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Income Tax Appellate Tribunal, “SMC – C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN
This appeal by the assessee is against the order dated 26.06.2019 of the CIT(Appeals)-3, Bengaluru relating to assessment year 2016-17.
The issue to be adjudicated in this appeal is as to whether the revenue authorities were justified in denying the claim of assessee for deduction u/s. 80P(2)(a)(i) of the Income-Tax Act, 1961 [“the Act”] of a sum of Rs.13,53,036.
The aforesaid sum was claimed as deduction u/s. 80P(2)(a)(i) of the Act by the assessee. The assessee is a co-operative society. The aforesaid sum also includes a sum of Rs.5,22,088 being interest on investments with Apex Bank and another sum of Rs.5,535 being interest on SB Account with Apex Bank. The interest income was claimed as deduction u/s. 80P(2)(a)(i) of the Act or alternatively u/s. 80P(2)(d) of the Act.
As far as deduction u/s. 80P(2)(a)(i) is concerned, the AO was of the view that as per the bye-laws of the society nominal members and associated members were also eligible for becoming members of the assessee, besides regular members. The AO was of the view that there was nothing in the bye-laws which prevented the assessee from accepting deposits from the public. In the aforesaid circumstances, the AO was of the view that income in question did not satisfy the requirements of principles of mutuality laid down by the Hon’ble Supreme Court in the case of Citizen C-operative Society Ltd. v. ACIT [2017] 86 taxmann.com 114 (SC). The AO therefore denied the deduction u/s. 80P(2)(a)(i) of the Act.
As far as deduction u/s. 80P(2)(d) is concerned, the AO was of the view that the interest income earned by the assessee was to be regarded as income from other sources and therefore deduction cannot be allowed as it was not in the nature of business income. In doing so, he relied upon the decision of the Hon’ble High Court of Karnataka in the case of Totgars Co-operative Sales Society, 83 taxman.com 140 (Kar).
6. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO.
At the time of hearing of the appeal, my attention was drawn to the decision of ITAT Bangalore Bench in the case of M/s. Manjunatheshwara Credit Co-operative Society Ltd. v. ITO, for the AY 2016-17, order dated 6.9.2019, wherein the principles for deciding such cases i.e., in the context of section 80P(2)(d) was laid down as follows:-
“5. It was submitted by Id. AR of assessee that the Id. CIT(A) has followed the judgment of Hon'ble Karnataka High Court dated 16.06.2017 rendered in the case of PCIT and Another Vs. Totagars Co-operative Sale Society as reported in 395 ITR 611 (Karn). He submitted that the facts of this case are different and therefore, this judgment is not applicable in the present case. He submitted that in the present case, another judgment of Hon'ble Karnataka High Court rendered in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO as reported in 230 Taxman 309 is applicable and therefore, the matter should be restored back to AO or CIT for a fresh decision by following this judgment. At this juncture, the Bench put forth a query regarding the facts of the present case because the decisions of Hon'ble Karnataka High Court rendered in both these cases cited above are on the same lines, but the conclusion is different on different facts. The Bench pointed out that in the case of PCIT and Another Vs. Totagars Co-operative Sale Society(supra), the money deposited in bank was out of liability of the assessee and in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO(supra), the money deposited in bank was not out of liability, but out of assessee's own funds and therefore this decision is in favour of the assessee. Therefore, if the facts of the present case are similar to that of the facts in the case of PCIT and Another Vs. Totagars Co-operative Sale Society (supra), then the issue should be decided against the assessee, but if the facts of the assessee are similar to that of Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO (supra), then the issue is to be decided in favour of the assessee. In reply, it was submitted by Id. AR of assessee that the facts are not readily available and therefore, the matter may be restored back to the file of CIT(A) for fresh decision after examining the facts of the present case in the light of these two judgments of Hon'ble Karnataka High Court. The Id. DR of revenue also agreed to this proposition put forward by the Id. AR of assessee.
I have considered the rival submissions and I feel it proper that the matter should go back to the file of CIT(Appeals) for fresh decision after examining the facts of the present case in the light of these two judgments rendered in the case of PCIT and Another Vs. Totagars Co-operative Sale Society(supra) and Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO(supra). If it is found that the facts of the present case are in line with the facts of the PCIT and Another Vs. Totagars Co- operative Sale Society(supra) then the issue may be decided against the assessee and if the facts of the present case are in line with the facts of the case of Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO(supra) then the issue may be decided in favour of the assessee. Accordingly, I set aside the order of the CIT(Appeals) and restore the issue back to the CIT(A) for fresh decision in accordance with the law in the light of above discussion after providing adequate opportunity of being heard to both sides.”
Following the aforesaid order of the Tribunal, the order of the CIT(Appeals) is set aside on this issue and the matter restored to the AO for fresh consideration and decision with similar directions as contained in the case of M/s. Manjunatheshwara Credit Co-operative Society Ltd. (supra) after affording opportunity of being heard to assessee.
As far as deduction u/s. 80P(2)(a)(i) of the Act is concerned, I am of the view that the issue as to whether the principles of mutuality is satisfied in the case of assessee, should be decided keeping in mind the following distinguishing features brought out by the assessee between the case of assessee and case decided by the Hon’ble Apex Court in the case of Citizen C-operative Society Ltd. (supra):-
Ratio laid down by the Facts of the impugned case Supreme Court Para 24: Undoubtedly, if one The learned Commissioner of has to go by the aforesaid Income Tax (Appeals) has failed definition of "Co-Operative appreciate the matter of common bank, the Appellant does not knowledge. The legal position of the get covered thereby. It is also a entity in the cited case and that of the matter of common knowledge Appellant in the instant case is one that in order to do the business and the same leading to an inference of a Co-Operative Bank, it is that the Appellant is not a Co- imperative to have a licence Operative Bank, but a society. from the Reserve Bank of India, which the Appellant does not possesses. Not only has this, as noticed above, the Reserve Bank of India itself clarified that the business of the Appellant does not amount to that of a co-operative bank. The Appellant, therefore, would not come within the mischief of sub-section [4] of Section 80P.
Para 25: So far so good. The entire ratio of Para cannot However, it is significant to be applied to the appellant's case point out that the main reason due to the following reasons:- for disentitling the appellant from getting the deduction a) There are no violations recorded provided under Section 801' of by the Assessing officer in the the Act is not sub-section [4] assessment order. At Para 7 of thereof. What has been noticed the assessment order, the AO by the Assessing officer, after only states that interest income discussing in detail the earned are not eligible for activities of the Appellant, is deduction u/s 80P. There is no that the activities of the finding as to whether the interest Appellant are in violations of was earned from the deposits of the provisions of the MACSA members or general public. under which it is formed. It is Further, the learned pointed out by the assessing Commissioner of Income Tax officer that the assessee is (Appeals) has not brought out catering to two distinct any new fact apart from what the categories of people. The first AO has done. The fact is that category is that of resident there is no such distinction made members or ordinary members. by the Karnataka Societies There may not be any difficulty Registration Act, 1959 between as far as this category is the ordinary members and concerned. However, the associate members and the assessee has carved out another advances received from such category of 'nominal members'. class of members are alike.
These are those members who are making deposits with the b) There is no hint of evidence assessee for the purpose of brought out by the revenue obtaining loans etc and in fact, disproving the above they are not members in real narrated facts. There is no sense. Most of the business of distinction drawn between the Appellant was with the the depositors and borrowers second category who has been nor there exists a mention to giving deposits which are kept that effect in the assessment in Fixed Deposits with a motive order. to earn maximum returns. A portion of these deposits is utilized to advance gold loans, c) There is no finding that the etc to the members of the first appellant is involved in category. It is found, as a granting loans to general matter of fact, that the public. depositors and borrowers are quite distinct. It is also found d) There are no proceedings / that the Appellant is engaged in lacunas identified by the the activity of granting loans to Registrar of Societies on the General Public as well. All this Appellant. is done without any approval from the Registrar of societies. With indulgence in such kind of activity of the Appellant is in violation of the Co-Operative Societies Act.
I am of the view that the issue needs to be decided keeping in mind the provisions of the Karnataka Societies Registration Act, 1959, which lays down the rights of various categories of members. Besides the above, it is also to be seen whether the income earned which was claimed as deduction u/s. 80P(2)(a)(i) to the extent it relates to provide credit facilities to the members of the assessee, who are permanent members or regular members cannot be denied. Since these aspects have not been looked into either by the AO or the CIT(Appeals), I deem it proper to set aside the order of CIT(Appeals) and remand the issue to the AO fresh consideration in the light of directions given above, after due opportunity to the assessee. It is ordered accordingly.
In the result, this appeal of the assessee is accordingly treated as allowed for statistical purposes.
Pronounced in the open court on this 16th day of October, 2019.