee vehemently urged that the AO and the ld CIT(A) has not considered the explanation and has made an addition of Rs. 2,69,320/- as estimated interest income. We find that the assessee is cooperative society and is in advancing credit facilities to its members and on earning interest is eligible for deduction under section 80P(2)(a)(i) on its activities. Thus, the assessee would be eligible for more deduction as has been accepted by CBDT in its Circular No.37/2016. Thus, it would be revenue neutral position. Hence, the addition of estimated interest is deleted. In the result, ground No. 3 is allowed. 8. Ground No. 4 of the appeal relates to estimated interest addition of 28,28,825/-. We find that the AO made this addition by taking view that the assessee has advance loans on different rates. The AO estimated interest by applying uniform rate of interest rate of 15% and worked out addition of Rs. 28,28,825/-. Before ld CIT(A) the assessee stated that different loan carries different rates of interest. The rates are determined by managing committee from time to time and adoption of uniform rate of interest @ 15% is not justified. The books of assessee were not rejected. The ld CIT(A) held that the AO can estimate income even from accepted books, if there are credible grounds to believe that the income is under stated. The ld CIT(A) held that estimating 15% interest rate is reasonable and conservative. Before us, the ld AR of the assessee vehemently urged that the assessee explained that different types of loans like housing loans, mortgage loans, personal loans, loans against deposits, overdraft/ cash credit facilities, etc. have differential rates of interest, such facts were ignored. The calculating interest on ad hoc basis @ 15% per cent on all loans is not justified.On considering the overall facts of the case we find merit in the submissions of ld AR of the assessee that different kinds of loans like housing loans, mortgage loans, personal loans, loans against deposits, overdraft/ cash credit facilities, carries differential rates of interest, such facts were totally ignored and thus calculating interest on ad hoc basis @ 15% per cent on all loans is not justified. In case the ad hoc addition of interest is upheld the assessee would be eligible for higher amount of deduction under section 80P(2)(a)(i). As recorded above, the activities of the assessee have been accepted by ld CIT(A) while allowing deduction of interest income from credit facilities from its members. We find that coordinate bench of Bangalore Tribunal in Sharavathi Pathina Sahakara Sangha Niyamitha vs. ITO (supra) held that if the AO disallows a business expense under Section 40(a)(ia) due to non-deduction of Tax Deducted at Source (TDS), the disallowed amount must be added back to the business income. Consequently, since this disallowance artificially increases the net operational profit of the co-operative society, the deduction under Section 80P(2)(a)(i) must be granted on the enhanced profit amount. 9. Thus, in view of above factual and legal position, we do not find any justification for making such addition of interest income, which we delete. In the result, this ground of appeal is allowed. e 10. In the result, appeal filed by assessee is partly allowed. Order was pronounced in open court on 19/08/2026 Sd/- Sd/- GIRISH AGRAWAL PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER