M/S. PADANGADY SAHAKARI VYAVASAYIKA SANGHA,BELTHANGADI vs. INCOME TAX OFFICER, WARD - 1, PUTTUR

Per CHANDRA POOJARI, AM:

1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.

2. The ld. CIT(A) is not justified in upholding the denial of deduction claimed u/s. 80P(2)(a)(i) of the Act amounting to Rs.33,70,747/- in respect of the profits earned by the appellant from the business of providing credit facilities to its members under the facts and in the circumstances of the case.

3. The ld. CIT(A) erred in holding that the business of providing credit facilities to the members carried on by the appellant cannot be regarded as a business carried on by a co-operative society complying with the principles of mutuality since the appellant had admitted nominal and associated members, who could neither vote nor were entitled to a share in the profits as per the bye-laws of the appellant and hence, the appellant was not entitled to deduction u/s. 80P(2)(a)(i) of the Act having regard to the rationale behind the judgment of the Hon’ble Supreme Court in the case of Citizens Co- operative Society reported in 397 ITR 1 (SC) under the facts and in the circumstances of the case.

4. The ld. CIT(A) ought to have appreciated that the appellant co-operative society had no doubt admitted nominal and associate members, which was permissible under the Karnataka Co-operative Societies Act, 1959 but, there was no violation of any of the provisions of the Karnataka Co-operative Societies Act under which the appellant was constituted and therefore, the judgment of the Hon’ble Supreme Court relied upon in the case of Citizens Co-operative Society reported in 397 ITR 1 was distinguishable and wholly inapplicable to the facts of the appellant’s case. 5. Without prejudice to the above, the ld. CIT(A) ought to have appreciated the alternate claim made by the appellant for allowance of deduction u/s. 80P of the Act with reference to the extent of income derived from advances given to members apart from nominal members, which was exempt under the principles of mutuality as held by the Hon’ble Bombay High Court in the case of M/s. QUEPEM Urban Co-operative Credit Society Ltd. in to 24 of 2015 dated 17/04/2015 under the facts and in the circumstances of the case. 6. The ld. CIT(A) ought not to have upheld the assessment of income earned by the appellant from investments made in South Canara District Co- operative Bank to the extent of Rs.32,27,560/- under the head “Other Sources” as against the claim of the appellant that the said interest income formed part of the income from business of providing credit facilities to the members and thus, was entitled to deduction u/s. 80P(2)(a)(i) of the Act following the judgment of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. reported in (2015) 230 Taxman 309 (Kar) under the facts and in the circumstances of the appellant’s case. 7. The ld CIT(A) ought to have appreciated that the appellant had earned the interest income from investments statutorily required to be maintained under the Karnataka Co-operative Societies Act from out of the profits besides 25% of the total deposits as SLR with co-operative banks and 3% of the total deposits towards CRR and thus, the income earned therefrom ought to have been assessed as part of the business of the providing credit facilities 2 Sources” under the facts and in the circumstances of the appellant’s case.

8. Without prejudice to the above, the learned CIT(A) ought to have appreciated that the cost of funds ought to have been allowed u/s. 57(iii) of the Act by allowing the actual interest paid on member’s deposits while assessing the interest income under the head “Other Sources” instead of the arbitrary allowance of 10%of the income as incidental expenses, under the facts and in the circumstances of the appellant’s case.

9. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged u/s. 234B of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.

3.1 The Assessing Officer denied deduction u/s.80P(2)(a)(i) amounting to Rs.1,43,187/- (income from lending of credit facility to Members) and u/s. 80P(2)(d) amounting to Rs.1,43,187 (income from Term Deposits with SCDCC Bank/Other Co- op Societies and Dividend Income from Investment in Shares with SCDCC Bank/Other Co-op Societies. Further, the Assessing Officer denied the assessee’s claim of expenses incurred for earning the interest income/dividend income and allowed only an ad hoc deduction of 10% of such income i.e. Rs.3,22,756/- without any basis, as expenses for earning interest income and dividend income. Thus, the Assessing Officer made an addition of Rs.29,04,804/- in respect of interest income/dividend income. Further, the Assessing Officer also denied entire deduction u/s. 80P to the assessee, thereby making addition of Rs.33,70,747/- on the reason that the assessee had admitted nominal members.

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.

6. 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. 10. 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. 11. We, therefore, remand the issue back to Ld.AO for re adjudicating it afresh on the basis of above direction.

7. 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 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 6 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. 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 8 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 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 9 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 :

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 11 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.