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Facts
The assessee, a co-operative society, filed a Nil income return. The AO disallowed 50% of awareness, meeting, seminar, and commission expenses, and added interest income, citing lack of documentation and rejecting books of accounts, which was upheld by the CIT(A). The assessee argued these expenses related to attracting members and promoting savings, and claimed exemption under Section 80P.
Held
The Tribunal held that the AO erred in rejecting the books and making ad hoc disallowances. The case is remanded back to the AO for de novo assessment to properly verify the Section 80P deduction claim and the commission payments to members, after giving the assessee a fair hearing. The Tribunal noted that commission payments to office bearers might be disallowed if prohibited by bye-laws.
Key Issues
Whether the disallowances of various expenses and the taxing of interest income were justified, and whether the assessee was entitled to deduction under Section 80P, given the AO's rejection of books and ad hoc additions.
Sections Cited
143(2), 142(1), 143(3), 80P, 57, 56
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘C’: NEW DELHI
O R D E R
PER S.RIFAUR RAHMAN, AM:
This appeal has been filed by the Assessee against the order of Learned Commissioner of Income Tax (Appeals)-10, New Delhi [“Ld. CIT(A)”, for short], dated 28/10/2016 for Assessment Year 2011-12.
The brief facts of the case are, the assessee filed its return of income declaring Nil income on 15/09/2011. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and served on the assessee. In response, the Ld. AR of the assessee attended and submitted relevant information as called for. During the assessment proceedings, the Assessing Officer observed from the income and expenditure account submitted by the assessee that assessee has shown interest income on loans of Rs.4.84 Cr.. He observed that the main business activity of the society was to take subscription from the members and giving of interest bearing loans to members in the income and expenditure account, the assessee has debited commission payment of Rs.85,15,243/-. He observed that when the AR of the assessee was asked to submit the relevant details of commissions of expenditure, details of unsecured loans, details of various expenditures claimed by the assessee, Sundry Creditors and details of addition to fixed assets. In response, the assessee has submitted certain information and he observed that the assessee has claimed the commission expenditure which was paid to its office bearers. Since, assessee has not submitted information as requested by the Assessing Officer, the Assessing Officer rejected the books of accounts and proceeded to disallow 50% of the awareness expenditures, disallowed Meeting and Seminar Expenses, commission expenditure claimed and the same were added to the income of the assessee.
Aggrieved with the above order, the assessee preferred an appeal before the Ld. CIT(A), the assessee has raised grounds of appeal and submitted as under: "We have filed an appeal against the order passed U/s 143(3) for A.Y. 2011-12.1 want to put some light on the background of the case and reasons to file the appeal to you.
M/s JYOTI CREDIT & SAVINGS SWABLAMBI SAHKARI SAMITI LIMITED (JCSSSS LTD) is a co-operative society registered under MSCS Act, 2002. It has pan India branches mostly in rural areas and having its registered office in New Delhi.
M/s JCSSSS Ltd is carrying out the activities to develop habit of savings, upliftment of quality of life and economic security of poor and people below poverty line and on the verge of poverty line. The society charges Rs. 10/- from the members to getting the membership and the person after paying the amount would be called and accepted as the member of M/s JCSSSS Ltd. By becoming the member, the person would get the right to open an account with M/s JCSSSS Ltd. and the person can deposit his small savings in the respective account. There are collection agents of the society who are also the members of society who collects the amount on behalf of society from other members. For collection of amount from other members the society pays commission to them and to the members who have deposited their amount in society would get an interest of 4% (Productive) per annum against their savings. In addition to this facility, members can also apply for loan to society against their savings at the time of their needs or at time when they want to set up some business. The society is helping the very poor section of society to develop the habit of saving. The society is PAN India, and have more than 20,000 members. In order to attract more and more people to become its member the society pays commission to its existing members so that they can add more and more members to the society. The commission to the members is based on the amount of collection made by them and their subordinates. The society has a defined slab for commission of members. The commission to members also includes all the expenses borne by them to add members to society and organizing events in many areas so that people can understand the importance of saving. The commission paid lo members includes all their travelling expenses, organizing functions and seminars and all other stuffs to attract more and more members to society. The commission is paid to the members and tax has been rightly deducted. As per the order U/s 143(3) for A.Y. 2011-12 the order says that the commission paid to board members is Rs.82,84,760/- But this amount includes all the expenses incurred by the board members to attract members and increase the collection of the society. No commission is being paid to the members for just being the board member of the society. Co-operative Principles and object awareness expenses of Rs.13,46,206/- have been disallowed by the Additional CIT, but we have proper vouchers to substantiate the expenses, similarly we have vouchers Meeting & seminar, and administrative and other operative expenses. The is our submission to you. Kindly accept our case and allow us the justice.”
After considering the submissions of the assessee, the Ld.CIT(A) sustained the additions made by the Assessing Officer by the following observations:- “4.2.1 Even during the appellate proceedings, Ld. AR has just filed photocopies of some bills in respect of purchase of some computer items, ACs, some furniture items etc. and also provided a CD containing therein excel sheets in respect of deposit and loan reports. On perusal of the same and specific issue in question, they are not found to be relevant to be relied upon. The photocopies of bills in respect of above items and excel statement in respect of general expenses have also been perused but during the appellate proceedings also, Ld. AR failed to produce the books of account to substantiate the claim that above expenses were incurred for exclusive business purpose and even no supporting bills and vouchers could be filed even at appellate stage in respect of general expenses. Only it has been claimed that society is maintaining proper vouchers to claim the above expenses. The submissions made are vague and general in natural devoid of any merit without any supporting evidence.
4.2.2 Considering the factual matrix of the case, I am of the considered view that AO has rightly disallowed the claim of expenses under the head cooperative principles and object awareness expenses of Rs. 13,46,206/- being 50% of total expenses, meeting and seminar expenses of Rs. 11,60,310/- being 50% of total expenses for want of books of account and bills and vouchers. Therefore, the additions of Rs.13,46,206/-, and Rs. 11,60,310/- are upheld for the reasons discussed above.
4.2.3 No grounds of appeal or submissions have been made in respect of withdrawal of deduction under Section 80P of the Act and taxing of interest income of Rs.8,22,148/- under Section 56 of the Act. Therefore, the additions to the extent above stands upheld.”
Aggrieved with the above order, the assessee is in appeal before us raising following grounds of appeal:- “1. The Id. A.O. is bad in law and against the facts of the case.
2. That the Id. A.O. erred in not allowing deduction under section 80P of the Income Tax Act.
3. That the Id. A.O. erred is not allowing Co-operative Principles & object awareness expenses of Rs. 13,46,206/-
4. That the Id. A.O. erred in making addition on account of disallowance of Unexplained Meeting & Seminar expenses and Business Affairs & Accessories expenses of Rs.11,60,310/-,
5. That the Id. A.O. erred in not allowing commission paid of Rs.85,15,243/-.
6. That the Id. A.O. erred in not allowing deduction of expenditure of interest income u/s 57 of the Act.
7. That the Ld. AO erred in treating Interest Income of Rs.8,22,148 as income from other sources u/s 56 of the Act.
8. That the Id. A.O. also erred in not following various judgments of Supreme Court and Jurisdictional High Courts.
9. That the appellant craves for the permission to add, alter, modify or delete any of the ground of appeal.”
6. At the time of hearing, the Ld. AR submitted that assessee is a co-operative society registered under MSCS Act, 2002. It has pan India branches mostly in rural areas and having its registered office in New Delhi. M/s JCSSSS Ltd is carrying out the activities to develop habit of savings, upliftment of quality of life and economic security of poor and people below poverty line and on the verge of poverty line. The society charges Rs. 10/- from the members to getting the membership and the person after paying the amount would be called and accepted as the member of M/s JCSSSS Ltd. society who collects the amount on behalf of society from other members. For collection of amount from other members the society pays commission to them and to the members who have deposited their amount in society would get an interest of 4% (Productive) per annum against their savings. In addition to this facility, members can also apply for loan to society against their savings at the time of their needs or at time when they want to set up some business. The society is helping the very poor section of society to develop the habit of saving. The society is PAN India, and have more than 20,000 members. In order to attract more and more people to become its member the society pays commission to its existing members so that they can add more and more members to the society. The commission to the members is based on the amount of collection made by them and their subordinates. Further, the submitted that the Assessing Officer has rejected the activities carried on by the assessee and refused to accept the commission paid by the assessee as per the approach/method adopted by the assessee to bring the deposits to the society and incentivewise the members to collect the same. Not happy with the submissions made by the assessee, the Ld. Assessing Officer has rejected the books of account and proceeded to make adhoc disallowances. The Ld. AO also not considered the plea of the assessee on the mutuality of its activities serving its own member and also overlook the grant of exemption u/s 80P of the Act. Further, he agreed the assessee has not substantiated anything new before the Ld. CIT(A) and however, he submitted that assessee has taken plea of exemption u/s 80P before the Ld. CIT(A) and Ld. CIT(A) has not adjudicated this issue. He prayed that the issue may be remitted back to the AO for allowing the assessee to claim exemption u/s 80P and the expenses cannot be disallowed on adhoc basis.
On the other hand, the Ld. DR has no specific objection to remit this issue back to the file of Jurisdictional Assessing Officer.
Considered the rival submissions and material placed on record. On a perusal of the assessment order and First Appellate Authority order, we find that even though the Assessing Officer and Ld. CIT(A) provided opportunity on several occasions, assessee could not appear nor complied to the notices issued. We observed that Ld. CIT(A) dismissed the appeal filed by the assessee based on the information available on record.
Considering the totality of facts and keeping in view the additions/disallowance made by the Assessing Officer, we are of the opinion that the society was formed to serve the poor people by upliftment of their life and economic security. All the activities are carried for the benefit of existing members by self financing. The commission was paid to the existing members to encourage the inflow of the funds. The Assessing Officer has found that the commission was paid to office bearers also. The office bearers are also part of the existing member. It was submitted that the assessee has detailed explanation for payment made through office bearers, it includes other expenses also. If there is any restriction on payment of commission to the office bearers as per the bye laws of the society, in our view, to that extent the payment may be disallowed. The Assessing Officer has wrongly rejected the books and proceeded to disallow on adhoc basis. Further, we are inclined to direct the Jurisdictional Assessing Officer to redo the assessment denovo without rejecting the books by following the above direction after giving proper opportunity of being heard to the assessee. Accordingly, in the interest of justice, this matter should go back to the file of the jurisdictional Assessing Officer for denovo verification and re-assessment on the issue of deduction u/s 80P of the Act and payment of commission to its own members to encourage the fund flow to the society. Assessee shall cooperate with the proceedings before the Jurisdictional Assessing Officer without taking unnecessary adjournments. Needless to say that the Assessing Officer shall give adequate opportunity of being heard to the assessee. Thus, this appeal is restored to the file of the Assessing Officer accordingly.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on 14th August, 2024.