THE NADAPURAM SERVICE COOPERATIVE BANK LIMITED,KOZHIKODE vs. JCIT, RANGE 2, KOZHIKODE

Being aggrieved by the above order of penalty, the appellant preferred an appeal before the CIT(A), subsequently migrated to NFAC, contending that the appellant is an primary agricultural credit society carrying on the business of banking and the provisions of section 269SS of the Act have no application and further contended that there was . The Nadapuram SC.B Limited. reasonable cause for accepting the deposits in cash from the members, and therefore, no penalty can be levied in view of the decision of the Hon’ble Supreme Court in the case of ACIT (Inv.) v. Kum.A.B.Shanti (2002) 255 ITR 258. However, the learned NFAC after referring to the judgment of the Hon’ble Madras High Court in the case of Vasan Healthcare Private Limited 103 taxman 26 (Mad.) and other judgments of High Courts held that in the absence of any reasonable cause for accepting the deposits or loans in cash, the levy of penalty is justified u/s.271D of the Act.

Being aggrieved by the order of NFAC confirming the levy of penalty, the appellant is in appeal before us. It is contended that the levy of penalty u/s.271D is arbitrary, inasmuch as, the appellant is into the banking business and no penalty can be levied in view of the decision of the Hon’ble Supreme Court in the case of Kum.A.B.Shanti (supra). It is further submitted that it was under the bonafide belief that the provisions of sec.269SS of the Act have no application, since the appellant was engaged in the banking business. Since the transactions are genuine and bonafide, levy of penalty is not justified in view of the decision of the Hon’ble Madras High Court in the case of PCIT v. Kundrathur Finance and Chit Co. (2006) 283 ITR 329 (Mad.). It is further submitted that there is no intention on the part of the appellant to evade the tax thereby causing loss to the Revenue, inasmuch as, the transactions are genuine and bonafide and the acceptance of deposits in cash by the appellant co-operative society from the members does not fall within the purview of sec.269SS of the Act, placing reliance on the

On the other hand, the learned CIT-DR submits that the appellant co-operative society is not permitted to do the banking business in the absence of any licence granted by the RBI. In this connection, he relied on the judgment of the Hon’ble Supreme Court in the case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer (2023) 458 ITR 384 (SC). He further submits placing reliance on the provisions of sec.56 of the Banking Regulation Act, 1949 that no co-operative society shall carry out banking in India unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. He further submits that the transactions of acceptance of deposits or loans in cash from members of a co-operative society comes within the purview of provisions of sec.269SS of the Act, drawing support from the 3rd proviso inserted to sec.269SS of the Act. The learned CIT- DR placing reliance on the judgment of the Hon’ble Kerala High Court in the case of NSS Karayogam (2020) 271 Taxman 193 (Kerala) submits that the genuineness of the transaction are bonafide cannot be considered as reasonable cause as provided u/s.273 of the Act to avoid penal consequence of penalty u/s.271D of the Act.

We heard the rival submissions and perused the material available on record. The issue that arises for our consideration is whether the AO was justified in levying penalty u/s.271D of the Act for violation of the provisions of sec.269SS of the Act. The admitted facts of the case are that the assessee is a co-operative society incorporated under the . The Nadapuram SC.B Limited. provisions of Kerala State Co-operative Societies Act, 1956. It is classified as a primary agricultural co-operative credit society does not enjoy the licence from the RBI to carry on the business of banking. The provisions of sec.269SS of the Act were inserted by the Finance Act, 1984 with effect from 1st July, 1984. It provides that no person shall after 30th day of June, 1984, take or accept from any person, any loan or deposit otherwise than by an account payee cheque or account payee bank draft or use of other electronic clearing system through a bank account, as may be prescribed in a sum exceeding Rs.20,000 or more. The first proviso to sec.269SS provides that the above provision shall not apply in respect of loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by, - (a) the Government; (b) any banking company, post office savings bank or co- operative bank; (c) any corporate established by a Central, State or Provincial Act; (d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013); (e) such other institution, association or body or class of institutions, associations or bodies which the Central government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette;

The provisions of sec.271D of the Act provides for levy of penalty for contravention of provisions of sec.269SS of the Act. The . The Nadapuram SC.B Limited. provisions of sec.273B of the Act provides that where there is a reasonable cause for violation of the provisions of sec.269SS, no penalty shall be levied. There is no dispute about the factum of receipt of loans or deposits by the appellant-society from its members in cash and the appellant-society is a primary agricultural co-operative credit society, which does not fall under the category of any banking company or a co-operative bank, nor it falls under any of the exempted categories enumerated under the first proviso to the above section. The contention that the appellant is a co-operative bank cannot be accepted for the reason that the appellant co-operative society does not enjoy a banking licence issued by the RBI. The Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer (2023) 458 ITR 384 (SC) categorically held that in the absence of licence to carry on the banking business by a co- operative society, it cannot be considered as a co-operative bank. It is an admitted fact that the appellant does not enjoy the licence issued by the RBI to carry on the business of banking. Therefore, the contention that it is a co-operative bank cannot be accepted.

As regards the contention that the provisions of sec.269SS of the Act have no application to the society formed under the Co-operative Societies Act, has no legs to stand in view of the fact that the co- operative society does not fall under any of the exempted categories enumerated under the first proviso to sec.269SS of the Act. Furthermore, the Parliament has inserted the third proviso to sec.269SS providing for enhancing the threshold limit from Rs.20,000 to Rs.2,00,000 in the case of loan or deposit accepted by the primary . The Nadapuram SC.B Limited. agricultural co-operative credit society, primary agricultural and rural development bank. Thus, the intention of the Parliament is abundantly clear that the provisions of sec.269SS of the Act should be applied even in respect of loan or deposits accepted by primary agricultural co- operative credit society. Therefore, the legislative intention is very clear that to make the provisions of sec.269SS is applicable to a primary agricultural co-operative credit society.

It is the contention of the appellant that it was under the bonafide belief that the provisions of sec.269SS have no application. It is not demonstrated before us as to how it has entertained such a bonafide belief. The term “bonafide belief” has not been defined under the provisions of Income-tax Act, 1961, but the provisions sub-section (22) of sec.3 of General Clauses Act, 1897 defines the term “bonafide belief” has not been defined under the provisions of the Income-tax Act, 1961 but the provisions of sub-section (22) of section 3 of General Clauses Act, 1897 defines the term `bona fide belief’ to mean that a thing shall be deemed to be done in good faith where it is in fact done honestly, whether it is done negligently or not. Thus, if the element of honesty is present, the requirement of good faith is satisfied. But this requires to be judged taking into consideration the factual situation prevailing in a particular situation. In the present case, on a careful perusal of the orders of the lower authorities, it would reveal that no factual foundation is laid as to how the appellant-society had entertained a bonafide belief that the provisions of sec.269SS of the Act have no application to it. In the absence of this factual foundation, no relief can be granted based on the bald submissions. Thus, we do not

Next, we will deal with the contention of the appellant-society that since the transactions of acceptance of loans or deposits in cash as genuine and bonafide, the penalty cannot be levied u/s.271D of the Act, placing reliance on the decision of the Hon’ble Madras High Court in the case of PCIT v. Kundrathur Finance and Chit Co. (2006) 283 ITR 329 (Mad.). This contention was rejected by the Hon’ble Kerala High Court in the case of NSS Karayogam v CIT (2020) 271 Taxman 193 (Kerala), wherein it was held that mere genuineness of transaction does not constitute a reasonable cause as contemplated u/s.271D of the Act for non-levy of penalty u/s.271D of the Act. The relevant portion of the judgment reads as under:-

Finally, the argument made on behalf of the appellant-society that there was a reasonable cause for accepting loans or deposits in cash from members, and therefore, no penalty can be levied u/s.271D of the Act also cannot be accepted for the reason that the appellant had failed to show the reasons which compelled the appellant-society to accept the loans and deposits in cash. Thus, this contention also cannot be accepted for the failure of the appellant to prove its reasonable cause. Therefore, we do not find any reason to interfere with the orders of the authorities below. Accordingly, the appeal filed by the assessee is dismissed by confirming the penalty u/s.271D of the Act.

In the result, the appeal filed by the assessee stands dismissed. Order pronounced on this 14th day of May, 2025.