THE BHARATHI CO-OPERATIVE CREDIT SOCIETY,BENGALURU vs. INCOME TAX OFFICER, WARD-7(2)(1), BANGALORE
Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEYAssessment Year: 2013-14
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi vide order dated 31/10/2023 in DIN No. ITBA/NFAC/
S/250/2023-24/1057532958(1) for the assessment year 2013-14. 2. The assessee has raised as many as 7 grounds of appeal which we are not inclined to reproduce the same here for the sake of brevity.
The Ground Nos. 1 and 7 of the assessee’s appeal are general in nature and do not require any separate adjudication. Likewise, the issue Page 2 of 9
.
raised in Ground No. 6 of the appeal pertains to the levy of interest under section 234B of the Act which is consequential in nature and does not require any separate adjudication. Hence, the Ground Nos. 1, 6 & 7
are hereby dismissed as infructuous.
The issues raised by the assessee through Ground Nos. 2 to 5 of the appeal are interconnected and pertain to the disallowances of deduction claimed under section 80P(2)(a)(i) of the Act.
The relevant facts are that the assessee is cooperative society and engaged in providing credit facilities to the members. The assessee for the A.Y. 2013-14 filed return of income declaring income at NIL after claiming deduction under section 80P of the Act for Rs. 73,68,520/- only. Subsequently, the assessment under section 143(3) of the Act was completed vide order dated 31st March 2016 assessing the income at Rs. 73,68,520/- after making the disallowances of deduction claimed u/s 80P of the Act.
On appeal by the assessee, the learned CIT(A) vide order dated 11-10-2017 confirmed the disallowance by placing reliance on the ruling of Hon’ble Supreme Court in the case of Citizen Cooperative Society Limited in civil appeal No. 10245 of 2017 and held that the element of mutuality is missing.
On further appeal the Tribunal remanded the issue to the file of the AO for fresh adjudication. Page 3 of 9
.
8. In the set aside proceeding, the AO observed that the assessee has admitted associate and nominal members. As per the bylaws of the assessee society, the associate member does not have voting rights and nominal member does not have right to share in the profit. Accordingly, the AO held that the element of mutuality is missing and in absence of mutuality the deduction under section 80P of the Act cannot be allowed.
1 The aggrieved assessee carried the matter before the learned CIT(A).
The assessee before the learned CIT(A) submitted that it accepts deposits and grants loans only to its members for their various needs, charging reasonable interest and offering banking-related services like cheques facilities solely for members. Under its bye-laws, the assessee is prohibited from offering such services to the general public. The assessee contends that it does not accept deposits from the public, does not maintain deposits in commercial banks for business purposes, and does not earn any interest on investments. The surplus generated from its activities is used solely for the economic upliftment of its members. The credit facilities are restricted to members only, which is in line with the principles of mutuality and the cooperative movement’s objectives. The AO had wrongly applied the ratio of Citizens Co-operative Society (supra) in the present case.
The assessee argued that the AO originally disallowed the claim of deduction by holding the assessee as cooperative bank under the provisions of section 80P(4) of the Act. The matter was remanded by the Hon’ble ITAT Bangalore for fresh examination and directed to verify the Page 4 of 9
.
applicability of ruling in case of Totgars Co-operative Sale Society Ltd.
and Citizens Co-operative Society. The AO, instead of addressing the directions, introduced a new ground regarding the principle of mutuality and once again disallowed the deduction. This was done without appreciating the factual position and legal provisions, and without considering the assessee’s detailed submissions.
The assessee, therefore submits that the disallowance of deduction under section 80P(2)(a)(i) is incorrect in law and on facts, and prays for the claim to be allowed in full.
The learned CIT(A) after considering the facts in totality noted that the assessment had been completed after a remand by the Hon’ble ITAT, which had directed the AO to reconsider the claim under section 80P of the Act in the light of the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. v. ACIT. On such examination, the Assessing Officer concluded that the appellant’s structure and operations were not in full conformity with the principles of mutuality. Specifically, the AO found that the appellant had two distinct classes of members i.e. (i) ordinary or resident members, and (ii) associate/nominal members.
The rights and privileges of associate and nominal members were significantly curtailed. They had no right to vote, no right to participate in annual general meetings, no right to receive notices of such meetings, and no right to receive the society’s annual financial statements or balance sheets. They also could not take part in the administration or directorship of the society and had no share in the profits or assets of the society. Their relationship with the society was essentially limited to Page 5 of 9
.
placing deposits, primarily to earn interest. These members did not contribute to the surplus in the same manner as ordinary members, nor did they participate in its distribution.
The learned CIT(A) referred to the principle of mutuality as laid down by the Hon’ble Supreme Court in CIT v. Bankipur Club Ltd reported in 226 ITR 97 and reiterated in Citizen Co-operative Society Ltd. (supra), that for mutuality to exist, all contributors to the common fund must be entitled to participate in the surplus and all participants in the surplus must be contributors, ensuring complete identity between contributors and participants. In the appellant’s case, the creation of a separate category of nominal and associate members broke this identity.
It was also observed that the appellant’s activities were akin to those of a finance business, and that it had accepted deposits from nominal members without the requisite mutual participation. The AO had found that such activities were in violation of the provisions of the Karnataka Co-operative Societies Act and were undertaken without necessary approvals from the