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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC” MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2015-16. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-44, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
Though the case was fixed for hearing on 08.03.2021, neither the assessee nor its authorized representative appeared before the Bench on the above date. As there is non-compliance by the assessee, we are proceeding to dispose off this appeal after examining the materials available on record and after hearing the Ld. Departmental Representative (DR).
Mr. Borivali Jankalyan 2
The grounds of appeal filed by the assessee read as under :
The Ld. CIT(A) erred in holding that the interest income of Rs.16,49,464/- earned by the appellant from investment of surplus funds with co-operative banks is not eligible for deduction u/s 80P(2)(d) or 80P(2)(a)(i).
1.1 The Ld. CIT(A) overlooked the fact that the part of the investments with co-operative banks were statutory (mandatory) investments and not of surplus funds and interest earned on such investments was eligible for deduction u/s 80P(2)(d).
1.2 The Ld. CIT(A) failed to appreciate that interest earned on statutory investments forms part of income from carrying on business of banking and is eligible for deduction u/s 80P(2)(a)(i).
Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year (AY) 2015-16 on 24.08.2015 declaring Nil income. In the order dated 29.05.2017 passed u/s 143(3) of the Act, the Assessing Officer (AO) observed that the assessee is a co-operative credit society and doing banking business ; it collects deposits from members from various schemes ; its major source of income as evident from the profit and loss account is on account of interest on loan given to members and interest on deposits with banks. In response to a query raised by the AO to explain as to why the deduction claimed u/s 80P should not be disallowed, the assessee filed a reply on 24.05.2017 stating that :
“Borivali Janakalyan Sahakari Patpedhi Ltd. is registered as Co-operative Credit Society under the Maharashtra State Co-operative Societies Act, 1960. The Society is governed by the Maharashtra State Co-operative Societies Act, 1960 and rules framed there under and the supervision of the Commissioner & Registrar of the Co-operative Societies.
Mr. Borivali Jankalyan 3 The Society is not registered under Banking Regulation Act, 1949 with Reserve Bank of India.
The Business of the Society is to provide credit facilities to its members only. The society collects/accepts/raise funds in the form of share capital, deposits from members and provide credit facilities to the members only, and the society invest the remaining funds as per the provisions of section 66, 70 and rules 54 and 55 and the bye laws of the society…… The total funds which is contributed/collected from members or generated in the activity or business of society has to be utilized by the society in the following manner and priorities. a) To provide credit societies to members within the framework of the Act, Rules & Bye Laws of the Society. b) To invest the statutory Reserve & funds as per the provisions of section 66 & 70 of the Maharashtra State Co-operatives Societies Act and Rules 54 & 55 and provisions of the bye-laws of our society. c) To keep Cash and Bank Balances and liquid investment to meet the working capital requirement of the Society.
As per provision of section-80P(2)(a)(i) in the case of Co-operative Society engaged in carrying on the business of providing credit facilities to its members, the whole of the amount of profit and gains of business attributable to any one or more of such activities which is included in gross total income there shall be deducted in computing the total income of the assessee.”
However, the AO was not convinced with the above explanation of the assessee on the ground that the assessee is a co-operative society, whose principal business is banking business and its share capital and reserves exceeds Rs. One lacs (the share capital of the society as on 31.03.2015 is Rs.50 lacs) and is registered under the Maharashtra State Co-operative Societies Act and therefore, it falls within the definition of “Co-operative
Mr. Borivali Jankalyan 4 Bank” provided in part V of the Banking Regulation Act, 1949. The AO has further observed that the assessee is neither a primary agricultural credit society nor a primary agricultural co-operative and rural development bank. Further, it is noted by him that as per explanatory note to Finance Bill, but for two primary units i.e. primary agricultural credit society and primary co- operative agricultural and rural development bank, all the co-operative societies are not eligible for deduction u/s 80P w.e.f. AY 2007-08. Thus it is held by him that as per the explanatory note and the new sub-clause (viia) in clause (24) of section 2 of the Income Tax Act, a co-operative society providing credit facilities to its members is also covered by the amended provisions of the Act. Therefore, the AO disallowed the claim of deduction of Rs.21,16,023/- made by the assessee u/s 80P of the Act.
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that vide order dated 10.06.2019 the Ld. CIT(A) held that the interest income earned by the assessee from co-operative bank is not eligible for deduction u/s 80P(2)(d) of the Act. Relying on the judgment of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Soceity Ltd. reported in 188 Taxman 282 (SC), the Ld. CIT(A) held that the interest income earned from investment of surplus funds will be taxable u/s 56 of the Act and the same will not be eligible for deduction u/s 80P(2)(a)(i) of the Act. Accordingly, he held that interest income earned from investment in surplus funds with co-operative banks are not eligible for deduction u/s 80P(2)(d) or 80P(2)(a)(i) of the Act and accordingly restricted the disallowance u/s 80P to Rs.16,49,464/-.
Before us, the Ld. DR submits that the interest income earned from investment of surplus funds with the Co-operative Banks are not eligible for deduction u/s 80P(2)(d) or 80P(2)(a)(i) of the Act and accordingly, the Ld.
Mr. Borivali Jankalyan 5 CIT(A) has rightly restricted the disallowance u/s 80P to Rs.16,49,464/- being the amount of interest received from investment made in Co-operative Banks. Thus the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the Ld. DR and perused the relevant materials on record. The bone of contention here is the order of the Ld. CIT(A) holding that interests income earned from investment of surplus funds with Co- operative Banks are not eligible for deduction u/s 80P(2)(d) or 80P(2)(a)(i) of the Act. In CIT v. Kalpadi Co-operative Township Ltd. (2016) 74 taxmann.com 226 (Madras), the Hon’ble Madras High Court held that “a Co- operative Credit Society providing credit facilities to its members alone and not to general public large nor it did receive moneys by way of deposits on general public, would not be treated as Co-operative Bank ; it would be entitled to deduction u/s 80P.”
In CIT v. Nilgiris Co-operative Marketing Societies Ltd. (2017) 77 taxmann.com 23 (Madras), again the Hon’ble Madras High Court has held that “where assessee co-operative credit society was providing credit facilities to its members alone and not general public large and it also did not receive monies by way of deposits on general public, it would not be turned as co-operative banks.”
6.1. Further the Hon'ble Karnataka High Court in the case of PCIT and Another vs. Totagars Co-operative Sale Society 392 ITR 0074 has held in para 8 to 11 as under:-
“8. The issue whether a Co-operative Bank is considered to be a Co-operative Society is no longer res integra. For the said issue has been decided by the ITAT itself in different cases. Moreover the word "Co-operative Society" are the words of a large extent, and denotes a genus, whereas the word "Co-operative Bank" is a word of limited extent, which merely demarcates and identifies a particular species of the genus Co-operative Societies. Co-Operative Society can be of Mr. Borivali Jankalyan 6 different nature, and can be involved in different activities; the Co-operative Society Bank is merely a variety of the Co-operative Societies. Thus the Co- operative Bank which is a species of the genus would necessarily be covered by the word "Co-operative Society".
Furthermore, even according to Section 56(i)(ccv) of the Banking Regulations Act, 1949, defines a primary Co-Operative Society bank as the meaning of Co- Operative Society. Therefore, a Co-operative Society Bank would be included in the words 'Co-operative Society'.
Admittedly, the interest which the assessee respondent had earned was from a Co-operative Society Bank. Therefore, according to Sec. 80P(2)(d) of the I.T. Act, the said amount of interest earned from a Co-operative Society Bank would be deductable from the gross income of the Co-operative Society in order to assess its total income. Therefore, the Assessing Officer was not justified in denying the said deduction to the assessee respondent.
The learned counsel has relied on the case of Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC). However, the said case dealt with the interpretation, and the deduction, which would be applicable under Section 80P(2)(a)(i) of the I.T. Act. For, in the present case the interpretation that is required is of Section 80P(2)(d) of the I.T. Act and not Section 80P(2)(a)(i) of the I.T. Act. Therefore, the said judgment is inapplicable to the present case. Thus, neither of the two substantial questions of law canvassed by the learned counsel for the Revenue even arise in the present case.”
Thus, the Hon'ble High Court has held that for purpose of section 80P(2)(d) a Co-operative Bank should be considered as a Co-operative Society 6.2 Let us conclude with a recent judgment dated 12th January 2021 . In the Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC), the Hon’ble Supreme Court has observed that:
The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banks i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act,
Mr. Borivali Jankalyan 7 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co- operative society shall carry on banking business in India, unless it is a co- operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.
Their Lordships held that :
“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.”
To summarize the above judgment, it can be said that the limited object of section 80P(4) is to exclude Co-operative Banks that function at par with other commercial banks i.e. which lend money to members of the public .
6.3 To sum up: In Totagars Co-operative Sale Society(supra), the Hon’ble Karnataka High Court has held that for purpose of section 80P(2)(d) a Co- operative Bank should be considered as a Co-operative Society. In Mavilayi
Mr. Borivali Jankalyan 8 Service Co-operative Bank Ltd. (supra), the Hon’ble Supreme Court has held that “Section 80P of the IT Act, being benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be liberally and reasonably, and if there is any ambiguity, in favour of the assessee.
6.4 In view of the above factual scenario in the present case and the principles laid down in the above judgements, we set aside the order of the Ld. CIT(A).
In the result, the appeal is allowed.
Order pronounced in the open Court on 30/03/2021.