KUNDAPURA SOUHARDA CREDIT CO-OPERATIVE LIMITED,UDUPI vs. INCOME TAX OFFICER, WARD-2, BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

1. In the facts and circumstances of the case, whether the below authorities were justified in holding that Interest on Investments derived by the appellant is chargeable under Sec. 56 of the Act and not under Sec. 28 of the Act ; 0. Whether the appellate authority was within his powers in directing the Respondent to include Interest receipts on accrual basis and allow interest payments claimed by the appellant as expenditure on accrual basis even when the provisions of Karnataka Souharda Sahakari Act, 1997 mandates accounting of interest payable on deposits on accrual basis and charging off to profits while it requires interest received on actual realisation basis ; 3. The C.I.T. (A) erred in holding that the decisions relied upon by the appellant, viz: TCA No. 882/2018 — The Commissioner of Income Tax vs. Ammapet Primary Agricultural Co-operative Bank Ltd. (Madras High Court) and ITA- 707/Bang/2019 (A. Y. 2016-17) dated 26.08.2019 Kodavoor Vyavasaya Seva Sahakari Sangha Ltd. & Ors. vs. The Income Tax Officer, Ward-2, Udupi (ITAT, Bengaluru) — were of no assistance in deciding the condition of 'principle of mutuality' instead, the decision relied upon by the Id. A.O. rendered by ITAT, Bengaluru in ITA: 1220 & 1221/Bang/2019 in Atmashakthi Multipurpose Co-operative Society Ltd. Mangalore holds the ground ;

Whether both the below authorities were correct in holding 4. that the disallowance of various Provisions of Rs. 4,10,993/- made in the audited Profit & Loss A/c of the appellant were not opposed to Sec. 40A(7) and Sec. 43(2) of the Act and further even if, said provisions are disallowed, whether or not the resultant increase in business profits will qualify for deduction u/s. 80P of the Act and will have Nil tax effect ; and 5. The appellate authority failed in considering that the appellant being a credit cooperative, its entire profits and gains of business is chargeable u/s. 28 of the Act and eligible for deduction

SP No.34/Bang/2022 Kundapura Souharda Credit Co-op. Ltd., Udupi

Page 3 of 8 u/s. 80P(2)(a)(i) of the Act as per the judgement of Hon'ble Apex Court dated 12-01-2021 in — The Mavilayi Service Co-op. Bank Ltd. & Ors. vs. C.I.T. Calicut & anr. vis-à-vis the judgment in The Citizen Co-operative Society Ltd. Hyderabad.

Page 4 of 8 Employee Gratuity Fund of Rs. 2,23,674/-, Leave Encashment Rs. 1, 36,729/- and Bad debt provision of Rs. 50,590/- totaling Rs. 4,10,993/- also came to be added back to the profits as unascertained liabilities and hence not allowable. Thus, the Gross Total Income of the assessee was determined at Rs. 88,43,209/- from which no deduction was allowed under Chapter VI A of the Act. Thus, the total income of Rs. 88,43,209/- was brought under tax levying tax plus interest of Rs. 37 12,046/- as per the Order of the A.O. dated 05.12.2019 and accordingly a Demand Notice of even date was raised for the said tax amount.

SP No.34/Bang/2022 Kundapura Souharda Credit Co-op. Ltd., Udupi Page 5 of 8 “After hearing both the parties we are of the view that the Supreme Court has reversed the decision of special Bench of Kerala High Court in the case of Mavilayi Service Co-operative Bank Ltd., Vs. CIT 414 ITR 67 wherein it was held as follows: "45. 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 cooperative 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), 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 nonmembers, profits attributable to such loans obviously cannot be deducted.

SP No.34/Bang/2022 Kundapura Souharda Credit Co-op. Ltd., Udupi Page 6 of 8 reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;" Considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).

SP No.34/Bang/2022 Kundapura Souharda Credit Co-op. Ltd., Udupi

Page 7 of 8 5. Next ground in this appeal is with regard to the disallowance of various provisions made in audited profit & loss account of the assessee by invoking the provisions of sections 40A(7) & 43(2) of the Act. The assessee has raised this issue for the first time before us. Since this ground is not emanated from the order of Ld. CIT(A), we remit this issue to the file of AO to consider the same afresh after giving an opportunity of hearing to the assessee.

6. Further, the assessee has raised one more ground without prejudice to the above ground that even if the provisions were disallowed, same to be considered as a business income of the assessee and deduction u/s 80P of the Act is to be granted. In our opinion, if the provisions were disallowed by invoking the provisions of section 40A(7) or 43(2) of the Act, the resultant income should be considered as business income and the appropriate deduction to be granted to the assessee in view of the judgement of Hon’ble Supreme Court in the case of Gem Plus Jewellery (330 ITR 175), wherein it was held as under:- “(iv) That it was an admitted position that the assessee had deposited both the employer’s and the employees’ contribution towards provident fund and ESIC, though beyond the due date including the grace period. The Assessing Officer added these payments to the total income of the assessee. The disallowance which was effected by the Assessing Officer had not been challenged by the assessee. The plain consequence of the disallowance and the add back that had been made by the Assessing Officer was 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 could not 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 Tribunal was justified in directing the Assessing Officer to grant the exemption under section 10A of the Act on the assessed income, which was enhanced due to disallowance of the employer’s as well as employees’ contribution towards PF/ESIC.”

SP No.34/Bang/2022 Kundapura Souharda Credit Co-op. Ltd., Udupi

Page 8 of 8 7. In view of the above judgement of the Hon’ble Bombay High Court, we also remit this issue to the file of AO for fresh consideration.