2025 (5) TMI 115 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - interest income earned by the assessee from term deposits - distinction between eligibility for deduction and attributability of amount of profits and gains from the activity of providing credit facilities to the members as well as deriving income from investments made with other cooperative societies HELD THAT - Admittedly assessee is a primary agricultural credit co-operative society and is governed by Karnataka Co-operative Societies Act 1956 and it is carrying out its co-operative business with its members the claim of deduction u/s 80P(2)(a)(i) of the Act cannot be denied. Also assessee does not hold a banking license issued by RBI so as to give it a status of Co-operative Bank. Hence we reverse the orders of lower authorities and allow this issue in the appeal of assessee. Disallowance u/s. 40A(2)(b) - AO concluded that assessee failed to prove the genuine services provided by the above related parties on the basis the assessee has given the commission - AO disallowed and added the entire payment of alleged commission to the total income of the assessee and initiated penalty proceedings u/s. 270A separately for under reporting of income - HELD THAT -Assessee had paid uniform rate of 2.5% as commission to such five agents and therefore the said payment is covered u/s 40A(2)(b) - commission paid to such persons is at par with commission made to other collection agents also. The agreement of appointment of daily deposit commission agent is submitted by the assessee during the course of hearing. Commission agents mentioned in assessment order have regularly filed the Income Tax Returns and copies of ITR acknowledgement is also submitted by the assessee during the time of first appellate proceedings. Assessee had also paid salary to Shashikant Dhumal as senior clerk and relative of director. The Salary is paid to Shashikant Dhumal as per his employment agreement and same is at par with other senior clerks in the Society. Assessee has also deducted TDS on the said commission and such deductee parties have also shown the said income in their Income Tax Return. AO and CIT(A) wrongly treated the said payment as the commission paid towards non-genuine services. AO and CIT(A) has also wrongly observed that assessee has failed to furnish the copy of bills raised by the person. However system generated daily collection received from members and commission paid on same is already submitted by the assessee. The said payment is not excessive and accordingly the disallowance made in this respect is deleted. Rent added as Income from other sources - assessee has received rent for renting out the terrace space from VIOM Network Limited now known as ATC Telecom Infrastructure Pvt. Ltd. - HELD THAT - As the rent received by the assessee for use of space by Telecom Companies in a building or part thereof owned by the assessee in our considered view the rent so received must be taken into account in computation of annual value to be taxed under the head income from house property . Accordingly assessee rightly contends the deduction u/s 24 is admissible on the facts of the present case. Assessee has already submitted leave and license agreement at the time of assessment proceedings and the first appellate proceedings. The rent received is offered to tax under the head Income form House Property and therefore AO as well as CIT(A) has wrongly treated the same under Income from Other Sources and therefore the same is deleted.

Summary

The core legal questions considered by the Tribunal in these appeals relate primarily to the eligibility of a cooperative credit society for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, the correct interpretation of the term "Primary Co-operative Bank" under section 56(ccv) of the Banking Regulation Act, 1949, the validity of disallowance of commission payments under section 40A(2)(b), and the proper classification and taxation of tower rent income.

The first and foremost issue concerns whether the appellant cooperative credit society, engaged exclusively in providing credit facilities to its members, is entitled to claim deduction under section 80P(2)(a)(i) of the Income-tax Act. This provision grants deduction to cooperative societies engaged in carrying on the business of banking or providing credit facilities to their members, subject to certain conditions and exceptions.

Closely linked to this is the second issue regarding the interpretation of the definition of "Primary Co-operative Bank" under section 56(ccv) of the Banking Regulation Act, 1949, and whether the appellant society falls within the scope of a cooperative bank, which would exclude it from claiming the deduction under section 80P(2)(a)(i) due to the proviso introduced by section 80P(4).

The third issue involves the disallowance of commission payments made to certain persons specified under section 40A(2)(b) of the Income-tax Act. The Assessing Officer disallowed these payments on the ground that the assessee failed to establish the genuineness of services rendered by the commission agents, particularly those related to directors or their relatives.

The fourth issue pertains to the classification and taxation of tower rent income received by the assessee. The Assessing Officer treated the entire rent as income from other sources and disallowed expenses incurred to earn such income, whereas the assessee contended that the rent should be treated as income from house property, allowing deductions under section 24.

In relation to the first two issues, the Tribunal examined the relevant legal framework, including the Income-tax Act, 1961, particularly sections 80P(2)(a)(i) and 80P(4), and the Banking Regulation Act, 1949, especially section 56(ccv). The Tribunal extensively considered precedents, including the Supreme Court decisions in The Mavilayi Service Cooperative Bank Ltd. and others vs. CIT and Kerala State Agricultural and Rural Development Bank Ltd. vs. Assessing Officer. These judgments clarified that section 80P is a beneficial provision intended to encourage cooperative societies and must be construed liberally in favor of the assessee.

The Supreme Court emphasized that the proviso in section 80P(4) excludes only those cooperative banks which are licensed by the Reserve Bank of India to conduct banking business. Cooperative credit societies that provide credit facilities exclusively to their members and do not hold such a license are not cooperative banks within the meaning of the Banking Regulation Act and are therefore eligible for deduction under section 80P(2)(a)(i). The Court further distinguished between eligibility for deduction and attributability of profits, noting that profits from loans to non-members are not deductible.

The Tribunal noted that the appellant society is registered under the Maharashtra State Cooperative Societies Act, 1960, and operates solely by accepting deposits from and granting loans to its members. It does not hold a banking license from the RBI and does not carry on banking business as defined under the Banking Regulation Act. The Tribunal found the Assessing Officer's treatment of the appellant as a cooperative bank to be erroneous, as it conflated cooperative credit societies with cooperative banks, contrary to the statutory definitions and judicial precedents.

The Tribunal also relied on the recent Supreme Court decision in PCIT vs. M/s. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., which reaffirmed that cooperative credit societies cannot be equated with cooperative banks and are entitled to claim the deduction under section 80P(2)(a)(i). The Tribunal thus reversed the orders of the lower authorities denying the deduction and held that the appellant society is entitled to the benefit of section 80P(2)(a)(i).

Regarding the disallowance under section 40A(2)(b), the Assessing Officer challenged the genuineness of commission payments made to certain collection agents, some of whom were directors or their relatives. The Assessing Officer demanded bills and details of services rendered, which the assessee failed to provide to the satisfaction of the revenue authorities. Consequently, the entire commission amount was disallowed and penalty proceedings were initiated.

The Tribunal scrutinized the facts and materials on record, including the appointment agreements of daily deposit collection agents, system-generated statements of deposit collections, and commission payments. It was established that the commission was paid uniformly at a rate of 2.5% to all agents, including those related to directors, and that these agents regularly filed income tax returns reflecting the commission income. Additionally, salary payments to a relative of a director were made under a proper employment agreement and were comparable to other senior clerks.

The Tribunal found that the Assessing Officer and CIT(A) erred in disallowing the commission payments merely on the ground of non-submission of bills, especially where the payments were substantiated by system records and tax filings of the recipients. The Tribunal held that the payments were not excessive and represented genuine expenditure incurred for collection services. Accordingly, the disallowance under section 40A(2)(b) was deleted.

On the issue of tower rent income, the Assessing Officer treated the rent received for installation of telecom towers on the society's terrace as income from other sources, disallowing expenses and rejecting the assessee's claim to tax the income under the head "Income from House Property." The CIT(A) upheld this treatment.

The Tribunal examined the nature of the rent, noting that the rent was for use of space on the terrace of the building owned by the society, not for the towers themselves. It relied on a coordinate bench decision which held that rent for space on a building's terrace is taxable under the head "Income from House Property," allowing the deduction of expenses under section 24. The Tribunal concluded that the Assessing Officer and CIT(A) erred in treating the rent as income from other sources and disallowing related expenses. The rent income was rightly offered under the head "Income from House Property," and the impugned additions were deleted accordingly.

The Tribunal also considered the issue of delay in filing the appeals and condoned the delay of 22 days on the ground of sufficient cause, namely the medical unavailability of the Authorized Representative, supported by medical reports and affidavits.

In summary, the Tribunal's significant holdings include the following:

"Section 80P of the Income-tax Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the cooperative sector in general, must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee."

"The proviso in section 80P(4) excludes cooperative banks which are cooperative societies engaged in banking business with a licence from the Reserve Bank of India. A cooperative credit society which does not hold such a licence and transacts only with its members is not a cooperative bank for this purpose and is entitled to claim deduction under section 80P(2)(a)(i)."

"The expression 'providing credit facilities to its members' in section 80P(2)(a)(i) is not confined to agricultural credit alone but covers credit facilities generally provided to members."

"Commission payments made to collection agents, including those related to directors, are allowable under section 40A(2)(b) if they are genuine, not excessive, and supported by records such as system-generated statements and tax filings of the recipients."

"Rent received for use of terrace space in a building owned by the assessee for installation of telecom towers is taxable under the head 'Income from House Property' and not under 'Income from Other Sources.' Deduction of related expenses under section 24 is admissible."

Consequently, the Tribunal allowed the appeals, reversed the orders of the lower authorities denying the deduction under section 80P(2)(a)(i), deleted the disallowance under section 40A(2)(b), and set aside the addition of tower rent income under "Income from Other Sources."