The C.D. Block Co-Operative Credit ... vs Assessee

The A.C.I.T., Vs. The C.D. Block Co-operative Circle Mandi, Credit Society Ltd., H.P. VPO Gohar Chachiot Mandi, H.P. PAN: AAABT2301D

And

C.O.No.42/Chd/2013

Arising out of

ITA No. 762/Chd/2013 (Assessment Year : 2007-08)

The C.D. Block Co-operative Vs. The A.C.I.T., Credit Society Ltd., Circle Mandi, VPO Gohar Chachiot Mandi, H.P. H.P. PAN: AAABT2301D (Appellant) (Respondent)

Assessee by : Shri Ajay Jain Department by : Dr.Amarveer Singh, CIT DR

Date of hearing : 02.07.2015 Date of Pronouncement : 07.07.2015

PER BHAVNESH SAINI, J.M. :

The departmental appeal and the Cross

Objection filed by the assessee are directed against the 2

order of learned Commissioner of Income Tax (Appeals),

Shimla dated 17.4.2013 for assessment year 2007-08.

2. The Revenue in the departmental appeal

challenged the order of the learned CIT (Appeals) in allowing

benefit of deduction under section 80P(2)(a)(i) of the Income

Tax Act, 1961 (in short 'the Act') amounting to

Rs.40,19,598/- to the assessee society which is providing

credit facilities and accepting deposits from its members

and non-members as per their objectives.

3. The learned counsel for the assessee during the

course of arguments seeks permission to withdraw the Cross

Objection. The endorsement to that effect is made in the

Cross Objection. The same is, therefore, dismissed as

withdrawn.

4. The issue left for consideration is deduction under

section 80P(2)(a)(i) of the Act as raised in the departmental

appeal.

5. Briefly, the facts of the case are that the assessee

is a co-operative society engaged in the business of

providing credit facilities to its members. During the

course of assessment proceedings, the Assessing Officer

observed that the assessee had paid advance tax on its

income and had not claimed any deduction under section

80P of the Act. However, the assessee society claimed

deduction under section 80P(2)(a)(i) of the Act during the 3

course of assessment proceedings. The Assessing Officer did

not accept the claim of the assessee for the said deduction

on the ground that as per the provisions of the Income Tax

Act as amended w.e.f. the assessment year 2007-08, the

exemption was not available to the co-operative banks other

than a Primary Agricultural Credit Society or Primary Co-

operative Agricultural & Rural Development Bank.

Accordingly, the Assessing Officer held that the assessee

was neither a Primary Agricultural Credit Society nor a

Primary Co-operative Agricultural & Rural Development

Bank. The Assessing Officer not only denied the deduction

under section 80P of the Act to the assessee but also made

addition on account of various expenses debited by the

assessee.

6. The assessee challenged the order of the Assessing

Officer before the learned CIT (Appeals) denying deduction

under section 80P(2)(a)(i) of the Act and written

submissions of the assessee are quoted in the impugned

order, in which the assessee briefly explained that the

assessee is a co-operative society formed under the

Himachal Pradesh Co-operative Society Act, 1968, is

engaged in the business of banking and providing credit

facilities to its members for more than 20 years back. The

assessee has been enjoying the deduction under section 80P

of the Act. For the year under consideration also, the

assessee filed its return of income and claimed deduction

under section 80P(2)(a)(i) of the Act. Due to insertion of 4

sub-section (4) in section 80P of the Act w.e.f. assessment

year 2007-08, the assessee deposited advance income tax as

correct interpretation of this sub-section was not clear.

The Assessing Officer without considering the interpretation

of sub-section (4) of section 80P of the Act made addition

despite the assessee has claimed deduction under section

80P of the Act. The assessee also relied upon the CBDT

Circular with regard to applicability of sub-section (4) of

section 80P of the Act and also submitted that the assessee

is not covered by the Banking Regulation Act. It was also

explained that the assessee had been doing its activities

only with the members so as to further the co-operative

movement. The assessee did not solicit customers from

among the public at large as the banks do. The area of

operation of the assessee society and providing credit

facilities is limited to its members only and confined to

District only. The assessee relied upon certain decisions

in support of its contention. The learned CIT (Appeals)

considering the issue in detail and amendment in the Act

allowed the claim of the assessee. The findings of the

learned CIT (Appeals) in paras 4 to 4.2 of the appellate

order are reproduced as under :

"4. The rival submissions have been carefully considered w.r.t. the facts of the case, the relevant provisions of law and the related assessment records. It is noted that in the show cause notice dated 21.10.2009 to the assessee society, the sole ground raised by the A.O. for his proposed disallowance of deduction u/s 80P of the Act was that the amended provisions of Section 80P w.e.f. the A.Y. 2007-08 do 5

not permit the deduction to Co-operative banks other than a Primary Agricultural Society or a Primary Co-operative Agricultural and Rural Development Bank. After issuing the said show cause notice, the A.O. proceeded to disallow the deduction only on the ground that "the assessee society could not furnish any plausible reply to this show cause as seen from further assessment proceedings." The A.O. has also mentioned on page 2 of the assessment order in the opening paragraph that "it has been noticed in the return of income that the assessee has declared itself to be taxable and did not claim any deduction and paid advance tax on income........,"

4.1 The above mentioned observations of the A.O. were checked w.r.t. the relevant assessment records and are not found to be factually and legally correct as per the discussion below.

(a) A perusal of the income tax return filed by the assessee shows that the assessee in ITR-V had shown gross total income at Rs.31,07,165/- and had also claimed deduction under Chapter VI-A at Rs.31,07,165/-. Accordingly the assessee had sought the refund of Rs.9,96,510/-against the advance tax paid and the TDS suffered. As per the Audit Report signed by Rajeev Sood & Co., Chartered Accountant, which was filed along with the return of income, deduction under Chapter VI-A was shown admissible to the assessee. As per the audit report in Form No. 3CD and 3 CA, the status of the assessee has been clearly shown as "co-operative society". In fact, the A.O. himself knew that the assessee had duly claimed deduction under section 80P of the Act even in its return of income. That's why, in clear contradiction of his own statement in the opening paragraph on page 2(supra) of the assessment order, the A. O. in the very next paragraph has reproduced his show cause notice wherein he has mentioned as follows:

"please note that as per your return of income you have shown gross total income of Rs.31,07,165/- andclaimeddeductionu/s80P on the same............"

6 The above show cause notice of the A.O. thus does not support his statement made in the preceding paragraph that the assessee had not claimed any deduction and had declared itself to be taxable.

(b) The A.O. has summarily rejected the assessee's claim for deduction u/s 80P of the Act by simply observing that the assessee society could not furnish any plausible reply to his show cause notice. The A.O. has neither cared to give the details of the reply furnished by the assessee in response to his show cause notice, nor has he elaborated as to how the said reply was not a "plausible reply". A perusal of the assessment records reveals that the assessee had submitted a lucid reply in response to the A.O.'s show cause notice which is reproduced as follows:

"Sub: Assessment proceedings in case of M/s CD Cooperative Credit Society Ltd. for the A.Y. 2007-08.

Your good self has pointed out the provisions of Sec. 80P of Income Tax Act 1961 which as per your interpretation does not cover the assessee in preview of the deduction.

It is respectfully submitted that the said interpretation is not correct.

The society is eligible for deduction u/s 80P (2) (a) of the Income Tax Act 1961, which provides that "where in the case of an assessee being a cooperative 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 sum specified in sub section (2) in computing the total income of the assessee.

(2) The sum referred to in sub section (1) shall be the following namely:-

(a) in the case of a co-operative society engaged in-

7 i. Carrying on the business of banking or providing credit facilities to its members.

The Finance Act 2006 w.e.f. 1-4-2007 inserted Sub Section 4 to Section 80P which provides

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. (This section has the impact of taking out the cooperative banks from the preview of deduction leaving the cooperative societies engaged in business of providing credit facilities to its members)

Explanation. For the purposes of this sub-section,

(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-them credit for agricultural and rural development activities. It may be noted that sub section 4 has been inserted to take out cooperative banks from the preview of the deduction u/s SOP. Further while excluding cooperative banks from the scope of deduction exception has been provided to certain kind of cooperative banks so that the exclusion from deduction does not become blanket exclusion to all cooperative banks. These cooperative banks include primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Thus the sub section 4 to sec 80 P takes out the cooperative banks other than primary agricultural credit society 8

or a primary co-operative agricultural and rural development bank from the preview of the deduction. It does not in any way effects the primary cooperative societies engaged in the business of providing credit to its members.

Your contention that the assessee is not a Primary agriculture credit society is absolutely correct along with the contention that it is also not a primary cooperative bank.

Since the deduction u/s 80P (2)(a)(i) is available to a cooperative society carrying on the business of providing credit facilities to its members and your assessee in the instant case engaged in the same line of business providing credit facilities to its members hence it is eligible for claiming the deduction.

To support the claim of assessee a clarification sought from CBDT on the said issue by The Delhi Cooperative Urban T & C society Ltd is enclosed with which clearly support the claim of the assessee."

It is clear from above that the assessee had argued its case on law but the A.O. simply opted to clearly ignore the said argument of the assessee without considering the same on merit. Accordingly the reason given by the AO for disallowing the deduction u/s 80P of the Act that the assessee had not submitted any plausible reply is found to be totally misleading.

(c) The A.O. has clearly and categorically admitted on page 1 of the assessment order that the assessee is a cooperative society "doing the business of providing credit facility to its members." Thus there is no disputing the fact that the assessee is a cooperative society engaged in the business of providing credit facilities to its members. A perusal of the certificates issued by the Registrar Co- operative Society, Mandi reveals that the assessee society was registered way back In June, 1957 and an 9

amendment was subsequently registered on 1st March, 2005. A perusal of the provisions of section 80P (2)(a)(i) reveals that the said section is applicable to a Co- operative Society carrying on the credit facility for its members. If the intention of the Legislature was not to grant deduction u/s 80P(2)(a)(i) to such Co-operative Society, this section would have been deleted by the Legislature. Instead the legislature has brought on the Statute only a new proviso to section 80P (4) which is applicable only to the Co-operative Banks and not to the credit Co-Operative Societies. It appears that the intention behind this amendment was to bring the co-operative banks into the taxation system at par with other commercial banks. The assessee is not a Cooperative bank in the instant case, and, therefore, the provisions of section 80P(4) will have no application in the assessee's case. The A.O. has clearly misdirected himself by concentrating only on the provisions of section 80P(4) and by not paying any attention to the existing sub-section (2) (a)(i) of section 80P. And, in the process, the A.O. has concluded that the assessee is neither a Primary Agricultural Credit Society, nor a primary Co-Operative Agricultural and Rural Development Bank within the meaning of Section 80P (4), but has overlooked the vital fact that the assessee is a Co- operative Society within the meaning of section 80P(2)(a)(i).

(d) CBDT Circular bearing No. 3/2008 dated 12/03/2008 also makes it clear that the amendment to section 80P (4) has withdrawn the deduction under section 80P in respect of co-operative banks. Further, the amendment to section 36 (1) (viia) by Finance Act, 2007 w.e.f. 01/04/2007 also provides that the deduction in respect of bad debts shall be allowable also to co- operative banks. This amendment also suggests that the deduction u/s 80P has been withdrawn by Finance Act, 10

2006 w.e.f. 01/04/2007 in respect of co-operative banks only.

(e) It is also noted that the Central Board of Direct Taxes vide clarification bearing F. No. 133/06/2007- TPL vide letter dated 09/05/2008 has clarified that the Delhi Co-Operative Urban Thrift & Credit Society Ltd., does not fall within the meaning of co-operative banks as defined in Part-V of the Banking Regulation Act, 1949. Sub-section -4 of section 80P will not apply in its 'case. The CBDT has also clarified that in Part-V of the Banking Regulation Act, 1949 "Co-operative Banks" means a State Co-operative Bank, a Central Co-operative Bank and Primary Cooperative Bank. From the clarification, it is evident that credit cooperative societies are not covered by the meaning of Co-operative Banks as defined in Part- V of the Banking Regulation Act, 1949 and are entitled to deduction u/s SOP (2)(i) of the Act."

4.2 From the above discussion it is clear that the provisions of section 80P (4) have application only to Co-operative banks. Section 80P (4) does not define the word "Co-Operative Society". The existing sub-section 80P(2)(a)(i) shall, therefore, be applicable to a Co-Operative Society extending credit facility to its members. Since there is nothing on record to establish that the assessee is a Co-Operative bank and not a cooperative Society, it is held that the appellant is entitled to the benefit of deduction u/s 80P (2)(a)(i) of the I.T. Act. Merely because the appellant, by way of extreme caution, had deposited the advance tax, does not debar it from making the claim of deduction u/s 80P (2)(a)(i) while filing its return of income." Similarly, merely because an inadvertent error has occurred while filling the column of 'status' in ITR -V does not nullify the remaining vital particulars furnished by the assessee in ITR-V in respect of its income, deduction claim and refund due. However, the A.O. is directed to find out whether there was any interest income on the short-term bank deposits and securities included in the total income of the society which has 11

been claimed by them as exempt. The said issue was decided by the Hon'ble Supreme Court in the case of Totgars Co-Op. Sale Society Ltd Vs ITO Karnataka. In the aforementioned judgment, the issue for determination was whether interest income on the short term bank deposits securities would be qualified as business income u/s 80P (2)(a)(i) of the IT Act, 1961. The Hon'ble Supreme Court had decided the issue as under:

"At the outset an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction u/s 80P(2) (a) (i) of the Income Tax Act is not the interest received from the members for providing the credit facilities to them. What is sought to be taxed u/s 36 of the Act is the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purpose. Assessee markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question before us, is whether interest on such deposits/securities which strictly speaking accrues to the members account could be taxed as business income under section 28 of the Act.

An Important point needs to be mentioned. The words the whole of the amount of profits and gains of business emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society, in the particular case, the evidence shows that the assessee society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income fails in the category of 'other Income which has been rightly taxed by the Department under section 56 of the I.T. Act".

12 In the light of the above the interest income if any, earned from keeping the surplus fund in banks would be taxable u/s 56 and will not qualify for reduction u/s 80P. The AO is directed to find out if there is any such income from Banks [other than from cooperative societies; the Income of interest or dividend from whom is otherwise exempt u/s 80P (2) (d)] and include it in the total income as Income from Other Sources' and no deduction u/s 80P be allowed on it.

The AO should given an opportunity of being heard to the appellant while determining such income, while giving effect to this order.

In the result, the appeal is allowed subject t above observations and directions to the A.O."

7. The learned D.R for the Revenue relied upon the

order of the Assessing Officer and referred to the provisions

of section 80P(4) of the Act. On the other hand, the

learned counsel for the assessee reiterated the submissions

made before the authorities below. He has submitted that

the assessee got the amendment of its bye-laws and it was

clarified in the heading "funds" that the assessee would

accept the deposits from the members and would also be

raising of loan from the members, which was approved by

the Registrar, Cooperative Societies (PB-32), and also filed

affidavit of Shri Bhinder Paul Gautam (PB-34), in which it

was clarified that the assessee society transacts with its

members only and no person other than member is allowed

to transact with the society and the operation of the

assessee is Mandi District only. He has also submitted

that after passing of the order by the Assessing Officer, the

assessments were reopened for assessment years 2008-09, 13

2009-10, 2010-11 and 2011-12 and the Assessing Officer

passed the orders under section 143(3)/148 of the Act and

allowed the claim of the assessee under section 80P(2)(a)(i)

of the Act. The copies of the assessment orders under

section 143(3)/148 of the Act are filed on record. The

learned D.R for the Revenue did not dispute the passing of

the assessment order by the Assessing Officer in the case of

the same assessee for subsequent year accepting the claim

of the assessee under section 80P(2)(a)(i) of the Act.

8. Considering the facts of the case in the light of

the findings of the learned CIT (Appeals) and material on

record including the subsequent assessment order passed

by the Assessing Officer under section 143(3/148 of the Act,

we are of the view that the departmental appeal has no

merit and is liable to be dismissed. The assessee has

produced sufficient evidence and material before the learned

CIT (Appeals) to prove that the assessee is a cooperative

society providing credit facilities to its members. It was

also supported by the amendment in the bye-laws of the

assessee. Therefore, the learned CIT (Appeals) correctly

going through the material on record allowed the claim of

the assessee. The Revenue Department in subsequent

assessment years 2008-09, 2009-10, 2010-11 and 2011-12

while reopening the assessments passed the orders under

section 143(3)/148 of the Act And accepted the claim of the

assessee for deduction/exemption under section 80P(2)(a)(i)

of the Act. Therefore, once the similar claim of the 14

assessee has been accepted by the Revenue Department for

subsequent years, nothing survives in favour of the Revenue

to challenge the order of the Assessing Officer for

assessment year under appeal. The Hon'ble Gujarat High

Court in the case of CIT Vs. Jafari Momin Vikas Co-op.

Credit Society Ltd., 49 Taxmann.com 571 (Guj) (362 ITR

331) held as under :

" IT : W h e r e a s s e s s e e w a s n o t a c r e d i t c o - o p e r a t i v e bank but a credit co-operative society, its claim f or deduction under section 80P(2)(a)(i) could not be rejected by invoking exclusion clause of sub-section (4) of section 80P."

9. Considering the above discussion, we do not find

any merit in the departmental appeal. The same is

accordingly, dismissed.

10. In the result, departmental appeal is dismissed

and Cross Objection of the assessee is dismissed as

withdrawn.

Order pronounced in the open court on this 7th

day of July, 2015.

Sd/- Sd/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated : 7 t h July, 2015 *Rati*

Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.

Assistant Registrar, ITAT, Chandigarh 15