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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI CHANDRA POOJARI
Per N. V. Vasudevan, Vice President
This appeal is by the assessee against the order dated 18.02.2019 of CIT(A), Bangalore, relating to AY 2015-16.
The assessee is a souharda credit co-operative registered under the Karnataka Souharda Sahakari Act, 1997, engaged in the business of acceptance of deposits from Members and lending the same to the Members. For Assessment Year 2015-16, the assessee filed a return of income declaring total income of Rs.3,43,160/-, after claiming deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) of Page 2 of 8 Rs.56,89,445/-. In a revised return of income filed, the assessee revised the said deduction to Rs.60,32,608/-. The assessee’s claim for deduction under section 80P(2)(a)(i) of the Act was denied by the AO on the ground that the society had nominal members and hence the principle of mutuality is not satisfied. The AO relied on the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Appeal No.10245/2017, judgment dated 08.08.2017, in which it was held that a society which does not fulfil the test of mutuality will not be entitled to deduction under section under section 80P(2)(a)(i) of the Act.
The assessee had also claimed deduction on account of interest on investments with scheduled banks and SCDCC banks u/s.80P(2)(a)(d) of the Act. This deduction was also denied by the AO on the ground that interest from co-operative banks are not eligible for the said deduction and in any event, as per the law laid down by the Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Society, 395 ITR 611 (Karnataka), interest earned on investments have to be treated as income from other sources and not income from business and therefore not eligible for deduction under section 80P(2)(d) of the Act. The assessee claimed expenses on earning interest income and in this regard filed a calculation of cost of funds and interest received by the assessee and claimed that the cost of funds was much more than the interest earned and therefore interest income is not chargeable to tax. The AO did not make any specific reference to the aforesaid plea in his order. Ultimately, the assessment was completed by denying the deduction under section 80P(2)(a)(i) and 80P(2)(d) of the Act.
Page 3 of 8 4. Assessee preferred an appeal before the CIT(A). The CIT(A) took the view that the assessee was a souharda co-operative and cannot be regarded as a co-operative society within the meaning of the Act and therefore the assessee was not entitled to the benefit of section 80P of the Act. In coming the aforesaid conclusion, the CIT(A) placed reliance on the decision of the ITAT Bengaluru Bench in the case of ITAT Bangalore Division Bench, in the case of Udaya Souharda Credit Co-operative Society Ltd. order dated 17.8.2018 wherein it was held that co- operative registered under the Karnataka Souharda Sahakari Act, 1997, cannot be regarded as a co-operative society within the meaning of the Act. He did not decide the issues on merits raised by the Assessee with regard to deduction u/s.80P(2)(a)(i) and 80P(2)(d) of the Act.
Aggrieved by the order of the CIT(A), the assessee has preferred the present appeal before the Tribunal. It was submitted by the learned counsel for the Assessee that the decision in the case of Udaya Souharda Credit Co- operative Society Ltd. (supra) did not consider the provisions of Sec.2(19) of the Act, which were very crucial to a decision on the issue in question. It was submitted that the Hon’ble Karnataka High Court in the case of M/S.Swabhimani Souharda Credit Co-operative Ltd., Vs. Government of India & 3 others W.P.No.48414 of 2018 Judgment dated 16.1.2020, in which the Principal Commissioner of Income Tax, Bengaluru and the ITO Ward- 5(2)(3), Bengaluru were also parties and after considering the provisions of Sec.2(19) of the Act declared that the entities registered under the Karnataka Souharda Sahakari Act, 1997 fit into the definition of Co-operative Society as enacted in Sec.2(19) of the Act and therefore subject to all just exceptions, are Page 4 of 8 entitled to stake their claim for the benefit of Sec.80P of the Act. The learned DR relied on the order of the CIT(A).
We have considered the rival submissions. Sec.2(19) defines co- operative societies for the purpose of the Act and the same is as follows:
“Definitions. 2. In this Act, unless the context otherwise requires,— (19) "co-operative society" means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies ;”
The Hon’ble Karnataka High Court in the case of Swabhimani Souharda Credit Co-operative Ltd.(supra) after considering the aforesaid definition of Co-operative society made the following observations: (i) the object of enacting sec.80P of the 1961 Act may be defeated if a restrictive meaning is assigned to the definition of "co-operative society" as given u/s.2(19) inasmuch as the invokability of the provisions of sec.80P is dependent upon the entity seeking the benefit thereunder being a co- operative society; going by the text and context of these provisions, one can safely conclude that all entities that are registered under the enactments relating to co-operative societies, regardless of their varying nomenclatures need to be treated as co-operative societies; (ii) in the State of Karnataka, there have been two statutes enacted by the State Legislature that relate to registration & regulation of co-operative societies viz., the Karnataka Co-operative Societies Act, 1959 i.e., Karnataka Act No.11 of 1959 and the Karnataka Souharda Sahakari
Page 5 of 8 Act,1997 i.e., Karnataka Act No.17 of 2000; both these Acts are enacted pursuant to Article 246(3) r/w Entry 32, List-II of Schedule VII of the Constitution of India; there is no other Entry to which this Act is relatable; the Legislative Entries being only the fields of legislation need to be very broadly interpreted, is the settled position of constitutional jurisprudence vide UJAGAR PRINTS, ETC. vs. UNION OF INDIA, AIR 1989 SC 516; Chapter X of 1997 Act containing sec.67 enacts important co-operative principles that animate and brood through almost all the provisions of this Act; (ii) After noticing the statement and objects and reasons for introducing The Karnataka Souharda Sahakari Bill, 1997 has the following as the Statement of Objects & Reasons and preamble to the Karnataka Co-operative Societies Act, 1959 and the Karnataka Souharda Sahakari Act,1997, concluded as follows:
“A perusal of these two preambles and various provisions of these two Acts leads one to an irresistible conclusion that both these Acts are cognate statutes that deal with co- operative societies, regardless of some difference in their nomenclature and functionality, the subject matter being the same; (e) the word 'co-operative' is defined by sec.2(d-2) of 1959 Act as under: "2(d-2): 'Co-operative' means a Co-operative registered under the Karnataka Souharda Sahakari Act, 1997 (Karnataka Act 17 of 2000), and includes the Union Co-operative and the Federal Co-operative" Similarly, the word 'co-operative' is defined by Sec. 2(e) of 1997 Act as follows: "2(e): "Co-operative" means a co-operative including a co-operative bank doing the business of banking registered or deemed to be registered under Section 5 and which has the words 'Souharda
Page 6 of 8 Sahakari' in its name (and for the purposes of the Banking Regulation Act, 1949 (Central Act 10 of 1949), the Reserve Bank of India Act, 1934 (Central Act 2 of 1934), the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (Central Act 47 of 1961) and the National Bank for Agriculture and Rural Development Act, 1981 (Central Act 67 of 1981), it shall be deemed to be a Co-operative Society". A close examination of these two definitions shows that they have abundant proximity with each other in terms of content and contours; it hardly needs to be stated that in both these definitions the word 'co- operative' is employed not as an adjective but as a noun; the definition of other relative concepts in the dictionary clauses of these Acts strengthens this view; this apart, sec.7 of the 1997 Act provides that the entity registered as a 'co-operative' shall be a body corporate, notwithstanding the conspicuous absence of the word 'society' as a postfix; sec.9 of the 1959 Act makes the entity once registered u/s.8 thereof a body corporate; both the entities have perpetual succession by operation of law; thus on registration be it under the 1959 Act or the 1997 Act, a legal personality is donned by them, so that inter alia they can own and possess the property; (f) the employment of the word "Sahakari" in the very title of the 1997 Act is also not sans any significance; 'Sahakaar' in Sanskrit is the equivalent of 'sahakaara' in Kannada which means 'co-operation'; as already mentioned above both the 1959 Act and the 1997 Act employ this terminology; the 1997 Act is woven with the principles of co- operation; sec.4 of this Act bars registration of an entity unless its main objects are to serve the interest of the members in the area of co- operation and its bye-laws provide for economic and social betterment of its members through self-help & mutual aid in accordance with the co- operative principles; this apart, even sub-section (2) of sec.4 is heavily loaded with co-operative substance. In the above circumstances, these writ petitions succeed; a declaration is made to the effect that the entities registered under the Karnataka SouhardaSahakari Act, 1997 fit into the definition of "co-operative society" as enacted in sec.2(19) of the Income Tax Act, 1961 and therefore subject to all just exceptions, petitioners are entitled to stake their claim for the benefit of sec.80P of the said Act; a Writ of Certiorari issues quashing the impugned notice dated 30.03.2018 at Page 7 of 8 Annexure-D in W.P.No.48414/2018; other legal consequences accordingly do follow. It is needless to mention that the other provisions of sec. 80P of 1961 Act and their effect on the claim of the petitioner-like-societies have been left to be addressed by the concerned authorities.”
In the light of the decision of the Hon’ble Karnataka High Court, we are of the view that the claim of the Assessee for deduction u/s.80P of the Act has to be examined afresh by the CIT(A). The CIT(A) did not go into the question regarding eligibility of Assessee to deduction u/s.80P on merits but dismissed on the prelimnary point that a co-operative registered under the souhardha sahakari Act, 1997 cannot be regarded as a co-operative society under the Act. The order of the CIT(A) is accordingly set aside with a direction to the CIT(A) will decide the issue on merits in accordance with law and after affording opportunity of being heard to the Assessee.
In the result, appeal by the assessee is treated as allowed for statistical purpose. .