SRI VENUGOPALKRISHNA CREDIT CO-OPERATIVE SOCIETY LTD ,BANGALORE vs. INCOME TAX OFFICER WARD-5(2)(4), BANGALORE

Assessee against an order dated 27.12.2017 in relation to AY 2013-14 and Bang/2018 is an appeal by the Assessee against an order dated 28.12.2017 in relation to AY 2014-15. Both the appeals are filed against the order of the CIT(A)-5, Bengaluru.

The assessee is a credit co-operative society. It filed return of income for the A.Y. 2013-14 & 2014-15 declaring income of Rs.nil after claiming deduction of Rs.48,40,748 and Rs.56,48,107/- for AY 13-13 & 14-15 respectively, 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) confirmed the orders of the AO by following the decision of the Hon’ble Supreme Court in the case of in the case of Citizens Co-operative Society Ltd. Vs. ACIT 397 ITR 1 (SC), wherein it was 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 Hon’ble Supreme Court however held that any member of the public can become members (nominal) and income earned from providing credit facilities to such member of the public does not satisfy the test of mutuality which is the spirit behind providing deduction to co-operative societies. The grievance of the Assessee is that in its case test of mutuality is satisfied and the CIT(A) has not spelt out as to how the said test fails in the case of the Assessee. We are of the view that such grievance of the Assessee 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, both the appeals are treated as allowed for statistical purpose.