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Facts
The assessee, M/s. Sri Siddeshwar Souharda Pattin Sahakari Niyamitha, an AOP registered under the Karnataka Souharda Sahakari Act, 1997, filed a return of income declaring Nil. The AO disallowed the deduction claimed under Section 80P(2)(a)(i) by holding that the assessee, being registered under the Souharda Act and not the Cooperative Societies Act, was not eligible for the deduction.
Held
The Tribunal noted that the Karnataka High Court in Swabhimani Souharda Credit Co-operative Ltd. vs. Govt. of India had held that entities registered under the Karnataka Souharda Sahakari Act, 1997, fit the definition of a 'co-operative society' under Section 2(19) of the Income Tax Act, 1961, and are thus eligible for Section 80P benefits. The Tribunal also referred to the Supreme Court decision in Mavilayi Service Co-operative Bank Ltd. v. CIT, which held that deduction under Section 80P cannot be denied for extending credit facilities to nominal or associate members.
Key Issues
Whether a society registered under the Karnataka Souharda Sahakari Act, 1997, is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, and if interest income from statutory deposits is allowable under Section 80P(2)(d).
Sections Cited
80P(2)(a)(i), 80P(2)(d), 80P(4), 2(19)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, SMC-‘B’ BENCH : BANGALORE
Before: SMT. BEENA PILLAI
Date of Hearing : 27-06-2024 Date of Pronouncement : 27-06-2024 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 22.04.2024 passed by Ld.CIT(A)-5, Kolkata for A.Y. 2017-18 on following grounds of appeal:
Page 2 of Tax effect relating to Grounds of Appeal each Ground of appeal That the learned Commissioner of Income Tax (`Appeals') [`CIT(A)1 — National Faceless Appeal Centre has erred on facts and General Ground circumstances of the case and in law so far as the first appellate order passed by him / her is prejudicial to the interest of the Appellant.
The learned CIT(A) has erred on facts and in circumstances of the case and in law so far as he was not provided sufficient opportunity of being heard.
He failed to appreciate the fact that, in faceless assessment, all the notices are served through e-mails, weather such notices are received by the appellant on time. 3. The learned CIT(A) as well as the learned AO erred in denying the deduction u/s 8oP(2)(a)(i) since the society is registered under the KARNATAKA SOUHARDA Rs.5,46,979 SAHAKARI ACT 1997 and it is registered as Co Operative and not as Co Operative societies registered under KARNATAKA COOPERATIVE SOCIETIES ACT 1959 4. The Appellant prays for leave to add, modify, delete, or introduce additional General Ground grounds of appeal at any time before the Appeal is disposed of. Total Tax Effect Rs.5,46,979 Brief facts of the case are as under: 2. The assessee is an AOP and filed its return of income on 01.12.2017 declaring total income of Rs. Nil. The case was selected for scrutiny through CASS and notice u/s. 143(2) of the act was issued along with notice u/s. 142(1).
2.1 In response to the notices, the assessee submitted that, it is carrying out the business in banking and providing credit facilities to its members consisting of regular, nominal and Page 3 of associate members. The Ld.AO completed the assessment by disallowing deduction claimed by the assessee u/s. 80P(2)(a)(i) by holding that, the assessee is registered as per section 5(3) of Karnataka Souharda Sahakari Act, 1997 and not under Karnataka Co-operative Societies Act, 1959. It was thus held by the Ld.AO that, if the assessee is directly registered as Souharda Co-operative, benefits u/s. 80P of the act is not available to the assessee.
Aggrieved by the order of the Ld.AO, assessee preferred an appeal before the Ld.CIT(A).
2.2 The Ld.CIT(A) issued notices to the email address provided by the assessee on 4 occasions however no response was received. Accordingly, the Ld.CIT(A) dismissed the appeal for non- compliance.
Aggrieved by the order of the Ld.CIT(A), assessee preferred appeal before this Tribunal.
At the outset, the Ld.AR submitted that assessee is registered under the Souharda Co-operative Act and is an AOP which has been admittedly noted by the Ld.AO in the para 5 of the assessment order. However, the assessee while applying for PAN, wrongly mentioned itself to be BOI.
3.1 Be that as it may, the Ld.AR submitted that the decision in case of Udaya Souharda Co-operative Society Ltd. in vide order dated 17.08.2018 has addressed the Page 4 of Souharda registered under Karnataka Souharda Sahakari Act, 1997, can be regarded as Co-operative Society entitled to benefit of deduction u/s. 80P(2)(a)(i) of the act.
3.2 The Ld.AR drew my attention to para 8 of the said decision and the arguments advanced by the revenue as well as the assessee therein. He further brought to my notice the decision of Hon'ble Karnataka High Court in case of Swabhimani Souharda Credit Co- operative Ltd. vs. Govt. of India and 3 others reported in (2020) 122 taxmann.com 37 vide decision dated 16.01.2020, wherein the revenue authorities were also a party to the petition. He submitted that Hon'ble High Court after considering the provisions of section 2(19) of the act, declared that the entities registered under the Karnataka Souharda Sahakari Act, 1997, fit into the definition of co-operative society as defined in section 2(19). He placed reliance on the following observations of the decision of Hon'ble Karnataka High Court in case of Swabhimani Souharda Credit Co-operative Ltd. vs. Govt. of India and 3 others (supra). “4. In the light of the rival submissions half heartedly made at the Bar, the following question of law arises for consideration: "Whether an entity registered under the Karnataka Souharda Sahakari Act, 1997 fits into the definition of "co-operative society" as enacted by sec. 2(19) of the Income- tax Act, 1961 for the purpose of Section 80P thereof?"
Having heard the learned counsel for the parties and having perused the petition papers, this Court is of a considered opinion that the answer to the above question needs to be in the affirmative for the following reasons: (a) sec. 80P of the 1961 Act provides for deduction in respect of income of Co- operative Societies is obvious going by its very text; sub-section (1) of said section reads as under: "80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2) in computing the total
Page 5 of income of the assessee." The other provisions of this section being not of much relevance to the question being treated, are not reproduced, although they too have been looked into. Sec. 2(19) which finds a place in the Dictionary Clause of the 1961 Act reads as under: 'co-operative society" means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies;' The provisions of sec.80P are enacted by the Parliament for promoting the co-operative movement in the Country in tune with what Father of the Nation Mahatma Gandhi preached to the countrymen; this Section needs to be liberally construed to effectuate the legislative object of encouraging & promoting the growth of co-operative movement vide Kanga & Palkhivala's The Law and Practice of Income Tax, 10th Edition, LexixNexis at page 1656; it is more so because the right to form a co-operative society itself is made a Fundamental Right, now enshrining in Article 19(1)(i) by virtue of 97th Amendment to the Constitution of India w.e.f. 15-10-2013; (b) the object of enacting sec.80P of the 1961 Act may be defeated if a restrictive meaning is assigned to the definition of "co-operative society" as given u/s.2(19) inasmuch as the invokability of the provisions of sec.80P is dependent upon the entity seeking the benefit thereunder being a co- operative society; going by the text and context of these provisions, one can safely conclude that all entities that are registered under the enactments relating to co-operative societies, regardless of their varying nomenclatures need to be treated as co-operative societies; this view accords with the purposive construction of sec.80P r/w sec.2(19) of the 1961 Act; (c) in the State of Karnataka, there have been two statutes enacted by the State Legislature that relate to registration & regulation of co-operative societies viz., the Karnataka Co-operative Societies Act, 1959 ie., Karnataka Act No. 11 of 1959 and the Karnataka Souharda Sahakari Act, 1997 ie., Karnataka Act No. 17 of 2000; both these Acts are enacted pursuant to Article 246(3) r/w Entry 32, List-II of Schedule VII of the Constitution of India; there is no other Entry to which this Act is relatable; the Legislative Entries being only the fields of legislation need to be very broadly interpreted, is the settled position of constitutional jurisprudence videUjagar Prints v. Union of India 1986 taxmann.com 529 (SC); Chapter X of 1997 Act containing sec.67 enacts important co- operative principles that animate and brood through almost all the provisions of this Act; (d) the Karnataka Souharda Sahakari Bill, 1997 has the following as the Statement of Objects & Reasons: "1. the recognition, encouragement and voluntary formation of co- operatives based on self help, mutual aid, wholly owned, managed and controlled by members as accountable, competitive, self-reliant and economic enterprises guided by co-operative principles specified therein; 2. removing all kinds of restrictions that have come to clog the free- functioning of the cooperatives and the controls and interference by the Page 6 of Government except registration and cancellation; 3. promotion of subsidiary organization, partnership between co- operatives and also collaboration between co-operatives and other institutions; 4. registration of co-operatives, union cooperatives and Federal Co- operative in furtherence of the objectives specified above; 5. Conversion of co-operative societies registered under the Karnataka Co- operative Societies Act, 1959 as a co-operative under the proposed legislation. Hence the Bill." (e) the preamble to the 1959 Act reads as under: "Whereas it is expedient (to promote voluntary formation, autonomous functioning, democratic control and professional management of co- operative societies) in the State of Karnataka; Be it enacted by the Karnataka State Legislature in the Tenth Year of the Republic of India as follows-" Similarly, the preamble to the 1997 Act reads as follows: "Whereas it is expedient to provide for recognition, encouragement and voluntary formation of co-operatives based on self-help, mutual aid, wholly owned, managed and controlled by members as accountable, competitive, self-reliant and economic enterprises guided by co-operative principles and for matters connected therewith; Be it enacted by the Karnataka State Legislature in the Forty-eighth Year of Republic of India as follows-". A perusal of these two preambles and various provisions of these two Acts leads one to an irresistible conclusion that both these Acts are cognate statutes that deal with cooperative societies, regardless of some difference in their nomenclature and functionality, the subject matter being the same. (e) the word 'co-operative' is defined by sec.2(d-2) of 1959 Act as under: "2(d-2): 'Co-operative' means a Co-operative registerd under the Karnataka Souharda Sahakari Act, 1997 (Karnataka Act 17 of 2000), and includes the Union Co-operative and the Federal Co-operative" Similarly, the word 'co-operative' is defined by Sec. 2(e) of 1997 Act as follows: "2(e): "Co-operative" means a co-operative including a co-operative bank doing the business of banking registered or deemed to be registered under section 5 and which has the words 'Souharda Sahakari' in its name (and for the purposes of the Banking Regulation Act, 1949 (Central Act 10 of 1949), the Reserve Bank of India Act, 1934 (Central Act 2 of 1934), the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (Central Act 47 of 1961) and the National Bank for Agriculture and Rural Development Act, 1981 (Central Act 67 of 1981), it shall be deemed to be a Co-operative Society". A close examination of these two definitions shows that they have Page 7 of abundant proximity with each other in terms of content and contours; it hardly needs to be stated that in both these definitions the word 'co- operative' is employed not as an adjective but as a noun; the definition of other relative concepts in the dictionary clauses of these Acts strengthens this view; this apart, sec.7 of the 1997 Act provides that the entity registered as a 'co-operative' shall be a body corporate, notwithstanding the conspicuous absence of the word 'society' as a postfix; sec.9 of the 1959 Act makes the entity once registered u/s.8 thereof a body corporate; both the entities have perpetual succession by operation of law; thus on registration be it under the 1959 Act or the 1997 Act, a legal personality is donned by them, so that inter alia they can own and possess the property; (f) the employment of the word "Sahakari" in the very title of the 1997 Act is also not sans any significance; 'Sahakaar' in Sanskrit is the equivalent of 'sahakaara' in Kannada which means 'co-operation'; as already mentioned above both the 1959 Act and the 1997 Act employ this terminology; the 1997 Act is woven with the principles of co-operation; sec.4 of this Act bars registration of an entity unless its main objects are to serve the interest of the members in the area of co-operation and its bye- laws provide for economic and social betterment of its members through self-help & mutual aid in accordance with the cooperative principles; this apart, even sub-section (2) of sec.4 is heavily loaded with co-operative substance. In the above circumstances, these writ petitions succeed; a declaration is made to the effect that the entities registered under the Karnataka Souharda Sahakari Act, 1997 fit into the definition of "co-operative society" as enacted in sec.2(19) of the Income-tax Act, 1961 and therefore subject to all just exceptions, petitioners are entitled to stake their claim for the benefit of sec.80P of the said Act; a Writ of Certiorari issues quashing the impugned notice dated 30-3-2018 at Annexure-D in W.P.No.48414/2018; other legal consequences accordingly do follow” He thus prayed that the claim needs to be analysed in the light of the decision of Hon'ble Karnataka High Court reproduced hereinbove.
3.3 On the contrary, the Ld.DR placed reliance on orders passed by authorities below.
I have perused the submissions advanced by both sides in the light of records placed before us.
4.1 The claim of the assessee is that assessee though a Souharda is entitled to benefit u/s. 80P(2)(a)(i) of the act by virtue of the Page 8 of Hon'ble Karnataka High Court in case of Swabhimani Souharda Credit Co-operative Ltd. vs. Govt. of India and 3 others (supra). In the light of the decision of Hon'ble Karnataka High Court in case of Swabhimani Souharda Credit Co-operative Ltd. vs. Govt. of India and 3 others (supra), I am of the view that assessee should be allowed deduction u/s. 80P(2) of the act.
4.2 On merits of the case, it is submitted that the assessee was denied deduction u/s. 80P(2)(a)(i) of the act, by holding that the assessee is a bank and therefore the provisions of section 80P(4) will be applicable. It is submitted that, the Ld.AO referred to the decision of Hon’ble Supreme Court in case of Citizen Co-operative Society Ltd. vs. ACIT reported in (2017) 84 taxmann.com 114 and held that the assessee provides credit facility to nominal members also thereby violating the principles of mutuality.
4.3 The Ld.AR submitted that assessee received interest from providing credit facilities to its members. The Ld.AR placed reliance on the decision of Hon’ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT reported in 431 ITR 1 in support of his argument.
4.4 The Ld.DR has supported the orders passed by the authorities below.
5. I note that assessee is admittedly carrying out activity of providing credit facilities to its members and has claimed deduction u/s. 80P(2)(a)(i) of the act. This Tribunal has in Page 9 of Hon’ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT reported in 431 ITR 1 deduction cannot be denied for the reason that the credit facility were extended to the nominal / associate members also. In the interest of justice, I remit this issue back to the Ld.AO to consider the claim of assessee having regard to the ratio laid down by Hon’ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT (supra) r.w. definition of “member” in Karnataka Co-operative Societies Act, 1959.
5.1 I also note that the assessee might have earned interest from deposits made for the purposes of statutory requirements. At this juncture, I refer to the decision of Hon'ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Co-operative Society vs. ITO reported in 230 taxman 309 wherein Hon'ble Court held that interest income in respect of temporary parking of own surplus funds not immediately required has to be considered under the provisions of section 80P(2)(d) of the act. Recently Hon’ble Supreme Court in case of Kerala State Co- operative Agricultural and Rural Development Bank Ltd. vs. AO reported in (2023) 154 taxmann.com 305, had considered the allowability of the claim u/s. 80P(2)(d). This Tribunal has considered this issue in light of the decision of Hon’ble Supreme Court in many cases.
5.2 It is directed to the Ld.AO that, in the event, assessee has earned any interest / dividend from investments, which cannot be considered under 80P(2)(a)(i), the Ld.AO is directed to consider
Page 10 of 80P(2)(d) by following the ratio laid down by Hon’ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. AO reported in (2023) 154 taxmann.com 305. The Ld.AO shall consider the provisions of section 57 in respect of such interest that cannot be considered u/s. 80P(2)(d) of the Act. Accordingly, the issues stands remanded to the Ld.AO for de novo verification in the light of the above decisions. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, the grounds raised by the assessee stands allowed for statistical purposes.
In the result, the appeal filed by the assessee stands allowed for statistical purposes. Order pronounced in the open court on 27th June, 2024.