ITO 15(1)(2), MUMBAI vs. BOMBAY MERCANTILE CO OP BANK LTD, MUMBAI

Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 24/02/2014 of the ld. First Appellate Authority, Mumbai. The only ground raised by the Revenue pertains to allow deduction u/s 80P of the Income Tax Act, 1961(hereinafter the Act), even thought the assessee carries on banking

2. During hearing of this appeal, at the outset, the ld. counsel for the assessee, Shri Nishit Gandhi, contended that the impugned issue is covered by the decision from Hon’ble Gujarat High Court in the case of CIT vs Jafari Momin Vikas Co-op Credit Society Ltd. (Tax Appeal No.442, 443 and 863 of 2013) order dated 15/01/2014 and also the decision of the Tribunal in ITO vs M/s Bharat Petroleum Employees Co-op Credit Society Ltd. (ITA No.6905/Mum/2013) order dated 28/04/2015. This factual matrix was no consented to be correct by the ld. DR, Shri Randhir Gupta.

2.1. We have considered the rival submissions and perused the material available on record. In view of the above we are reproducing hereunder the relevant portion from the order of the Tribunal dated 28/04/2015 (ITA NO.6905/Mum/2013) for ready reference:-

“This appeal by the Revenue is directed against the order passed by the ld. CIT(A) - 33, Mumbai dated 02-09-2013 for the A.Y. 2010-11 in the matter of an order passed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961 dated 16-01-2013.

2. In this appeal, the Revenue has raised the following grounds of appeal:-

Bombay Mercantile Co-op. Bank Ltd. Employees “1. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing assessee's appeal and allowing relief u/s 8OP of the Act in the case of the assessee credit co-operative Society.

2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred I n holding that the credit co-operative society is different from the credit co-operative bank.

3. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in holding that the amended provision of section 80P(4) of the Act is not applicable to the credit co-operative society.

4. The appellant prays that the order of the CIT(A) on the above grounds be reversed and that of the Assessing Officer be restored.”

Bombay Mercantile Co-op. Bank Ltd. Employees (viia) was also inserted in clause (iv) of Section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried by cooperative society with its members shall be included in the definition of expression “income”. On the basis of his combined reading of Sections of Section 2(24) (viia) and Section 80P of the Act after amendment by Finance Act, 2006, the A.O. concluded that even a co- operative society engaged in providing credit facilities to its members would be denied the exemption u/S 80P of the Act. Accordingly, the A.O. assessed the total income at Rs. 80,98,490/- and rejected assessee’s claim for deduction under Section 80P of the Act.

4. The ld. CIT(A) has since disagreed with the A.O. primarily on the ground that the assesse-society was not carrying out any banking facilities and that its activities were limited to its members only. The ld.CIT(A) also held that the activities of the assessee do not fall for consideration as banking activities as defined in Banking Regulation Act, 1949. In coming to such conclusion, the ld. CIT(A) has relied on the following decisions of the Tribunal:-

(i) ITO, Wd 1(4) Pune v/ Jankalyan Nagri Sahakari Patsanstha Ltd 54 SOT 60(Pune)/24 taxmman.com 127(Pune) (2012)

(ii) ITO v/s Jain Nagri patsanstha Ltd ITAT Pune Bench (2010)

(iii) DCIT v/s Jayalakshmi Mahila Vivivdodeshagala Souharda Sahakari Ltd. 137 ITD 163(Panji) (2012)

Bombay Mercantile Co-op. Bank Ltd. Employees (iv) Sri Vasavi Multipurpose vs CIT ITAT Bangalore bench order dated 10,05.2015.

5. Accordingly, he directed the A.O. to allow deduction to the assessee under Section 80(P)(2)(a)(i) of the Act except to the extent of interest income earned by the assesse from SBI, Patiala. Against the aforesaid decision of the ld. CIT(A), Revenue is in appeal before us.

The Assessing Officer held that by virtue of section 80P(4), the respondent-assessee would not be entitled to the benefits of deduction under section 80P. The Commissioner (Appeals) as well as the Tribunal reversed the decision of the Assessing Officer on the premise that the respondent-assessee not being a bank, exclusion provided in sub-section (4) of section 80P would not apply. This, irrespective of the fact that the respondent would not fall within the expression primary agricultural credit society".

Had this been the plain statutory provisions under consideration in isolation, in our opinion, the question of law could be stated to have arisen. When, as contended by the assessee, by virtue of sub-section (4) only co-operative banks other than those mentioned therein were meant to be excluded for the purpose of deduction under section 80P, a question would arise why then the Legislature specified primary agricultural credit societies along with primary co-operative agricultural and rural development banks for exclusion from such exclusion and, in other words, continued to hold such entity as eligible for deduction. However, the issue has been considerably Simplified by virtue of the Central Board of Direct Taxes Circular No. 133 of 2007, dated May 9, 2007. Circular provides as under :

Bombay Mercantile Co-op. Bank Ltd. Employees "Subject: Clarification regarding admissibility of deduction under section BOP of the Income-tax Act, 1961.

3. In Part V of the Banking Regulation Act, 'co-operative bank means a State co-operative bank, a Central co-operative bank and a primary cooperative bank.

7 From the above clarification, it can be gathered that sub-section (4) of section 80P will not apply to an assessee which is not a co- operative bank. In the case clarified by the Central Board of Direct Taxes, the Delhi Co-op. Urban Thrift and Credit Society Ltd. was under consideration. The circular clarified that the said entity not being a co-operative bank, section 80P(4) of the Act would not apply to it. In view of such clarification, we cannot entertain the Revenue's contention that section 80P(4) would exclude not only the co- operative banks other than those fulfilling the description contained therein but also credit societies, which are not co-operative banks. In the present case, the respondent-assessee is admittedly not a credit co- operative bank but a credit co-operative society. The exclusion clause of sub-section(4) of section 80P, therefore, would not apply. In the result, the tax appeals are dismissed.

Bombay Mercantile Co-op. Bank Ltd. Employees Niyamitha in Income Tax Appeal No. 5006/2013 dated 5th February, 2014 also considered a similar issue. The following discussion in the judgment of Hon’ble Karnataka High Court is relevant:-

Section 80P of the Act deals with the deduction of income of a society. In the case of any assessee being a Co-operative society, the whole of the amounts of profits and gains of business attributable to any of other activities referred to sub-section (2) of Section 80P shall be deducted in computing the total income of the assessee. In other words, the said income is not taxable. It is a benefit given to the Co- operative society. Section 80P(4) was introduced by Finance Act, 2006 with effect from 01.04.2007 excluding the said benefit to a Co- operative Bank. The said provision reads as under:-

(4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

(a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities."

Therefore, the intention of the legislature is clear. If a Co-operative Bank is exclusively carrying on banking business, then the income derived from the said business cannot be deducted in computing the total income of the assessee. The said income is liable for tax. A Co- operative bank as defined under the Banking Regulation Act includes the primary agricultural credit society or a primary cooperative agricultural and rural development bank. The Legislature did not want to deny the said benefits to a primary agricultural credit society or a primary cooperative agricultural and rural development bank. They did not want to extend the said benefit to a Co-operative bank which is exclusively carrying on banking business i.e. the purport of this amendment. Therefore, as the assessee is not a Co- operative bank carrying on exclusively banking business and as it does not possess a licence from Reserve Bank of India to carry on business, it is not a Co-operative bank. It is a Co-operative society which also Bombay Mercantile Co-op. Bank Ltd. Employees Section 80P(2)(a)(i) i.e. carrying on the business of banking for providing credit facilities to its members. The object of the aforesaid amendment is not to exclude the benefit extended under Section 80P(1) to such society.

2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, conclusion drawn in the aforesaid order of the Tribunal, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we note that the ld. Commissioner of Income Tax (Appeals) has already examined the expenditure account of the assessee. The assessee received interest of Rs.16,74,584/- on fixed deposits and no other interest income from FDs was credited. In the balance sheet, the accrued interest, as on 31/03/2010, on FDs, was shown at Rs.30,46,494/- whereas as on 31/03/2009, it was Rs.23,90,648/-. The interest has been received either from a schedule bank or a cooperative bank. No interest income has been received by the assessee from its investment in a cooperative society. In the present

Bombay Mercantile Co-op. Bank Ltd. Employees appeal, the assessee has invested statutory reserved funds in fixed deposits with schedule banks/cooperative banks. Such reserves funds are either surplus funds or which cannot be utilized or appropriated by the assessee for its day to day activities including granting of loan to its members, meaning thereby, such reserve funds has to be invested only for the highly restricted purposed as mentioned in the bye laws of the assessee society. All this facts and the legal position along with the decision from Hon’ble Gujarat High Court and Karnataka High Court have been discussed by the Tribunal while dismissing the appeal of the assessee vide order dated 28/04/2015. In the absence of any contrary decision, brought to our notice by either side, we affirm the conclusion drawn in the impugned order. Finally the appeal of the Revenue is dismissed This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 26/10/2015.

Sd/- Sd/- (Rajesh Kumar) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 27/10/2015 f{x~{tÜ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai