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

प्रनत रवीश सूद, जे.एम./PER RAVISH SOOD, J.M.

The captioned appeals filed by the Revenue are directed against the respective orders passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), orders passed by the Assessing Officer (for short “A.O.”) u/s 143(3) of the Income Tax Act, 1961 (for short “the Act”) dated 31.12.2019
and 23.03.2021 for A.Ys. 2017-18 and 2018-19, respectively.
2. As common issues are involved in the captioned appeals, therefore, the same are being taken up and disposed of vide this consolidated order.
3. 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:
“1. The Ld. CIT(A), NFAC, Delhi erred in law and on facts of the case.
2. The Ld. CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80P(2)(a)(i) of the Act, in view of the clear finding of the Assessing Officer that the assessee had violated the provisions of AP
Mutually Aided Co-operative Societies Act, 1985. 3. The Ld. CIT(A) erred in holding that the society is eligible for deduction u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act, in view of the fact that the assessee society is accepting loans and deposits from even non- members.
4. The Ld. CIT(A) is not correct in law by deleting the additions made u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act relying on the decision of the Hon'ble ITAT in the assessee's own case for the assessment years 2008-
09 to 2010-11 wherein the case was restored to the file of the AO for quantification of loans given to the members.
5. The Ld. CIT(A) erred in allowing the interest paid on share capital despite the fact that the interest paid on share capital of Rs.13,46,051/- was more than the bank interest paid of Rs.4,34,493/-
.”
4. 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.
5. 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
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.
6. 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.
7. 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.
8. 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.
9. Aggrieved, the assessee society carried the matter in appeal before the CIT(A), who found favor with its contentions and 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:
ITA Nos.1264 and 1269/Hyd/2024
ITA Nos.1264 and 1269/Hyd/2024
ITA Nos.1264 and 1269/Hyd/2024

(emphasis supplied by us)
14. 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 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:
“24. 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