INCOME TAX OFFICER WARD-2(1), DAVANGERE vs. THE TUNGABHADRA CREDIT CO-OP SOCIETY LIMITED , DAVANGERE

This appeal is filed by the Revenue against the order dated 18.6.2018 passed by the Commissioner of Income-tax [Appeals], Davangere relating to assessment year 2013-14.

The grounds of appeal filed by the Revenue are as under:-

The assessee is a co-operative society providing a credit facilities to its member. In the return of income is filed for the asst. year 2013-14, the assessee claimed deduction of sum of Rs.68,78,336/- u/s 80P(2)(a)(i) of the Income Tax Act, 1961 (Act). The AO denied the benefit of deduction to the assessee.

Under Sec.80P(2)(a)(i) of the Act, where the gross total income of a co-operative society includes income from carrying on the business of banking or providing credit facilities to its members, the same is allowed deduction. By the Finance Act, 2006 w.e.f. 1-4-2006, Sub-section (4) was inserted in Sec.80-P which provides as follows:

According to the AO, the assessee was a co-operative bank and therefore the deduction u/s. 80P(2)(a)(i) cannot be allowed in view of the provisions of Sec.80P(4) of the Act. In coming to the above conclusion, the AO noticed that the nature of the activity of the assessee, though registered as a credit co-operative society, is that of a banking institution notwithstanding the fact that receipt of and lending money is limited to its members. The AO further noticed that clause (viia) in section 2(24) of the Act was inserted by the Finance Act 2006 effective from 1/4/2007, which provides that profits and gains of any business (including providing credit facilities) carried on by a co-operative society with its members the assessee’s activity was also “Income”. That the deduction from gross total income of certain receipts is available only to primary agricultural credit societies or primary co-operative agricultural and rural development banks; and that the benefit of such deduction is not available to institutions like the assessee society. The AO also referred to section 5(b) of the Banking Regulation Act to hold that, if one of the two conditions of the appellant i.e. its primary object should be banking or its principal business must be transaction in banking business, is sufficient to bring the appellant into the concept of a banking institution. The AO referred to the objects of the assessee society and held that accepting deposits and lending to its members are in the nature of transaction of banking activity. According to the AO, the following features make the assessee ineligible to exemption contemplated in section 80P of the Act:

In the light of the above-mentioned observations, the AO held that the appellant was not entitled to exemption in respect of the amount u/s 80P(2)(a)(i) of the Act and brought the same to tax.

On appeal by the Assessee, the CIT(A) noticed that the Hon’ble Karnataka High Court in the case of CIT Vs. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, Bagalkot, has held that a credit co-operative society giving credit to its members is not hit by the provisions of Sec.80P(4) of the Act as it does not possess a licence from RBI to carry on business and is not a co-operative bank. The object of introducing Sec.80P(4) of the Act was not to exclude the benefit extended u/s.80P(1) to co-operative society carrying on the business of banking or providing credit facilities to its members. Following the said decision, the CIT(A) held that the Assessee was entitled to deduction u/s.80P(2)(a)(i) of the Act on the sum of Rs.96,26,666/-.

Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal. We have heard the rival submissions. The AO denied the benefit of deduction claimed by the Assessee because of the provisions of Sec.80P(4) of the Act which lays down that deduction u/s.80P(2) of the Act will not be available to a co-operative Bank. The Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd. Vs. ACIT 397 ITR 1 (SC), has held that for doing business of banking one has to obtain license from Reserve Bank of India(RBI) and since the Assessee in that case which was a co-operative society did not have such license and further that Assessee also produced a certificate from RBI that it was not carrying on the business of banking, the Hon’ble Supreme Court held that it cannot be said to be a co-operative Bank. The other grievance of the revenue that the income earned is not from providing credit facilities to its members as membership is open to any member of the public. Such grievance would be addressed by setting aside the issue of deduction u/s.80P(2)(a)(i) of the Act to the 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 the business carried on by the 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 the 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. Further the Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd. (supra) has also held 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 different categories of members of a society and what are the conditions attached to their being admitted as members and their rights as contributors of funds to the society and participants in surplus and the byelaws of the society is necessary. On this aspect of deduction u/s.80P(2)(a)(i) of the Act, the learned counsel for the Assessee’s submission was that the AO in the order of assessment did not make out a case that income from dealing with nominal members would not be eligible for deduction u/s.80P(2)(a)(i) of the Act and by directing the AO to make an investigation into membership of the society and applying the principle of mutuality the Tribunal would permit the department to make out a new case for denying deduction u/s.80P(2)(a)(i) of the Act. We are however not persuaded by this argument for the reason that the law declared by the Hon’ble Supreme Court is deemed to be the law at all point of time and an examination of the claim for deduction in the light of the law as it always existed cannot put the Assessee in any disadvantageous position. Moreover the deduction u/s.80P2(a)(i) is allowed only in respect of income arising out of the transactions with the members and therefore to examine who are members would be necessary before a claim for deduction can be allowed. The relevant law governing co-operative societies of the concerned State providing status of different categories of members in so far as the affairs of the co-operative society are concerned, is also required to be examined. It is only income which arises from dealing with members and which is either in the nature of banking or providing credit facilities to members that would be allowed as deduction. All these aspects also require examination. We hold and direct accordingly. The AO will allow opportunity of being heard to the Assessee and filing appropriate evidence, if desired, by the Assessee to substantiate its case, before deciding the issue. The Assessee will also be at liberty to show that income earned is income from business of banking and some part of the income was earned by making investment in statutory reserves in fulfillment of law regarding maintenance of statutory reserves. We hold and direct accordingly.

In the result, appeal by the Revenue is treated as allowed for statistical purpose. Order pronounced in the open court on 21st December, 2018. Sd/- Sd/- (JASON P BOAZ) (N.V VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore Dated : 21/12/2018 Vms Copy to :1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order