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Income Tax Appellate Tribunal, “SMC-A” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA
O R D E R
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee and this is directed against the order of ld. CIT (A), Gulbarga dated 23.11.2017 for Assessment Year 2010-11.
The grounds raised
by the assessee are as under. “1. That the order of the learned Commissioner of Income Tax (Appeals) is prejudicial to the interests of the appellant, is bad and erroneous in law and against the facts and circumstances of the case.
2. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in upholding the disallowance of deduction u/s 80P(2)(a)(i) amounting to Rs. 8,79,220/- on the ground that the appellant is a Co-operative Bank and such finding is perverse and contrary to the materials available on record.
3. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in upholding the disallowance u/s. 80P(2)(a)(i) of the Act on a new ground altogether which was not the basis for disallowing the deduction u/s. 80P(2)(a)(i) by the assessing officer.
4. That the action of the learned Commissioner of Income Tax (Appeals) in denying the deduction on an entirely new ground amounts to enhancement and the learned Commissioner of Income Tax (Appeals) erred in law and on facts in enhancing the assessment without establishing the factual foundation and without following the procedure u/s 250(2) of the Act.
Without prejudice to the above grounds, that the appellant is a co- operative society registered under the Karnataka State Co-operative Societies Act, 1959 and that Act allows the Co-op Societies to admit nominal and associate members and therefore, the decision of Hon. Supreme Court is not applicable to the facts of present case.
6. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that the sum of Rs.4,000/- disallowed u/s. 43B of the Act is not allowable u/s 80P(2) of the Act.
That the learned Commissioner of Income Tax (Appeals) ought to have appreciated that whatever income which is determined in accordance with the provisions of Income Tax Act is to be allowed as a deduction u/s 80P(2) of the Act. Each of the above grounds is without prejudice to one another, the appellant seeks the leave of the Hon’ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or modify otherwise any of the above grounds either before or at the time of hearing of this appeal.”
The appeal was filed after a delay of 9 days and the assessee has filed an application for condonation of delay. In application for the condonation of delay, this is the submission that assessee that he was travelling during the relevant period and for this reason, there was a delay of 9 days in filing the appeal before the Tribunal. The assessee has also submitted an affidavit of the President of the assessee society in support of its contentions. Considering these facts, the small delay of 9 days is condoned in the interest of justice and the appeal is admitted.
It is submitted by ld. AR of assessee that the ld. CIT(A) has followed the judgment of Hon’ble Apex Court rendered in the case of The Citizen Co- operative Society Ltd. Vs. ACIT as reported in 397 ITR 1, copy available on pages 304 to 312 of the paper book. My attention was drawn to page 311 of the paper book and it was submitted that in Para 25 of this judgment, it was held by Hon’ble Apex Court that the main reason for disentitling the assessee from getting the deduction provided u/s. 80P of the Act is not sub-section (4) thereof. What has been noticed by the AO, after discussing in detail the activities of the assessee, is that the activities of the assessee are in violation of the provisions of the MACSA under which it is formed. It is also noted by Hon’ble Apex Court that it is pointed out by the AO that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of “nominal members”. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc and, in fact, they are not members in real sense. Most of the business of the assessee was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. This is also the finding of Hon’ble Apex Court that a portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the assessee is that of finance business and cannot be termed as co- operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well and all this is done without any approval from the Registrar of the Societies and this is the remark of the AO that indulgence in such kind of activity by the assessee is in violation of the Co- operative Societies Act and therefore, it is a co-operative credit society which is not entitled to deduction u/s. 80P(2)(a)(i) of the Act. He submitted that in the present case, the assessee society is formed under the Karnataka Act and under this act, nominal member is also a member and therefore, this judgment of Hon’ble Apex Court is not applicable in the present case. At this juncture, it was pointed out by the bench that as per para 4.7 at page 9 of the order of CIT(A), the CIT(A) decided the issue by following this judgment of Hon’ble Apex Court without discussing and comparing the facts of the present case with facts of that case and relevant bylaws of assessee society in the present case and therefore, in the interest of justice, the matter should go back to the file of CIT(A) for fresh decision by way of a speaking and reasoned order.
5. In reply, the ld. AR of assessee accepted this proposition put forward by the bench. The ld. DR of revenue also agreed to this proposition. Regarding ground no. 6 of the assessee’s appeal, it was submitted by ld. AR of assessee that this ground is not pressed and accordingly this ground is rejected as not pressed. Having rejected ground no. 6 of the assessee’s appeal, I find that all the remaining grounds are regarding only one issue i.e. regarding allowability of deduction u/s. 80P. The CIT(A) has decided this issue as per para 4.7 of the order of CIT(A) which is reproduced hereinbelow for the sake of ready reference. “4.7 In light of the above decision all the arguments and various judicial pronouncements and reliance placed by the appellant during appeal proceedings stands on a weak footing and lacks merits. The appellant has to clearly prove that the conditions discussed in Supreme Court judgment did not exist in his case. The AO had given a detailed order and also mentioned that any person above 18 yrs of age living permanently within the area of operation can become a member by paying share fee of100. The AO in remand report brought out as follows. Thus, it is clear from the above that the assessee society is not only dealing with members but also with the nominal members who are general public for acceptance of deposits and thus, doing banking business. The appellant was not able to prove that it is purely a co-operative society with no nominal members and no financing to public and hence the latest decision of Supreme Court as above squarely applies. The appellant has not been able to explain that his case is not covered by the judgment of Apex court as above. The appellant is solely relying on the favorable judgement of ITAT but he also had to prove that his case is not covered by the latest Supreme court judgment which was delivered almost three years after the order of ITAT He had to distinguish his case from the latest judgement of Supreme Court and prove his eligibility for deduction and that the violations mentioned in Supreme Court judgment did not exist in his case. Therefore, I do not find any need to interfere with the A0's order. And it is felt that the judgment of Hon’ble Supreme Court is applicable in appellant's case. Thereby the AO is justified in rejecting the assessee claim deduction u/s 80P(2)(a)(i) of the Income Tax Act. The relevant grounds of appeal are hereby dismissed.”
I also reproduce paras 25 to 27 of judgment of Hon’ble Apex Court rendered in the case of The Citizen Co-operative Society Ltd. Vs. ACIT (supra) as per page no. 311 of the paper book.
“25) So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under Section 80P of the Act is not sub-section (4) thereof. What has been noticed by the Assessing Officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violations of the provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of ‘nominal members’. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co-operative Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction under Section 80P(2)(a)(i) of the Act.
26) It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion:
“As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality; that no person can earn from him; that there a profit motivation; and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third party vis- a-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs].
In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all.”
27) These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a co- operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act.”
7. From the above paras reproduced from this judgment of Hon’ble Apex Court, it is seen that in that case, this was the finding of AO that the assessee is engaged in activity of granting loans to general public. This is also the finding in that case that assessee has carved out a category of nominal members and these are those members who are making deposits with the assessee for the purpose of loan etc. and in fact, they are not members in real sense. There are some aspects of facts of that case discussed by Hon’ble Apex Court in these paras of judgment. In the relevant para of CIT(A), there is no discussion about the facts of the present case and its comparison with the facts in that case. Hence I feel it proper to restore the matter back to the file of CIT(A) for fresh decision by way of a speaking and reasoned order after discussing the facts of the present case and comparing the same with the facts of that case and pass a speaking order after providing adequate opportunity of being heard to both sides. In view of this decision, no further adjudication is called for on merit of the case at this stage.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.