M/S BANGALORE CREDIT CO-OPERATIVE SOCIETY LTD ,BANGALORE vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX BANGALORE-7, BANGALORE

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:

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.

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:

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:

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:

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.