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Income Tax Appellate Tribunal, “SMC - C” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN
IN THE INCOME TAX APPELLATE TRIBUNAL “SMC - C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT to 152/Bang/2022 Assessment Years : 2013-14 to 2015-16 M/s. Sharavathi Pathina Sahakara Vs. ITO, Sangha Niyamitha, Ward - 5, PLD Bank Building, Shivamogga. Taluk Office Road, Thirthahalli – 577 432, Shivamogga. PAN : AABAS 8853 K APPELLANT RESPONDENT Assessee by : Shri. G. Sathyanarayan, CA Revenue by : Shri. Ganesh R Ghale, Standing Counsel for Department. Date of hearing : 25.07.2022 Date of Pronouncement : 01.08.2022 O R D E R These are three appeals by the Assessee against three orders all dt. 15.3.2019 of CIT(A), Davangere, relating to Assessment Years 2013-14 to 2015-16. There are common issues involved in these appeals and were therefore heard together.
The common issue that arises for consideration in the appeal is as to whether the Revenue authorities were justified in denying the benefit of deduction u/s.80P(2)(a)(i) of the Act to the Assessee. The Assessee is a society registered under the Karnataka Co-operative Societies Act, 1959. In the return of income filed for the relevant AY, the Assessee claimed Page 2 of 13 deduction u/s.80P(2)(a)(i) of the Act. According to the Asessee it did not have license to carry on any banking business under the Banking Regulation Act, 1949. It was engaged in marketing agricultural produce of its members, providing credit facility to its members, sale and distribution of fertilizers, pesticides, agricultural equipments, farm products, providing warehousing facilities for storing agricultural produce.
The AO denied the benefit of deduction to the Assessee by applying the provisions of Sec.80P(4) of the Act and the CIT(A) confirmed the order of the AO.
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 co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions ‘co- operative 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.
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’. Page 3 of 13 6. The CBDT vide Circular No. 6/2010 [F.No. 173(3)/44/2009-IT (A-I)] dated 20-9-2010 has also issued a circular for the sake of clarity the circular is reproduced as under “Section 80P of the Income-tax Act, 1961 provides for a deduction from the income of co-operative societies referred to in that section. As Regional Rural Banks (RRB) are basically corporate entities (and not co-operative societies), they were considered to be not eligible for deduction under Section 80P when the section was originally introduced. However, as Section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be co-operative society for the purposes of the Income-tax Act, 1961, in order to make such banks eligible for deduction under Section 80P, CBDT issued a beneficial Circular No. 319 dated 11-1- 1982, which stated that for the purpose of Section 80P, a Regional Rural Bank shall be deemed to be a co-operative society. Section 80P was amended by the Finance Act, 2006, with effect from 1 -4- 2007 introducing sub-section (4), which laid down specifically that the provisions of Section 80P will not apply to any co-operative bank other than a Primary Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank. Accordingly, deduction under Section 80P was no more available to any Regional Rural Bank from assessment year 2007-08 onwards. An OM dated 25-8-2006 addressed to RBI was issued by the Board clarifying that Regional Rural Banks would not be eligible for deduction under Section 80P of the Income-tax Act, 1961 from the assessment year 2007-08 onwards. It has been bought to the notice of the Board that despite the amended provisions, some Regional Rural Banks continue to claim deduction under Section 80P on the ground that they are co-operative societies covered by Section 80P(1) read with Boards Circular No. 319 dated 11-1-1982. It is, therefore, reiterated that Regional Rural Banks are not eligible for deduction under Section 80P of the Income-tax Act, 1961 from the assessment year 2007-08 onwards. Further more, the Circular No. 319 dated 11-1-1982 deeming any Regional Rural Bank to be co-operative society stands withdrawn for application with effect from assessment year 2007-08. The field officers may take note of this position and take remedial action, if required.” Page 4 of 13 7. The first aspect to be seen is as to whether the Assessee can be said to be a co-operative Bank. In [2017] 84 taxmann.com 114 (SC) Citizen Co- operative Society Ltd. vs. ACIT, the Hon’ble Supreme Court held that in order to do the business of a cooperative bank, it is imperative to have a licence from the Reserve Bank of India. It can therefore be said that a co- operative society which does not possess a license from RBI cannot be equated to a co-operative Bank, even though it might indulge in the business of banking. In this case the AO adopted the definition of co-operative Bank as given in the Banking Regulation Act, 1949, ignoring the specific exclusions given in Sec.80P(4) of the Act. The CBDT circular referred to above is also not applicable to the Assessee as it cannot be said to be a Regional Rural Bank.
In COMMISSIONER OF INCOME TAX AND ANOTHER vs. SRI BILURU GURUBASAVA PATTINA SAHAKARI SANGHA NIYAMITHA BAGALKOT(2014) 369 ITR 0086 (Karn), the Hon’ble Karnataka High Court held:
“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 Page 5 of 13 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 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 Co- operative 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 Co- operative 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 6 of 13 9. Co-operative Societies carrying on business of banking are therefore entitled to claim deduction u/s.80P(2)(a)(i). The AO/CIT(A) refused to follow the aforesaid decision of the Hon’ble Karnataka High Court on the ground that SLP has been filed before the Hon’ble Supreme Court against the said decision of High Court.
I am of the view that in the light of the decision of Hon’ble High Court of Karnataka referred to above, the deduction u/s.80P(2)(a)(i) of the Act cannot be denied to the Assessee. The latest verdict by the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT 2021 TaxPub(DT) 273 (SC) : (2021) 431 ITR 1 (SC) while delivering the judgment in favour held: “Section 80P being a benevolent provision enacted by Parliament to encourage and promote credit of co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of 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 revenue 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, limited object of which is to exclude co-operative banks that function at par with other commercial banks, i.e., which lend money to members of public. Thus, if Banking Regulation Act, 1949 is 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 said Act, which means accepting, for the purpose of lending or investment, of deposits of money from public. Likewise, under section 22(1)(b) of Banking Regulation Act, 1949 as applicable to co-operative societies, no co- operative society would carry on banking business in India, unless it is a cooperative bank and holds a licence issued in that behalf by RBI. As opposed to this, a primary agricultural credit society is a co-operative society, primary object of which is provide financial accommodation to its members for agricultural purposes or for purposes connected with Page 7 of 13 agricultural activities. As a matter of fact, some primary agricultural credit societies applied for a banking licence to the RBI, as their bye- laws also contain as one of the objects of the Society the carrying on of business of banking. This was turned down by RBI. Clearly, therefore, once section 80P(4) was out of harm's way, all the assessee's entitled to the benefit of deduction under section 80P(2)(a)(i), notwithstanding that they might also be giving loans to their members which were not related to agriculture. Also, in case it is found that there were instances of loans being given to non-members, profits attributable to such loans obviously could not be deducted."
The Hon'ble Supreme Court held that section 80P being a benevolent provision must be read liberally and reasonably and in case of any ambiguity it must be interpreted in favour of the assessee. Supreme Court observed that section 80P(2)(a)(i) which covers a co-operative society engaged in the business of banking or providing credit facilities to its members does not require that the assessee has to be a primary agricultural credit society. The Hon'ble Supreme Court noted that section 80P(2)(a)(i) does not require that the society has to give agricultural credit only. It further observed that once the co-operative society provides credit facility to its members, the fact that it also provides credit facility to non-members does not disentitle the society from availing of deduction. Supreme Court observed that the object of section 80P(4) was to exclude co-operative banks that function at par with other commercial banks and noted that as primary agricultural credit societies are not entitled for obtaining a banking license would not be hit by this provision. In the light of the law on the issue discussed above, I am of the view that the Assessee is entitled to deduction u/s.80P(2)(a)(i) of the Act as claimed and the same is directed to be allowed. Page 8 of 13 12. In the light of the law on the issue discussed above, I am of the view that the Assessee is entitled to deduction u/s.80P(2)(a)(i) of the Act as claimed and the same is directed to be allowed.
The other common issue that arises for consideration in the appeal for AY 2013-14 & 2014-15 is that for non deduction of tax at source on payment to pigmy agents, disallowance of those payments as expenses were made by the AO 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.
We have heard the rival submissions. There is no dispute regarding genuineness of the expenditure that was disallowed and the fact that the said expenditure is otherwise allowable as deduction in computing income from business. In such circumstances, even if the expenditure is disallowed u/s.40(a)(i) of the Act, the result will be that the disallowance will go to increase the profits of the business which is eligible for deduction u/s.80- P(2)(a)(i) of the Act and consequently the deduction u/s. 80-P(2)(a)(i) of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Born) and Hon'ble Gujarat High Court in the case of ITO vs. Kewal Construction, 354 ITR 13 (Gui) have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction Page 9 of 13 under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:- “3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance”.
Further the Hon’ble Karnataka in the case of CIT Vs. M/s. M.Pact Technology Services Pvt. Ltd. in ITA No.228/2013 order dated 11.7.2018 had to deal with admissibility of the following substantial question of law in an appeal by the Revenue u/s.260A of the Act :- “5. Whether the Tribunal is correct in law in not adjudicating the main issue of applicability of provisions of section 40(a)(ia) in respect of disallowance of sub-contracting chares of RS.16,21,851/- made by assessing authority on the ground that the assessee had failed to deduct tax at source under section 194C of I.T.Act? 6. Whether the Tribunal is justified in law in directing the assessing authority to allow deduction under section 10A in respect of amount disallowed under section 40(a)(ia) without appreciating the fact that the income enhanced on account of deeming provisions cannot be considered for the purpose of claiming benefit under the provisions of section 10A?” 16. The Hon’ble Karnataka High Court held as follows: “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:- Page 10 of 13 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 Page 11 of 13 [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 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 Page 12 of 13 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.”
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.
18. In the appeal for AY 2015-16, another issue that arises for consideration is as to whether the rent income of Rs.6,66,000 received by the Assessee from letting of Godowns is entitled to deduction u/s.80P(2)(e) of the Act. The AO/CIT(A) did not consider the plea of the Assessee in the light of the provisions of Sec.80P(2)(e) of the Act which provides that income derived by co-operative society from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, is eligible for deduction but examined the said claim as one made u/s.80P(2)(a) of the Act. We therefore Page 13 of 13 deem it fit and proper to direct the AO to examine this issue afresh and for this purpose the issue is set aside to the AO.
In the result, the appeals of the Assessee for AY 2013-14 & 2014-15 are allowed while the appeal for AY 2015-16 is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.