MAHAPALIKA KSHETRA MADHYAMIK SHIKSHAK SAHAKARI PATSANSTHA MARYADIT,MUMBAI vs. INCOME TAX OFFICER 21(2)(2), MUMBAI

The present cross appeals are directed against the consolidated order passed by the CIT(A)-33, Mumbai, dated 03.04.2017, which in turn arises from the respective assessment orders passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short „Act‟) for A.Y. 2012-13 and A.Y. 2013-14. As common issues are involved in the captioned appeals, therefore, the same are being taken up and disposed off together by way of a consolidated order. We shall first advert to the cross appeals for A.Y. 2012-13.Assessee has assailed the impugned order for A.Y 2012-13 on the following grounds of appeal :

The CIT (Appeal) erred in law and in the circumstances of the case by not treating the whole income of Rs. 55,38,329earned by the appellant society from engaging in the business of providing credit facilities to its members under section 28 and accordingly allowing deduction as per section 80P(2)(a)(i) but instead bifurcated the income of Rs. 55,38,329 into business and investment income as stated in ground 2 above, without taking into consideration the fact of the case and without giving any notice or opportunity to the Appellant of being heard and to represent its case in this regard.

The Appellant craves to leave, add, alter, amend and / or delete any grounds of appeal during the course of appeal.” On the other hand, the revenue has challenged the order of the CIT(A) on the following grounds of appeal:

Briefly stated, the assessee which is a co-operative credit society engaged in the business of collecting deposits and providing credit facilities to its members had filed its return of income for A.Y 2012-13 on 26.09.2012, declaring its income at Rs. Nil. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2) of the Act.

During the course of the assessment proceedings it was observed by the A.O that the assessee had claimed deduction under Sec.80P of Rs.55,38,329/-. Observing, that pursuant to insertion of sub-section (4) of Sec.80P, vide the Finance Act, 2006 w.e.f 01.04.2007, the assessee would no more be entitled for claim of deduction under Sec.80P(a)(i), A.O called upon the assessee to put forth an explanation justifying its aforesaid claim for deduction. As the explanation of the assessee did not find favour with the A.O, therefore, he declined to allow the P a g e | 4582/Mum/2017 AYs.2012-13 & 2013-14 & 4752/Mum/2017 A.Ys.2012-13 & 2013-14 Mahapalika Kshetra Madhyamic Shikshak Sahakari Patsanstha Maryadi Vs. CIT-33 claim of deduction raised by the assessee under Sec. 80P and assessed its income at Rs.55,38,329/-.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As observed by us hereinabove, the A.O held a conviction that as the assessee was hit by provisions of Sec. 80P(4), therefore, it was not eligible to claim deduction under Sec. 80P(2)(a)(i). The claim of the assessee that it was a co- operative credit society providing banking/credit facilities only to its members and was not a co- operative bank providing banking/credit facility to the public at large did not find favour with the A.O. As is discernible from the records, the A.O was of the view that deduction under Sec.80P (2)(a)(i) in the case of cooperative credit society engaged in carrying on the business of banking (co-operative banks) was withdrawn by the legislature, vide the Finance Act, 2006 w.e.f 01.04.2007, except for in the case of a “primary agricultural credit society” or “a primary co-operative agricultural and rural development bank”. Further, It was observed by the A.O, that the Explanation to Sec. 80P(4) clearly defined the expressions “co-operative bank”, “primary agricultural credit society” and “primary cooperative agricultural and rural development bank”. It was also noticed by him that as per the Finance Act, 2006 sub-clause (viia) to Sec.2(24) had been inserted, which provided that the profit and gains of any business of banking (including providing credit facilities) carried out by a co-operative society with its members shall be included in the definition of „income‟. On the basis of his aforesaid deliberations, it was observed by the A.O that as the assessee fulfilled all the three conditions laid down under Sec.56(c)(ccv) of Part V of the Banking Regulation Act, 1949 viz. (i) that, the primary object of the principal business of the co-operative society is the transaction of banking business; (ii) that, the paid-up share capital and reserves of the co-operative society are not less than one lakh of rupees; and (iii) that, the bye laws of the co-operative society did not permitted P a g e | 4582/Mum/2017 AYs.2012-13 & 2013-14 & 4752/Mum/2017 A.Ys.2012-13 & 2013-14 Mahapalika Kshetra Madhyamic Shikshak Sahakari Patsanstha Maryadi Vs. CIT-33 admission of any other co-operative society as a member, therefore, it clearly fell within the category of a primary co-operative bank. In the backdrop of his aforesaid deliberations the A.O had concluded that the assessee being a primary co-operative bank would not be eligible for claim of deduction under Sec. 80P(2)(a)(i). It was on the basis of his aforesaid observations that the assesses claim for deduction under Sec.80P of Rs. 55,38,329/- was declined by te A.O.

We have deliberated at length on the issue under consideration and are unable to persuade ourselves to accept the view taken by the A.O. As per sub-section (4) of Sec. 80P that was inserted by the Finance Act, 2006 w.e.f 01.04.2007, the provisions of the said section were not to apply in relation to any co-operative bank other than a “primary agricultural credit society” or “a primary agricultural and rural development bank”. As is discernible from a perusal of Sec. 80P(2)(a)(i), the same envisages a deduction in respect of the whole of the amount of profits and gains of business “attributable to” the specified activities of the co-operative society. In our considered view, the term “attributable to” which is much wider in impact than the expression “derived from”, would thus also cover receipts from other activities related to the business of banking. As to whether the assessee can be held to be a co-operative bank, the same can be answered in the backdrop of the judgment of the Hon’ble High Court of Bombay in the case of Quepem Urban Credit Society Ltd. Vs. ACIT, (2015) 58 taxmann.com 113 (Bom). It was observed by the Hon‟ble High Court in its aforesaid judgment, that an assessee cannot be considered to be a co-operative bank for the purposes of Sec.80P(4) 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. In our considered view, the word „banking‟ means 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. As in the case of a co-operative credit society the acceptance and lending of money is only from the members and not from the public, P a g e | 4582/Mum/2017 AYs.2012-13 & 2013-14 & 4752/Mum/2017 A.Ys.2012-13 & 2013-14 Mahapalika Kshetra Madhyamic Shikshak Sahakari Patsanstha Maryadi Vs. CIT-33 therefore, it can safely be concluded that the principal business or primary objective of the said co-operative credit society is not the business of banking. As such, the first condition mentioned hereinabove can safely be held to have not been satisfied by the assessee before us.Apart there from, we find that there is a clear distinction between co-operative banks registered under the Banking Regulations Act, 1949 and co-operative societies registered under Co-operative Societies Act. In our considered view, the assessee which is a co-operative credit society cannot be categorised as a co-operative bank which is governed under the Banking Regulations Act, 1949. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Karnataka in the case of Shri Vardhaman Urban Co-operative Credit Society Ltd. Vs. CIT [ITA No. 100038 of 2014, dated 21.09.2015]. In the said case, the Hon‟ble High Court while deliberating on the scope of Sec. 80P(4), had observed, that all the co-operative credit societies are eligible for deduction under Sec.80P(2)(a)(i), unless they were declared as a bank by the Reserve Bank of India. Since the assessee society before us is not recognized as a bank by the Reserve Bank of India, therefore, in our considered view it cannot be treated as a co-operative bank. On the basis of our aforesaid observations, we are of the considered view that as the assessee is a co-operative credit society and not a co-operative bank, therefore, it would not be hit by the provisions of Sec. 80P(4) of the Act.

As the assessee before us is co-operative credit society and not a co-operative bank, therefore, it would not be hit by the provisions of Sec.80P(4) as had been made available on the statute by the Finance Act, 2006, w.e.f 01.04.2007. In fact, as observed by us hereinabove, it is absolutely mandatory for a co-operative society to seek a licence from the Reserve Bank of India to form and operate as a co-operative bank. Further, a perusal of Circular No. 312 of Reserve Bank of India reveals the process involved for conversion of a co-operative credit society into a primary co-operative bank. Admittedly, in the case before us, as the assessee being a co-operative credit society is neither authorized nor had undertaken any of the banking business activities as are carried out by a co-operative bank, but had only provided financial assistance/credit to its members, therefore, it can safely be concluded that it cannot be held to be a co-operative bank. On the basis of our aforesaid deliberations, we are persuaded to be in agreement with the view taken by the CIT(A) that the assessee would not be hit by the provisions of Sec.80P(4) of the Act. Apart there from, we find that the Tribunal in the assesses P a g e | 4582/Mum/2017 AYs.2012-13 & 2013-14 & 4752/Mum/2017 A.Ys.2012-13 & 2013-14 Mahapalika Kshetra Madhyamic Shikshak Sahakari Patsanstha Maryadi Vs. CIT-33 own case for A.Y 2014-15 viz. ITO-21(20(2) vs. M/s Mahapalika Kshetra Madhyamik Shikshak Sahakari Patsanstha (ITA No. 928/Mum/2018, dated 25.06.2019) had concluded that the assessee society was duly entitled for claim of deduction u/s 80P(2)(a)(i) of the Act. We thus not finding any infirmity in the order of the CIT(A), who had rightly concluded that the assesses claim for deduction under Sec. 80P(2)(a)(i) was in order, uphold his order in context of the issue under consideration.

The appeal of the revenue is dismissed.

We shall now advert to the appeal of the assessee. As observed by us hereinabove, it is the claim of the ld. A.R, that as the CIT(A) had absolutely at the back of the assessee bifurcated its entitlement towards claim of deduction under Sec.80P into two parts viz.(i) deduction under Sec.80P(2)(a)(i): Rs.52,24,593/-; and (ii) deduction under Sec.80P(2)(d) Act: Rs.3,13,736/-, therefore, the assessee was divested of any opportunity of meeting out the aforesaid view of the CIT(A), and also the consequential adverse inferences emerging therefrom. We have perused the order of the CIT(A) and find substantial force in the claim of the ld. A.R, that the entire exercise of bifurcating the assesses claim for deduction under Sec.80P had been carried out by the CIT(A) without affording any opportunity to the assessee to rebut the same. In fact, we find that the assesses claim for deduction under Sec. 80P was declined by the A.O on the standalone basis of a conjoint reading of Sec.80P(2)(a)(i) r.w.s 80P(4). In our considered view, the CIT(A) before resorting to the aforesaid fresh basis for restricting the assesses claim for deduction under Sec.80P to an amount of Rs.52,12,193/-, in all fairness, should have afforded an opportunity of being heard to the assessee and called for his objections, if any, as regards the same. As is discernible from the records, no opportunity was afforded by the CIT(A) to the assessee prior to embarking on the aforesaid fresh basis for confining the assesses claim for deduction under Sec.80P of the Act. In the backdrop of the aforesaid facts, we are of the considered view, that insofar the assesses claim for deduction under Sec.80P of Rs.3,13,736/- has been declined by the CIT(A), the same in all fairness would require to be revisited by him. Accordingly, for the limited purpose of reconsidering the assesses entitlement towards claim of deduction under Sec.80P of Rs.3,13,736/- the matter is restored to the file of the CIT(A) for fresh adjudication. Needless to say, the CIT(A) shall during the course of the “set aside” proceedings afford a sufficient opportunity of being heard to the P a g e | 4582/Mum/2017 AYs.2012-13 & 2013-14 & 4752/Mum/2017 A.Ys.2012-13 & 2013-14 Mahapalika Kshetra Madhyamic Shikshak Sahakari Patsanstha Maryadi Vs. CIT-33 assessee. The Grounds of appeal No.1 to 7 raised by the assessee are allowed for statistical purposes in terms of our aforesaid observations.

The Ground of appeal No. 8 being general in nature is dismissed as not pressed.

The appeal of the assessee is allowed for statistical purposes in terms of our aforesid observations

We shall now advert to the cross appeals for A.Y. 2013-14. Assessee has assailed the impugned order on the following grounds of appeal:

The CIT (Appeal) erred in law and in the circumstances of the case by not treating the whole income of Rs. 60,07,707 earned by the appellant society from engaging in the business of providing credit facilities to its members as per section 80P(2)(a)(i) but instead bifurcated the income of Rs. 60,07, 707 into business and investment income as stated in ground 1 above.

The CIT (Appeal) erred in law and in the circumstances of the case in exceeding his power under section 25 1(1) by. bifurcating total income of Rs 60,07,707 into section 80P(2)(a)(i) and section 80(P)(2)(d) whereas the assessee has made a claim under section 80P(2)(a)(i) which the Assessing officer has disallowed as per the assessing order passed.

The appellant craves leave to amend or to alter any ground or add a newground, which may be necessary.”

Briefly stated, the assessee had filed its return of income for A.Y. 2013-14 on 28.09.2013, declaring its total income at Rs. Nil. Subsequently, the case of the sasessee was selected for scrutiny assessment under Sec.143(2) of the Act.

During the course of the assessment proceedings it was observed by the A.O that the assessee had claimed deduction under Sec. 80P of Rs.60,07,707/-. It was observed by the A.O, that pursuant to insertion of sub-section (4) of Sec.80P, vide the finance Act, 2006 w.e.f 07.04.2007, the provisions of Sec.80P were no more applicable to any co-operative Bank other than a Primary Agricultural Credit Society or Primary Co-operative Agricultural Rural Development Bank. On the basis of a conjoint reading of Sec.80P(2)(a)(i) r.w.s 80P(4) the A.O declined to allow the assessee claim for deductoin under Sec.80P of Rs.60,07,707/-. In the backdrop of the aforesaid facts, the A.O after inter alia withdrawing the assesses entitlement towards deduction under Sec.80P assessed its income at Rs.62,36,132/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) observed, that the A.O while framing the assessment had also made two additions/disallowances viz.(i) disallowance of personal expenditure:Rs.68,425/-; and (ii) disllowance of gratuity : Rs.1,00,000/-. As regards the assesses entitlement towards claim of deduction under Sec.80P was concerned, the CIT(A) followed the view that was taken by him while disposing off the appeal of the assessee for the immediately preceding year i.e A.Y. 2012- 13. However, as the sasessee had niether furnished its profit and loss account for the year under consideration nor had filed the bifurcation of its receipts from different sources for the P a g e | 4582/Mum/2017 AYs.2012-13 & 2013-14 & 4752/Mum/2017 A.Ys.2012-13 & 2013-14 Mahapalika Kshetra Madhyamic Shikshak Sahakari Patsanstha Maryadi Vs. CIT-33 year under consideration, therefore, the CIT(A) directed the A.O to obtain the necessary details from the assessee, and after carrying out the necessary befurcations as was done in A.Y.2012- 13, therein re-work out the assesses claim for deduction under Sec.80P. It was specifically directed by the CIT(A), that the assessee would not be entitled for claim of deduction under Sec.80P(2)(a)(i) insofar its rental receipts or receipts from printing and stationery or income of any such nature were concerned. Also, it was observed by him, that the assessee would not be entitled to claim deduction under Sec.80P(2)(d) in respect of its interest income received during the year form FDs or other investments which were kept in the financial institutions or banks. In sum and substance, the CIT(A) had directed the A.O to principally work out the assesses claim for deductoin under Sec.80P, in the same manner in which the same was done by him while disposing off the appeal of the assessee for A.Y. 2012-13.

Both the assessee and the revenue being aggreived with the order of the CIT(A) have carried the matter in appeal before us. Insofar the appeal of the revenue is concerned, it was submitted by the ld. A.R, that the CIT(A) had rightly concluded that the assessee was entitled for claim of deductoin under Sec. 80P(2)(a)(i) of the Act. As regards the appeal of the assessee, it was submitted by the ld. A.R, that as the CIT(A) had without affording any opportunity of being heard to the assessee directed the A.O to rework out the assesses entitlement towards claim of deduction under Sec.80P after bifurcating the same into two parts, viz. (i) deduction under Sec.80P(2)(a)(i); and (ii) deduction uner Sec. 80P(2)(d), therefore, the assesee had remained divested of putting forth any objection as regards the same. It was averred by the ld. A.R, that insofar the declining of the assesses entitlement towards claim for deduction u/s 80P in respect of its interest income received during the year form FDs or other investments by the CIT(A), the same having been done without affording any opportunity of being heard to the assesee on the said issue, thus, in all fairness may be restored to the file of the CIT(A) with a direction to readjudicate the same after providing an opportunity of being heard to the assessee.

Per contra, the ld. D.R adverting to the appeal of the revenue submitted, that as the A.O on the basis of a conjoint reading of Sec.80P(2)(a)(i) r.w.s Sec.80P(4) had rightly declined the assesses claim for deduction under Sec. 80P of Rs.60,07,707/-, therefore, the CIT(A) was in error in concluding to the contrary and dislodging the well reasoned order of the A.O. Insofar,

We have heard the authorised representatives for both the parties, perused the orders of the lower authorities, as well as the judicial pronouncments relied upon by them. On a perusal of the order of the CIT(A), we find, that the same is materially the same as in comparison to the order that was passed by him while disposing off the appeal of the asessee for the immediately preceing year i.e A.Y. 2012-13. In fact, the only difference during the the year under consideration is that in the absence oif the profit and loss account and also the bifurcated details of income, as the CIT(A) was not able to rework the assesses entitlement towards claim for deduction under Sec.80P(2)(a)(i) and under Sec.80P(2)(d), had thus, directed the A.O to rework out the same by following the observations which were recorded by him while disposing off the appeal of the assessee for A.Y. 2012-13. On similar line, as in A.Y. 2012-13, the CIT(A) while disposing off the appeal for A.Y. 2013-14 had directed the A.O not to allow deduction under Sec.80P(2)(d) with respect to the interest income received by the assesee during the year from FDs or other investments kept in financial institutions or banks. Also, as in the preceding year, the CIT(A) had directed the A.O not to allow deduction under Sec.80P(2)(a)(i) to the asseseee in respect of its rental income or receipts from printing and stationery or income of any such nature. We find that as the facts and the issue invovled in the present appeal remains the same as were there before us in the cross appeals of the assessee and the revenue for A.Y. 2012-13, therefore, our order therein passed while disposing off the said respective appeals shall apply mutatis mutandis for disposal of the present appeals. Accordingly, in the same terms, the appeal of the revenue is dismissed and the appeal the assessee is allowed for statistical purposes.

The appeal of the assessee for A.Y. 2012-13 and A.Y. 2013-14 in & are allowed for statistical purposes. On the other