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Income Tax Appellate Tribunal, B BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI PRAKASH CHAND YADAV
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of NFAC for the assessment year 2017-18 dated 31.10.2023 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). The assessee raised following ground of appeal:
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in upholding the assessment order passed on the appellant in the status of local authority without appreciating that the appellant is a co-operative society and therefore, the order of assessment passed in the wrong status ought to have been cancelled.
3. Without prejudice to the above, the learned CIT[A] erred in upholding the denial of deduction claimed by the appellant u/s 80P(2)(a)(i) of the Act with regard to the income derived from activity of providing credit facilities to its members under the facts and in the circumstance of the appellant's case.
M/s. The Bharathi Co-operative Credit Society, Bangalore Page 2 of 12 4. The learned CIT[A] ought to have appreciated that associate and nominal members are also members permitted under the Karnataka Co- operative Societies Act, 1959 and that there cannot be a denial of deduction claimed for the alleged violation of the principles of mutuality on account of different category of members under the facts and in the circumstances of the appellant's case.
Without prejudice to the above, the learned CIT[A] ought to have appreciated that the appellant was entitled to deduction u/s. 80P(2)(a)(i) of the Act with regard the profits earned from dealing with regular members under the facts and in the circumstances of the appellant's case.
6. Without prejudice to the above, the learned CIT[A] ought to have observed and directed that the cost of funds and proportionate administrative expenses be allowed from the income to be considered as derived from dealing with associate and nominal members that was not entitled to deduction u/s. 80P(2)(a)(i) of the Act under the facts and in the circumstances of the appellant's case.
7. Without prejudice to the right to seek waiver before the Hon'ble DG/CCIT, the appellant denies itself liable to be charged to interest u/s. 234-B of the Act, which requires to be cancelled under the facts and in the circumstances of the appellant's case.
8. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
The assessee filed appeal before the ld. CIT(A) against the order passed by ld. AO disallowing Rs. 93,29,080/- under section 80P of the Act. Brief facts of the case are that the assessee filed the return of income for the Assessment year (AY) 2017-18 declaring a total income of Rs Nil after claiming deduction of Rs 93,29,08/- u/s 80P of the Act. The case was selected for scrutiny. During the course of assessment proceedings, the assessee submitted that as on 31.03.2017, there were 22,399 members consisting of 9916 ordinary members and 12,483 Associate Members. Both the ordinary and associate members have voting powers. The AO also found that the assessee has 153 nominal members- who are only kith and kin of regular members who are eligible for loans or having voting rights and dividend eligibility. The AO held that considering the provisions of section 18 of the Karnataka Credit Co-operative Societies Act, 1959, the number of associates should not exceed 15% of the total M/s. The Bharathi Co-operative Credit Society, Bangalore Page 3 of 12 membership but in the case of the assessee, the percentage of associate members are 55% whereas the society in only eligible to have 15%. The AO held that the assessee has in gross violation of the Karnataka Cooperative Society Act continued to do business with persons who were no longer legible to be associate members and were liable to be removed. The AO disallowed the assessee’s claim of deduction u/s 80P of the Act. 2.1. The view of the ld. AO was confirmed by ld. CIT(A) by placing reliance on the judgement of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. Vs. ACIT 84 taxmann.com 114 (SC) dated 8.8.2017, by observing that the appellant cannot be treated as a cooperative society meant only for its members and providing credit facilities to its members as it is carved out a category called 'nominal members' and 'associate members' and in violation of the provisions of section 18 of the Karnataka Credit Cooperative Societies Act, 1959, the number of associates exceed 15% of the total membership i.e the percentage of associate members are 55% and as such could not claim the benefit of section 80P of the Act. The appellant cannot be considered a society run by the members and only for the members and not Public, as the associate members as in majority and are more than 15% (55% of the total members in the case of the appellant) and the Karnataka Credit Co-operative Societies Act, 1959, clearly distinguishes associate members as different from members as it lays down that the excess associate members shall be either made as member, if eligible under the section 16. Therefore, associate members are not members of the appellant society in the true sense. Thus, the appeal in these grounds were dismissed by ld. CIT(A). Against this assessee is in appeal before us by way of above grounds.
We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Kavradi Co-operative Agricultural M/s. The Bharathi Co-operative Credit Society, Bangalore Page 4 of 12 Bank in dated 10.6.2024, wherein held as under: “5. We have heard the rival submissions and perused the materials available on record. In this appeal, there are 3 issues and we dealt with each issue separately. 5.1 The first issue relates to the disallowance of deduction claimed u/s 80P(2)(i) of the Act by the AO on the basis that the assessee had violated the provisions of the Karnataka Co-operative Societies Act by having more number of nominal and associate members than prescribed under section 18 of the Karnataka Co-operative Societies Act. We have perused the provision and found that the Act prescribed that the nominal members should not exceed 15% of the total members and not as stated by the ld AO. The statement of membership filed by the assessee shows that the nominal members are within 15% of the total members prescribed under the statute and therefore there is no violation of any of the provisions of the Karnataka Act. Further we are of the view that the ld. AO has no jurisdiction to look into the fact whether there is any violation committed by the assessee under the provisions of the Karnataka Co-operative Societies Act. It is for the Registrar of Co-operative Societies to take any action on the assessee society, if there is any violation committed by them. Further the ld AO cannot disallow the claim of deduction and also disqualify the assessee as a Coop society for the reason that the assessee is dealing with the nominal members when there is no prohibition under the Act. The only condition prescribed under the Act is that the assessee should be a registered Coop. Society under the provisions of the Coop Societies Act. Admittedly the assessee is registered under the Karnataka Act and therefore the deduction can not be denied by citing other reasons. We find that the issue is fully covered by the judgement of the Hon’ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. Vs. CIT cited (supra). We therefore, find that there is no merit in the arguments made by the ld. D.R. and held that the order of the ld. AO is against the provisions of the Act and also against the judgement rendered by the Hon’ble Supreme Court.
The next issue is with regard to the disallowance of the interest income received from Co-operative banks. We have considered the argument made by the ld. A.R. that the deposits were made pursuant to the statutory obligation contained in the Karnataka Act and Rules. We also perused the circular issued by the Registrar of Coop. Societies in this regard. Further the ld. AR in their written submissions and in Gr 2.13 and 2.14 gave a statement about the Fixed deposits which is as follows:
M/s. The Bharathi Co-operative Credit Society, Bangalore Page 5 of 12 6.1 As seen from the above table the assessee themselves admitted that the total statutory deposit is Rs 3,03,00,221 and the balance deposits of Rs 97,44,751 is not as per the statute. Therefore, the interest income generated from the statutory deposits are eligible for deduction u/s 80P(2)(i) of the Act. The balance non statutory deposits interest income should be taxed u/s 56 of the Act after granting deductions of cost of funds and administrative and other related expenses. 6.2 We have also gone through the order of the coordinate Bench of the Tribunal in the case of M/s. S.K. Goldsmiths Industrial Co-operative Society Ltd. Vs. ITO in ITA 771/Bang/2023 dated 12.12.2023 wherein this Tribunal held as under: “9. We have heard the rival submissions and perused the material on record. The first contention of the learned AR is that investments are made with the Central Co-operative Bank and is in compliance with the requirements under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was contended that such interest income received on investments made under compulsion under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, is entitled to M/s. The Bharathi Co-operative Credit Society, Bangalore Page 6 of 12 benefit of deduction under section 80P(2)(a)(i) of the Act. We find that this issue has been considered by the Bangalore Bench of the Tribunal in the case of M/s. Kachur Credit Co-operative Society Ltd., Vs. ITO (supra). The Bangalore Bench of the Tribunal had followed its earlier orders. The relevant finding of the Bangalore Bench of the Tribunal reads as follows: “8. I have heard the rival submissions and perused the material on record. The solitary issue for adjudication is whether a sum of Rs.5,07,822/- can be allowed as a deduction under sections 80P(2)(a)(i) of the Act. Admittedly, the amount of Rs.5,07,822/- has been received by the assessee from South Canara District Central Co-operative Bank Ltd. It is the claim of the assessee that the amounts are invested in compliance with the relevant Acts and Rules. On identical facts, the Bangalore Bench of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) by following the Co-ordinate Bench’s order in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT in (order dated 13.08.2021) had stated that if the investments made with the Central Co-operative Bank is out of compulsions under Karnataka State Co-operative Societies Act, 1959 and Rules, the income received from such investments would be entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) reads as follows:
7.1 In the instant case, it was contended that majority of the interest income is earned out of investments made with Cooperative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co- operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction.
In view of the above order of the Tribunal, I restore the issue to the files of the AO to examine whether interest income received amounting to Rs.5,07,822/- from South Canara District Central Co-operative Bank Ltd., is out of compulsions and in compliance with the Karnataka State Cooperative Societies Act, 1959 and the relevant Rules. If it is so, the same interest income is to be assessed as income from business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, I restore the matter to the AO. It is ordered accordingly.”
M/s. The Bharathi Co-operative Credit Society, Bangalore Page 7 of 12 10. In light of the above orders of the Tribunal, we direct the AO to examine whether the interest income received on investment with Central Co-operative Bank is out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is so, the same may be considered as ‘business income’ and entitled to deduction under section 80P(2)(a)(i) of the Act. In other words, if assessee society does not comply with the relevant provisions of the Act, and the Rules of Karnataka Co-operative Societies Act, 1959, it cannot carry on its cooperative activities, namely carry on the business of banking or providing credit facilities to its members. Therefore, if the investments are out of compulsion under the Act and relevant Rules, necessarily it is part of assessee’s business activity entailing the benefit of section 80P(2)(a)(i) of the Act.”
6.3 The above order of the Co-ordinate bench of this Tribunal is on the very same facts and therefore , we set aside the order in respect of this portion and granted a similar relief by remitting the issue to the jurisdictional AO to examine whether the interest income received on investments with co-operative bank is out of compulsion under the provisions of the Karnataka Co-operative Societies Act and if so, the same may be considered under business income and the assessee is entitled for relief u/s 80P(2)(a)(i) of the Act after quantifying the correct income. In so for as the interest income received from other commercial banks the ld AO is directed to verify if there is any statutory compulsion, otherwise the same should be treated as income from other sources and the assessee is entitled for the cost of funds.
The third issue raised by the assessee is that whether the provision made for the interest expenses is eligible for deduction u/s 80P of the Act. We perused the provision and the other financial statements filed by the assessee and found that the assessee made provisions for interest expenses on an accrual basis which is in accordance with the accounting policies as prescribed under Karnataka Co- operative Societies Act. The Rule 22 of the Karnataka Co-operative Societies Rules specifies that interest income should be accounted for on an actual receipts basis while interest expenses should be recognized on an accrual basis. Therefore, the assessee, a registered society registered under the Karnataka Act, have to follow Rule 22 of the Karnataka Co-op. Societies Rules and therefore the method of accounting is in accordance with the Karnataka Rules and therefore the ld AO’s allegation that they are employing hybrid system of accounting one for the interest income and the other for the interest expenses is not correct. We therefore held that the disallowance of the Provision for Net Interest Expenses is not correct. Further, the coordinate bench of this Tribunal in the case of Sumangala Credit Co-operative Society, Bantwal Vs. ITO in dated 7.9.2023 had held as follows: “6. We have heard the rival submissions and perused the materials available on record. Admittedly, in the assessment year under consideration, the assessee made gross provisions of Rs.1,77,20,374/-. Out of this, assessee deducted earlier assessment year provisions up to 31.3.2016 of Rs.1,40,63,514/-. Thus, additional provision charged to M/s. The Bharathi Co-operative Credit Society, Bangalore Page 8 of 12 P&L account was Rs.36,56,860/-. This provision cannot be treated as unascertained liability as the provision has been made on the basis of regular method of accounting consistently followed by the assessee. In the present case, it is not disputed that assessee has been following mercantile system of accounting and interest accrued on deposit but not due as on date of 31.3.2017 to be provided in the books of accounts of the assessee and there was no question of mutuality, which cannot be applied herein and the interest accrued, which has been provided by the assessee in the books of accounts by following the mercantile accounting system of book keeping, the claim of assessee cannot be denied. Accordingly, we allow the claim of the assessee.” 7.1 We therefore, find that this issue is in favour of the assessee and we allow the appeal of the assessee in so far as the provision made for the interest expenses are concerned.
In respect of the other two issues, i.e. the denial of the deduction u/s 80P(2)(i) of the Act and disallowance of the interest income received on the deposits made with Co Op Banks and other commercial banks, we are remitting the same to the file of ld. AO to consider the same afresh in accordance with law after giving an opportunity of being heard to the assessee.”
3.1 Further, similar issue came for consideration before this Tribunal in the case of Kotekar Vyavasaya Seva Sahakara Sangha Niyamitha in wherein the Tribunal vide order dated 1.5.2024 held as under: “4. We have heard the rival submissions and perused the materials available on record. The Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (123 taxman.com 161) had held that the co-operative societies providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the Act. The Hon’ble Apex Court after considering the judicial pronouncements on the subject, had stated the term “member” has not been defined under the Income-tax Act. It was, therefore, stated by the Hon’ble Apex Court that the term “member” in the respective State Co-operative Societies Acts under which the societies are registered have to be taken into consideration. The Hon’ble Apex Court held that if nominal / associate member is not prohibited under the said Act, for being taken as a member, the income earned on account of providing credit facilities to such member also qualify for deduction u/s 80P(2)(a)(i) of the Act. It was further held by the Hon’ble Apex Court that section 80P(4) of the I.T. Act is to be read as a proviso. It was stated by the Hon’ble Apex Court that section 80P(4) of the Act now specifically excludes only co-operative banks which are co-operative societies engaged in the business of banking i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. The Hon’ble Apex Court had enunciated various principles in regard to deduction u/s 80P of the Act. On identical factual situation, the Bangalore Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO in ITA No.1262/Bang/2019 (order dated 31.08.2021) had remanded the issue to the files of M/s. The Bharathi Co-operative Credit Society, Bangalore Page 9 of 12 the A.O. for de novo consideration. The Tribunal directed the A.O. to follow the dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co- operative Bank Ltd. & Ors. v. CIT & Anr. (supra). The relevant finding of the Co- ordinate Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO (supra), reads as follows:- “6. Grounds 2-4 & additional Ground No.1:
In respect of associate / nominal members, Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC) has held that the expression “Members” is not defined in the Income-tax Act. Hence, it is necessary to construe the expression “Members” in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. In view of this, the facts are to be examined in the light of principles laid down by the Hon’ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (surpa).
Accordingly, we remit this issue of deduction u/s 80P(2)(a)(i) of the Act to the files of Ld.AO to examine the same de novo in the light of the above judgment. Needless to say that proper opportunity of being heard is to be granted to assess in accordance with law.” 4.1 In view of the order of the ITAT, which is identical to the facts of the case, we restore the issue of claim of deduction u/s 80P(2)(a)(i) of the Act to the file of the A.O. for de novo consideration.
………… 6.1 Without prejudice to the above, we make it clear that if the interest earned by assessee from the banks is considered under the head “Income from other sources”, relief to be granted to the assessee u/s 57 of the Act in accordance with law. Accordingly, the issue is restored to the file of ld. AO for de-novo consideration with the above observations.”
3.2 In view of the above decisions in the case of Kavradi Co- operative Agricultural Bank cited (supra) and in the case of Kotekar Vyavasaya Seva Sahakara Sangha Niyamitha cited (supra), the issue is required to be examined in the light of above orders of the Tribunal. 3.3 Contrary to this, ld. D.R. relied on the order of Tribunal in the case of Primary Agricultural Credit Co-operative Society Ltd. Vs. ITO in dated 3.7.2024 wherein held as under:
M/s. The Bharathi Co-operative Credit Society, Bangalore Page 10 of 12 “9. Considering the rival submissions, we note that the assessee is registered under Karnataka Co-operative Society Act 1959. During the course of assessment proceedings, the AO asked to submit details as per notice u/s 142(1) and the AO noted as per Bye-laws that there are regular/normal members and nominal members. The regular members participate in day to day affairs, and nominal members have no role in the management of society, have no voting rights & no entitlement for share in the assets or profits. The sec. 20(2)(a) of the Karnataka Cooperative Society Act denies any right to vote to a nominal or associate members. Further the Nominal/Associate members are not entitled to attend the general meetings of the society, not eligible to contest on election. The assessee is doing business with non-members and the profit from such business is divided among the regular members of the society. The ld. DR submitted that as per the Karnataka Co- operative Society Act sec. 18 amended by the Act 2014, the associated/nominal members should not exceed 15% of the regular members, if it exceeds, then it has to be regularized within the period of six months. We note that the lower authorities have disallowed deduction on interest income received from providing credit facilities from all the members by following the judgment of Hon’ble Apex Court in the case of Citizen Co-operative Society Ltd., Hyderabad Vs. ACIT noted supra. The decision relied on by the ld. AR in the case of Mavilayi Service Co-operative Bank Ltd., (supra) is under Kerala Co-operative Societies Act in which it has been held that proportionate deduction u/s. 80P(2)(a)(i) should be granted to the assessee from the interest income received from providing credit facilities to its members but not from the non-members. The Para 33 of the said judgement says as under:- “……………..Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non- members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.” The ratio of Hon’ble Apex Court in the case of Mavilayi Service Cooperative Bank Ltd., (supra) is very much applicable for computing the income attributable to the business of the assessee among the members and non-members. The assessee is governed by Karnataka Co-operative Societies Act, 1959 and assessee has to follow section 18 (amended) Act of 2014 and bye-laws of the society. We note that AO in para 5 has observed that nominal members do not have a right in share of profits of the assessee. The AO has to examine with the bylaws of the Society in regard to classification of members, their rights, sharing of profits of the society among the members (Regular/Nominal). In the event it is found that thee nominal/associate members are not members and they are not entitled from share of profits earned by the assessee, then the proportionate deduction u/s 80P(2)(a)(i) to be granted in terms of the judgment of Hon’ble Apex Court in the case of Mavilayi Service Co- operative Bank Ltd., (supra) on such income. The assessee is directed to produce the quantum of interest income received from all the categories of members for AO to carry out necessary verification. Accordingly we remit this issue to the AO for afresh consideration and determination of the interest received from members and non-members from providing credit facilities and decide the issue as per law. The M/s. The Bharathi Co-operative Credit Society, Bangalore Page 11 of 12 AO shall grant deduction on such interest income u/s 80P(2)(a)(i) of the Act that satisfies principle of mutuality as per bye-laws. Accordingly this issue is partly allowed for statistical purpose. …………………………. …………………………..
We further note that the assessee has received interest from other co- operative banks/commercial banks on its investments. The revenue authorities have considered the entire interest as income from other sources u/s. 56 including the interest received from co-operative bank and no expenses u/s. 57(iii) has been allowed to the assessee for earning of such income. While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. Therefore relying on the judgment of Hon’ble Jurisdictional High Court in case of Totgars’ Cooperative Sales Society Ltd. vs ITO Sirsi, reported in (2015) 58 taxmann.com 35 (Karnataka), the assessee is eligible for claim of its cost of funds on the interest income received from banks. Reliance is also placed on the judgment of Co-ordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souharda Credit Co-op. Ltd. Accordingly, the assessee is directed to provide the details of cost of funds before the assessing officer. Therefore for allowing cost of funds, we are remitting this issue to the assessing officer for determining the cost of funds for earning entire interest income from bank (co-operative bank and scheduled bank).
3.4 As seen from the above order of the Tribunal, there is no dispute regarding grant of deduction u/s 80P(2)(a)(i) of the Act in the light of judgement of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd..Vs. CIT and another (123 taxman.com 161), if the nominal and associated members were not entitled for profit earned by the assessee and to grant proportionate deduction u/s 80P(2)(a)(i) of the Act. Similarly, when interest income received from investment from banks if it is not attributable to the main business of the assessee providing credit facilities to its members, there was no question of deduction u/s 80P(2)(a)(i) of the Act on that income. In view of the above, the issue in dispute is remitted to the file of ld. AO on similar directions to decide afresh.
M/s. The Bharathi Co-operative Credit Society, Bangalore Page 12 of 12