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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee against the order dated 18.10.2021 u/s. 250 passed by the National Faceless Appeal Centre (NFAC), Delhi relating to Assessment Year 2017-18 on following grounds of appeal:
1. The learned Assessing Officer has erred in disallowing the deduction claimed by the cooperative society of Z. 60,91,244/- under section 80P(2)(a)(i) and the learned First Appellate Authority has erred in confirming the orders of the assessing authority.
2. The learned assessing officer has erred in treating the sum of Z.53,58,651/-being the interest and dividend received from SCDCC Bank as income from other sources, which the appellant had included under income from business. The assessing officer has erred in not granting the benefit of deduction u/s 80P(2)(d) for the interest received from co-operative banks 3. The assessee society is registered under the Co- operative Societies Act, 1959 and complied with The Karnataka Co-operative Societies Act, 1959, the Karnataka Co-operative Societies Rules, 1960 and bye laws of the society as well. The Karnataka Co-operative Societies Act, 1959 for the year under appeal permits to do the transaction with ordinary members, associate members and nominal members. Hence all the borrowers are members (regular or associate or nominal) of the appellant society and business was conducted with the above category of members and not with the general public as observed by the assessing officer. Section 80P(2)(a)(i) and mutuality concept are not inter related. Mutuality concept is not mandatory to claim the deduction u/s 80P(2)(a)(i). 4. During the year under appeal the assessee society received interest and dividend of Z. 53,58,651/- on deposits from co operative banks and claimed deduction u/s 80P(2)(a)(i). However the assessing officer relied on the decision of Hon'ble High Court of Karnataka Dharwad Bench in the case of M/s. Totagars Co-operative Sale Society and after allowing the cost of funds made the addition of Rs.. 8,74,992/- However our case is not similar to the case followed by the learned assessing officer , and the assessee is a co- operative society hence eligible to claim deduction u/s 80P(2)(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society. In Several decisions of courts of law it has been held that co-operative bank does not lose the character of a Co- operative Society. The recent judgement of Hon'ble ITAT Delhi Bench 'E' in the case of Mantola Co-operative Thrift & Credit Society Ltd. supports the contention of the appellant. 5. We further submit that, as per the provisions of section 80(P)(2)(a)(i), in the case of a co-operative society, the whole of the amount of profits and gains attributable to the business of providing credit facilities to its members shall be allowed as full deduction. If any activity is carried on with non members as alleged by the assessing officer and Page 3 of First Appellate Authority, the profit attributable to such business can only be taxed. Therefore in the case of the appellant if nominal members are not considered as members as alleged by the assessing officer, only such portion of profit attributable to the business with nominal members could be taxed. The Judgement passed by the Honourable Supreme Court in CIVIL APPEAL NOS. 7343-7350 OF 2019 with CIVIL APPEAL NO.8315 OF 2019 AND CIVIL APPEAL NO. OF 2021 (@ SLP(C) NO.________OF 2021) (DIARY NO. 31268 OF 2019) supports the contention of the appellant.
6. The appellant has been assessed as a co-operative society and such being the case all benefits available to the appellant as per the provisions of section 80P of the Income Tax Act cannot be denied without a legal provision to do so. The learned First Appellate Authority has erred in not considering this while disposing of the appeal 7. The appellant craves leave to add, to amend and/or alter any of the foregoing grounds and such other grounds as may be urged at the time of hearing, the Appellant prays for allowing the deduction u/s 80P(2)(a)(i) & 80P(2)(d).”
The assessee is a Primary Agricultural Co-operative Society duly registered under the Karnataka Co-operative Societies Act,1959 established with the main object of providing credit facilities to its members by collecting funds from its members, marketing agricultural produce and agricultural implements, sale of fertilizers / pesticides etc. and purchase & sale of domestic requisites and grocery etc.
The assessee filed its return of income for the Assessment Year 2017-18 on 22.10.2017 declaring a total income of Rs.20,990/- after claiming deduction of Rs. 60,91,244/- u/s 80P of the Act.
The assessee furnished all the details asked for by the Ld.AO as well as made detailed submissions as to why the deduction u/s 80P should be allowed and how the facts of the following case laws are distinguishable to the facts of the assessee:
Page 4 of a. M/s The Totgars' Co-operative Sale Society 08.02.2010 in Civil Appeal No. 1622 of 2010 ; b. M/s. Totagars' Co-operative Sale Society dt 16.06.2017 in of 2016 ; c. M/s Citizen Co-operative Society, Hyderabad dt 08.08.2017 in Civil Appeal No. 10245 of 2017 .
The AO denied the deduction u/s 80P(2)(a)(i) amounting to Rs.60,91,244/- [ income from lending of credit facility to Members ] and u/s 80P(2)(d) amounting to Rs. 53,58,654/- towards interest earned on Term Deposits with SCDCC Bank / Other Co Op Societies and Dividend Income from Investment in Shares with SCDCC Bank / Other Co Op Societies.
The Ld.AO denied entire deduction of Section 80P to the assessee thereby making an addition of Rs. 8,74,992/- merely because of the fact that the assessee had admitted Nominal Members. The AO ought to have appreciated the fact that the bye laws of the assessee Society and the Karnataka Co Operative Societies Act, 1959 under which the assessee is registered, permits the admission of such class of members and the assessee has not violated the law by admitting Nominal Members. 7. On appeal by the assessee, the CIT(A) confirmed the order of the AO by placing reliance on the decision of the Hon'ble Supreme Court in the case of Citizens Co-operative Society Ltd. Vs. ACIT 397 ITR 1 (SC). Aggrieved by the order of the CIT(A), the assessee has preferred the present appeal before the Tribunal. 8. We have heard the rival submissions.
Page 5 of On ground Nos.1 to 3, the Ld. A.R. submitted that the law on deduction of 80P(2)(a)(i) of the Act available to credit co-operative societies has since been settled by Hon'ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd. Vs.CIT (2021) reported in 123 taxmann.com 161 (SC). He submitted that the Hon'ble Supreme Court has held that the expression "Members" is not defined in the Income-tax Act. Hence, it is necessary to construe the expression "Members" in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. The Ld. A.R. submitted that the Hon'ble Supreme Court has considered the decision rendered by it in the case of Citizen Co-operative Society Ltd. (supra) and observed that the ratio decidendi of Citizen Co-operative Society Ltd. must be given effect to. Accordingly, he submitted that the assessee should be allowed deduction u/s 80P(2)(a)(i) of the Act. The Ld. D.R., on the contrary, submitted that the issue of deduction needs to be examined afresh in the light of decision rendered by Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. (supra). Accordingly, he submitted that this issue may be restored to the file of the A.O.
9. We heard the parties on this issue and perused the record. We find merit in the submission made by Ld. D.R. Since the Hon'ble Supreme Court has settled many issues in the decision rendered by it in the case of Mavilayi Service Co-operative Bank Ltd. (supra) and since the facts prevailing in the instant case needs to be examined afresh in the light of the principles enunciated by Hon'ble Supreme Court in the above said case, we are of the view Page 6 of 80P(2)(a)(i) of the Act requires fresh examination at the end of the A.O. Accordingly, we set aside the order passed by Ld. CIT(A) for the year under consideration and restore them to the file of the A.O. for examining it afresh based on the principles laid down by Hon’ble Supreme Court in case of Mavilayi Service Co-operative Bank Ltd. (supra).
As far as ground No. 4 is concerned, we have heard the rival submissions. In the case of Karkala Co-op. S. Bank Ltd. Vs. ITO (ITA No.1288 & 1289/Bang/2019 dated 18.2.2021), the Bangalore Bench of Tribunal has considered issue of eligibility of the assessee to claim deduction u/s 80P(2)(d) and it was held that the assessee is eligible for deduction of expenses incurred for earning the interest income. The relevant observations made by the Tribunal are extracted below:- "7. The next common issue relates to rejection of deduction claimed u/s 80P(2)(d) of the Act in respect of interest income earned from fixed deposits kept with bank. We noticed earlier that the A.O. has observed in Assessment Year 2015-16 that the interest income received by the assessee from deposits kept with banks is not eligible for deduction u/s 80P(2)(c) 8s 80P(2)(d) of the Act since the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act. In AY 2016-17, the AO assessed the interest income received on bank deposits under the head "Income from other sources" and denied deduction claimed u/s 80P(2)(d) of the Act. The Ld CIT(A) confirmed the action of the AO on this issue.
The Ld. A.R. submitted that the assessee is entitled to claim deduction allowable u/s 57 of the Act in respect of cost of funds and proportionate administrative and other expenses. In support of this submission, the Ld. A.R. placed reliance on the decision rendered by Hon'ble High Court of Karnataka in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO (2015) 58 taxmann.com 35 (Karn). The Ld. A.R. submitted that the assessee in the above said case had put forth identical claim claim before Hon'ble Supreme Court in the case reported as Totgars Co- operative Sale Society Ltd. Vs. ITO (2010) 188 taxmann.com 282 and the Hon'ble Supreme Court, vide 14 of its order, had restored Page 7 of Hon'ble High Court of Karnataka. Consequent thereto, the Hon'ble High Court of Karnataka has passed the order in the case reported in 58 taxmann.com 35 and held 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 proportionate cost, administrative expenses incurred in respect of such deposits. Accordingly, the Ld. A.R. prayed that the A.O. may be directed to allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head "other sources".
We heard Ld. D.R. on this issue. We find merit in the prayer of the assessee, since it is supported by the decision rendered by Hon'ble High Court of Karnataka in the case of Totgars Cooperative Sale Society Ltd. Vs. ITO (2015) 58 taxmann.com 35 (Karn). Accordingly, we direct the A.O. to allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head "other sources".
Following the above said decision of the Tribunal, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head -other sources. In the result, appeal by the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on 03rd February, 2022.