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TMI Blog2020 (10) TMI 1187X X X X Extracts X X X X X X X X Extracts X X X X ..... awn. 3. Now, we shall decide the cross appeals filed by the assessee and Revenue. 4. Since the issue involved in both the appeals are identical, therefore, for the sake of brevity, both the appeals are heard together and disposed off by this consolidated order. 5. Grounds raised by the assessee in its appeal for A.Y. 2013-2014 read as under:- 1. That the order passed by the learned CIT(A] is arbitrary, excessive, contrary to facts and bad in law. 2. That the learned assessing officer has erred in law and on facts of the case by disallowing the provision for bad-debts and provision for interest amounting to Rs. 1,36,00,000/- to which the Ld. CIT(Appeals) has wrongly confirmed the same addition and without considering the fact that the provisions are made as per the statute. 3. That the learned assessing officer has erred in law and on facts of the case by disallowing the provision for gratuity amounting to Rs. 1,36,824/- to which the Ld. CIT(Appeals) has wrongly confirmed the same addition and without considering the fact that the provisions are made as per the statute. 4. That the learned assessing officer has erred in law and on facts of the case by disallowing the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Society Limited registered under the Odisha Cooperative Society Registration Act, 1962 bearing Registration No. 158KE, dated 19.08.2000. The society derives income from doing business of banking operating in the district of Kendrapara, Jagatsinghpur, Jajpur and Cuttack. The assessee filed its return of income for A.Y. 2013-2014 on 03.02.2015 showing total income at Rs. Nil. Thereafter case of the assessee was selected for scrutiny and statutory notices were issued to the assessee. On perusal of the return of income, the AO found that the assessee got its accounts audited on 25.12.2014 and has shown gross receipts of Rs. 9,27,34,960/-. After debiting expenses under various heads arrived at net profit of Rs. 25,52,940/-. But in Part-B TI, after claiming deduction under Chapter VI-A of Rs. 25,52,940/-, total income has been shown at Rs. Nil. On further verification of books of accounts of the assessee, the AO found that no bad debt loan has been written off during the year, therefore, the AO disallowed Rs. 1,36,00,000/- claimed by the assessee as provisions for bad debt loan and added the same to the total income of the assessee. Further the AO added Rs. 1,36,824/- and Rs. 30,00,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the I.T. Act, 1961 (hereinafter referred as "the Act"). 2. Regular assessment in the case of the assessee-society was completed u/s. 143(3) of the Act on 31.03.2016 determining total income at Rs. 1,92,89,760/- as the assessee-society was denied deduction u/s. 80P(2)(a)(i) of the Act & by adding the following items to the profit disclosed at Rs. 25,52,940/- for the year under consideration. (a) Provisions for bad debt - Rs. 1,36,00,000/- (b) Provision for Gratuity Fund - Rs. 1,36,824/- (c) Provision for Building Fund - Rs. 30,00,000/- 3. The assessee-society, being aggrieved with the above order of the Assessing Officer (hereinafter referred as "the AO"), challenged the said order before the CIT(A) vide ITA No. 0166/2016-17. The CIT(A) in his order dated 25.03.2019, upheld the additions made by the AO on the above counts, but at the same time, he has held that the assessee-society is eligible for claim of deduction u/s. 80P(2)(a)(i) of the Act, without appreciating the facts and circumstances of the case in a fair and judicious manner. The CIT(A) has based his decision upon the fact that the assessee-society does not fulfil all the following three conditions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere, 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 subsection (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:-- (a) in the case of a co-operative society engaged in-- (i) carrying on the business of banking or providing credit facilities to its members, or (ii).. 2. (iii).. (iv) (vi) (vii) the whole of the amount of profits and gains of business attributable to any one or more of such activities: 7. From the above, it is evident that a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members is eligible to get deduction of the whole of its income from business attributable to such activities. However, section 80P(2)(a)(i) is subject to the provisions of Section 80P(4), which has been inserted by the Finance Act, 2006 with effect from 01.04.2007, i.e. from A.Y. 2007-08 onwards. The said section 80P(4) reads as under-Sec 80P(4): The pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation (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. 11. After having reproduced the definition of various terms used in Section 80P(2)(a)(i) & Section 80P(4) of the IT. Act and section 56 of the Banking Regulation Act, 1949, it is worthwhile to examine the claim of deduction of assessee-society u/s. 80P(2)(a)(i) on the ground that it is purely a "cooperative society" engaged in carrying on the business of banking and of providing credit facilities to its members, but not a "cooperative bank". 12. On examination of the above claim of the assessee with reference to provisions of the Income Tax Act, 1961 and Banking Regulation Act, 1949, it is found that the assessee itself admits that it is a "co-operative society" engaged in "carrying on the business of banking or providing credit facilities to its members". In that view of the matter, it fits into the definition of a "co-operative bank" as defined in Part V of the Banking Regulation Act, 1949. To be specific, it is a "Prim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is found that they have been admitted as members in violation of Clause 9 of the Bye-laws (Annexed herewith as Annexure-1) of the assessee society. Clause 9 of the Bye-laws deals with the membership criteria of the society. 9. MEMBERS: a) An individual may admitted as a member of he is an adult, competent to contract and resides within the areas of operation of the society as specified in the Bye-Laws and the State or Central/Government, or both such Govt. as the case may be provided; further that not more than 3 individuals from the same family shall be accepted as member. i) The society shall not without sufficient cause, refuse admission as a member to any person who is duly qualified thereof and the decision refusing admission shall be communicated by the Society to the person concerned with reasons for such refusal within 90 days from the date of the application for membership failing which such person shall be deemed to have admitted as a member of the society with effect from the date following the expiration of the said period of thirty days. Where a person is deemed to have been admitted as a member of a Society and the society may file an application before the Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. Thus it is clear that the assessee society is a "primary co-operative bank", thereby satisfying the definition of a "co-operative bank" given in Part V of the Banking Regulation Act, 1949. As the assessee society is a "co-operative bank", it is debarred from enjoying the benefit of Section 80P(2)(a)(i) in view of clear bar provided in Section 80P(4) with effect from A.Y. 2007-08 onwards. Accordingly, the claim of deduction u/s. 80P(2)(a)(i) has been rightly denied to the assessee by the AO. The CIT(A) has ignored the vital factual aspect while deciding the appeal of the assessee. The CIT(A) has ignored these vital factual aspect while deciding the appeal of the assessee. 22. Reliance is also placed on the decision of the Supreme Court in the case of The Citizen Co-operative Society Ltd. v. Assistant Commissioner of Income Tax [2017] 397 ITR 1(SC). In that case also, it had been claimed before the AO that the society was entitled to deduction u/s. 80P(2)(a)(i) on the ground that it was a cooperative society carrying on the business of banking or providing credit facilities to its members. Since the matter related to A.Y. 2009-10, the AO had referred to Section 80P(4) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue has already been dealt by the CIT(A) in his order which reads as under:- "After perusing the aforementioned comments of the creditor, the bye laws of the society and the books of account of the assessee, the AO concluded that the benefit of section 80P(2) will be denied to the assessee as its case was falling under section 80P(4) of the I.T. Act, 1961. The AO held that the assessee enjoys the status of a 'Co-operative Bank' as explained in Part V of the Banking Regulation Act, 1949 and would, therefore, not be eligible for the deduction envisaged u/s. 80P(2). During the course of the appellate proceedings, the assessee argued that section 80P(2)(a)(i) specifically stipulates a deduction of profits earned by a Co-operative society from carrying on the business of banking or providing credit facilities to its members. Further, the assessee tendered detailed submissions explaining that the assessee was not a 'Cooperative Bank' within the meaning outlined under part V of the Banking Regulation Act, 1949. I have perused the facts of the case and also examined the assessment order of 143(33/147 for the AY.-2010-11 dt. 30.03.2016. The detailed submissions of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion can be availed only by a Co-operative society engaged in the business of banking or providing credit facilities to its members. This is a crucial distinction that sets apart a Co-operative society from a Co-operative Bank. However, in the assessment order U/S. 143(3)/147 for A.Y.-2010-11 dt. 30.03.2016, the ITO, Kendrapara Ward has not given any finding in this regard and has based his decision of whether the Co-operative society in question is a Co-operative Bank Society solely on the comments of the statutory auditor of the assessee. To rephrase the above argument, the first condition of section 5(CCV) of the Banking Regulation Act, 1949 entails the assessee to be engaged in the business of banking. Now, section 5b of the Banking Regulation Act, 1949 defines 'banking' to mean accepting of deposits, for the purpose of lending or investment, from the public which will be repayable on demand or otherwise. In other words, a Co-operative society engaged in the business of 'banking' would not differentiate between members and non-members and would accept deposits from the public at large. If we examine the bye-laws of the assessee it will be seen that clause 5 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is accepting deposits of money from its members and advancing money to members. In view of this the assessee is eligible for deduction u/s. 80P(2) of the Act. 13. We noticed from the order of AO that the AO, at the outset, of the order has mentioned that the assessee is engaged in banking business and has disallowed the claim of the assessee u/s. 80P. From the above order of the CIT(A), it is clear that the assessee is eligible for deduction u/s. 80P(2) of the Act and not engaged in banking business. Before the CIT(A) the assessee had submitted that the assessee is eligible for deduction u/s. 80P(2)(a)(i) of the Act and the CIT(A) has also held that the assessee is eligible for deduction u/s. 80P(2) of the Act. 14. The provision of Section 80P(2) of the Act, reads as under:- Deduction in respect of income of co-operative societies. 80P. (2) The sums referred to in sub-section (1) shall be the following, namely:-- (a) in the case of a co-operative society engaged in-- (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the benefit of the consumers; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other cooperative society, the whole of such income; (e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22. Explanation.--For the purposes of this section, an "urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. 15. During the course of arguments, ld. AR of the assessee subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctives cannot be treated as investment of the stock-in-trade or circulating capital. The income derived from such investment cannot qualify for deduction as income from banking activity-Madhya Pradesh Co-op. Bank Ltd. v. Addl CIT' [1996] 84 Taxman 640 (SC). [Matter referred to larger Bench: CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 13 (SC)]. 'Attributable to'-The expression 'attributable to' is much wider than the expression 'derived from', and it suggests that the Legislature intended to cover receipts from sources other than the actual conduct of the business of the assessee-CIT v. Co-op. Cane Development Union Ltd. [1979] 118 ITR 770 (All.). When section 80P(1)(a)(i) refers to a co-operative society engaged in providing credit facilities to its members, it really refers to a credit society whose primary object is to provide loans or other credit facilities to its members; it does not include any society whose primary object is something other than the provision of loans or other credit facilities, such as a consumer cooperative society-Rodier Mill Employees' Co-op. Stores Ltd. v. CIT (supra). BANKING BUSINESS Co-operativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r profit-linked deduction under Chapter VI-A. 2. The issue of the claim of higher deduction on the enhanced profits has been a contentious However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: (i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduct ion of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: Income-tax Officer-Ward 5(1) Keval Construction, Tax Appeal No. 443 of 2012, December 10, 2012, Gujarat High Court. (NJRS-2012-LL-1210-45) Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambhamath Tiwari, IT Appeal No. 2 of 2011, September 11, 2015, Bombay High Court.(NJRS-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l shall be applied mutatis mutandis to the appeal of the assessee for assessment year 2010-2011. Thus, ITA No. 134/CTK/2019 is allowed. 13. Respectfully following the above observations of the Tribunal, we hold that the assessee society is eligible for deduction u/s. 80P(2)(a)(i) of the Act and the assessee will get the benefit of Circular issued by the CBDT No. 37/2016, dated 02.11.2016 as quoted above. Since we have allowed the legal ground of assessee, other grounds raised by the assessee on merits are for academic purposes. Thus, appeal of the assessee is allowed on legal ground. 14. The revenue in its appeal has raised the legal ground that the CIT(A) is not justified in granting deduction u/s. 80P(2)(a)(i) of the Act. We have already discussed this issue in detail in the foregoing paragraphs wherein we have held that the assessee is eligible for deduction u/s. 80P(2)(a)(i) of the Act. Thus, the stand taken by the Revenue in its appeal is dismissed and consequently appeal of the Revenue is dismissed. 15. In the result, appeals of the assessee i.e. ITA No. 162/CTK/2019 is dismissed, ITA No. 135/CTK/2019 is allowed and appeal of the Revenue in ITA No. 206/CTK/2019 is dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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