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Income Tax Appellate Tribunal, BANGALORE BENCH ‘SMC-C’, BANGALORE
Before: SHRI A.K.GARODIA, ACCOUNANT MEMBER
per the decision of Hon’ble Supreme Court decision in the case of Citizen Co – Operative Society Limited vs. ACIT, 397 ITR 1, deduction u/s 80P (2) (a) of I T Act is allowable only in respect of income earned from regular members and not on income earned from others. He directed the AO to allow deduction u/s 80P (2) (a) in respect of interest earned from regular members. Now the assessee is in further appeal before the tribunal.
Learned AR of the assessee submitted that some interest is earned from nominal members but even then the judgment of Hon’ble Supreme Court decision in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra) is not applicable in the facts of the present case. He pointed out that in that case, it was noted that most of the business of that assessee was with nominal members. It was also noted in that case that the assessee was granting loan to general public also and various other objections are noted in Para 25 of that judgment and because of the cumulative effect of these various objections, it was held that the assessee is not entitled to deduction u/s 80P (2) (a) (i). He submitted that this is not the ratio of this judgment that even if a small portion of total income is earned from nominal members, deduction u/s 80P should not be allowed qua such income although deduction is to be allowed in respect of income from regular members as held by CIT (A) in the present case. He submitted that the order of CIT (A) is very cryptic without comparing the facts of the present case with the facts in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra). He submitted that under these facts, the matter should be restored to CIT (A) for a fresh decision after comparing the facts of the present case with the facts in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra). Learned DR of the revenue supported the order of AO & CIT (A).
I have considered the rival submissions. First I reproduce the relevant paras of the judgment of Hon’ble Supreme Court decision in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra). The same are as under:- “25. So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under Section 80P of the Act is not sub-section (4) thereof. What has been noticed by the Assessing Officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violations of the provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of ‘nominal members’. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co-operative Societies Act. Moreover, it is a co- operative credit society which is not entitled to deduction under Section 80P(2)(a)(i) of the Act.
It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion: “As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality; that no person can earn from him; that there a profit motivation; and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third party vis-a-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs]. In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all.”
These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act.
This appeal, therefore, fails and is hereby dismissed with costs.”
I find that as per this judgment of Hon’ble Supreme Court rendered in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra), this is not the ratio that that even if a small portion of total income is earned from nominal members, deduction u/s 80P should not be allowed qua such income although deduction is to be allowed in respect of income from regular members as held by CIT (A) in the present case. In fact, in that case, apart from this objection that most of the business of the assessee was with nominal members, there were various other objections also such as deposit from nominal members was also received and the same was utilized for giving gold loans to regular members. There is no discussion in the present case about this aspect as to whether deposit was received from nominal members and it was utilized to give loan to regular members. As per the facts of the present case, the interest income from nominal members is Rs. 36,90,730/- out of the total interest earned Rs. 133,14,319/- and hence although it is substantial, it cannot be said that most of the business of the assessee was with nominal members. There was one more objection in that case that the depositors and borrowers are quite distinct and because of this, this was the observation in that case that such activity of the assessee is that of finance business and cannot be termed as co operative society. There was one more objection in that case that the assessee is engaged in the activity of granting loans to general public as well. In my humble understanding these various objections were considered cumulatively and it was held that the assessee is not eligible for deduction u/s 80P at all and his was not a ratio of this judgment that deduction is to be allowed in respect of earning from regular member but to be disallowed in respect of income from nominal members. In fact, in the present case, apart from this objection that about 28% of interest income is from nominal members, there is no observation about any other aspect of various objection raised in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra) and it is held by CIT (A) that deduction should be disallowed in respect of interest earned from nominal members by stating that this is the ratio of this judgment of Hon’ble Supreme Court rendered in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra) but in my considered opinion as evident from relevant paras of this judgment reproduced above, this is not the ratio of this judgment.
In the light of above discussion, I Feel that in the interest of justice, the mater should go back to the file of CIT (A) for a fresh decision. Hence, I set aside the order of CIT (A) and restore this matter back to his file for a fresh decision with the direction that sufficient opportunity should be provided by him to both sides and the assessee should provide complete detail with cogent evidence in respect of business carried out by the assessee with nominal members and general public, if any. The assessee should also demonstrate about the difference in facts of the present case and facts in the case of Citizen Co – Operative Society Limited vs. ACIT (Supra). The AO can also demonstrate as to how the facts are similar. Thereafter the CIT (A) should pass speaking and reasoned order as per law.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on the date mentioned on the caption page.