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Income Tax Appellate Tribunal, “SMC” BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by the assessee is directed against the order of CIT(A), NFAC, Delhi dated 12.8.2022 for the AY 2015-16. The grounds of appeal raised by the assessee are reproduced as under:
“The Appellant objects to the Assessment Order on the following grounds in so far as it is prejudicial to the Appellant as it is opposed to law and circumstances of the case: -
The CIT (A) was not correct in restring the addition to the extent of Rs. 14,92,910/-relating to interest on deposits with Co - Operative Banks as the Appellant is eligible for deduction u/s.80P(2)(a) (i)
c ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 2 of 8` 2. The CIT (A) was not correct in rejecting Appellant's contention that interest earned from Deposit with Co Operative Banks is not part of the Business of the Appellant, as the entire income including interest earned from Co operative Banks is part of the business income of the Appellant and is eligible for deduction u/s. 80P(2)(a)(i).
The CIT(A) and A.O. erred in not appreciating that the Appellant Society has fulfilled all necessary conditions for claim of exemption u/s.80P (2) (a) (i) as the Appellant's activities are to provide credit facilities to its members.
The CIT (A) was not correct in not following the Jurisdictional Hon'ble ITAT and High Court decisions, which are mentioned below. a)) In the case of Honnali Credit Co-Op Society Ltd ITA Nos.2752 & 2753/Bang/2017 AY 2011-12 & AY 2012-13, where Totagars Co operative Sale Society decision of High Court of Karnataka is distinguished and followed the decision of Hon'ble High Court decision of Tumkur Merchants Souharda Credit Co Operative Ltd (55 Taxmann.com 447).
b) In the case of Bilur Gurubasava Pattina Sahakari Sangha Niyamit Bagalkot In ITA No.5006/2016 dated 05.02.2014.
Without prejudice, the CIT(A) and AO erred in not allowing the expenditure incurred in earning the interest on deposits which ought to be allowed as expenditure following the decision of the Jurisdictional High Court in the case of Vijayanagara Club in ITA No. 459 of 2013 on the facts and circumstances of the case
The Appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the Appeal.”
The assessee claimed a deduction u/s 80P(2)(a)(i) of the Income-tax Act,1961 ['the Act' for short] at Rs.14,92,910/-, which has been disallowed by AO vide order passed u/s 143(3) of the Act dated 22.12.2017 on the reason that the assessee is engaged in banking business and in view of the provisions of section 80P(4) of the Act, the assessee is not eligible for deduction u/s 80P of the Act.
ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 3 of 8` 2.1 Further, the learned AO while framing the assessment on erroneous appreciation of facts in case of assessee, compared the assessee as a mutual concern or association is as association of person (AOP):
The relevant paras of Assessment Order are as follows:
"3. The details furnished by the assessee especially the trading account revel that it is into the business of providing credit facilities to its members after obtaining deposit from the members. The profit arising out of the same was claimed by the assessee as deduction u/s.80P(2)(a) of the I.T. Act, 1961. Vide this office letter necessary details were sought from the assessee in order to ascertain whether the assessee qualify for deduction u/s.80(2)(a) of the I.T. Act, 1961. The details furnished by the assessee reveal the following
The facts submitted by the assessee reveal that the assessee is a co- operative society which is in the business of providing credit facilities to its members after obtaining deposits from its members. The assessee society claims itself to be a mutual concern, which is governed by the principle of mutuality and hence not liable to income tax. Hence, the deduction claimed u/s.80P by it is just and right as per law.
A mutual concern or association is an association of person (AOP), who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out in the same capacity in which they have made the contributions. Thus, the capacity as contributors and participants will remain the same. The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves. It is enough if they have a right of disposal over the surplus. Further in a mutual concern the members contribute not with an idea to trade but with an idea of rendering mutual help. Hence, the receipts in their hand is not really the profit, since no man can make a profit out of himself, just as he cannot enter into a trade or business with himself. The principle of mutuality in respect of the income of "mutual concern" has been further classified by the Hon'ble Apex Court in the case of Chelmford Club vs. CIT, 243 ITR p.83 (SC). The principles laid down have been summarised in the head note on pp.89 Et 90, is reproduced herewith for easy reference.
"Under the Income Tax Act, what is taxed is the 'income, profit or gains' earned or 'arising', 'accruing', to a `person'. Where a number of persons
ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 4 of 8` combine together and contribute to a common fund for the financing of some venture or object and in this respect, have no dealings or relations with any outside body, then they returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the. contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits, which are chargeable to tax. Where the trade activity, certain members only of the association take advantage of the facilities, which it offers, does not affect the mutuality of the enterprise. The law recognizes the principle of mutuality excluding the levy of income tax from the income of such business to which the above principle is applicable. A perusal of the section 2(24) of the Income Tax Act 1961, shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are: a. The identity of the contributors to the fund and the recipients from the fund. b. The treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate and
c. The impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
6.The three conditions enumerated above are compared with that of the assessee's case in order to determine whether the assessee is a mutual concern eligible for deduction u/s. 80P. The mutual is an AOP who agree to contribute funds for some mutually beneficial common purpose and receive back the surplus left out in the same capacity in which they have made the contribution. Therefore, the capacity as contributors and participators remains the same. The members contribute not with an idea to trade but with an idea of rendering mutual help. In the case of the assessee, the main objective of the AOP is promote and help members to spend less, by way of self help and other cooperative activities. In order to achieve the said goal, it collect the deposits from the members and provides credit facilities to its members.
Perusal of the bye law of the society registered with the registrar societies reveal. that there are three kinds of members; namely,
ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 5 of 8` a. Regular member as per the definition sl. No. 12 is a person who has at least own one share of the society. As per clause 8, he has the power to inspect the activities carried out by the society. He can obtain the list of all the members list from the society on payment of fee. He also has the power to obtain the financial statement. The regular member have entire power to interfere in the day to day activities of the enterprise. Such member can be part of the Governing body and has the voting power to elect the Governing body. He also has the share in the surplus of the enterprise as per his contribution.
b. Associate Member as per the clause 14 of the Bye law. An associate member gets all the benefits as that of the regular member from the society and also have right on the share of surplus. However, they are not entitled to attend the General Body Meeting or executive committee meeting, to obtain financial statements of the society. He also cannot contest the election with regard to the Governing Body and also does not have the voting power.
c. Nominal member as per clause 15 of the bye laws. The nominal members can open a deposit account, can avail loan by pledging government bonds, gold loans, vehicle loans, loans against deposit. They are not entitled to the share on surplus. They cannot participate in the AGM or participate in the administrative matter or become office bearers. They also cannot be a guarantor to the society for any other members who avail the loan.
The above said three different classes of members clearly prove that there is no complete identity between the contributors and the participants. The major contribution to the deposits are from the second and third category members. Any person who needs a loan can become an associate or nominal member and can avail loan. The main objective of the assessee is to encourage and inculcate savings, self-help and cooperation among its members. The activities of the assessee and the different classes of members only goes to prove that it is against the mandate of the assessee to encourage and inculcate savings,-self-help and cooperation among its members. In the case of the assessee the major contributors are the second and the third category members and the beneficiaries are the first categories members. Hence the depositors and borrowers are quite distinct and cannot be termed as cooperative activity. This activity is definitely an act of finance business. It is plain business and any willing buyer can utilize the services of the assessee. Hence the claim of the assessee that is a cooperative society which acts according to the principle of mutuality is absent hence, the deduction claimed u / s. 80(p) is hereby disallowed.”
ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 6 of 8` 2.2 Against this assessee went in appeal before the ld. CIT(A), who has confirmed the order of AO. Against this assessee is in appeal before us.
I have heard the rival submissions and perused the materials available on record. Before me, the ld. AR relied on the order of this Tribunal in the case of M/s. Krishnarajapet Taluk Agri Pro Co-op. Marketing Society Ltd. Vs. Principal CIT in ITA No.514/Bang/2021 dated 8.2.2022 for the A.Y. 2015-16. In my opinion, this judgement is delivered before the delivery of judgement by Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. and others (2021) 431 ITR 1. Hence, it is not considered.
3.1 In my opinion, similar issue came up for consideration before this Tribunal in the case of Gnana Shale Souhardha Co-operative Ltd. Vs. Principal CIT in ITA No.887/Bang/2022 dated 2.11.2022 for the AY 2015-16 wherein held as under: 9. “We have heard rival submissions and perused the material on record. The assessee had earned interest income on investments made with co-operative banks. Such interest income is not entitled to deduction u/s 80P of the I.T.Act in the light of the judgment of the Hon’ble Apex Court in the case of Totagar’s Co-operative Sale Society Ltd. v. ITO reported in (2010) 322 ITR 283 (SC) and the judgement of the Hon’ble jurisdictional High Court in the case of Pr.CIT & Anr. v. Totagars Co-operative Sale Society Ltd. reported in (2017) 395 ITR 611 (Kar.). The Explanation 2 (d) of section 263(1) of the I.T.Act states that an assessment order passed not in accordance with the judgment of the Hon’ble jurisdictional High Court or the Hon’ble Supreme Court shall deem to be an order erroneous and prejudicial to the interest of the Revenue. Therefore, the order of the Assessing Officer dated 26.12.2017 passed u/s 143(3) of the I.T.Act allowing interest income on investments with the co-operative banks has been correctly set aside by the PCIT in the impugned order passed u/s 263 of the I.T.Act. 9. As mentioned earlier, the limited submission of the learned AR is that when income is sought to be assessed on the said interest income, the expenses incurred for earning such income would be entitled to deduction u/s 57 of the
ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 7 of 8` I.T.Act. The Hon’ble jurisdictional High Court in the case of Totagars Co- operative Sale Society Ltd. v. ITO reported in (2015) 58 Taxmann.com 35 (Karnataka) had held when the assessee-co-operative society earned interest on deposits kept with scheduled banks only the net interest, i.e., the interest income reduced by the administrative expenses and other proportionate expenditure to earn the said income had to be brought to tax u/s 56 of the I.T.Act. The relevant finding of the Hon’ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO reported in (2015) 58 Taxmann.com 35 (Karnataka), reads as follows:-
“11. Having heard the learned counsel for the parties and perusing the records and in the light of the finding recorded by the Hon’ble Supreme Court that the interest income earned by the appellant falls within the category of “other income” what falls for consideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deduction in respect of proportionate costs incurred as permissible under Section 57. 12. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as “other income” falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from “other sources”, the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. 13. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits.”
The assessee has not raised the plea before the PCIT that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised before the PCIT, we are of the view that since the Act prescribes for taxing only the net income (i.e. total income minus the expenses incurred for earning such income), this plea of the assessee has to
ITA No.989/Bang/2022 The BBR & RDCC Bank Employees Co-op. Society Ltd., Bangalore
Page 8 of 8` be necessarily entertained, especially in the light of the judgment of the Hon’ble jurisdictional High Court in the case of Totagars Sale Co-operative Society v. ITO [2015] 58 taxmann.com 35 (Karnataka). Accordingly, the case is restored to the files of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources’. If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. The A.O. shall examine the aforesaid issue untrammeled by the direction of the PCIT in the impugned order passed u/s 263 of the I.T.Act. It is ordered accordingly.” 4. In view of the above order of the Tribunal, taking a consistent view, we remit this issue in dispute to the file of AO on similar directions. 5. In the result, th appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 28th Dec, 2022
Sd/- (Chandra Poojari) Accountant Member
Bangalore, Dated 28th Dec, 2022. VG/SPS
Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.