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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Shree Datta Prasad Sahakari Income Tax Officer Patsanstha Ltd. Ward 15(3)(4) Dion Shelter Co Op HSG Matru Mandir, Grant RD, Society IST Floor, Shop No. 108 Mumbai-07 Vs. S.B. Barve Marg, Kurla (E) Mumbai-400 024 PAN No. AABAS6993E Appellant .. Respondent (A.Y:2010-11) Vs. Income Tax Officer Shree Datta Prasad Sahakari Ward 15(3)(4) Patsanstha Ltd. Matru Mandir, Grant RD, Dion Shelter Co Op HSG Society Mumbai-07 IST Floor, Shop No. 108 S.B. Barve Marg, Kurla (E)s Mumbai-400 024 PAN No. AABAS6993E Appellant .. Respondent .. Mr. M Subramanian, AR Assessee by Revenue by .. Mr. K. Ravi Kiran, DR .. Date of hearing 16-05-2017 Date of pronouncement .. 24-05-2017 O R D E R PER MAHAVIR SINGH, JM:
These Cross appeals by the assessee and by the Revenue are arising out of the order of CIT(A)-26, Mumbai, in appeal No. CIT(A)-26/IT-102/15(3)(4)/12-13 dated 25-03-2014. The Assessment was framed by ITO ward-15(3)(4), Mumbai for the A.Y. 2010-11 vide order dated 08-02-2013 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in the Revenue’s appeal is as regards to the order of CIT(A) directing the AO to allow deduction under section 80P of the Act to the assessee even though assessee caries the business of banking and other business & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 in the name of Cooperative Society. For this Revenue has raised following three effective grounds: -
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing to allow deduction u/s. 80P to the assessee even though assessee carries on banking and other business in the name of a credit co-operative society.
2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing deduction u/s. 80P(2)(a)(i) without considering insertion of sec. 80P(4) and sub clause (viia) to sec. 2(24) vide Finance Act, 2006 w.e.f. 01-04-2007."
" On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the facts that the assessee falls under the category of "Primary Co-operative Bank" as per the definition part V of the Banking Regulation Act, 1949".”
3. Briefly stated facts are that the assessee is a co-operative society registered under Maharashtra Co-operative Societies Act, 1960 for the relevant AY 2010-11. The assessee filed nil return of income after claiming deduction under section 80 P of the Act on the total income of Rs. 24,32,807/-. According to AO, the assessee co-operative society is doing banking business and it is collecting deposits from members by way of fixed deposits, saving deposits and recurring deposits etc. The assessee has declared profit for the relevant FY 2009- 10 relevant to AY 2010-11 at Rs. 24,32,807/- and claimed deduction under section 80P (2)(a)(i) of the Act. The assessee vide letter dated 22-10-2012 admitted that the nature of the business of credit society is to accept deposits from the members, non-members and account holders on interest basis. The AO in view of sub-section 4 of section 80P of the Act as inserted by the Finance Act Page 2 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 2006 with effect from 01-04-2006 noted that the deduction can be claimed in this provision subject to that section shall not apply in the relation to any co- operative bank other than primary agriculture credit society or a primary cooperative agriculture and rural development bank. He also noted that assessee fulfills the conditions laid down under section 56(c) in section 5(ccv) of Part 5 of the Banking Regulation Act 1949 and is a primary co-operative bank. Accordingly, he disallowed the claim of deduction at Rs. 24,32,807/-. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) noted that the income earned by the society from the activities entered into with its members only and it accepts deposits from members and also grant loans and advances to members only. For this the CIT(A) after verifying the records noted in Para 3.1 of his appellate order reads as under: - “3.1.4 During appeal, the appellant has filed details regarding interest income and its members. It has been submitted that all activities of the appellant are with members only. It accepts deposits from embers and also grants loan/advances to the members. Society does not conduct any business with any person other than a member. It was also submitted that the AO was not correct while holding that the appellant is a bank or that assessee is engaged in the business of banking in any manner. It has also relied on various case laws in its support viz. judgement of ITAT, Pune in case of Jankalyan Nagri Sahakari Pat Sanstha Ltd. 54 SOT 60, ITAT, Panji in the case of Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. (2012) 137 ITD 163and ITAT Nagpur Bench in the case of Buldana Urban Co-operative Credit Society Ltd. (2013) 85 DTR (Nag)(Trib) 410.
3.4.5 Facts of the case, the order of the AO and the submissions of the AR together with various judicial precedents relied upon by the AO as well AR have Page 3 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 been considered carefully. The appellant is a registered as Co-operative Credit Society and it is providing facility to its members to deposit their savings on which interest is paid and also loan/advance on which interest is charged from the members for such loan/advance. As submitted, the appellant has received aggregate interest from various co-operative and scheduled bank of Rs.20,42,220/- on FDs and it is maintaining current accounts with certain scheduled banks and cooperative banks.”
According to CIT(A), the Bank Regulation Act 1949 does not affect to the assessee being a co-operative society and accept deposits in the manner and to the extent specified in Part 5 of the State Act and he also noted that as per Bank Regulation Act, the assessee is not a Co-Operative Bank and since it is neither a State Co-Operative Bank nor a central Co-operative Bank, it cannot be said to be transacting the business of banking, hence, he noting the provision of section 80IP(2)(a)(i) allowed the claim of the assessee by observing in Para 3.1.17 and 3.1.18 as under: - “3.1.17 Further, Provisions of sec.80P(2)(a) are applicable to all co-operative societies in respect of their incomes as mentioned in various sub-clauses therein.
Sub clause (1) reads as under: - "carrying on the business of banking or providing credit facilities to its member, or"
Thus, in case of a co-operative society, which carries on even if the "business of banking" or "providing credit facilities to its members", the income of the Co-operative Society from such activities of banking Page 4 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 or providing credit facilities to its members, is eligible for deduction u/s.80P of the Act.
3.1.18 It is not in dispute that the assessee is a co- operative society. It is also not the case that it has provided credit facilities to any person other than its members or that it has accepted any deposits from a person other than its members. Therefore, the assessee is a co-operative society providing credit facility to its members. Hence, from a plain reading of the Act, it is clear that the assessee is eligible for deduction u/s.80P read with section 80P(2)(a)(i) of the Act.”
Aggrieved, now Revenue is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Now, the issue before us is whether the assessee, being a co-operative society register under the Maharashtra State Co-operative Act 1960, enables its members to obtaining loans and to make deposits as per the bye laws of the society, can be equated to be engaged in the banking business or with the co-operative bank so as to be treated under exclusionary clause of sub- section 4 of section 80IP of the Act. We find that this issue has been decided by Hon’ble Bombay High Court in the case of Quepem Urban Co-Operative Credit Society Ltd vs. ACIT [2015] 377 ITR 272 (Bom), Wherein the question referred before Hon’ble Bombay High Court reads as under: - “9. There is no dispute between the parties that the appellant is a cooperative society as the same is registered under the Co-operative Societies Act. The appellant is claiming deduction of income earned on providing credit facilities to its members as provided under Section 80P(2)(a)(i) of the Act. It is appellant's case that, it is not carrying on the business of the banking. Consequently, not being a co-operative bank the & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 provisions of Section 80P(4) of the Act would not exclude the appellant from claiming the benefit of deduction under Section 80P(2)(a)(i) of the Act. However in terms of Section 80P of the Act the meaning of the words Cooperative Bank is the meaning assigned to it in Chapter V of the Banking Regulation Act, 1949. A cooperative bank is defined in Section 5(cci) of Banking Regulation Act to mean a State Cooperative Bank, a Central Cooperative Bank and a primary cooperative bank. Admittedly, the appellant is not a State Cooperative Bank, a Central Cooperative Bank. Thus what has to be examined is whether the appellant is a primary Cooperative Bank as defined in Para V of the Banking Regulation Act. Section 5(ccv) of the Banking Regulation Act defines a primary cooperative bank to mean a cooperative society which cumulatively satisfies the following three conditions :
(1) Its principal business or primary object should be banking business of Banking; (2) Its paid up share capital and reserves should not be less that rupees one lakh. (3) Its bye-laws do not permit admission of any other cooperative society as its member.
It is accepted position that condition No.(2) is satisfied as the share capital in an excess of rupees one lakh. It has been the appellant's contention that the conditions No. (1) and (3) provided above are not satisfied.
10. Therefore the issue that arises for consideration is whether the appellant satisfies condition No.(1) and (3) above. The impugned order after referring to the definition of 'Banking Business' as defined in Section 5b of the Banking Regulation Act, held that the principal business of the Appellant is Banking. Section 5b of the Banking Regulation Act defines banking to mean & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 accepting of deposits for the purpose of lending or investment, of deposit of money from the public repayable on demand or otherwise. The impugned order juxtaposes the above definition with the finding of fact that the appellant did deal with non members in a few cases by seeing deposits. This read with Bye law 43 leads to the conclusion that it is carrying on banking business.
This fact of accepting deposits from people who are not members has been so recorded by the CIT(A) in his order dated 15 July, 2014. Before the Tribunal also the appellant did not dispute the fact that in a few cases they have dealt with non members. However so far as accepting deposits from non members is concerned it is submitted that the Bye-law 43 only permits the society to accept deposits from its members. It is submitted that Bye laws 43 does not permit receipt of deposits from persons other then members, the word "any person" is a gloss added in the impugned order as it is not found in Bye law 43. It is undisputed that the transactions with non members are insignificant/miniscule. On the above basis it cannot be concluded that the appellant's principal business is of accepting deposits from public and therefore it is in banking business. In fact, the impugned order erroneously relies upon bye-law 43 of the society which enables the society to receive deposits to conclude that it can receive deposits from public. However, the impugned order relies upon bye-law 43 to conclude that it enables the appellant to receive deposits from any person is not correct. Thus in the present facts the finding that the appellant's principal business is of Banking is perverse as it is not supported by the evidence on record. So far as the issue of primary object of the appellant is concerned the impugned order gives no finding on that basis to deprive the appellant the benefit of Section 80P of the Act. The impugned order sets out Page 7 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 the object clause of the appellant, which has 24 objects but thereafter draws no sequiter to conclude that the primary object is Banking. Consequently there is no occasion to deal with the same as that is not the basis on which the impugned order holds that it is a Primary Cooperative Bank.
In the above view, the alternative contention of the appellant that it is not in the business of Banking as the sine quo non to carry on banking business is a licence to be issued by the Reserve Bank of India, which it admittedly does not have, is not being considered.
12. So far as condition No.3 of the definition/meaning of Primary Cooperative Bank as provided in Section 5(ccv) of the Banking Regulation Act is concerned, the same requires the Bye laws of society to contain a prohibition from admitting any other cooperative society as its member. In fact the bye-laws of the appellant society originally in bye-law 9(d) clearly provided that no co-operative society shall be admitted to the membership of the society. Thus there was a bar but the same was amended w.e.f. 12 January, 2001 as to permit a society to be admitted to the membership of the society. Therefore for the subject assessment years there is no prohibition to admitting a society to its membership and one of three cumulative conditions precedent to be a primary cooperative bank is not satisfied. However the impugned order construed the amended clause 9(d) of the appellant's bye laws to mean that it only permits a society to be admitted to the membership of the appellant and not a co- operative society. According to the impugned order, a society and a co-operative society are clearly words of different and distinct significance and the membership is only open to society and not to a co-operative society. As & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 rightly pointed out on behalf of the appellant the word society as referred to bye law 9(d) would include the co-operative society. This is so as the definition of a society under the Co-operative Act is co- operative society registered under the Cooperative Act. Besides the qualifying condition 3 for being considered as a primary Cooperative bank is that the bye laws must not permit admission of any other cooperative society. This is a mandatory condition i.e. the bye laws must specifically prohibit admission of any other cooperative society to its membership. The Revenue has not been able to show any such prohibition in the bye laws of the appellant. Thus even the aforesaid qualifying condition (3) for being considered as a primary cooperative bank is not satisfied. Thus, the three conditions as provided under Section 5 (CVV) of the Banking Regulation Act, 1949, are to be satisfied cumulatively and except condition (2) the other two qualifying conditions re not satisfied. Ergo, appellant cannot be considered to be a co-operative bank for the purposes of Section 80P(4) of the Act. Thus, the appellant is entitled to the benefit of deduction available under Section 80P(2)(a)(i) of the Act.
13. The contention of Ms. Dessai, learned Counsel for the revenue that the appellant is not entitled to the benefit of Section 80P(2)(a)(i) of the Act in view of the fact that it deals with non-members cannot be upheld. This for the reason that Section 80P(1) of the Act restricts the benefits of deduction of income of co-operative society to the extent it is earned by providing credit facilities to its members. Therefore, to the extent the income earned is attributable to dealings with the non-members are concerned the benefit of Section 80P of the Act would not be available. In the above view of the matter, at the time when effect has been given to the order of this Court, the Page 9 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 authorities under Act would restrict the benefit of deduction under Section 80P of the Act only to the extent that the same is earned by the appellant in carrying on its business of providing credit facilities to its members.
Accordingly, the substantial question of law as framed is answered in the negative i.e. in favour of the appellant and against the respondent-Revenue.”
As the issue is squarely covered in favour of assessee in the given facts and circumstances of the case and by the decision of Hon’ble Bombay High Court in the case of Quepem Urban Co-Operative Credit Society Ltd. (supra). Respectfully, following the same, we confirm the order of CIT(A) and this issue of Revenue’s appeal is dismissed.
As regards to the assessee’s appeal the issue is against the confirmation of disallowance of deduction on interest income on FDRS for this assessee has raised following grounds: - “i) Holding that the income of interest on investments is not covered by the provisions of section 80IP(2)(a)(i) of the Income Tax Act 1961. ii) In holding that the interest on F.D.S. of Rs20,42,220/- credited to the Profit and Loss Account is not covered by the provisions of section 80IP(2)(d) of the Income Tax Act 1961.”
8. We find that the CIT(A) disallowed the claim of deduction on an amount of interest received on FD from various co-operative and Schedule banks amounting to Rs.20,42,220/-. He disallowed deduction on the interest under section 80IP(2)(d) of the Act. The learned Counsel for the assessee relied on the decision of Hon’ble Karnataka High Court in the case of Guttigedarara Credit Co-operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karn) Wherein the same issue as regards to the interest so derived on the capital, if not immediately so required to be lent to the members cannot be kept as idle and if this deposits in a Page 10 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 bank account earned interest, the interest so earned is attributable to the profits and gains of the business providing credit facilities to its members. Hon’ble High Court in this case held as under: - “11. In this context when we look at the judgment of the Apex Court in Totgars Co-operative Sale Society's case (supra), on which reliance is placed, the Supreme Court was dealing with a case where the assessee/Co- operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short- term deposit/security.
Such an amount which was retained by the assessee- Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to its members, as there were no takers. Therefore they had Page 11 of 13 & 3769/Mum/2014 Shree Datta Prasad Sahakari Patsanstha Ltd.; AY 10-11 deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State Co- operative Bank Ltd. [2011] 336 ITR 516/200 Taxman 220/12 taxmann.com 66.
In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial questions of law are answered in favour of the assessee and against the revenue. Hence, we pass the following order:”
As the principle laid down by the above High Court in the above case, respectfully, following the same we allow the claim of the assessee and this issue of the assessee’s appeal is allowed.
In the result, the Revenue’s appeal is dismissed and assessee’s appeal is allowed.
Order pronounced in the open court on 24-05-2017.