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Facts
The assessee, a co-operative society, filed its return of income declaring Nil income after claiming deductions under Section 80P(2)(a)(i) and for interest income. The Assessing Officer disallowed these deductions, citing violation of the principle of mutuality and that interest income was not attributable to the main business activity. The CIT(Appeals) also disallowed the deductions.
Held
The Tribunal noted that the assessee was not afforded proper opportunity of hearing before the CIT(Appeals) due to the transition to the faceless assessment scheme. The Tribunal found merit in the assessee's submission that the matter should be re-examined.
Key Issues
Whether the assessee is eligible for deduction under Section 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act, and whether proper opportunity of hearing was provided.
Sections Cited
80P(2)(a)(i), 80P(2)(d)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
Per Laxmi Prasad Sahu, Accountant Member
This appeal is filed by the assessee against the order dated 31.03.2024 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the AY 2014-15 on the following grounds of appeal:-
“ That the order of the Commissioner of Income Tax (Appeals) in so far it is prejudicial to the interests of the appellant is bad and erroneous in law and against the facts and circumstances of the case.
That the Commissioner of Income Tax (Appeals) erred in law and on facts in deciding the appeal ex-parte without providing a proper opportunity of being heard by sending the appeal hearing communication manually as part of principles of natural justice.
3. That the Commissioner of Income Tax (Appeals) ought to have considered the fact that the entire appeal faceless scheme is newly introduced and not all the assessees are well aware of it and can acknowledge the hearing notices sent through emails. 4. That the order of the Commissioner of Income Tax (Appeals) erred in law and on facts in allowing deduction only to the extent of profits attributable to regular members only which is claimed as deduction u/s 80P(2)(a)(i) of the Act. 5. That the learned Commissioner of Income Tax (Appeals) ought to have appreciated that the Karnataka Co-operative Societies Act, 1959 allows the Co-operative Society to admit nominal and associate members and therefore, deduction u/s 80P(2)(a)(i) of the Act be allowed. 6. That the order of the learned Commissioner of Income Tax (Appeals) erred in law and on facts in not allowing the interest income of Rs.10,99,273/- earned from Co-operative Banks as deduction u/s 80P(2)(d) of the Act. 7. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in stating that the interest income earned cannot be considered as eligible for deduction u/s 80P(2)(d) of the Act since the same is received from co-operative banks. 8. That the order of the learned Commissioner of Income Tax (Appeals) erred in law and on facts in not allowing the interest income of Rs.10,99,273/- as deduction u/s 80P(2)(a)(i) of the Act even though the investments were made out of surplus fund and attributable to the business activity of the appellant. 9. Without prejudice to the above grounds, that the learned Commissioner of Income Tax (Appeals) erred in law and on facts in not allowing the proportionate expenditure on interest income
earned from the deposits made on the principle of commercial expediency. Each of the above grounds is without prejudice to one another, the appellant craves to leave of Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or otherwise modify all or any of the grounds of appeal either before or at the time of hearing of this appeal.”
2. Briefly stated the facts are that assessee filed return of income declaring total income at Nil after claiming deduction of Rs.25,83,728 u/s. 80P(2)(a)(i) of the Act. The assessment was completed u/s. 143(3) r.w.s. 147 of the Act and the AO observed that assessee is not eligible for deduction u/s. 80P(2)(a)(i) of the Act since the assessee has Class A and Class C members as there are no equal rights for Class A and Class C members and the assessee violated the principles of mutuality. Accordingly following the Apex Court judgment in the case of Citizen Co-operative Society Ltd. he disallowed deduction u/s. 80P(2)(a)(i) of the Act. The assessee has also received interest from co-operative and commercial bank of Rs.10,99,273 which was also denied. The AO assessed income of Rs.25,83,724.
Aggrieved by the above order, the assessee filed appeal before the First Appellate Authority (FAA). The ld. FAA following the judgment in the case of Mavilayi Service Co-op. Bank Ltd. directed the AO to allow proportionate deduction to the extent of profits attributable to members only and members to be considered as per the provisions of the Karnataka Co-operative Societies Act, 1959 read with decision of Mavilayi Service Co-op. Bank Ltd. dated 12.01.2021. Further in respect of interest received of Rs.10,99,273 from cooperative/commercial bank, the ld. FAA noted that the payer banks are functioning under license from RBI and it is not attributable to main activity of assessee society and not eligible for deduction u/s. u/s. 80P(2)(d) of the Act and considered it as income u/s. 56 of the Act. Aggrieved, the assessee is in appeal before the ITAT.
The ld. AR submitted that the appeal was filed on 08/01/2020 and case was migrated to National Faceless Appeal Center ( NFAC) in terms of Notification No. 76/2020 dated 25.09.2020 but the assessee was not aware of this NFAC appeal proceedings. The Notices were issued during COVID-19 period on 09.03.2020, 30.12.2020 and 11.10.2021. The CIT (A) provided only one opportunity only on 10.02.2024 which was also not received by the assessee. Therefore the case was not represented before the CIT (A). The CIT(A) has also not decided the issue in terms of the Judgment of Hon’ble Apex Court in the case of Mavilayi Service Co-op. Bank Ltd. reported in [2021] 123 taxmann.com 161 (SC) regarding definition of Members. The AO has also not considered the definition of members as per section 2f of Karnataka Co=operative Society Act. 1959. The AO has further relied on the judgment of Hon’ble Apex Court in the case of Citizen Co-op. Society Ltd. v. C IT (in Civil Appeal No.10245/2017) is also not applicable. He undertook that if a chance is given to the assessee, the assessee will be able to show that it is eligible for deduction u/s. 80P(2)(a)(i) as well as 80P2(d). Therefore he requested that the matter may be sent back to the AO.
On the other hand, the ld. DR relied on the order of the Ld.CIT(A) and he submitted that the interest income received by the assessee is not to be considered as a business income since the Hon’ble Jurisdictional High Court of Karnataka has settled this issue in the case of Totgars’ Co-operative Sales Society Ltd. reported in (2017) 395 ITR 611 (Karnataka) dated 16.06.2017.
The ld. DR also submitted that the assessee has violated the principle of mutuality and lower authorities have relied on the judgment of Hon’ble Apex Court in the case of Citizen Co-operative Society Ltd. reported in (0217) 397 ITR 1 (SC). Accordingly the assessee is not eligible for deduction as observed by the lower authorities u/s 80P(2)(a)(i). He further submitted that in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs. Assessing Officer, (2023) 154 taxmann.com 305 the Hon’ble Supreme Court has clearly held that if the payer bank holds licence from RBI for carrying out banking business, then the interest received from such bank is not eligible for deduction u/s. 80P(2)(d), though the co-operative bank may be primarily formed as co-operative society and that the activity of the entity should be seen. He submitted that the interest received from co-operative bank is governed by Banking Regulation Act, 1949. The ld. DR further submitted that the for deduction or exemption provision the strict interpretation should be considered as decided by the Hon’ble Apex Court in the case of Commissioner of Customs (Import), Mumbai vs Dilip Kumar & Company reported in [2018] 95 taxmann.com 327 (SC)/[2018] 69 GST 239 (SC)/[2018]. The ld. DR submitted that the literal interpretation of the section 80P(2) should be considered while granting deduction.
Considering the rival submissions we note that the assessee filed appeal before the First Appellate Authority (FAA) against the reassessment order passed by the AO u/s. 143(3) r.w.s. 147 dated 10.12.2019. The assessee filed appeal on 8.1.2020 before FAA and case was migrated to NFAC. The FAA issued three notices on the dates stated above and only one opportunity was granted on 10.2.2024 after a lapse of long time and the assessee could not present its case. Accordingly the FAA passed the order on the basis of documents available before him. We find substance in the submission of the ld. AR that the matter may be re-examined by the AO afresh. Therefore in the interest of justice and request made by the ld. AR of the assessee, we remit the issue to the AO for fresh consideration and decision as per law. The assessee is directed to update its email id, communication address and other details and file necessary documents that would be essential and required for substantiating his case and for proper adjudication by the revenue authorities. Needless to say that reasonable opportunity of being heard be given to the assessee. The assessee is directed to cooperate with the proceedings and in case of further default, the assessee shall not be entitled to any leniency.
In the result, the appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on this 03rd day of July, 2024.