2018 (2) TMI 2137 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - As per revenue assessee carries on banking business - CIT(A) allowed deduction - HELD THAT - CIT(A) after appreciating the facts of the present case and while reaching to the conclusion for granting deduction to the assessee u/s 80P had relied upon the decision of assessee s own case for AY 2010-11. Even before us DR could not demonstrate any difference in factual position from that of AY 2010-11. Therefore grounds raised by the revenue stands dismissed. Deduction being staff leave encashment and election expenditure - HELD THAT - CIT(A) after appreciating the facts of the present case has correctly held that since the assessee is eligible to claim deduction of the whole of the profits attributable to its activities therefore allowing these expenses u/s 37(1) has become infructuous. It was clarified by CIT(A) that even if these amounts are disallowed the same would be eligible for deduction u/s 80P of the I.T. Act. Resultantly these grounds raised by the revenue stands dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the deduction claimed under section 80P(2)(a)(i) of the Income Tax Act is allowable to the assessee, a co-operative credit society engaged in banking business, despite the insertion of section 80P(4) and sub-clause (viia) to section 2(24) by the Finance Act, 2006, which restricts such deduction for co-operative banks.

(b) Whether the income of the assessee, particularly interest income earned from deposits and loans to members, is taxable and not eligible for deduction under section 80P(2)(a)(i).

(c) Whether the deduction of Rs. 8,50,000 claimed as staff leave encashment and election expenditure is allowable or should be disallowed as appropriation of profit and thus not deductible under section 37(1) of the Income Tax Act.

(d) Ancillary grounds relating to the reversal of the CIT(A) order and restoration of the Assessing Officer's order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Allowability of deduction under section 80P(2)(a)(i) to a co-operative credit society engaged in banking business

Relevant legal framework and precedents: Section 80P(2)(a)(i) provides deduction to co-operative societies engaged in certain specified activities, including banking business. However, section 80P(4), introduced by the Finance Act, 2006, excludes co-operative banks from claiming this deduction. The key question is whether the assessee, a co-operative credit society registered under the Maharashtra State Co-operative Societies Act, 1960 and engaged in banking activities for its members, qualifies for deduction or falls within the exclusion under section 80P(4).

Precedents relied upon include the Supreme Court decision in M/s Totgars Co-operative Sales Society Ltd., which held that interest income earned by a co-operative society from deposits invested in banks or government securities is taxable and not eligible for deduction under section 80P. However, the Gujarat High Court in CIT vs. Jafari Momin Vikash Cooperative Credit Society Ltd. clarified that the exclusion under section 80P(4) applies only to co-operative banks and not to co-operative credit societies. Several ITAT decisions were also cited supporting this distinction, including Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd., Jankalyan Nagri Sahakari Pat Sanstha Ltd., Kasipalayam Primary Agricultural Co-operative Bank Ltd., Rama Krishna Credit Co-operative Society Ltd., and Sagar Credit Cooperative Society Ltd.

Court's interpretation and reasoning: The Tribunal examined the nature of the assessee's activities and its registration status. It was found that the assessee is a co-operative credit society limited to providing credit facilities to its members and accepting deposits from them. It does not provide banking services to the general public nor does it operate as a co-operative bank under the Banking Regulation Act, 1949. The Tribunal noted that the assessee's bylaws restrict it from undertaking banking activities as defined under the Banking Regulation Act.

The Tribunal distinguished the present case from the Supreme Court decision in Totgars Co-operative Sales Society Ltd., noting that the assessee did not invest surplus funds in banks or government securities to earn interest income. Hence, the rationale of taxing interest income under section 56 was inapplicable here.

Key evidence and findings: The assessee's financial statements showed interest income earned primarily from loans advanced to members and interest paid on deposits accepted from members. The paid-up capital and the nature of deposits were consistent with a co-operative credit society rather than a co-operative bank. The CIT(A) had relied on the ITAT's earlier order in the assessee's own case for AY 2010-11, which held in favor of the assessee on similar facts.

Application of law to facts: Applying the legal principles and precedents, the Tribunal upheld the CIT(A)'s finding that the assessee is not a co-operative bank and hence not barred from claiming deduction under section 80P(2)(a)(i). The exclusion under section 80P(4) was held inapplicable.

Treatment of competing arguments: The revenue argued that the assessee was engaged in banking business and thus excluded from deduction under section 80P(4). It also relied on the Supreme Court decision in Totgars Co-operative Sales Society Ltd. The Tribunal rejected these contentions, emphasizing the distinction between co-operative banks and co-operative credit societies and the factual position that the assessee did not earn interest income from investments in banks or government securities.

Conclusions: The Tribunal dismissed the revenue's grounds challenging the allowance of deduction under section 80P(2)(a)(i), confirming that the assessee is entitled to the claimed deduction of Rs. 1,45,60,585.

Issue 3: Allowability of deduction of Rs. 8,50,000 being staff leave encashment and election expenditure

Relevant legal framework and precedents: Section 37(1) of the Income Tax Act allows deduction of any expenditure incurred wholly and exclusively for the purpose of business or profession. The Assessing Officer disallowed Rs. 8,59,440 on the ground that it was an appropriation of profit and not an allowable expenditure.

Court's interpretation and reasoning: The CIT(A) noted that the assessee had debited Rs. 49,75,000 in its Profit & Loss account but the AO disallowed only Rs. 41,15,560. The AO contended that the entire amount should be disallowed as appropriation of profit. The assessee clarified that Rs. 4,50,000 pertained to staff leave encashment and Rs. 4,00,000 to election expenses. The CIT(A) held these expenses to be allowable under section 37(1). However, the CIT(A) further observed that since the assessee was eligible to claim deduction of the entire profits under section 80P, whether these expenses were allowed or disallowed under section 37(1) became infructuous.

Key evidence and findings: The detailed submissions and accounts showed the nature of the expenses. No contrary evidence was presented by the revenue to rebut the assessee's claim.

Application of law to facts: The Tribunal agreed with the CIT(A) that the expenses in question were allowable under section 37(1). Even if disallowed, the profits would be deductible under section 80P, rendering the disallowance inconsequential.

Treatment of competing arguments: The revenue's argument that these were appropriations of profit and hence not deductible was rejected for lack of supporting evidence and in view of the overriding deduction under section 80P.

Conclusions: The Tribunal dismissed the revenue's ground challenging the allowance of these expenses.

Issue 4 & 5: General grounds

These grounds were general in nature and did not require specific adjudication. The Tribunal did not find merit in these grounds.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The only issue before us is whether the assessee being a Co-operative Credit Society registered under the Maharashtra State Co-operative Act, 1960, created for the employees of Mazagaon Dock, can be said to be engaged in the banking business or equated with the Co-operative Bank, so as to be treated under exclusionary clause of sub-section 4 of section 80P. The Hon 'ble Gujarat High Court in the case of CIT Vs. Jafari Momin Vikash Cooperative Credit Society Ltd. (supra), after noting down the CBDT circular no. 133 of 2007 dated 09.05.2007 has explained the said provision in the following manner.- Thus, it was held by the Hon 'ble High Court that deduction in respect of Co-operative Credit Society is available u/s. 80P(1) and they cannot be equated with Co-operative Bank."

"The finding of the CIT(A) is legally correct and is in consonance with the judicial precedence in aforesaid cases and, therefore, the same is upheld."

"The decision of the Hon 'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra), the same is not applicable here because, it is not the case of the A.O. or the CIT(A) that assessee has invested any surplus funds in the Bank or Government Securities for earning interest income. Thus the ration of the said decision and the plea that interest income is to be taxed u/s 56 is not applicable."

"Since the assessee is eligible to claim deduction of the whole of the profits attributable to its activities, therefore allowing these expenses u/s 37(1) has become infructuous. To put it simply, even if these amounts are disallowed, the same would be eligible for a deduction u/s 80P."

Ultimately, the Tribunal dismissed the appeal filed by the revenue, confirming the allowance of deduction under section 80P(2)(a)(i) to the assessee, a co-operative credit society, and upheld the allowance of staff leave encashment and election expenses.

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