BANNANJE GRAHAKARA VIVIDHODDESHA SAHAKARA SANGHA LTD., ,UDUPI vs. INCOME TAX OFFICER, WARD-1, & TPS, , UDUPI

Similarly, we would like to make reference to authoritative pronouncement of Hon'ble Supreme Court in the case of N. Balakrishnan Vs. M. Krishnamurthy (supra). It reads as under: "Rule of limitation are not meant to destroy the right of parties. They are meant to see that parties do not resort to dilatory tactics, but seek their remedy promptly. The object of providing a legal remedy is to repair the damage caused by reason of legal injury. Law of limitation fixes a life- span for such legal remedy for the redress of the legal injury so suffered. Time is precious and the wasted time would never revisit. During efflux of time newer causes would sprout up necessitating newer persons to seek legal remedy by approaching the courts. So a life span must be fixed for each remedy. Unending period for launching the remedy may lead to unending uncertainty and consequential anarchy. Law of limitation is thus founded on public policy. It is enshrined in the maxim Interest reipublicae up sit finis litium (it is for the general welfare that a period be putt to litigation). Rules of limitation are not meant to destroy the right of the parties. They are meant to see that parties do not resort to dilatory tactics but seek their remedy promptly. The idea is that every legal remedy must be kept alive for a legislatively fixed period of time. A court knows that refusal to condone delay would result foreclosing a suitor from putting forth his cause. There is no presumption that delay in approaching the court is always deliberate. This Court has held that the words "sufficient cause" under Section 5 of the Limitation Act should receive a liberal construction so as to advance substantial justice vide Shakuntala Devi lain Vs. Kuntal Kumari [AIR 1969 SC 575] and State of West Bengal Vs. The Administrator, Howrah Municipality [AIR 1972 SC 749]. It must be remembered that in every case of delay there can be some lapse on the part of the litigant concerned. That alone is not enough to turn down his plea and to shut the door against him. If the explanation does not smack of mala fides or it is not put forth as part of a dilatory strategy the court must show utmost consideration to the suitor. But when there is reasonable ground to think that the delay was occasioned by the party deliberately to gain time then the court should lean against acceptance of the explanation. While condoning delay the Could should not forget the opposite party

We do not deem it necessary to recapitulate the proposition laid down in other decisions. Suffice to say that the Hon'ble Courts are unanimous in their approach to propound that whenever the reasons assigned by an applicant for explaining the delay, then such reasons are to be construed with a justice oriented approach.

In the light of the above, the assessee has adduced sufficient bona-fide cause for the delay, and was neither lax nor negligent in pursuing its case, we condone the delay of 58 days in filing the present appeal.

The brief facts of the case are that the assessee filed return of income on 21/09/2016 declaring gross total income of Rs.30,08,301/- and after claiming deduction u/s 80P(2), the total income was nil. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee.

The assessee filed a copy of registration certificate, list of members, list of depositors and list of members who have availed loan from the society etc. The AO noted from the list of members as on 31/03/2016 that the assessee has A Class member, B class member as per clause 6 of the Bye-laws. The AO further noted that the assessee had made claim of deduction u/s 80P(2)(a)(i) of the Act on the interest received from the credit facilities provided to the members. The assessee society also had received interest from SCDCC & IDBI Bank of Rs.3,90,951/ and rental income of Rs.1,13,500/-. The assessee society included the above income for claiming deduction u/s 80P(2)((a)(i) of the Act. It was further noted from the interest received of Rs. 3,900,951/- the interest of Rs.3,67,819/- was from IDBI Bank, Udupi Brach and the interest of Rs.23,132/- was received from SCDCC Bank Udupi and the entire interest was claimed as deduction u/s 80P(2)(a)(i) of the Act. Even the assessee is also not eligible to make a claim u/s 80P(2)(a)(i)/80P(20(d) of the Act for such interest received in the light of the judgment of the Hon’ble jurisdictional High Court in the case of Totagars Co-operative State Society reported in dated 16.06.2017, in which it has been held that interest received from other than co-operative societies ought to be assessed u/s 56 of the Act. In this regard, the assessee was issued show cause notice and assessee replied to the same. The assessee submitted that the judgment relied by the AO is not applicable in the present facts of the case and he relied on the judgment of the Hon’ble Karnataka High Court in ITA No.29/2015 in the case of M/s Guttigedarara Credit Cooperative Society Ltd. Vs. ITO, Ward-2(2) Mysore.

The AO further noted that the assessee need application to investment from its liquid assets and resultant interest is nothing but income in the hands of the society. The assessee society has invested its idle funds and interest received from on such funds. Therefore, interest received on such investments has to be brought to tax and the AO also analyzed balance sheet for the last 3 years of the society and noted that the investments have been increased each year. The interest received was not from short term investments and he treated it as income u/s 56 of the Act. Further examined u/s 80(P)(a)(i) and noted that sec. 2(19) of the Income Tax Act defines co-operative society to mean 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. Section 4 of the Indian Co- operative Societies Act, 1912 defines a cooperative "as a society which has its objective the promotion of economic interest of its members in accordance with co-operative principles". Section 2(c) of the Karnataka Co-operative Societies Act, 1959 defines "Co-operative society' means, a society registered or deemed to be registered under this Act". Being an Association of Persons incorporated as `Person' under section 2(31 )(e), a co-operative society is an entity liable for income tax. The Finance Act, 2006 inserted section 2(24)(viia) with effect from assessment year 2007-08 to include, "the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members" as income. The objects as per bye laws of the assessee society are found to be in the nature of providing credit facility to members and objects of the society are specified in clause4 of the bye laws(4.1 to 4.25).

As per clause 5 of the byelaws, the society has made rules with regard to collecting deposits and capital. Some of them are reproduced hereunder

In response to notice u/s 142(1) assessee produced a list lf large number of members who possessed at least one share and had active participation in the affairs of the society and another large list of persons who were admitted as nominal members who did not possess any share certificate nor did they have any role in election of the managing body. As per the documents submitted it was noted that there was A class of members of 3437 and detail of the Associate/nominal members were not submitted even after repeated request. There was unequal rights among the different class of members as noted by the AO in his order. The detail of loans availed was not produced. The list of persons from whom the assessee society received deposits were not members and borrowers in loan account, they were also persons from the general public, not members of the society, the details of which was not furnished even repeated request to the assessee. The AO noted that the “members” means share holding members only. Anyone one can become a nominal member of the society on payment of nominal token fee and activity of the society is entirely that of commercial banking and earned interest income at par with other commercial banks. The AO relying on the judgement of Hon’ble Apex Court in the case of Citizen Co-operative Society Ltd. [ Civil Appeal No. 10245 of 2017reported in (2017) 397 ITR 1 ] observed that the assessee has violated the principal of mutuality and accordingly it is not eligible for deduction u/s 80P(2)(a)(i) on the interest income received from providing credit facility to its members. The assessee is also not eligible for deductions u/s 80P(2)(d) on the interest income on its investments made with SCDCC Bank and schedule bank relying on the judgment of Hon’ble Jurisdictional High Court in the case of The Totgars Co-operative Sales Society in order dated 16.06.2017.

The AO further noted that the assessee has debited Rs.1,50,000/- towards provision for audit fee which is unascertained liability. Accordingly, it was also disallowed. Accordingly, the total income was assessed at Rs.31,24,251/-.

Aggrieved, the assessee field appeal before the CIT(A). The CIT(A) after discussing the issue in detail, dismissed the appeal of the assessee. Aggrieved, the assessee field appeal before the ITAT.

The ld.AR of the assessee submitted that both the lower authorities have denied the deduction u/s 80P(2)(a)(i) of Rs. 25,03,850/- and section 80P(2)(d) on the interest received from providing credit facilities to its members and on the investment made with SCDCC Bank and IDBI Bank aggregating to Rs.3,90,951/- and wrongly considered as income u/s 56 of the Act. The amount was deposited as per Karnataka Co-operative Society Act. Alternatively, he submitted hat if the interest received is considered as income u/s 56 of the Act, then the cost of fund u/s 57(iii) should be granted to the assessee. He also relied on the 2 judgments:- 1) Hon’ble High Court of Karnataka in – Tumkur Grain Merchants Souharda Co-operative Ltd., Vs. ITO and ITA No.29/2015 – Guttigedarara Credit CO-op. Society Ltd., Mysore Vs. ITO 2) Hon’ble High Court of Judicature at Hyderabad in W.P No.12727 and 12767/2016 – The Vavveru CO-op. Rural Bank and Anr. Vs. The Chief CIT & Anr. vis-à-vis the judgment in Totgars Co- operative Sale Soicety Ltd.,

The ld.AR of the assessee also submitted that the assessee has not violated any of the rules and regulations of the Karnataka Co-operative Society Act and has provided credit facilities to its members only. Therefore, income received on providing credit facilities for deduction should be allowed to the assessee. He further submitted that the provision of Rs.1,50,000/- towards audit fee is a liability of the assessee. The assessee is required to get its books of account audited every year after closure of the financial year. Therefore, audit fee is required to be paid to the auditor, therefore, observing that its un-ascertained liability by the ld.CIT(A) is completely wrong. Therefore, the provision made for the audit fee should be allowed as business expenditure.

The ld.AR further submitted that as per the Karnataka Co- operative Society Act 1959, there is no limit prescribed for members. The Karnataka Co-operative Society Act, 1959 has defined the members in u/s 2(f) and it is a inclusive definition. The assessee has not violated the concept of mutuality as relied on by the CIT(A) in the case of Citizen Co-operative Society Vs. ACIT in Civil Appeal No.10245/2017 dated 08/08/2017 which is not applicable in the present facts of the case and he relied on the judgment of Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. VS. CIT, Calicut & Anr., in Civil Appeal No.7343-7350/2019. Accordingly, the assessee is eligible for deduction u/s 80P(2)(a)(i) on the interest income received from members of the society providing credit facilities.

The Ld.DR relied on the order of the lower authorities 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. He also submitted that the Hon’ble Gujarat High Court in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. reported in (2022) 140 taxmann.com 602 (Gujarat) dated 04.01.2022 on similar facts had decided the issue in favour of the revenue and not allowed deduction u/s 80P(2)(d). The assessee has also violated the provision of section 18 of the Karnataka Co- operative Society (amended ) Act. 2014. The assessee did not submit the detail of members nominal/associate members even repeated request made by the AO. These are not members who did not possess any share certificate nor did they have any role in election of the managing body.

Considering the rival submissions, we note that the assessee registered under Karnataka Co-operative Society Act 1959. During the course of assessment proceedings, the AO asked about the list of members, list of loans and deposits, interest paid and interest received from nominal members as on 31/03/2016 and explanation and evidences/information in support of claim of deduction under Chapter VIA of the Act. The assessee submitted its reply. The AO noted that there is A class members, B class members and nominal/associated members. As per the Chapter 11 of the byelaws, the nominal members and associated members have no role in the management of the society . The sec. 20(2)(a) of the Karnataka Co-operative Society Act denies any right to vote to a nominal or associate members nominal/associated members has no right to vote. .Further the Nominal/Associate members are not entitled to attend the general meetings of the society, not eligible to contest on election. As per bye-laws society collects Rs. 10/- as nominal member ship fee and are not allowed to contribute to the society by way of subscribing shares of the society and are not entitled for profits of the society. Accordingly, the AO made analysis of the rights and duties of the A Class, B Class and Nominal/Associate members

The AO further noted that A class members are 3437 as on 31/03/2016. The assessee also furnished list of persons of A class members who made deposits with the assessee. However, the assessee failed to furnish the list of nominal members/associated members in spite of repeated request made by the AO. 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 6 months. However, the assessee has not furnished the details of nominal/associated members and the assessee could not furnish whether the assessee society has complied to amended Sec. 18 of the Karnataka Co-operative Society Act. 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) 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 regular members but not from the non-members. The Para 33 of the said judgement says as under:- ………………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 decided in this para 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 but the assessee has not filed the detail of nominal/associate members/non-members and the ld. AR of the assessee was also unable to explain for complying the above provision. We noted that there is unequal rights among the A Class Members, Associate/ Nominal Members, accordingly the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act on the interest income received from its nominal/associate members if they are not members and also on income earned from dealing with non-members. Accordingly we remit this issue to the AO for fresh consideration and determination of the interest received from members and non-members from providing credit facilities and decide the issue as per law. The assessee is directed to produce the quantum of interest income received from providing credit facilities from A- Class members(regular members) and the AO shall grant deduction on such interest income u/s 80P(2)(a)(i) of the Act. and rest interest income from Nominal/Associate members ( if they are not members) are to be disallowed. Accordingly this issue is partly allowed.

Regarding disallowance u/s 80P(2)(d) of the Act, the assessee received interest from SCDCC Bank of Rs.23,132/- and Rs.1,67,119/- form IDBI Bank aggregating to Rs.3,90,951/-. The CIT(A) has dealt this issue at para No.6.2, which is as under:-

The CIT (A) has noted that the interest income received by the assessee are not operational income. Regarding section 80P(2)(d) of the Act, we note from the submissions of the ld. AR that the assessee has invested in SCDCC Bank and Nationalized earned interest thereon and deduction should be allowed u/s 80P(2)(d). Section 80P(2)(d) describes that if the assessee has derived interest/dividend from its investments with any other co-operative society, then the assessee is eligible for claim of deduction on such interest/dividend derived. In the judgment of Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. (KSCARDB) vs. Assessing Officer, (2023) reported in 154 taxmann.com 305 (Supreme Court) it has been discussed in detail the definition of co-operative banks and co-operative society. As per The Karnataka Co-operative Society Act 1959 section 2 [(b1) “Co-operative Bank” means a Co-operative Society which is doing the business of banking. Explanation.—For the purpose of this clause “banking” shall have the meaning assigned to it in section 5 of the Banking Regulation Act, 1949 (Central Act 10 of 1949). If the payer bank falls under the definition of co-operative bank in the light of the judgment of Hon’ble Apex Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income derived from SCDCC Bank & IDBI Bank. We note that the assessee has received interest from SCDCC Bank & IDBI Bank are a schedule bank which is governed by the Banking Regulation Act of 1949 as observed by the lower authorities and these findings have not been denied by the ld. AR of the assessee, accordingly we hold that the assessee is not eligible for deduction u/s 80P(2)(d) on such interest income also.

We further note that the assessee has received interest from SCDCC Bank & IDBI Bank on its investments. The revenue authorities have considered the entire interest as income from other sources u/s. 56 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’ Co- operative 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 bank. Reliance is also placed on the judgment of Co-ordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souhardha 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 interest income.

Regarding provision for audit fee the ld.CIT(A) has not accepted that it is a ascertained liability for the year under consideration. We note that the assessee is a registered Co-operative Society and it is required to get its books of accounts audited after closure of every year, therefore, the payment of audit fee is compulsory liability of the society. The observation made by the lower authorities on this issue is wrong. Accordingly, the assessee is eligible for deduction u/s 37(1) of the Act as a business expenditure for the year under consideration. Accordingly, this ground of appeal is allowed.

In the result, appeal of the assessee is partly allowed for statistical purposes.