SHRI MAHAVEER CO-OPERATIVE CREDIT SOCIETY LTD,ALAGUR vs. INCOME TAX OFFICER, ALAGUR

This appeal is filed by Shri Mahaveer Co-operative Credit Society Ltd. (the assessee/appellant) for the assessment year 2016-17 against the appellate order passed by the Addl./JCIT(Appeal), Bhubaneswar [ld. CIT(A)] dated 08.11.2024 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [the Act] dated 29.11.2018 was partly allowed for statistical purposes.

The assessee is aggrieved with the same and preferred this appeal mainly contesting that the (i) deduction u/s. 80P(2)(a)(i) and/or 80P(2)(d) of the Act should be allowed to the assessee, (ii) Further the disallowance of Rs.75,000 was confirmed for non-deduction of tax at source for the audit fees.

Briefly stated the facts of the case show that assessee is registered under the Karnataka Co-operative Societies Act [KCS Act] , filed its return of income on 16.5.2017 declaring gross total income of Rs.19,10,651 and claimed deduction u/s. 80P(2)(a)(i) of the same amount resulting into taxable income at Nil. The return of income was picked up for scrutiny by issue of notice u/s. 143(2) on 17.8.2018. During the course of assessment proceedings, the ld. AO disallowed the entire deduction u/s. 80P(2)(a)(i) relying on the decision of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. In the assessment order, the ld. AO held that in view of the decision of Hon’ble Supreme Court in the case of Citizen Co-operative Society, the assessee is not entitled to deduction u/s. 80P(2)(a)(i). With respect to interest income from investment in other co- operative banks also, interest income earned from Belgaum District central Cooperative bank Limited of Rs 20,88,556/- was not allowed as deduction u/s 80P (2) (d) of the Act. Further it was also found that assessee has debited a sum of Rs.75,000 towards audit fees, but did not furnish any details for TDS, therefore 30% of 75,000 i.e., Rs.22,500 was further disallowed. Accordingly assessment order was passed u/s. 143(3) of the Act on 29.11.2018. Accordingly, total income of was computed at Rs.19,33,151/-.

The assessee aggrieved with the same, preferred appeal before the ld. CIT(A). It was submitted that the amount of investment made by the assessee is in terms of provisions of KCS Act and therefore assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act on the whole of the income. It was further stated that BDCC Bank is prima facie a co-operative society and as per Banking Regulation Act, it is a co-operative bank being a co-operative society carrying on the business of banking. Therefore, interest income earned by the assessee from that bank is eligible for deduction u/s. 80P(2)(d) of the Act. With respect to the disallowance u/s. 40(a)(ia) on account of non-deduction of tax at source, the audit fees paid of Rs.75,000, the assessee contested that recipient of the income has already offered the same as income of the recipient and therefore no disallowance can be made.

The ld. CIT(A) confirmed the disallowance u/s. 80P(2)(a)(i) and held that deduction u/s. 80P is allowable to the society that provides credit facilities to its regular or nominal members only and not to anybody else. With respect to deduction u/s. 80P(2)(d) on interest income of Rs.22,02,796 from BDCC Bank, he held that interest income is received from a co-operative bank and the meaning of the word “co-operative society” cannot be extended to include the co-operative banks also. Accordingly deduction u/s. 80P(2)(d) was also denied. Regarding disallowance of audit fees, he held that no Form 26A issued by the auditor of recipient to prove his claim that auditor has offered the income for taxation, disallowance was confirmed.

Accordingly assessee is in appeal before us. The ld. AR submitted a paperbook containing 91 pages and also a case law compilation of 8 different authorities. The ld. AR submitted that the ld. CIT(A) has confirmed the disallowance without verifying the facts of the case, but merely relied upon the decision of the Hon’ble Supreme Court and has not considered the mutuality concept of the society. He submitted that as per section 18 of the KCS Act, even nominal and associate members are also valid members of the society and any business done with associate members does not violate the mutuality concept. Further the business done with nominal members is hardly 1.82% of the total business. He further relied upon the decision of the coordinate Bench dated 10.11.2022 wherein the coordinate Bench has remanded the case back to the AO to consider and then allow the claim u/s. 80P(2)(a)(i) of the Act. It was further contested that even otherwise on the interest income from BDCC Bank amounting to Rs.20,88,556, the ld. AO has not given any deduction wherein according to KCS Act, 25% of the profit is required to be invested into statutory reserve fund with BDCC Bank. It is an investment with Apex Bank. Even otherwise, it is a co-operative society carrying on the business of banking and interest therefrom is eligible for deduction u/s. 80P(2)(d) of the Act. With respect to disallowance of 30% of audit fees, it was submitted that no opportunity was provided to the assessee to produce the relevant forms that recipient of the income has offered the income for taxation.

We have carefully considered the rival contention and the orders of the ld. lower authorities. The assessee is a co-operative society registered under the Karnataka state co-operative societies Act. Fact stated before us shows that out of the total loan granted by the assessee only 1.81% of the total loan is granted to associate members and 98.18 percentage of the loan is granted to the regular members. It is also a fact that the Registrar of cooperative society has not questioned the registration granted to the assessee under that act. Ld. Lower Authorities have merely denied the deduction to the assessee based on the decision of the Hon’ble Supreme Court in case of Citizen Cooperative Society.

Honourable Supreme Court had an occasion later on to consider this decision of the Honourable Supreme Court in case of Citizen Cooperative Society Limited (2017) 9 SCC 364 in the another decision of the larger bench of the Honourable Supreme Court in Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC)[12-01-2021] wherein it was held as under:-

In Kerala State Coop. Mktg. Federation Ltd. v. CIT [1998] 5 SCC 48, this Court, while dealing with classes of societies covered by section 80-P of the Act, held as follows:

We may notice that the provision is introduced with a view to encouraging and promoting growth of cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption."

Undoubtedly, if one has to go by the aforesaid definition of "cooperative bank", the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative to have a licence from Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a cooperative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of section 80-P.

So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under section 80-P of the Act is not sub-section (4) thereof. What has been noticed by the assessing officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violation of the provisions of MACSA under which it is formed. It is pointed out by the assessing officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of "nominal members". These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as cooperative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the assessing officer that the activity of the appellant is in violation of the Cooperative Societies Act. Moreover, it is a cooperative credit society which is not entitled to deduction under section 80- P(2)(a)(i) of the Act.

It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the assessing officer, our purpose would be served by taking note of the following portion of the discussion:

These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a cooperative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80-P of the Act."

Further honourable supreme court explained the provision of section 80 P of the Act referring to several judicial precedents as under:-

Secondly, for purposes of eligibility for deduction, the assessee must be a "co- operative society". A co-operative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.

Thirdly, the gross total income must include income that is referred to in sub- section (2).

Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being "engaged in" carrying on the business of banking or providing credit facilities to its members. What is important qua sub- clause (2)(a)(i) is the fact that the co-operative society must be "engaged in" the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression "engaged in", as has been held in CIT v. Ponni Sugars & Chemicals Ltd. [2008] 174 Taxman 87/306 ITR 392 (SC), would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars & Chemicals Ltd. (supra) held:

The learned Additional Solicitor General relied upon the second proviso to section 2(oaa) of the Kerala Act, and argued that given the fact that the principal object in most, if not all, of the Appellants before us has not been fulfilled, these Appellants have lost all characteristics of being primary agricultural credit societies. In answer to this submission, learned counsel for the Appellants cited the following judgments, namely, Asstt. CIT v. A.K. Menon [1995] 5 SCL 319 (SC) (paragraph 4); Titan Medical Systems (P.) Ltd. v. Collector of Customs 2003 taxmann.com 2027 (SC) (paragraph 12); and Vadilal Chemicals Ltd. v. State of Andhra Pradesh 2006 taxmann.com 2217 (SC) (paragraphs 20 to 23), for the proposition that it is the RBI alone under the Banking Regulation Act, 1949, and the Registrar alone under the Kerala Act who can look into questions as to whether a primary agricultural credit society is, or is not, a co-operative bank, and whether a society's classification as primary agricultural credit society ought to continue or be re-classified as a co-operative bank. Neither argument applies to the facts of these cases, given that the statutory provision involved does not require the Appellants to be primary agricultural credit societies to claim a deduction under section 80P(2)(a)(i) in the first place.

Fifthly, as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 8 SCC 393 at paragraph 23, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under section 80P. Therefore, the assessing officer under the Income-tax Act cannot be said to be going behind any registration certificate when he engages in a fact-finding enquiry as to whether the co-operative society concerned is in fact providing credit facilities to its members. Such fact finding enquiry (see section 133(6) of the Income-tax Act) would entail examining all relevant facts of the co-operative society in question to find out whether it is, as a matter of fact, providing credit facilities to its members, whatever be its nomenclature. Once this task is fulfilled by the assessee, by placing reliance on such facts as would show that it is engaged in providing credit facilities to its members, the assessing officer must then scrutinize the same, and arrive at a conclusion as to whether this is, in fact, so.

Sixthly, what is important to note is that, as has been held in Kerala State Cooperative Marketing Federation Ltd. (supra) the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P(2)(a)(i) must be contrasted with section 80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a "primary" society engaged in supplying milk etc. thereby defining which kind of society is entitled to deduction, unlike the provisions contained in section 80P(2)(a)(i). Also, the proviso to section 80P(2), when it speaks of sub-clauses (vi) and (vii), further restricts the type of society which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in section 80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non- members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.

Seventhly, section 80P(1)(c) also makes it clear that section 80P is concerned with the co-operative movement generally and, therefore, the moment a co- operative society is registered under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). The reach of sub- clause (c) is extremely wide, and would include co-operative societies engaged in any activity, completely independent of the activities mentioned in sub-clauses (a) and (b), subject to the cap of INR 50,000/- to be found in sub-clause (c)(ii). This puts paid to any argument that in order to avail of a benefit under section 80P, a cooperative society once classified as a particular type of society, must continue to fulfil those objects alone. If such objects are only partially carried out, and the society conducts any other legitimate type of activity, such co-operative society would only be entitled to a maximum deduction of Rs. 50,000/- under sub-clause (c).

Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole."

As the assessee is carrying on the business of the assessee as per the certificate granted by the respective registrar of the cooperative societies and according to its bylaws, the reliance by the learned lower authorities on decision of the honourable Supreme Court in case of Citizen cooperative society (supra), is unjustified. In fact, the principles laid down by that decision favours the claim of the assessee and does not support the case of revenue. Thus the assessee is entitled to deduction under section 80 P (2) (a) (i) of the Act.

Now the issue was also raised that assessee has earned interest from a cooperative societies which is carrying on the business of banking and therefore the deduction u/s 80 P (2) (d) is denied to the assessee. Revenue relied heavily on the decision of honourable Karnataka High court in case of PCIT V Totagar Cooperative Sales Society (2017) 395 ITR 611 ( Karnataka ) dated 16 June, 2017.

We find that honourable Supreme court has rendered two decisions after that in case of (i) Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC)[12-01-2021] and (ii) Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. vs. Assessing Officer [2023] 154 taxmann.com 305 (SC)/[2023] 295 Taxman 675 (SC)/[2023] 458 ITR 384 (SC)[14-09-2023] which now binds us .

Honourable supreme court in Mavilayi decision [ supra ] has extracted certain definitions as under :-

Further the Karnataka state cooperative societies Act 1959 defines a cooperative bank in section 2 ( b1) as under :-

Thus a cooperative bank is necessarily a cooperative society first under The Karnataka State Cooperative Societies Act.

Thus, the Interest income earned from the Investment in another Cooperative Societies, even if it is carrying on the business of banking, being a cooperative bank as per the Karnataka Cooperative Societies Act 1959, qualifies for the deduction u/s 80 P (2) (d) of the Act. If the interest earned is not from investments but from business operations, it necessarily qualifies for deduction u/s 80 P (2) (a) itself.

Thus, according to me, the assessee is entitled to the deduction u/s 80 P (2) (a) if it is business income chargeable to tax under the head ' profit and gains of business and Profession" and or under section 80 P (2)(d) if it is investments income chargeable to tax under the head ' income from Other sources" . In both the cases it forms part of the 'Gross Total income' of the Assessee.

Thus, Grounds no 1 and 2 of the appeal are allowed and ld AO is directed to grant deduction of the interest income to the assessee either u/s 80P (2) (a) if the interest income is attributable to the business of the assessee otherwise u/s 80 P (2)(d) of the Act, if it is chargeable to tax under the head ' Income from Other Sources'.

Grounds no 1,5 and 6 are general in nature, no arguments were advanced, hence, dismissed.

In the result, the appeal by the assessee is allowed for statistical purposes Pronounced in the open court on this 25th day of July, 2025.