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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 :
This is an appeal by the Revenue against the order dated 16.2.2018 of CIT(A), Hubballi, relating to AY 2014-15.
The assessee is a credit co-operative society. It filed return of income for the A.Y. 2014-15 declaring income of Rs.nil after claiming deduction of Rs.71,91,877/- 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.
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 Biluru Gurubasava Pattina Sahakari Sangh Niyamit (ITA No.5006/2013) reiterated in Guddigedara Credit Co-operative Society Ltd. Vs.CIT dated 9.6.2015 wherein it was 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.
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:
i) Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) Hubballi was justified in law in holding that the assessee-society is entitled to deduction under section 8013(2)(a)(i) of the Income- tax Act, when the assessee-society does not satisfy even the basic requirement of being a" Primary Agricultural Credit Society(PACS)" within the meaning of section 80P(4) introduced w.e.f 1.4.2007, which puts an embargo on the category of co-operative societies eligible to claim deduction u/s.80P of the Act. ii) Whether the Ld.CIT (A) is right in not adjudicating on the points for determination arising out of the assessment order especially when the assessing officer has taken a totally different view, in view of the decision of the Hon'ble High Court of Karnataka in the case "Biluru Gurubasava Pattina Sahakari Sangh Niyamit (ITA NO.5006/2013)", against which the Department has filed SLP before the Hon'ble Supreme Court. The Assessing Officer did not treat the society as "Co-Operative Bank" to disallow the deduction u/s 80P but put to test whether the society satisfies the basic requirement of being Primary Agricultural Credit Society (PACS) as mentioned in section 80P(4).
Since the assessee society is not a PACS, it is not eligible for deduction u/s 80P(2)(a)(i). iii) Whether the Ld.CIT(A) is right in ignoring an important issue mentioned in the Assessment Order i.e. why two entities i.e., Primary Agricultural Credit Society (PACS) or a Primary Co-Operative Agricultural and Rural Development Bank (PCA & RDB) are finding a place in section 80P(4) if the intention of the Legislature was to deny the benefit of section 80P(2)(a)(i) only to Co-Operative Banks *.e.f. 01-04-2017? iv) Whether the Ld.CIT(A) is right in ignoring the intention of the legislature which can be clearly understood from the following wordings contained in the Speech of the Hon'ble Finance Minister Co- Operative banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agriculture Credit Societies (PACS) and Primary Co-Operative Agricultural and Rural Development Banks(PCARDB) stand on a special footing and will continue to be exempt from tax r4er section 80P of the Income-tax Act. However, I propose to exclude all other co-operative banks from the scope of that section". (REFER PART-B XIV. TAX PROPOSAL FINANCE BILL 2006). v) For these and such other grounds that may be urged at the time of hearing it is urged that the 'der of the CIT(A) in as much as it is prejudicial to the interest of revenue may be cancelled and that of the Assessing Officer be restored.”
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. 8 Order pronounced in the open court on 7th December, 2018.