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Income Tax Appellate Tribunal, BENGALURU BENCH, BANGALORE (SMC
Before: SHRI CHANDRA POOJARI, AM
The assessee has raised the following grounds of appeal:
1. The ld. CIT(A) is not justified in dismissing the appeal of the assessee without allowing sufficient and real opportunity to the appellant to explain additions/disallowances made in the impugned order and consequently, the order passed is in violation of the principles of natural justice and therefore, requires to be vacated.
I.T.A. Nos. 2609 & 2610/Bang/2019
2. Without prejudice to the above, the ld CIT(A) is not justified in disallowing the addition of Rs.14,19,450/- claimed as deduction u/s. 80P(2)(a)(i) of the Act on the ground that the exemption shall not be available to co-operative banks (first part) other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank (PLD Banks). However, the ld. CIT(A) erred in considering that the deduction shall still be available to a co-operative society which is engaged in the business of providing credit facilities to its members.
The facts of the case are that the assessee is a Primary Agricultural Co-operative Society duly registered under the Karnataka Co-operative Societies Act, 1959 and is engaged in the business of accepting deposits from members and lending credit facilities to its members. For the assessment yeara 2015-16 and 2016-17, the assessee filed its return of income declaring income after claiming deduction of u/s. 80P(2)(d) of the Act. Thereafter, the assessee’s case was selected for scrutiny under CASS and notice u/s. 143(2) was issued by the Assessing Officer. The assessee relied on the following case laws: a) The Totgars’ Co-operative Sale Society in Civil Appeal No. 1622 of 2010. b) The Totgars’ Co-operative Sale Society in of 2016 dated 16/06/2017. c) M/s. Citizens Co-operative Society, Hyderabad in Civil Appeal No.10245 of 2017 dated 08/08/2017.
3.1 The Assessing Officer in A.Y. 2015-16 made the addition of Rs.14,19,450/- claimed as deduction u/s. 80P(2)(a)(i) of the Act on the ground that the exemption shall not be available to co-operative banks (first part) other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank (PLD Banks). Similar is the position in the A.Y. 2016-17.
I.T.A. Nos. 2609 & 2610/Bang/2019 4. On appeal, the CIT(A) confirmed the order of the Assessing Officer on the above issue in both A.Ys.
5. Against this, the assessee is in appeal before me. The Ld. AR submitted that the orders of the lower authorities are not justified and submitted that the assessee society is providing credit facilities to its members including nominal members and other members. The Ld. AR submitted that the assessee is entitled for deduction u/s. 80P(2) of the I.T. Act.
On the other hand, the Ld. DR submitted that the assessee’s case is covered by the decision of the Co-ordinate Bench in the case of Mahaveera Credit Co-op Society Ltd. vs. ITO in & 283/Bang/2020 dated 21/08/2020 wherein it was held as follows: “9. We have perused submissions advanced by both sides in light of records placed before us.
The grievance of assessee is that, in its case test of mutuality is satisfied however, Ld.CIT(A) did not spell out as to how the said test fails. We are of the view that, such grievance of the assessee would be addressed by setting aside the issue of deduction u/s.80P(2)(a)(i) of the Act to Ld.AO for consideration afresh, with a direction to the Assessee to produce a certificate from RBI that it does not possess license from it for doing banking business and further that business carried on by Assessee is not akin to business of a co-operative bank. Further the first part of Sec.80P(2)(a)(i) allows deduction in respect of income derived by a co- operative Society from business of banking. Even the claim of the Assessee for deduction requires to be examined under the first part of Sec.80P(2)(a)(i) of the Act. Hon'ble Supreme Court in case of Citizen Co- operative Society Ltd. (supra) has also held that, it is also important to ascertain as to what is the nature of income which is claimed as exempt and as to how the principle of mutuality is not violated in respect of such income. An examination of (i) the memorandum of association, the articles of association, (ii) the byelaws and other documents explaining the rules and regulations of the society is necessary, so as to clearly understand the purpose and the nature of business done by it. An examination of the facts in light of discussion cited by Ld.CIT(A) as well as decision of Hon’ble Karnataka High Court in case of Tumkur (Supra) is to be carried out. 3
I.T.A. Nos. 2609 & 2610/Bang/2019
We, therefore, remand the issue back to Ld.AO for re adjudicating it afresh on the basis of above direction.
Accordingly, appeals filed by assessee stands allowed for statistical purposes.”
Countering this, the Ld. AR submitted that the issue should be remitted to the file of the Assessing Officer by following the decision of the Co-ordinate Bench in the case of M/s. Kodavoor Vyavasaya Seva Sahakari Sangha Niyamitha vs. ITO in 762, 765, 942, 1190 & 1191/Bang/2019 dated 26/08/2019 wherein it was held as follows: “4. We heard the rival submissions and perused the material on record. Prima facie, the sole disputed issue being denial of claim of deduction under Section 80P(2)(a)(ii) of the Act. The Assessing Officer has dealt on the interest income from investment / deposits in Banks, whereas the assessee society is engaged in business of carrying on banking and providing credit facilities. In the present assessment year, the assessee has made fixed deposits with Karnataka DCC Bank and received interest income and the assessee has claimed deduction under Section 80P(2)(a)(i) of the Act further Assessing Officer found that the assessee has provided Banking facilities to the nominal members. Whereas the ld. AR has restricted his arguments to the extent of denial of deduction under Section 80P(2) of the Act and further submitted that the nominal members has been categorized as members and are eligible for benefits. Whereas CIT (Appeals) has relied on the judicial decisions, which shall apply to a society which is engaged in numerous activities but in the present case the assessee society is engaged in providing facilities of Banking business or credit facilities to its members. We found the issue of denial of deduction under Section 80P(2) and treatment of interest on deposits and also nominal members are treated as members for the purpose of benefit of section 80P(2) was dealt by the judicial forums. We consider it proper to refer to the decision of the co-ordinate Bench of the Tribunal in the case of The Jayanagar Co-operative Society Vs. ITO in ITA No.3254/Bang/2018 in respect of interest income earned by the society were the Assessing Officer denied the claim of the assessee observing that interest income earned on investment of surplus funds has to be assessed as ‘income from other sources’ and not from business at Page No.3 paras 4 & 5 held which read as under : “ 4. The issues that arise for consideration in this appeal by the assessee are as to whether the Revenue authorities were justified in holding that the 4 & 2610/Bang/2019 assessee was not entitled to the benefit of deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 (in short ‘the Act’) on interest income earned and under section 80P(2)(d) of the Act in respect of interest received from Co-operative institutions. The Assessing Officer (AO) denied the claim of the assessee on the ground that interest income earned by making investment of surplus funds has to be assessed under the head “Income from Other Sources” and not income from business and since interest income is not assessed as business income, the claim for deduction under section 57 of the Act cannot be allowed. In upholding the above conclusions, the CIT(A), inter alia, relied on the decision of the Hon’ble Supreme Court in the case of The Totgar’s Co-operative Sales Society Ltd., Vs. ITO 322 ITR 283 (SC) wherein the Hon’ble Supreme Court held that the benefit of deduction under section 80P(2)(a)(i) of the Act is only on income which is assessable under the head “Income from Business”. Interest earned on investment of surplus funds not immediately required in short term deposits and securities by a Co-operative Society providing credit facilities to members or marketing agricultural produce to members is not business income but income from other sources and the society is not entitled to special deduction. 5. While learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Tumukur Merchants Souharda Credit Co-operative Ltd., 230 taxman 309 (Karn), the DR relied on a subsequent decision of the Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sale Society Ltd., 395 ITR 611 (Karn.). We have carefully gone through the said judgment. The facts of the case before the Hon’ble Karnataka High Court was that the Hon’ble Court was considering a case relating to Assessment Years 2007-08 to 2011-12. In case decided by the Hon’ble Supreme Court in the case of the very same assessee, the Assessment Years involved was Assessment Years 1991-92 to 1999-2000. The nature of interest income for all the Assessment Years was identical. The bone of contention of the Assessee in AY 2007-08 to 2011-12 was that the deduction under Section 80P(2) of the Act is claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act which was the claim in AY 1991-92 to 1999- 2000. The reason given by the Assessee was that in AY 2007-08 to 2011-12 investments and deposits after the Supreme Court's decision against the assessee Totgar's Co-operative Sale Society Ltd. (supra), were shifted from Schedule Banks to Cooperative Bank. U/s.80P(2)(d) of the Act, income by way of interest or dividends derived by a Co-operative Society from its investments with any other Co-operative Society is entitled to deduction of the whole of such interest or dividend income. The claim of the Assessee was that Co-operative Bank is essentially a Co-operative Society and therefore deduction has to be allowed under Clause (d) of Sec.80P(2) of the Act. The Hon'ble Karnataka High Court followed the decision of the supreme Court in The Totgars Co-operative Sales Society Ltd. (supra) and held that interest earned from Schedule bank or cooperative bank is assessable under the head income from other sources and therefore the provisions of Sec.80P(2)(d)of the Act was not applicable to such interest income. It is thus clear that the source of funds out of which investments were 5 I.T.A. Nos. 2609 & 2610/Bang/2019 made remained the same in AY 2007-08 to 2011-12 and in AY 1991-92 to 1999-2000 decided by the Hon'ble Supreme Court. Therefore whether the source of funds were Assessee's own funds or out of liability was not subject matter of the decision of the Hon'ble Karnataka High Court in the decision cited by the learned DR. To this extent the decision of the Hon'ble Karnataka High Court in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra) still holds good. Hence, on this aspect, the issue should be restored back to the AO for a fresh decision after examining the facts in the light of these judgment of the Hon'ble Apex Court rendered in the case of The Totgars Co-operative Sale Society Ltd. (supra) and of Hon'ble Karnataka high Court rendered in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra).”
Similarly, on the issue of definition of the Member where Nominal Members are also eligible for benefits. The Member defined under the co-operative society Act bye-laws includes Nominal Member. We found Ahmedabad Bench of ITAT in for Asst. Year 2015-16 in the case of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT (supra) at para 7 has held as under : “ 7. We have heard ld.DR and gone through the record. We have also gone through case laws cited both the sides before ld.CIT(A). We find that fundamental facts which are not disputed by the Revenue authorities are that the assessee is a primary agricultural credit society registered under the Gujarat Cooperative Societies Act, 1961. It is engaged in providing credit facilities to the farmers in the region of Bhavnagar district. As per the AO, members of the assessee-society consisted of two types viz. regular member and nominal members. It is the case of the Revenue that assessee is doing more business with nominal members than the regular member in order to earn more profit, which is against the law, and therefore, there is a break- down of principle of mutuality resulting disentitlement of exemption under section 80P. The ld.AO relied upon the judgment of Hon’ble Supreme Court in the case of Citizens Cooperative Society Ltd. (supra) to support his view. While the case of the assessee is that being a primary agriculture credit society, it is entitled for exemption under sub-section (4) of section 80P. Judgment of Hon’ble Apex Court relied upon by the Revenue is distinguishable on facts. In that case assessee was a cooperative society registered under Multi State Cooperative Societies Act, 2002, while in the present case, assessee is a primary agriculture credit society registered under Gujarat State Cooperative Societies Act. The Hon’ble Supreme Court disentitled the assessee from claiming exemption under section 80P due to violation of provisions of MACSA, under which it was formed, and most of the 6 & 2610/Bang/2019 business of the assessee was with carved out category of persons without approval of Registrar of the Societies. Weighing point of view of both sides, we find that balance tilt in favour of the assessee. We find that by virtue of sub-section (4) of section 80P, the assessee is entitled for deduction under section 80P(2). Further, Income Tax Act does not define “member”, nor has provided distinction between ‘regular member’ and ‘nominal member’ and therefore, its meaning and objects has to be understood in the context of definition given in the State Act. The Revenue authorities are trying to extrapolate the meaning of expression “Member” contrary to the spirit of the Act. It is evident from the definition of “member” provided in section 2(13) of the Gujarat Cooperative Societies Act that “Member” includes nominal, associate or sympathizer member. Therefore, in the present case, the nominal members are members as provided in the Act and that deposits received and loan advanced to the nominal cannot be treated as from non- members or from public and in the nature of banking business. That being so, then, an assessee engaged in primary agriculture activities and providing credit facilities and agriculture facilities to the farmer-members of a particular region, claim of deduction under section 80P(2) cannot be denied. It is not denied by the Revenue that the activities of the assessee society are of primary agriculture activities. Competent authority has also recognized the assessee as primary agriculture credit society. In the earlier assessment year also, Revenue has accepted this fact and allowed the claim of the assessee. Judgment of Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd. (supra) is distinguishable on facts. In that case, status of the assessee is that of co-operative bank, whereas assessee in the present case is a primary agriculture credit society and applicability of section 80P(2)(4) of the Act. Considering all these facts, we are not convinced with the reasoning and finding given by the Revenue authority in denying claim of the assessee under section 80P(2). We allow the claim of the assessee and direct the ld.AO to re-compute income of the assessee by allowing claim under section 80P(2)(4) of the Act.” Also in Tax Case Appeal No.882 and 891 of 2018 of Hon'ble Madras High Court in the case of The Prin. Commissioner of Income Tax Vs. S-1308 Ammapet Primary Agricultural Cooperative Bank Ltd. held in paras 11 to 18 as under :
I.T.A. Nos. 2609 & 2610/Bang/2019
I.T.A. Nos. 2609 & 2610/Bang/2019
We found the facts of the present case are similar to the decision rendered by the co-ordinate Bench and the jurisdictional High Court in respect of “Members” definition and “chargeability of interest income under ‘income from other sources’ ”. We follow the judicial precedence and restore the entire disputed issue to the file of Assessing Officer to adjudicate afresh in the light of the decision of chargeability of interest income under the head ‘income from other sources’ and the observations of Hon'ble Supreme Court in the case of Totgar’s Co-operative Sales Society Ltd. Vs. ITO 322 ITR 283 (SC) and Hon'ble Karnataka High Court decision in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. 230 Taxman 309 (Kar) as discussed in above paras. Whereas in respect of the claim of Nominal Members included in the definition of Member we find support on our view rely on the decision of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT (supra) and Prin. CIT Vs. S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd. (supra) which is covered in favour of the assessee. Accordingly, we are of the substantive opinion that the nominal members are also eligible for the Benefits of credit society. Accordingly we restore entire disputed issue to the file of Assessing Officer to grant the benefit to the nominal members and the assessee should be provided adequate opportunity of hearing and co-operate in submitting the information for early disposal of the case and allow the grounds of appeal of the assessee for statistical purposes.
6. Similarly the appeals filed in 765, 942, 1190 & 1191/Bang/2019 are similar and identical. Hence the decision rendered in ITA No.707/Bang/2019 9
I.T.A. Nos. 2609 & 2610/Bang/2019 at paras 4 & 5 above shall apply mutadis mutandis. Accordingly the disputed issue in these appeals are remitted to the file of Assessing Officer as indicated and allow the grounds of appeal of assessees.
7. In the result, appeals of the assessee in 762, 765, 942, 1190 & 1191/Bang/2019 are treated as allowed for statistical purposes.”
I have heard the rival submissions and perused the material on record. The assessee is having nominal members and having nominal members in the Co- operative Society does not disentitle the assessee for getting exemption u/s. 80P of the Act. In my opinion, the issue is covered by the above orders of the Co-ordinate Bench relied on by the Ld. AR and is required to be re-adjudicated by the Assessing Officer after considering the above decisions. Accordingly, I remit this issue to the file of the Assessing Officer for fresh consideration on similar directions. Thus, this ground of appeal
of the assessee is partly allowed for statistical purposes.
9. In the result, the appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 10th September, 2020.