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Income Tax Appellate Tribunal, “D” Bench, Mumbai
O R D E R Per Shamim Yahya (AM) :- These are appeals by the Revenue against respective orders of learned CIT(A) for A.Y. 2014-15 & 2015-16.
The common issues raised read as under :- 1. "Whether on facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the assessee's claim for deduction u/s. 80P(2)(d) of the I.T. Act, 1961 disregarding the provisions of section 80P(4) of the Act,1961." 2. " Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that co-operative banks are co- operative societies and as such the assessee is entitled to claim interest earned from deposit kept with co-operative banks as a deduction u/s. 80P(2)(d) of the Act, 1961." 3. " The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored."
Since facts are similar we are referring to the order of A.Y. 2014-15.
2 M/s. Ramaraja Kshatriya Cooperative Credit Society Limited
Brief facts are that the Assessing Officer disallowed the deduction u/s. 80P(2d) of the I.T. Act by holding that the assessee was a Cooperative bank as per section 80P(4). He concluded as under :- (l) On perusal of the Balance Sheet as on 31.03.2014, it is seen that the major item on the liability side is a figure of Rs.26.20 crores reflected against the head Deposits'. On the asset side, the major item is Rs.31.42 crores shown against the head 'Loan and Advances'. From these, it is crystal clear that the assessee on the one hand accepts deposits from the members for which interest is paid to them On the other hand, it advances loans out of these deposits etc. to the needy members from whom interest is received at a higher rate. These are the silent features of a business activity and that business is nothing but 'banking business.
(2) Further, perusal of the Balance Sheet as on 31.03.2014 of the assessee reveals unclaimed dividend of Rs.1,47,919/-. The declaration of dividend is an attribute of a business wherein profit has been derived almost every year, out of which there was declaration of dividend, part of which is appearing in balance sheet as unclaimed in last few years. This is also a characteristic of the business activity.
(3) From the Balance Sheet of the assessee as on 31.03.2014, it is further seen that a reserve has been created for 'Bad and Doubtful debts' of Rs.41,00,000/-. The credit balance in that reserve was Rs. 35,00,000/- for the immediately preceding financial year. This is another salient feature of a business carried on by the assessee.
From the above, it is abundantly clear that what the assessee carried on, is nothing else than the banking business. To hold that it is banking business, one need not necessarily carry on a full-fledged banking business with a licence from the concerned authorities. That is it is not essential to satisfy each and every requirement of a bank engaged in banking business.
Further, from the Balance Sheet of the assessee, it is seen that Authorised Share Capital is Rs.15 crores while the issued and subscribed share capital stands at Rs.3,55,77,030/- as on 31.03.2014. Further, the Reserve Fund of the assessee shows a credit balance of Rs. 4.12 crores as on 31.-03.2014. In this background, it needs to be seen whether the assessee is a banking institution engaged in banking activity. For this, a reference may be made to the relevant provisions of the Banking Regulation Act, 1949 (reproduced in para 5 above). According to section 5(ccii), 5(ccv) and 5(ccvi) of Banking Regulation Act, where principal business of a primary credit society is the transaction of banking business and its paid up capital and reserves attained the level of Rs.l lakh, that primary credit society automatically becomes a primary co-operative bank. Further, its banking business activity is carried on in the city / suburb of Mumbai.
3 M/s. Ramaraja Kshatriya Cooperative Credit Society Limited 5.7 Over and above all these, as per the Banking Regulation Act, 1949, there are three basic tests for judging whether a given cooperative credit society/patpedhi is a cooperative bank or not.
Firstly, the primary object or principal business transacted should be banking business. Secondly, the paid up share capital and reserve should be Rs. One lakh or more. Thirdly, by a member, if these conditions are fulfilled, the cooperative credit society will be regarded to be primary co-operative bank. In the present case, first two conditions are satisfied and the assessee is to be regarded as a primary cooperative bank.
Yet another aspect concerning the issue is that the decision of Hon'ble Karnataka High Court in CIT, Belgaum vs. Baflur Surubasav Pathinai Sahakari'Sangh Niyam St, Bagalkot in favour of the assessee has been challenged by the Department and an StP against that decision has been admitted by Hon'ble Apex Court on 06.07.2015 (2015)(62 Taxrnan.com 216(SC). The same is pending. Similarly, the Department has filed SLR against the decision of Hon'ble Mumbai High court in ; case of Gupem Urban C-operative Credit Society Ltd. vs. ACIT [2015] 58 taxman.com 113 (Bombay), which has been admitted vide Order No.CC NO.17&85/20I5 dated OS. 10.2015 and is pending.
5.8 Although the assessee's representative has cited some decisions of Hon'ble Courts of other states, it is not known whether those have been accepted by the Department. Hence, with due respect to those decisions, the same «re not -followed in -this order.
5.9. TO sum up, viewed against the backdrop of the foregoing discussion, and the emerging position, the explanations furnished by the assessee during the course of assessment proceedings are devoid o/merit. After careful consideration, the AO held that the Assessee's case falls within the mischief of sub-section (4) of Section SOP and therefore, the deduction claimed of Rs.1,69,20,631/- u/s. 80P(2) is hereby disallowed Penalty proceedings u/s.271(l)(c) of the I. T. Act, 1961 is hereby initiated separately for furnishing inaccurate particulars of income.”
4. Upon assessee’s appeal learned CIT(A) deleted the disallowance holding that the was not a cooperative bank. The learned CIT(A) held as under :- 7. I have considered the facts of the case, oral contentions and written submissions of the appellant as against the observations/findings of the AO in the assessment order. The contentions/submissions of the appellant are being discussed and decided^ as under:-
7.1 A careful and considerate perusal of the grounds of appeal revealed that the essence of the merits of the present appeal is that the appellant is aggrieved by the action of the AO in refusing to grant the deduction u/s.80P(2)(a)(i) to the tune of Rs.1,69,20,631/-. This has been challenged vide grounds 3.2 to 3.4 which shall be adjudicated together.
4 M/s. Ramaraja Kshatriya Cooperative Credit Society Limited 7.2 I have very carefully perused the impugned order, the entire relevant facts and circumstances of the matter and the submissions of the Ld. AR, as well as the various judicial pronouncements cited by him. I have also perused with circumspection, the pertinent details and materials on record.
7.3 On this entire issue, it is pertinent to mention that the activities mentioned in Section 80P(2)(a)(i) are ‘a co-operative society engaged in carrying on business of banking or providing credit facilities to its members'. As per section 80P(4), the provisions of section SOP shall not apply in relation to any co-operative bank. Therefore, even after the insertion of Sec. 80P(4), the co-operative society engaged in providing credit facilities to its members continued to be entitled for deduction u/s 80P(2)(a)(i). There is no prohibition u/s. SOP not to allow deduction to such co-operative societies in respect of business relating to its members.
7.4 Further, it is to be noted that the Banking business has been defined under section 5(b) of the Banking Regulation Act, 1949 in the following manner: "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.
7.5 The Banking Regulation Act, 1949 defines a co-operative bank in cl. (cci) of sec. 5 (as inserted by sec. 56 of the said Act) and Co-operative Credit Society is not included but its identity is kept separate by way of independent definition in Clause (ccii) of Sec. 5 of the Banking Regulation Act which is reproduced as under:
(cci) "Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank
(ccii) "co-operative credit society" means a Co-operative Society, the primary object of which is to provide financial accommodation to its members and includes a co-operative land mortgage bank; "
7.6 On plain reading of the Banking Regulation Act, 1949, nowhere it is suggested that the term "Co-operative Bank" also includes 'Co-Operative Credit Society". Further, the Primary Co-operative bank is defined in cl. (ccv) of sec. 5 of the Banking Regulation Act 1949 as under:—
'(ccv) "primary co-operative bank" means a co-operative society, other than a primary agricultural credit society— i) the primary object or principal business of which is transaction of banking business: ii) the paid-up share capital and reserves of which are not less than one lakh of rupees: and 5 M/s. Ramaraja Kshatriya Cooperative Credit Society Limited iii) the bye-laws of which do not permit admission of any other co- operative society as a member:
7.7 Therefore, going by the definition of 'banking', 'co-operative bank' and 'primary cooperative bank as mentioned above, if a co-operative society is not allowed to accept deposits of money from the public for the purpose of lending or investment, it cannot be said that the prime object or principal business of the appellant is banking business. Hence, it will not be a primary co-operative Bank and consequently not a co-operative bank.
7.8 In this regard, I also find that the case of the appellant, inter-alia, is covered by the decision of the jurisdictional High Court in the case of Quepem Urban Co-operative Credit Society Ltd. vs. ACIT [2015] 58 taxmann.com 133 (Bom): [2015] 377 ITR 272 (Bombay), decided on 17.04.2015 wherein it is held that the assessee cannot be considered as a co- operative Bank for the purposes of section 80P(4) of the Act, unless the following three conditions are satisfied- (i) the principal business or primary objective should be business of banking (ii) its paid up share capital and reserves should not be less than rupee one lac (iii) its bye-laws do not permit admission of any other co-operative society as its member. It is also pertinent to note that in the above quoted decision of the jurisdictional High Court in the case of Quepem Urban Co-operative Credit Society Ltd. (quoted supra), the Hon’ble High Court has also taken due note of the decision in the case of Totgars Cooperative Sales Society Limited.”
Against the above order the Revenue is in appeal before us.
We have heard both the counsel and perused the records. We find that this issue is squarely covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of Citizen Cooperative Society Ltd. (Civil Appeal No. 10245 of 2017 vide order dated 8.8.2017) and The Mavilayi Service Cooperative Bank Ltd. & Ors. Vs. CIT, Calicut & Ors. (Civil Appeal Nos. 7343- 7350 of 2019 dated 12.1.2021. We find that the Assessing Officer has completely erred in treating the assessee as cooperative bank and invoking the provisions of section 80P(4). Section 80P(4) provides that :- (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 co-operative agricultural and rural development bank. Explanation.—For the purposes of this sub-section,—
6 M/s. Ramaraja Kshatriya Cooperative Credit Society Limited (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.
Honourable Supreme Court in the case of Citizen Cooperative Society Ltd. (Civil Appeal No. 10245 of 2017 vide order dated 8.8.2017) has settled the law that for being considered as a cooperative bank licence from RBI in this regard is a sine qua non. In absence of the RBI licence as such the assessee cannot be treated as cooperative bank. Hence disallowing the deduction by referring to the provisions of section 80P(4) is completely unsustainable. Moreover section 80P(2)(d) provides exemption to interest earned on fixed deposit in cooperative societies. It is nobody's case that cooperative bank are not cooperative societies.
Moreover similar issue was elaborately dealt by a larger bench of honourable Supreme Court in the case of The Mavilayi Service Cooperative Bank Ltd. & Ors. Vs. CIT, Calicut & Ors. (Civil Appeal Nos. 7343-7350 of 2019 dated 12.1.2021) and the issue was decided in favour of the assessee. We may gainfully refer to the Hon'ble Apex Court observation in para 21 as under, wherein the Hon'ble Apex Court referred to its earlier decision of Citizen Cooperative Society Ltd. (supra) :-
“The following propositions may be culled out from the judgment:
(I) That section 80P of the IT Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; (II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in subsection (2) of section 80P must be given by way of deduction;
7 M/s. Ramaraja Kshatriya Cooperative Credit Society Limited (III) That this Court in Kerala State Cooperative Marketing Federation Ltd. and Ors. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so - which is not the case with section 80P(2)(a)(i); (V) That 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 co- operative banks, which are cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4).”
Respectfully following the precedent as above, we uphold the learned CIT(A)’s order.
In the result, Revenue’s appeals stand dismissed. Pronounced in the open court on 11.3.2021.