INCOME TAX OFFICER, WARD-1 & TPS, BAGALKOT vs. JYOTI CO-OP. CREDIT SOCIETY LIMITED, OPP. SBI, NAVANAGAR

At the time of hearing, the Ld.DR submitted that when there is a restriction on the number of associate/ nominal members, the deduction could not be granted when the membership of the associate/ nominal members of the assessee exceeds the limit. The Ld.DR further submitted that the deduction allowed u/s. 80P(2)(d) of the Act is also not correct in Hon’ble Jurisdictional High Court judgment in case of PCIT vs. Totgars Co-operative Sales Society Ltd. The Ld.DR further submitted that the assessee was not authorised to accept the specified bank notes from its members after 08/11/2016 and therefore the addition made u/s 68 is in order. The Ld.DR also relied on the order of the Coordinate Bench of this Tribunal in dated 30/11/2023.

The Ld.AR of the assessee submitted that the deduction claimed u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act are concerned, the same is eligible for deduction in view of the judgment of the Hon’ble Supreme Court in case of Mavilayi Service Co-operative Bank Ltd. v. CIT reported in 431 ITR 1. The Ld.AR further submitted that the interest earned from the co-operative societies and co-operative banks are eligible for deduction since the co- operative banks are also a co-operative society and further submitted that the Ld.CIT(A) had relied on the various orders of this Tribunal and submitted that the relief granted by the Ld.CIT(A) are also in order. The Ld.AR further submitted that the Ld.CIT(A) had not granted the relief in respect of the interest received from the deposits made in other scheduled banks, commercial banks and any financial institutions and therefore the deduction allowed on the interest received from the co-operative banks and societies are in order. The Ld.AR further submitted that the addition made u/s. 68 of the Act for the reason that the assessee had deposited SBN notes during the demonetisation period is also not correct since the amounts deposited by the assessee are the monies deposited by the members upto 14/11/2016 from which date the assessee came to know about the RBI Notification dated 14/11/2016 prohibiting the assessee from collecting the SBN notes. Therefore whatever the amount collected from the members, were entered into the books of accounts and thereafter the said SBNs were deposited into the assessee’s bank account well before the appointed date i.e 31/12/2016 by the Government and therefore the same could not be treated as an unexplained cash credit u/s. 68 of the Act. The Ld.AR also filed a small paper book enclosing the written submissions as well as the order of the ITAT, Bangalore Bench in support of his arguments.

We have heard the arguments of both sides and perused the materials available on record.

We have perused the assessment order as well as the Ld.CIT(A) order in respect of the denial of deduction claimed u/s. 80P(2)(a)(i) of the Act and found that the AO denied the deduction since the assessee had exceeded the permissible limit of associate / nominal members. As seen from the said finding of the AO, there is no doubt about the status of the assessee and the interest income was earned through the members. The assessee society also governed under the provisions of the Karnataka Co-operative Societies Act which permits the associate / nominal members as members of the society and the byelaws of the society also permitted the said members as members of the society. The only grievance of the AO is that because of the presence of more members, than the limit prescribed under the Karnataka Co- operative Societies Act, the assessee is not entitled for deduction u/s. 80P(2)(a)(i) of the Act. The AO had not pointed out any other defects such as the assessee is dealing with the third parties who are all not connected with the assessee society in order to deny the deduction claimed u/s. 80P(2)(a)(i) of the Act. The Ld.CIT(A) by taking into consideration all the material facts and also the judgment of Hon’ble Supreme Court cited (supra) had come to the correct conclusion that the assessee had been doing the business with its members only and therefore they are entitled for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.CIT(A) had given the following findings in para 4.2.3 of its order which is extracted as below: “4.2.3 In this regard, it may be seen that the deduction under Section 80P(2)(a)(i) of the act has been allowed by the Hon'ble SC in the case of Mavilayi Service Co-operative Bank Ltd. V Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC) stating that the deduction has to be allowed irrespective of status of member, if the members are mentioned in the respective state act. In this case, the appellant is registered under 'The Karnataka State Co-operative Societies Act, 1959'. In the state act, the definition of Member given under Sec. 2 (f) of Karnataka Co-operative Societies Act also includes Nominal and Associate Member. Since, the Karnataka Co-operative Societies Act allows the co-operatives to include a nominal member in accordance with act, also the appellant has done all its business with its members only, the appellant is well within the law to claim the deduction u/s. 80P(2)(a)(i) of the Income Tax Act, 1961.”

We do not find any error in the order passed by the Ld.CIT(A) since the same is in accordance with the principles laid down by the Hon’ble Supreme Court judgment cited (supra).

Further, we are of the view that the Co-operative Societies Act prescribed a ceiling on the membership and when any violation has been committed by the assessee, the authorities under the Co-operative Societies Act should take action on the assessee. Unless and until the status of the assessee has not been changed, then naturally, they are entitled for deduction on the incomes received from their members. Insofar as the order relied on by the Ld.DR, we are of the view that the said order speaks about the profits attributable to non-members and therefore the same are not eligible for deduction u/s. 80P(2)(a)(i) of the Act. In the present case, the interest income are earned from the members including the associate / nominal members who are all members of the society as per the judgment of the Hon’ble Apex Court cited (supra) and therefore the said order is of no assistance to the revenue.

On the other hand, we relied on the order of the Coordinate Bench of this Tribunal in case of Kavradi Co-operative Agricultural Bank vs. ITO in dated 10/06/2024 wherein similar issue came up for adjudication and this Tribunal held that the assessee is entitled for deduction irrespective of the violation of exceeding the ceiling prescribed under the Karnataka Co-operative Societies Act. The findings of the Coordinate Bench of this Tribunal is as follows: “5.1 The first issue relates to the disallowance of deduction claimed u/s 80P(2)(i) of the Act by the AO on the basis that the assessee had violated the provisions of the Karnataka Co-operative Societies Act by having more number of nominal and associate members than prescribed under 18 of the Karnataka Co-operative Societies Act. We have perused the provision and found that the Act prescribed that the nominal members should not exceed 15% of the total members and not as stated by the ld AO. The statement of membership filed by the assessee shows that the nominal members are within 15% of the total members prescribed under the statute and therefore there is no violation of any of the provisions of the Karnataka Act. Further we are of the view that the ld. AO has no jurisdiction to look into the fact whether there is any violation committed by the assessee under the provisions of the Karnataka Cooperative Societies Act. It is for the Registrar of Co-operative Societies to take any action on the assessee society, if there is any violation committed by them. Further the ld AO cannot disallow the claim of deduction and also disqualify the assessee as a Coop society for the reason that the assessee is dealing with the nominal members when there is no prohibition under the Act. The only condition prescribed under the Act is that the assessee should be a registered Coop. Society under the provisions of the Coop Societies Act. Admittedly the assessee is registered under the Karnataka Act and therefore the deduction can not be denied by citing other reasons. We find that the issue is fully covered by the judgement of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. Vs. CIT cited (supra). We therefore, find that there is no merit in the arguments made by the ld. D.R. and held that the order of the ld. AO is against the provisions of the Act and also against the judgement rendered by the Hon’ble Supreme Court.”

In view of the above said discussions, we are of the view that the order of the Ld.CIT(A) insofar as the deduction allowed u/s. 80P(2)(a)(i) of the Act is in order and therefore we dismiss the ground raised by the revenue on this issue.

The second deduction allowed by the Ld.CIT(A) is with regard to the interest earned from the co-operative societies and co-operative banks. The Ld.CIT(A) had relied on the order of the various Tribunals and extracted one of the order in its order at para 5.3 and allowed the deduction claimed by the assessee as follows: “5.3 In particular, the relevant Para No. 7 from the fifth order Kaliandas Udyog Bhavan Premises Co-op. Society Ltd. vs. in dated 25.04.2018, is reproduced below:

From the above we found that the co-operative banks are originally registered under the provisions of the Societies Act and therefore they are to be treated as co-operative societies. Subsequently, in view of the activities carried on by them, they are acting as a co-operative bank catering to the needs of the public. Even though, they are termed as co-operative bank, their original status was only a co-operative society registered under the provisions of the Societies Act and therefore the incomes earned from the deposits made with the said co-operative societies as well as the co-operative banks are eligible for deduction u/s. 80P(2)(d) of the Act. The Hon’ble Gujarat High Court in case of PCIT Vs. Ashwinkumar Arban Co-Operative Society Ltd. reported in [2024] 168 taxmann.com 314 (Gujarat) had held that deduction u/s. 80P(2)(d) is available to co-operative societies on income earned as interest on investment made with co-operative bank which in turn, is a co-operative society itself. By considering the above said proposition of the law and the facts, we do not find any illegality in the order passed by the Ld.CIT(A) and therefore this ground of the revenue is also dismissed.

The third issue to be decided in this appeal is about the deletion of addition made u/s. 68 of the Act on the deposits of SBN notes during the demonetisation period. We perused the finding given by the Ld.CIT(A) in paras 6.1 and 6.2 in which the Ld.CIT(A) had perused the details submitted by the assessee before the AO as well as before him from which it was clear that the particulars of the members who had deposited the cash in SBN SBN notes received were properly entered in the books of accounts as well as the ledger of the members and therefore it could not be termed as unexplained cash credit u/s. 68 of the Act. The relevant portion of the order of the Ld.CIT(A) is extracted as below:

Further, we have also perused the order of the Coordinate Bench of this Tribunal relied on by the assessee in the case of Sri Bhageeratha Pattina Sahakara Sangha Niyamitha vs. ITO in dated 18/02/2022 in which the Coordinate Bench has given a clear finding in paras 14 and 15 which are extracted as below:

The case of the A.O is that the assessee has collected the demonetized notes after 8.11.2016 in violation of the notifications issued by RBI. Accordingly, he has taken the view that the above said amounts represents unexplained money of the assessee. I am unable to understand the rationale in the view taken by A.O. I noticed that the AO has invoked the provisions of sec.68 of the Act for making this addition. I also noticed that the assessee has also complied with the requirements of sec.68 of the Act. The AO has also not stated that the assessee has not discharged the responsibility placed on it u/s 68 of the Act. Peculiarly, the AO is taking the view that the assessee was not entitled to collect the demonized notes and accordingly invoked sec.68 of the Act. I am unable to understand as to how the contraventions, if any, of the notification issued by RBI would attract the provisions of sec. 68 of the Income tax Act. In any case, I notice that the assessee has also explained as to why it has collected demonetized notes after the prescribed date of 8.11.2016. The assessee has explained that it has stopped collection after the receipt of notification dated 14.11.2016 issued by RBI, which has clearly clarified that the assessee society should not collect the demonetized notes. Accordingly, I am of the view that the deposit of demonetized notes collected by the assessee from its members would not be hit by the provisions of section 68 of the Act in the facts and circumstances of the case. Accordingly, I set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete this disallowance.”

On going through the facts of the present case, the ingredients to attract section 68 is absent in this case. The assessee from its members had received SBN notes upto 14/11/2016 and later on deposited the said SBN notes into their bank account since the government had given time upto 31/12/2016 to deposit the SBN notes into their bank account. The receipt of the SBN notes from the members and the details of the members were properly explained by the assessee before the AO as well as before the Ld.CIT(A) and therefore the credit entries reflected in the books of accounts were properly explained by the assessee. The cash received in SBN notes itself could not be termed as unexplained cash credit when the assessee had explained the source. The various Tribunals had taken a similar view and the Ld.CIT(A) had followed the view taken by the Tribunals including the orders cited by the Ld.CIT(A) and therefore we do not find any mistake or illegality in the order passed by the Ld.CIT(A) and therefore we are dismissing the ground raised by the revenue.

In the result, the appeal filed by the revenue is dismissed.