ACIT., CIRCLE-9(1), HYDERABAD vs. RANGAREDDY DIST JUDL EMPLOYEE MUTUALLY AIDED CO OPERATIVE SOCIETY, HYDERABAD

As common issues are involved in the captioned appeals, therefore, the same are being taken up and disposed of vide this consolidated order.

We shall first take up the appeal filed by the assessee for A.Y. 2017-18 in ITA No.1264/Hyd/2024 wherein the impugned order has been assailed on the following grounds of appeal before us:

Succinctly stated, the assessee society which is a Credit Co- operative Society registered under the Andhra Pradesh Mutually Aided Co-operative Societies Act (APMACS-Act), had filed its return of income for A.Y. 2017-18 on 30.10.2017, declaring an income of Rs.21,18,480/-. Subsequently, the case of the assessee society was selected for scrutiny assessment under CASS and a notice was issued by the A.O. under Section 143(2) of the Act.

During the course of the assessment proceedings, it was observed by the A.O. that the assessee society had raised a double facet claim for deduction u/s 80P of the Act, viz., (i). U/s 80P(2)(a)(i): Rs.1,04,92,276/-; and (ii). U/s 80P(2)(d): Rs.1,20,81,643/-. The A.O., holding a conviction that as the assessee society was accepting deposits from the public at large and advancing the money so raised both to its members and non- members was a “Co-operative bank”, called upon it to explain its entitlement for deduction u/s 80P of the Act. In reply, it was claimed by the assessee society that it was not a co-operative bank. Elaborating on its contention, it was stated by the assessee society that it has three categories of members, viz., (i) Members; (ii) Associate Members; and (iii) Nominal Members. It was further stated that membership was given to the employees of Ranga Reddy Courts and they were covered under the first category, i.e. "Members”; their spouse/children were covered in the second category, i.e. “Associate Members”; and membership given to any other person who volunteered to become a member of the society was covered within the meaning of third category, i.e. “Nominal Members". Apropos the declining of its claim for deduction u/s 80P(2)(a)(i) of the Act, it was stated by the assessee society that it had carried out the activities within the purview of the APMACS- Act and there was no embargo for admission of any person as a member of the assessee society. It was further stated by the assessee society that the Income-tax Act, 1961 referred to the advancing of credit/loans to the members of the society and deriving of income from the advancing of such loans, but was silent on the other issue, therefore, the A.O. was precluded from roping in any exterior matter for declining the deduction that it had sought u/s 80P(2)(a)(i) of the Act.

Apropos the assessee's claim for deduction u/s 80P(2)(d) of the Act, it was the claim of the assessee society that it was a credit co-operative society that had advanced funds to its members, and had parked with the Regional Rural Banks (RRBs) which were categorized as co-operative banks by the CBDT, only those funds which were not immediately required, therefore, the interest on the said deposits was duly entitled for deduction u/s 80P(2)(d) of the Act.

Apropos the claim of the assessee society for deduction of interest payment of Rs.13,46,051/- that was paid on the share capital as per its bye-laws, the assessee society claimed that the same was allowable as a deduction in its hands.

However, the A.O. did not find favour with the aforesaid explanation of the assessee society and framed the assessment vide his order passed u/s 143(3) of the Act dated 31.12.2019, wherein he declined its claim for deduction u/s 80P of the Act, viz (i) U/s 80P(2)(a)(i); Rs.1,04,92,276/-; and (ii) U/s 80P(2)(d) of the Act: Rs.1,20,81,643/-. Also, the claim raised by the assessee society for deduction of interest paid on share capital of Rs.13,46,051/- was disallowed.

Aggrieved, the assessee society carried the matter in appeal before the CIT(A), who found favor with its contentions and vacated both the impugned disallowance of its claim for deduction u/s 80P of the Act as well as interest paid on share capital. For the sake of clarity, the observations of the CIT(A) are culled out as under:

0 Appellate findings:

1 I have considered the facts of the case and grounds of appeal, gone through the assessment order and reply of the appellant. Various grounds of appeal raised by the appellant are as under:

2 Ground Nos.1 & 4: These grounds of appeal raised by the appellant are general in nature and hence do not require any adjudication.

3 Ground No. 2: Vide this ground of appeal the appellant has challenged the addition made by AO in order u/s 143(3) of the Act by disallowing the deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.1,04,92,276/- and deduction u/s 80P(2)(d)(iv) of the Act amounting to Rs.1,20,81,643/-. 5.3.1 I have carefully considered the order passed by the AO, submission of the appellant on the merit, facts of the case and grounds of appeal cited by the appellant. The appellant filed return of income declaring income of Rs.21,18,480/- after claiming deductions u/s 80P(2)(a)(i) of the Act amounting to Rs.1,04,92,276/- and deduction u/s 80P(2)(d)(iv) of the Act amounting to Rs.1,20,81,643/-. The case was selected for scrutiny under CASS. From the perusal of assessment order it is seen that AO has denied the benefit of deduction u/s 80P(2)(a)(i) by observing that the appellant falls under the category of a primary co-operative bank. The AO also observed that the primary business of the society is to accept funds from members, non-members (categorized as nominal or associate members) and other co-operative societies to be utilized for giving loans to members and in practice loans are extended to non-members also. The AO held that on a conjoint reading of the provisions of Bank Regulations Act and Income Tax Act, it is clear that the appellant is a co-operative bank as per section 80P(4) of the Act. Thus, the AO held that the appellant does not qualify for the deductions u/s 80P(2)(a)(i) and disallowed the claim amounting to Rs.1,04,92,276/-. 5.3.2 The AO also disallowed the deduction u/s 80P(2)(d)(iv) of the Act amounting to Rs.1,20,81,643/- by observing that the interest income is earned from investments made with scheduled banks and co-operative banks and not eligible for deduction u/s 80P(2)(d) of the Act. The AO held that the Regional Rural Banks are not co-operative societies as per the circular 6/2010 dated 20.09.2010. As such interest earned from investments in Regional Rural Banks are not eligible for deduction u/s 80P(2)(d) of the Act. 5.3.3 The appellant strongly opposed the order and submitted that the applicability of section 80P(2)(a)(i) of the Act has been extensively dealt by the Juri ictional ITAT in the appellant's own case in the earlier Assessment Years. The ITAT, Hyderabad held that just because the appellant has deposits from Non-members, it does not prevent being a co-operative society nor it prevents claiming deduction u/s 80P(2)(a)(i) of the Act. The appellant also submitted that the interest income was from investment in Grameena Banks which are considered as Regional Rural Banks. Since the Regional Rural Banks are considered as co-operate societies, the interest earned from investment in such banks is allowable u/s 80P(2)(d) of the Act. 5.3.4 On the proper appreciation and evaluation of the order passed by the AO and reply of the appellant, it is seen that the AO denied the deduction u/s 80P(2)(a)(i) of the Act stating that the appellant is a performing the operations of a bank and is therefore a 'co-operate bank'. However, the Hon'ble Supreme Court in the case of Citizen Co-operative Society Ltd. (Civil Appeal No. 10245 of 2017 vide order dated 08.08.2017) has settled the law that for being considered a 'co-operative bank', license from RBI in this regard is a sine qua non. In absence of the RBI license, as such the appellant cannot be treated as a co-operative bank. Hence disallowing the deduction by referring to the provisions of section 80P(4) is completely unsustainable. The section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only cooperative banks, which are cooperative societies who must possess a license from the RBI to do banking business. The appellant, in the present case does not possess license from RBI and thus, would not fall within the mischief of section 80P(4) of the Act. 5.3.5 The recent judgement of Hon'ble Supreme Court in the case of The Mavilayi Service Cooperative Bank Ltd. & Ors. Vs. CIT, Calicut & Ors. Dated 12.01.2021 has clarified the provision of section 80P of the Act in great detail and the Hon'ble Supreme Court concludes- “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 co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence 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 non-members, profits attributable to such loans obviously cannot be deducted." 5.3.6 The Hon'ble ITAT, Hyderabad judgement in the appellant's own case for AY 2012-13 vide ITA No. 1128/Hyd/2017 dated 27.03.2018 and ITA Nos.348 & 1332/Hyd/2012 for AYs 2008-09 & 2009-10 and ITA No. 136/Hyd/2014 for AY 2010-11 dated 04.03.2015 has held the appellant eligible for deductions u/s 80P(2)(a)(i) and 80P(2)(d) of the Act. 5.3.7 The Hon'ble ITAT, Hyderabad in the case of Metro City Criminal Courts Employees Mutually Aided Coop Credit Society Ltd Hyderabad vs ACIT, Circle- 7(1), Hyderabad vide ITA Nos.1581 & 1582/Hyd/2016 for AYs 2012-13 & 2013-14 dated 31.07.2017 has allowed the deduction u/s 80P(2)(d) of the Act and held as under: COME TAX DEPARTME() "

Ground No. 3 raised on principle of mutuality is also does not apply because the assessee has not claimed any exemption of income on the principle of mutuality. As far as deduction under section 80P(2)(d) is concerned, they are eligible under the Act. The assessee can claim deduction under section 80P(2)(d) on the deposits of money made in regional rural banks, co-operative societies etc. as per the provisions. The restrictions placed under section 80P(4) does not apply to the facts of the case as the said provision is applicable only in the case of incomes received by a cooperative bank and not by a co-operative society. This issue is also discussed in the coordinate bench at Hyderabad decision in the case of Asstt. CIT v. Advocates Mutually Aided Co-operative Society [2015] 4 ITR (Trib)-OL 313 (Hyd.) pronounced on February 20, 2015 as under (page 326):

The ground No. 3 regarding deduction under section 80P(2)(d) is in respect of interest received from co-operative societies and the co- operative banks. We are unable to understand why the co-operative banks are not considered as co-operative societies in banking business. The sub-section (4) introduced by the Finance Act, 2006 with effect from April 1, 2007 is as under: '(4) The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. Explanation. - For the purposes of this sub-section,-- (a) 'co-operative bank' and 'primary agricultural credit society' shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949). (b) primary co-operative agricultural and rural development bank' means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.'

As per this section, the exemption provided under sub-section (2) or sub-section (3) does not apply to the incomes of the co-operative bank other than a primary agricultural co-operative society or a primary co-operative agricultural and rural development bank. However, the above provision applicable in the case of co-operative bank is not in respect of interest received from co-operative banks by a co-operative credit society/co-operative society. Section 80P(2)(d) is applicable to the assessee-society in respect of incomes by way of interest or dividends received by the co-operative society from its investments with any other co-operative society. Therefore, in the case of the ITA Nos 1581 and 1582 of 2016 Metro City Criminal Courts Employees Mutually Aided Coop Credit Society Ltd Hyderabad assessee-society, sub-section (4) is not applicable and deduction under section 80P(2)(d) is certainly eligible to the assessee. In the assessment of a co-operative bank, the incomes may not be exempt after April 1, 2007 by virtue of sub-section (4), but the assessee is not a co-operative bank. Therefore, the Revenue ground is not only illogical but also not supported by the facts of the case. Moreover as seen, the recommendation made by the Assessing Officer to the learned Commissioner of Income-tax in their internal correspondence is extracted as a ground. This also indicates non-application of mind either by the Assessing Officer or by higher authority like Commissioner of Income-tax. This sorry state of affairs should come to an end and Officers should act responsibly while preferring second appeal on the orders of the senior officer like the learned Commissioner of Income-tax (Appeals). The Revenue's appeal is dismissed”. 5.3.8 In view of the above discussions, it is seen that a co-operative society is not defined specifically for the purpose of section 80P. However, section 2(19) of the IT Act, 1961 defines a co-operative society to be an entity registered under the Co- operative Society Act, 1912 or under any other law governing the registration of co- operative societies in any State. Various High Courts have held that all co-operative societies other than those coming under the control of RBI are eligible for a deduction u/s 80P. A co-operative society conducting banking activities is not a co-operative bank licensed by the Reserve Bank of India. It can, therefore, claim the deduction u/s 80P(2)(a)(i) of the IT Act. The present appellant has been classified as a co-operative society registered under AP Mutually Aided Co-operative Societies Act(APMACS- Act). On the strength of this, the appellant society has claimed deduction u/s 80P(2)(a)(i) in respect of the income earned from members while carrying on the business of banking or providing credit facility to its member. Hence in my considered opinion, the appellant co-operative society is duly eligible for claiming deduction u/s 80P(2)(a)(i). The appellant had claimed deduction u/s 80P(a)(i) of the Act only on the interest earned from the members only. Therefore, respectfully following Hon'ble Supreme Court decision in the case of The Mavilayi Service Cooperative Bank Ltd. & Ors. Vs. CIT, Calicut & Ors. Dated 12.01.2021 and the Hon'ble ITAT, Hyderabad decision in the appellant's own case and in the case of Metro City Criminal Courts Employees Mutually Aided Coop Credit Society Ltd Hyderabad vs ACIT, Circle-7(1), Hyderabad, I am inclined to accept the contention of the appellant that it is eligible for deduction u/s 80P(2)(a)(i) and 80P(2)(d) of the Act. Accordingly, the AO is directed to allow the deduction of Rs.1,04,92,276/- claimed u/s 80P(2)(a)(i) and Rs.1,20,81,643/- claimed under 80P(2)(d) of the IT Act, 1961. In view of the above discussion, the ground of appeal no. 2 is allowed.

4 Ground No. 3: Vide this ground of appeal the appellant has challenged the addition made by AO in order u/s 143(3) of the Act by disallowing the interest payment of Rs.13,46,051/- on the shared capital of the society. 5.4.1 I have carefully considered the facts of case and the issue pertaining to addition of Rs.13,46,051/- made by AO in his assessment order. In this regard I have duly considered the submission of the appellant. The appellant has explained that the amount paid by the appellant as interest on share capital goes to reduce the gross interest collected by it from its members and it would not form part of profit at all. 5.4.2 The Hon'ble ITAT, Hyderabad in the case of The Bhavana Rishi Co- operative Urban Bank Ltd. Vs. DCIT vide I.T.A. No. 418/Hyd/2016 dated 27.07.2016 passed judgement on the interest on share capital by co-operative societies as below:

We have heard the rival contentions of both the parties and perused the material available on the record. We are of the opinion that the order passed by the authorities below are required to be set aside and the appeal of the assessee is required to be allowed. In our view, in case of Cooperative Society, there is a liability to repay the share capital to the members concerned. Once he ceases to be a member, therefore, the share capital in the hands of Cooperative Society cannot be treated with the share capital of the company, it could be treated as a borrowed capital. Further the assessee was following the mercantile system of accounting and any business expenditure relating to a financial year which is not paid during the financial year is required to be provided in the P&L account and the said provision will be set up with actual payment paid in the subsequent year. On the same analogy, the assessee made the provision for Rs.23,97,359/- towards the interest on share capital in the P&L account for the financial year 2008-09 Co-operative urban Bank Ltd. (supra) and also the judgment in the case of 19/Vizag/2011 dated 29/08/2011. Wherein, in both the orders it was held that the interest paid on the share capital goes to reduce the interest collected by the society from its members and it did not form part of the profit. In our view, the making provision for the payment of interest on the share capital and paying the interest on the share capital will not make any change in the application of law." 5.4.3 Respectfully following the decision of the Hon'ble ITAT, Hyderabad in the case of The Bhavana Rishi Co-operative Urban Bank Ltd. Vs. DCIT, I am inclined to accept the appellant's contention that the interest on share capital does not form part of profit. Further, without prejudice, even if the said interest is added back, the resultant increase in the business profit will again qualify for deduction u/s 80P of the Act and consequently will have no change in main tax effect. In my consideration there is force in the submission and merit in the explanation of the appellant. There is going to be no tax effect if findings contained in para 5.3 supra is taken into consideration. Accordingly, the AO is directed to allow the interest on share capital amounting to Rs.13,46,051/-. In view of the above discussion, the ground of appeal no. 2 is allowed.

In result, the appeal is hereby Allowed.

The Revenue being aggrieved with the order of CIT(A), has carried the matter in appeal before us.

We have heard the learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Apropos, the declining of the claim of the assessee society for deduction u/s 80P(2)(a)(i) of the interest received from advancing of funds to its members, we find that the issue is squarely covered by the order passed by the Tribunal in the assessee's own case for the preceding years viz., (i) A.Y. 2012-13 in ITA No.1128/Hyd/2017 dated 27.03.2018; (ii) ITA Nos.348 and 1322/Hyd/2012 for A.Y. 2008-09 and 2009-10; (iii) ITA No.136/Hyd/2014 for A.Y. 2010-11, dated 04.03.2015. 13. Apropos the observation of the A.O. that as the primary business of the assessee society is to accept funds from members, non-members (categorized as nominal or associate members) to be utilized for giving loans to members and in practice to non- members also, it falls in the category of a primary co-operative bank under Section 56(c)/(ccv) of Part V of the Banking Regulation Act, 1949, and thus, being a co-operative bank it was disentitled from claiming deduction under Section 80P(2)(d) of the Act, we are unable to persuade ourselves to concur with the same. We though are in agreement with the observations of the A.O. that with the insertion of sub-section (4) of Section 80P vide the Finance Act, 2006 w.e.f. 01.04.2007, the provisions of Section 80P would no more be applicable in relation to any Co-operative Bank, other than a Primary Co-operative Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank, but are unable to concur with him that the assessee society falls within the meaning of a “Co-operative bank”. Our aforesaid view is supported by the Hon'ble Supreme Court in the case of in the case of Mavilayi Service Co-operative Bank Ltd and others Vs. CIT, Calicut & Ors., AIR 2021 Supreme Court 612, dated 12.01.2021. The Hon'ble Apex Court in its aforesaid order had observed that for being considered a “Co- operative Bank” license from RBI is a sine qua non. It was further observed that the assessee society in the absence of RBI license cannot be treated as Co-operative Bank. For the sake of clarity, the observations of the Hon'ble Apex Court are culled out as under:

With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a cooperative bank. However, if it is a primary agricultural credit society or a primary cooperative agricultural and rural development bank, the deduction would still be provided. Thus, cooperative banks are now specifically excluded from the ambit of Section 80-P of the Act.

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." (emphasis supplied by us)

At this stage, we may herein observe that just because the assessee society had received deposits from non-members, it would not be disentitled from raising claim of deduction u/s 80P(2)(a)(i) of the Act. As Section 80P(2)(a)(i) of the Act contemplates a claim of deduction of the income of the assessee society from carrying out the business of banking or providing credit facility to its members, but does not lay down any restriction as regards the source from which the funds are to be settled i.e., members or non-members, therefore, we find substance in the claim of the assessee society that the very basis for, inter alia, declining of its claim for deduction u/s 80P(2)(a)(i) of the Act was based on a misconstrued position of law by the A.O. We are of the view that once it is clear that the co-operative society is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle it from availing of the deduction. However, as the profits and gains from the 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 claimed as deduction u/s 80P(2)(a)(i) of the Act. Our aforesaid view is fortified by the judgment of the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd and others Vs. CIT, Calicut (supra), wherein it was, inter alia, observed as under:

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