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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by the assessee against the common order dated 30/03/2019 passed by the Ld.CIT(A) Mangaluru for assessment year 2016-17 on the following grounds . “1. That the order of the learned Commissioner of Income-Tax (Appeals) is bad in so far it is prejudicial to the interests of the appellant and erroneous in law and against the facts and circumstances of the case.
2. That the learned Commissioner of Income-Tax (Apeals) erred in law and on facts in confirming the disallowance of Rs.29,08,581/- claimed as deduction u/s. 80P(2)(a)(i) of the Act.
3. That the learned Commissioner of Income-Tax (Appeals) denied the deduction u/s. 80P(2)(a)(i) of the Act on the only ground that the appellant deals with nominal and associate members.
That the learned Commissioner of Income-Tax (Appeals) ought to have appreciated that the appellant is registered as Co-operative Society under Karnataka State Co-operative Societies Act, 1959 and the said Act allows the appellant to admit nominal and associate members. Each of the above grounds is without prejudice to one another, the appellant seeks the leave of the Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or otherwise modify each or any of the grounds of appeal
either before or at the time of hearing this appeal.”
2. Following Additional grounds has been raised by assessee vide application dated 31/12/2020:
“The appellant herein seeks the leave of the Hon'ble Tribunal to file the following additional grounds:
1. 1. Without prejudice to the claim that the appellant is entitled to deduction u/s 80P(2)(a) of Income Tax Act 1961 (Act) the learned lower authorities ought to have allowed the deduction u/s 80P(2)(a) of the Act to the extent that such income is attributable to the dealing with regular members and nominal members.
2. That the learned lower authorities ought to have allowed the deduction u/s 80P(2)(d) of the Act in respect of the interest earned from Co-operative Banks and Co-operative Societies.” 2.1. It has been submitted by the Ld.Counsel that they emanate from the facts, that are already on record and that no new facts needs to be considered to adjudicate it. He submitted that these are legal issues to be looked into for adjudicating the claim of assessee. Ld.Counsel placed reliance on the decision of Hon’ble Supreme Court in case of National Thermal Power Corporation Ltd (NTPC) vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd., reported in 187 ITR 688. He submitted that no prejudice will be caused to the revenue upon admission of the additional grounds raised. He thus prayed for its admission. 2.2. On the contrary, the Ld.DR though opposed the admission of the additional grounds, could not controvert the submissions made by the Ld.Counsel. 2.3. We have perused the submissions advanced by the both sides and records placed before us. 2.4. We note that issue raised by the assessee in this additional ground is no longer res-integra. The ground raised by assessee under this application is a legal ground and needs to be admitted. We draw our support from the decision of Hon’ble Supreme Court in case of National Thermal Power Corporation Ltd (NTPC) v. CIT(supra).
Accordingly we admit the additional grounds is reproduced hereinabove. Brief facts of the case are as under:
Assessee is a co-operative society providing credit facilities to its members. For years under consideration assessee filed its return of income after claiming deduction under section 80P of the Act. The return was selected for scrutiny under Cass and notice under section 143(2) was issued to assessee. In response to the statutory notices, representative of assessee appeared before the Ld.AO and filed requisite details as called for.
3.1 Ld.AO from the details filed by assessee observed that:
(i) assessee has earned interest on investment in Co-operative banks, nationalised banks; (ii) assessee has claimed deduction under section 80P(2)(a) of the act in respect of amount of profit attributable to the activity of providing credit facilities to its members. 3.2 In the instant case, it was noticed by the Ld.AO during assessment proceedings, that the assessee society was earning income not only from the members but majority of the income from the nominal/ Associate members. Taking into cognizance the ratio of decision of Hon’ble Supreme Court, in the case of Citizen Co-op Society Ltd, Hyderabad v. ACIT, C-9(1), Hyderabad in Civil Appeal No.10245 of 2017 dated 8.08.2017 the Ld.AO denied deduction claimed u/s.80P by holding that the asessee provided credit facilities to three categories of members viz., i) Regular member ii) Associate members and iii) Nominal members. Hence, Ld.AO disallowed the deduction claimed u/s.80P(2)(a)(i) of the Act.
3.3 The Ld.AO was of the view that principle of mutuality was violated by assessee and therefore denied the deduction in view of the decision of Hon’ble Supreme Court in case of Citizen co- operative society Ltd. in Civil appeal No. 10245/2017 dated 08.08.2017, on following grounds: i) interest/dividend income was held to be income from other sources and excluded from the deduction under section 80P(2)(a)(i). For the deduction under section 80P(2)(d) was also denied relying on the decision of Hon’ble Karnataka High Court in case of M/s Totgars Co-operative so sale society Ltd. by order dated 16/06/2017. ii) The principles of majority were violated relying on the decision of Hon’ble Supreme Court in case of M/s Citizen Co-operative Society Ltd., Hyderabad dated 08/09/2017. 3.4 Aggrieved by the order of Ld.AO, assessee preferred appeal before the Ld.CIT(A). 3.5.The Ld.CIT(A) came to the conclusion that as per the decision of Hon’ble Supreme Court in the case of Citizens Co-op Society (Supra), if the principle of mutuality is not satisfied, then the assessee is not entitled to deduction u/s 80P(2)(a)(i) of the Act.
3.5 In respect of members, the Ld.CIT(A) observed that the assessee admitted excess nominal/associate members which is more than 15% of the total members when compared to regular members which is in violation of Karnataka Co-operative Society Act, 1959. In view of the violation of the Karnataka Co-operative Society Act, the Ld.CIT(A) observed that the society is not eligible for deduction u/s 80P and as such ratio of the decision of Hon`ble Supreme Court decision in the case of Citizen Co-op Society Ltd, Hyderabad v. ACIT, C-9(1), Hyderabad in Civil Appeal No.10245 of 2017 dated 8.08.2017 is applicable to the facts of the assessee society. 3.6 The Ld.CIT(A) also held that, in the assessee's case, mutuality principles have failed as substantial business is being carried out with the general public or nominal members and also in view of the assessee being registered as Souharda Co-operative Society and not as Co-operative Society and taking into account the byelaws and the nature of business carried out by the assessee, the society is not eligible for deduction u/s 80P of the Income tax Act, 1961. 3.6 The Ld.CIT(A) thus upheld the order of Ld.AO. 4 Aggrieved by the order of Ld.CIT(A) assessee is in appeal before us now. 4.1. We have considered the rival submissions of both sides in the light of records placed before us. 4.2. The issue that arises for consideration is: (i) whether the authorities below were justified in denying the claim of the assessee for reduction u/s 80P(2)(a)(i) of the Act. (Grounds 2-4, Additional Ground no.1) (ii) whether, interest income earned by assessee is eligible for deduction u/s 80P(2)(d) of the Act, whereas the deduction is one claimed u/s 80P(2)(a)(i) of the Act. (Additional ground 2) 5. Ground No.1 is general in nature and therefore do not require any adjudication.
Grounds 2-4 & Additional Ground No.1: In respect of associate/nominal members, Hon’ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC) has held that the expression “Members” is not defined in the Income-tax Act. Hence, it is necessary to construe the expression “Members” in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. In view of this, the facts are to be examined in the light of principles laid down by the Hon’ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (supra). Accordingly, we remit this issue of deduction u/s.80P(2)(a)(i) of the Act to the file of Ld.AO to examine the same de novo in the light of the above judgment. Needless to say that proper opportunity of being heard is to be granted to assessee in accordance with law Accordingly grounds 2-4 and Additional Ground No.1 stands allowed for statistical purposes.
Additional Ground 2 is in respect of interest from investment in Co-operative banks, nationalised banks. 7.1 This issue has been decided by coordinate bench of this Tribunal in case of Potters Cottage Industrial Co-Operative Society Ltd., for assessment years 2015-16 in & 1258/Bang/2019 by order dated 30-08-2019. This Tribunal observed and decided as under: “We note that the Ld.AO denied deduction under section 80P(2)(d) of the Act, as well in respect of interest income received by assessee from deposits kept with banks for the years under consideration. The Ld.AO assessed the interest income received from bank deposits under the head income from other sources. The Ld.Counsel placed reliance on the decision of Hon’ble Karnataka High Court in keep case of Totgars co-operative sale society Ltd. vs ITO reported in (2015) 58 Taxmann.com 35. We have perused plethora of decisions on this issue by Hon’ble Karnataka High Court and the ratio laid down by Hon’ble Supreme Court. Hon’ble Supreme Court in the case of the Totgars Co-operative Sale Society Ltd. Vs. ITO reported in 322 ITR 283 held that, Income from utilisation of surplus funds was taxable under the head income from other sources, and therefore not eligible for deduction u/s 80P. Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO reported in 230 Taxman 309, dealt with an issue where deduction u/s.80P(2)(a)(i) of the Act was claimed on interest from the deposits made in a nationalized bank which was used for providing credit facilities to its members. The Assessee therein claimed that the said interest amount is attributable to the credit facility provided by the assessee and forms part of profits and gains of business. Hon’ble Karnataka High Court after considering the decision by Hon’ble Supreme Court in case of Totgars(supra) held that, since the word income is qualified by the expression “attributable” to the business of Banking, is used in Sec.80P(2)(a)(i) of the Act, it has to receive a wider meaning and should be interpreted as covering receipts from sources other than the actual conduct of business. Hon’ble Karnataka Court held that a Cooperative Society that is carrying on with the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, cannot be kept idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. Hon’ble Karnataka Court distinguished the facts in the decision of the Hon’ble Supreme Court in the case of Totgars (supra) by observing that Hon’ble Supreme Court was dealing with a case where the assessee-cooperative society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee-Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the or under Section 80P(2)(a)(iii) of the Act. Therefore, in the facts of Totgars (supra), Hon’ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. The Court also observed that even the Hon’ble Supreme Court made it clear that, they are confining the said judgment to the facts of that case. Similar view taken in case of Guttigedarara Credit Co-operative Society Ltd. vs. ITO reported in [2015] 377 ITR 464 by Hon’ble Karnataka High Court. In a subsequent decision of Pr.CIT And Anrs vs. Totagars Co- Operative Sale Society reported in 392 ITR 74 in the context of deduction u/s.80P(2)(d) of the Act, it was held by Hon’ble Karnataka high Court that deduction in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income is available under sec.80P(2)(d) of the Act. Hon’ble Karnataka high Court held that decision by Hon’ble Supreme Court in case of Totgars (supra), was not on the deduction claimed u/s.80P(2)(d) of the Act, but was rendered in respect of deduction claimed under Section 80P(2)(a)(i) of the Act. Hon’ble Karnataka High Court in the case of Pr.CIT Anr. vs. Totgars Co- Operative Sale Society reported in 395 ITR 611 took a different view and held that interest income earned on deposits whether with any other bank will be in the nature of income from other sources and not income from business and therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed to the Assessee. The Hon’ble Court followed decision of Hon’ble Gujarat High Court in the case of SBI Vs. CIT reported in 389 ITR 578, wherein Hon’ble Gujarat High Court dissented from the view taken by the Hon’ble Karnataka High Court in the case of Tumkur Merchants case (supra). It can thus be seen that the ratio laid down by the Hon’ble Karnataka High Court in the case of Totagars Cooperative Sales Society in 395 ITR 611 is that, in light of the principles enunciated by Hon’ble Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. Thus interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by assessee with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. This needs to be verified by the Ld.AO. On the basis of above discussions, and in the interest of Justice we remand this issue back to the Ld.AO to verify the interest earned from investments made in co-operative societies that is eligible for deduction under section 80P(2)(d) of the Act.”
11.2 Respectfully following the above view, we direct the Ld.AO to verify the interest earned on investment earned from co-operative societies and to consider the claim of assessee in accordance with law under section 80p(2)(d) of the Act.
Accordingly these grounds raised by assessee stands allowed for statistical purposes.
Accordingly, the appeals filed by assessee for assessment years under consideration stands allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 31st August, 2021