DHANVARSHA NAGARI SAHAKARI PATSANSTHA LIMITED,NAVI MUMBAI vs. ITO WARD 28(1)(3), NAVI MUMBAI

Treating the income of Rs.36,52,853/- as income from other sources u/s 56 of the Income Tax Act, 1961

CIT(A) has erred in confirming the disallowance made by the AO of Rs. 13,94,486/- paid to Pigmy Deposit Collectors u/s 40(a)(ia) for non-deduction of TDS u/s 194H without looking at the Juri ictional Bombay High Court's decision in case of CIT v. Sunil Vishwambharnath Tiwari (2016), 388 ITR 630(Bom), wherein appellant is entitled to claim deduction for enhancement of gross total income because of disallowance of expenditure u/s 40(a)(ia).

The appellant craves leave to add, alter, modify, amend, or substitute all or any of the above grounds of appeal.”

Since all the grounds are connected, the same are taken up for adjudication together.

The facts relevant for adjudication of the aforesaid grounds are that in the return of income filled for the Assessment Year 2014- 2015, the Appellant had claimed deduction under Section 80P of the Act. The Assessing Officer denied deduction claimed by the Appellant by placing reliance on the provisions contained in Section 80P(4) of the Act.

In appeal, the CIT(A) concurred with the Assessing Officer and declined to grant any relief on this issue. The CIT(A) further observed that the amount in respect of which deduction was claimed by the Appellant under Section 80P(2)(a)(i) of the Act was in the nature of interest income received from co-operative bank in respect of which neither deduction under Section 80P(2)(d) nor deduction under Section 80P(2)(a)(i) of the Act could have been granted.

Being aggrieved the Appellant is now in appeal before the Tribunal.

We have heard the rival submission, perused the material on record and examined the position in law.

Facts as emanating from records show that the Appellant was engaged in providing credit facilities to its members and had claimed deduction under Section 80P(2)(a)(i) of the Act in respect of income earned from the same. The Assessing Officer has made disallowance by invoking provisions of Section 80P(4) of the Act observing as under: "4.9 In view of the above discussion it is clear that the credit society assessee falls under the category of Primary Co- operative Bank. The assessee fulfills all the 3 conditions of a Primary Co-operative Bank and therefore, the provisions of sec. 80P(4) are applicable in this case.

10 Similar precedence laid down in Renuka Co-Operative 346/PNJ/2013 dated 14/08/2014 and ITO, Ward 1(3), Belgaum vs. Shri Dudundeshwar Urban Co-Opperative Credit Society Ltd. 53 taxann.com 165(Panji-Trib.).

11 The AR of the assessee also relied on the decision of the Hon'ble Bombay High Court (Goa Bench) in the case of Quepem Urban Co-operative Credit Society(In tax appeal No. 22,23 & 24 of 2015). In this regard, it has been found that against the order of the Hon'ble Bombay High Court, Department has filed SLP before the Hon'ble Supreme Court Of India vide SLP(C) No. 8296 of 2015 (Appeal Civil: 8296 of 2015). The said SLP is pending before the Hon'ble Supreme Court.”

Thus, Assessing Officer had not doubted that the income in respect of which deduction under Section 80P(2)(a)(i) of the Act has been claimed by the Appellant was income earned by the Appellant from providing credit facilities to its members. The Assessing Officer wanted to disallow the above deduction claimed by the Appellant by placing reliance on Section 80P(4) of the Act which provided that the provisions of Section 80P of the Act would not apply in relation to any co-operative bank (other than primary agricultural credit society or primary co-operative agricultural and rural development bank). It was contended on behalf of the Appellant that the provisions of Section 80P(4) of the Act barred a co-operative bank from claiming deduction under Section 80P of the Act and not a co-operative society engaged in providing credit to its members. Reliance in this regard, was placed by the Appellant upon the judgment of the Hon'ble Bombay High Court in the case of Quepem Urban Co-operative Credit Society (supra) The Assessing Officer noted that the issue stood decided in favour of the assessee in the aforesaid judgment. However, since the Revenue had not accepted the decision and preferred special leave petition before the Hon'ble Supreme Court, the Assessing Officer proceeded to make the disallowance invoking provisions of Section 80P(4) of the Act.

We find that the disallowance made by the Assessing Officer cannot be sustained in view of the judgment of the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut: [2021] 431 ITR 1 (SC)[12-01-2021], wherein it was held that the provision of Section 80P(4) of the Act are attracted only in case of co-operative society holding a banking license issued by the Reserve Bank of India (RBI). It is not the case of the Revenue that the Assessee is either registered with RBI under Banking Regulation Act, 1949 and/or holds banking license issued by RBI. Therefore, provisions of Section 80P(4) of the Act would not get attracted in the case of the Appellant. The relevant extract of the aforesaid judgment of the Hon'ble Supreme Court reads as under:

We now come to the judgment of this Court in Citizen Cooperative Society Ltd. (supra). This judgment was concerned with an assessee who was established initially as a mutually aided cooperative credit society, having been registered under section 5 of the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995. As operations of the assessee began to spread over States outside the State of Andhra Pradesh, the assessee got registered under the Multi- State Cooperative Societies Act, 2002 as well. The question that the Court posed to itself was as to whether the appellant was barred from claiming deduction in view of Section 80P(4) of the Income-tax Act see paragraph 5. After setting out the findings of fact in that case, and the income tax authorities concurrent holding that the society is carrying on banking business and for all practical purposes acts like a co-operative bank, this Court then held as follows: XX XX

An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment: (I) That section 80P of the IT Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; (II)That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more of such activities mentioned in sub- section (2) of section 80P must be given by way of deduction; (III) That this Court in Kerala State Cooperative Marketing Federation Ltd. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so which is not the case with section 80P(2)(a)(i); (V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4) XX XX

Applying the aforesaid decisions, it is clear that the ratio decidendi in Citizen Cooperative Society Ltd. (supra) would not depend upon the conclusion arrived at on facts in that case, the case being an authority for what it actually decides in law and not for what may seem to logically follow from it. Thus, the statement of the principles of law applicable to the legal problems disclosed by the facts alone is the binding ratio of the case, which as has been stated hereinabove, is contained in paragraphs 18 to 23 of the judgment. Paragraphs 24 to 26, being the judgment based on the combined effect of the statements of the principle of law applicable to the material facts of the case cannot be described as the ratio decidendi of the judgment. Nor can it be said that it would logically follow from the finding on facts that the assessing officer can go behind the registration of a society and arrive at a conclusion that the society in question is carrying on illegal activities. On this score alone, the Full Bench's understanding of this judgment has to be faulted and is set aside.

However, this does not conclude the issue in the present case. We now turn to the proper interpretation of section 80P of the Income-tax Act. Firstly, the marginal note to section 80P which reads "Deduction in respect of income of co-operative societies" is important, in that it indicates the general "drift" of the provision. This was so held by this Court in K.P. Varghese v. ITO [1981] 7 Taxman 13/131 ITR 597 as follows:

This interpretation of sub-section (2) is strongly supported by the marginal note to Section 52 which reads "Consideration for transfer in cases of understatement". It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins, M.R. in Bushel v. Hammond [1904] 2 KB 563 to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section (vide Bengal Immunity Company Limited v. State of Bihar [1955] 2 SCR 603])."

Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". A co-operative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co- operative societies. This, therefore, refers only to the factum of a co- operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.

Thirdly, the gross total income must include income that is referred to in sub-section (2).

Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being "engaged in" carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society must be "engaged in" the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression "engaged in", as has been held in CIT v. Ponni Sugars & Chemicals Ltd. [2008] 174 Taxman 87/306 ITR 392 (SC), would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars & Chemicals Ltd. (supra) held:

In order to earn exemption under section 80P(2) a cooperative society must prove that it had engaged itself in carrying on any of the several businesses referred to in sub- section (2). In that connection, it is important to note that under sub-section (2), in the context of cooperative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the Tribunal was required to examine the memorandum of association, the articles of association, the returns of income filed with the Department, the status of business indicated in such returns, etc. This exercise had not been undertaken at all." XX XX

Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole.

Coming to the provisions of section 80P(4), it is important to advert to speech of the Finance Minister dated 28-2-2006, which reflects the need for introducing section 80P(4). Shri P. Chidambaram specifically stated: "166. Cooperative Banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income-tax Act. However, I propose to exclude all other cooperative banks from the scope of that section."

Likewise, a Circular dated 28-12-2006, containing explanatory notes on provisions contained in the Finance Act, 2006, is also important, and reads as follows: "Withdrawal of tax benefits available to certain cooperative banks ** ** **

2 The cooperative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank. The expressions 'co-operative bank', 'primary agricultural credit society' and 'primary co-operative agricultural and rural development bank' have also been defined to lend clarity to them."

A clarification by the CBDT, in a letter dated 9-5-2008, is also important, and states as follows: "Subject: Clarification regarding admissibility of deduction under section 80P of the Income-tax Act, 1961. ** ** **

In this regard, I have been directed to state that sub-section (4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank. For the purpose of the said sub-section, co-operative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949. 3. In part V of the Banking Regulation Act, "Co-operative Bank" means a State Co-operative bank, a Central Co- operative Bank and a primary Co-operative bank.

Thus, if the Delhi Co-op Urban T & C Society Ltd. does not fall within the meaning of "Co-operative Bank" as defined in part V of the Banking Regulation Act, 1949, sub-section(4) of section 80P will not apply in this case.

Issued with the approval of Chairman, Central Board of Direct Taxes."

The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banks i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.

As a matter of fact, some primary agricultural credit societies applied for a banking licence to the RBI, as their bye-laws also contain as one of the objects of the Society the carrying on of the business of banking. This was turned down by the RBI in a letter dated 25-10-2013 as follows: "Application for license Please refer to your application dated April 10, 2013 requesting for a banking license. On a scrutiny of the application, we observe that you are registered as a Primary Agricultural Credit Society (PACS). In this connection, we have advised RCS vide letter dated UBD (T) No. 401/10.00/16A/2013-14 dated October 18, 2013 that in terms of Section 3 of the Banking Regulation Act, 1949 (AACS), PACS are not entitled for obtaining a banking license. Hence, your society does not come under the purview of Reserve Bank of India. RCS will issue the necessary guidelines in this regard XX XX

To sum up, therefore, the ratio decidendi of Citizen Co- operative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word "agriculture" into section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co- operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm's way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted." (Emphasis Supplied) Identical view has been taken by the Hon'ble Supreme Court in case of 'The Pr. Commissioner of Income Tax-17, Mumbai Vs, M/s Annasaheb Patil Mathadi kamgar Sahakari Patpedhi Maryadit (Civil Appeal No. 8719/2022, : dt. 20.04.2023).

It would be pertinent to note that in Section 80P(2)(a) of the Act the expression `the whole of the amount of profits and gains of business attributable to any one or more of such activities' has been used, whereas in Section 80P(2)(d) of the Act expression used is `any income by way of interest'. Thus, `any income by way of interest' derived by a co-operative society (from a co-operative bank) would be eligible for deduction under Section 80P(2)(d) of the Act irrespective of the fact that such interest income is taxable as `profits and gains of business' or as `income from other sources' since Section 80P(2)(d) uses the expression `any income' and not `profits & gains of business'. In the case of Kaliandas Udyog Bhavan Premises Co-operative Society Ltd. vs. ITO: ITA No. 6547/Mum/2017, dated 24.04.2018, after examining the judgment of the Hon'ble Supreme Court in the case of Totgars which was followed by the Hon'ble Karnataka High Court in the case of Pr.CIT vs. Totgars Co-operative Sale Society Ltd.: 2017 395 ITR 611 (Kar), and after taking into account the insertion of Section 80P(4) of the Act vide the Finance Act, 2006, the Mumbai Bench of the Tribunal has held that co-operative bank continues to be a co-operative society and therefore, the Assessee receiving interest from a co-operative bank would be eligible to claim deduction under Section 80P(2)(d) of the Act in respect of interest so received. To the same effect are the decisions of the Tribunal in the case of Lands End Co-operative Housing Society Ltd. Vs. ITO [ITA No.3566/Mum/2014, dated 15/01/2016], M/s Sea Green Cooperative Housing and Society Ltd. Vs. ITO-21(3)(2), Mumbai [ITA No. 1343/Mum/2017, dated 31/03/2017], and Mystique Rose Cooperative Housing Society Ltd.: vs. ITO 22(2)(3) [ITA No. 1290/Mum/2021, dated 30/03/2022].

Thus, as regards profits and gains earned by the Appellant from the business of provide credit facility to its members, the Appellant would be entitled to deduction under section 80P2(a)(i) of the Act whereas in respect of interest received from Co- operative Bank the Appellant would be entitled to deduction under Section 80P2(d) of the Act.

In view of the above, the order passed by the Assessing Officer and CIT(A) denying deduction as claimed by the Appellant under Section 80P(2)(a)(i)/80P(2)(d) of the Act cannot be sustained. Accordingly, disallowance of INR.36,52,853/- is deleted and claim of deduction under Section 80P of the Act as made by the Appellant is allowed. Ground No.1 to 3 raised by the Appellant is allowed.

As regards Ground No. 4 raised by the Appellant in relation to the alternative disallowance of made by the Assessing Officer under Section 40(a)(ia) of the Act is concerned, we find merit in the contention advanced on behalf of the Appellant that even if the disallowance is sustained the same would increase the income earned by the Appellant form providing credit facilities to its members. While allowing Ground No.1 to 3 raised by the Appellant we have held that the Appellant would be entitled to claimed deduction under Section 80P(2)(a)(i) of the Act in respect of the aforesaid income earned by the Appellant form providing credit facilities to its members. Thus, pursuant to disallowance made under Section 40(a)(ia) of the Act the Appellant would be entitled to claim deduction under Section 80P(2)(a)(i) of the Act on the enhanced income of INR.13,94,486/-. Our view draws support from the judgment of the Hon'ble Bombay High Court in case of CIT v. Sunil Vishwambharnath Tiwari (2016), 388 ITR 630 (Bom), and Circular No. 37 of 2016, dated 02/11/2016 issued by the Central Board of Direct Taxes. In view of the aforesaid, there would be no additional income or tax liability in the hands of the Appellant even if the disallowance is sustained. The Assessing Officer and the CIT(A) has also not made any addition/disallowance in the computation of income or tax liability in this regards. Therefore, in terms of the aforesaid, Ground No. 4 raised by the Appellant is allowed for statistical purposes.

We would now take up appeal for the Assessment Year 2017-18 [ITA No. 1599/MUM/2024] preferred by the Assessee challenging the order dated 29/09/2023, passed by the Ld. CIT(A) whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 19/11/2019, passed under Section 143(3) Act.

Both the sides agreed that there being no change in facts and circumstances of the case and the applicable legal position, our reasoning, findings and adjudication in appeal for the Assessment Year 2014-15 shall apply mutatis mutandis to corresponding grounds raised in appeal for the Assessment Year 2017-18. Accordingly, in view of paragraph 10 to 15 above, disallowance of INR.32,63,969/- is deleted and claim of deduction under Section 80P of the Act as made by the Appellant is allowed. Ground No.1 & 2 raised by the Appellant are allowed.

In result, in terms of paragraph 15, 16 and 18 above, both the appeals preferred by the Assessee are allowed. Order pronounced on 29.07.2024. (Narendra Kumar Billaiya) Accountant Member मुंबई Mumbai; दिनांक Dated : 29.07.2024 Poonam Mirashi, Stenographer (Rahul Chaudhary) Judicial Member आदेश की प्रतिलिपि □ ग्रेषित/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / The CIT 4. प्रधान आयकर आयुक्त / Pr.CIT 5. विभागीय प्रतिनिधि, आयकर अपीलीय अधिकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. सत्यापित प्रति //// आदेशानुसार / BY ORDER, उप/सहायक पंजीकार /(Dy./Asstt.