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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’
Before: SHRI N.V VASUDEVAN & SHRI JASON P BOAZ
PER SHRI N.V VASUDEVAN, VICE PRESIDENT :
28.3.2017 passed by the Commissioner of Income-tax [CIT], Benguluru-7, Benguluru, u/s. 263 of the Income-tax Act, 1961 [ “the Act”] in relation to AY 2012-13.
The assessee is a credit co-operative society. It filed return of income for the A.Y. 2012-13 declaring income of Rs.nil after claiming deduction of Rs.1,46,79,403/- u/s. 80P(2)(a)(i) of the Act. The assessment was completed accepting the return of income filed by the assessee by order dated 27.8.2014.
The CIT, in exercise of his powers u/s. 263 of the Act, was of the view that the aforesaid order of AO was erroneous and prejudicial to the interests of the Revenue for the reason that the AO accepted the claim of the Assessee without proper verification of the claim for deduction u/s.80P(2)(a)(i) of the Act. The CIT was of the view that after the introduction of section 80P(4) of the Act, deduction was not available to co-operative banks. The assessee was akin to a co- operative bank and therefore deduction u/s. 80P(2)(a)(i) of the Act ought not to have been allowed to the assessee. Since the AO failed to look into the aforesaid aspects, the CIT set aside the order of the AO and directed him to frame fresh assessment in accordance with law, after due opportunity to the assessee.
Aggrieved by the order of the CIT, the assessee has preferred the present appeal before the Tribunal.
We have heard the rival submissions. As far as deduction u/s. 80P(2)(a)(i) of the Act is concerned, we are of the view that the order of the CIT u/s. 263 of the Act has to be upheld. The conclusion of the CIT in the impugned order regarding absence of enquiry by the AO before accepting the claim for deduction u/s.80P(2)(a)(i) of the Act are as follows:
6. 1 have considered the facts and circumstances of the case and also examine the case records along with written submission filed by the assessee before me. In the first instance it is noticed that the assessee has claimed that Assessing Officer had verified the details that had been placed before him and therefore it cannot be stated that no verification had been done. The assessee has also relied on a number of case laws to supports its case. I have carefully considered this point as raised however I find that it cannot be accepted. Records in order sheet as available show that the notings relate to issue and service of notice and the attendance in compliance by the AR of the assessee. The details available on file are simply the audited profit and loss account and balance sheet of the assessee concern. There is no note regarding the operation of the society in the said details. Further there are no queries raised regarding the linking of the income as shown in the P&L
account to the activities of the society. There are no discussions holding that the activities of the society fall in the purview of the deduction claimed by the society and are covered by the judicial rulings in this year. It therefore stands that the claim of the assessee that AO has not accepted the deduction on a mechanical manner but after inquiries, would not stand. No queries raised or enquiries made by the assessee while scrutinising the case for assessment especially when a major amount of the profit is declared as exempt from Tax makes the order liable to be termed as a mechanical acceptance. This by itself leaves it open to the invocation of Section 263 specially when it is required that it be verified that the Income claimed to be exempt is incidental to the activities of the assessee society and liable for exemption claimed for Section as per law. The statement of the assessee that all details had been submitted by it to the Assessing Officer to establish its claim regarding the deduction claimed is incorrect. It is also seen that besides placing the above mentioned profit and loss account and balance sheet on file the records are silent regarding further enquiry/verification done by the Assessing Officer while assessing the case under Section143 (3) of the Income Tax Act 1961 to establish the fact whether the claim as made by the assessee was allowable or not. In fact as stated earlier the assessment order is absolutely silent on this issue. The assessment has been made in a routine manner as far as this issue is concerned. As there has been no proper inquiry made or facts verified it is clear that there has been no application of mind to relevant material available and this Act ion of the Assessing Officer is definitely an Act ion which is erroneous and prejudicial to the interest of revenue. A claim has been allowed in a routine manner. The Assessing Officer has not called upon the assessee to establish/prove the deduction claim. Neither has the Assessing Officer made any effort to verify or enquire or ask for proof from the assessee to discharge the burden of proof placed on the assessee to establish the claim made for deduction. The Assessing Officer before accepting the statement of the assesse ought to have requested the assessee to discharge the onus that was placed upon it to establish its claim and should have conducted further enquiry before accepting the claim of the assessee that the Income earned by it is liable for deduction under Section 80 P (2) (a)(i) of the Income Tax Act especially as the said Section is bound by conditions of limitations.”
The above finding in the impugned order have not been challenged as incorrect by the Assessee either in the grounds of appeal before the Tribunal nor any arguments were advanced on the above findings. The law is well settled that failure to make enquiries which the AO was duty bound to make in the given facts and circumstances of a case renders the order of assessment passed by him without making such enquiries renders his order erroneous and prejudicial to the interest of the revenue. Therefore the order of the CIT in this regard is upheld.
As far as the deduction u/s.80P(2)(a)(i) of the Act is concerned, we direct the AO to examine the claim of the Assessee in the light of the directions which we propose to give while deciding the appeal of the Revenue for AY 2014-15 in and to this extent is treated as partly allowed for statistical purpose.
ITA No. 1718/Bang/2017 :
This is an appeal by the Revenue against the order dated 26.5.2017 passed by the Commissioner of Income-tax [CIT], Benguluru-7, Benguluru, in relation to AY 2014-15.
The assessee is a credit co-operative society. It filed return of income for the A.Y. 2009-10 declaring income of Rs.nil after claim- ing deduction of Rs.2,12,32,529/- u/s. 80P(2)(a)(i) of the Income Tax Act, 1961 (Act).
Under Sec.80P(2)(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:
“(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation : For the purposes of this sub- section,— (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.”
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 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:
i) Since membership is open to anyone paying a sum of Rs.10/- to Rs.100/- for membership and no other condition is imposed. In other words, membership as is available in any banking institution is available in the case of the appellant society. ii) The purpose of accepting deposits from the public is for making investments and for lending to members. Confining the lending only to members makes no difference. iii) Deposits collected from the depositors are repayable on demand and do not go into the corpus of the appellant. iv) The assessee society came within the Explanation to sub-section (4) of section 80P of the Act as a banking institution.
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. The following are the grounds of appeal of the Revenue:
1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. "Whether on the facts and circumstances of the case, the C!T(A) was justified in law in allowing deduction u/s. 80P(2)(a)(i) of the Act to the co-operative society carrying on the business of bak<ing, inspite of the fact that clause no.(4) of section 80P inserted with effect from 01.04.2007 clearly bars the co-operative society the above deduction, other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank". 3. "Whether the CIT(A) is justified in law in placing reliance on the order of the Hon'ble High Court of Karnataka in assessee's own case for the AY.2009-10 in dated 27.06.2014 which is not accepted by the department and further appeal has not been filed only on the consideration that the tax effect in this case is below the monitory limits. Further, the order of the Hon'ble ITAT in ITA No.14541Ban g/2012 dated 11.07.2014 in the instant case for the A.Y. 2008- 09 has not become final and the department has filed further Appeal before the Hon 'ble High Court of Karnataka"? 4. "Whether on the facts and circumstances of the case, the ClTA) was justified in law in allowing deduction u/s. 80P(2)(a)(i) of the Act to the co-operative society carrying on the business of baking, when the Hon'ble Supreme Court in its latest decision delivered on 08-08- 2017 in Civil Appeal No. 10245 of 2017 in the case of The Citizen Co-operative Society Ltd. Vs. A CIT. Hyderabad has denied deduction u/s 80P(2) to the co- operative societies engaged in banking activities"? 5. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so for as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
6. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.”
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. Deduction u/s.80P2(a)(i) is allowed only in respect of income arising out of the transactions with the members. 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. 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 fulfilment 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.
In the result, the appeal by the Assessee is treated as partly allowed for statistical purpose and that of the Revenue is treated as allowed for statistical purpose.
Order pronounced in the open court on 7th December, 2018.