2015 (5) TMI 751 - AT - Income Tax

Disallowance of deduction claimed u/s.80P - the assessee had violated the provisions of AP Mutually Aided Co-Operative Societies Act, 1995 - whether, having given a finding that Nominal/Associate Members are not Members of the society, the incomes from them are excluded while calculating deduction u/s.80P(2)(a)(i)? - Held that - Assessee-society is clearly a co-operative society and Assessing Officer herself has stated that assessee is a co-operative society, but violated the provisions of the Co-operative Societies Act. There is no restriction of getting any deposits from outsiders, leave alone from nominal Members and Associate Members. As rightly pointed out by the Ld.CIT(A), the source of funds for doing the business is not a criteria. What is required to be examined by the Assessing Officer is whether the deduction u/s.80P(2)(a)(i) is from the profits and gains of providing credit facilities to its Members. To that extent the Assessing Officer can examine the assessee s transactions. Just because assessee has deposits from Non Members, it does not prevent being a co-operative society nor it prevents claiming deduction u/s.80P(2)(a)(i), if it is otherwise eligible on the said incomes. In view of this, while accepting in principle that assessee is eligible for deduction u/s.80P(2)(a)(i) and 80P(2)(d), quantification of income ie. income/profits and gains on credit facilities provided to Members, is restored to the file of Assessing Officer for necessary examination of the details of the transactions and quantifying the same. Therefore, while upholding the order of the CIT(A) on the principles of law, the quantification of deductions made by CIT(A) is therefore set aside and restored to the file of Assessing Officer to examine it afresh, in the light of the above observations/ directions. - Decided in favour of revenue for statistical purpose.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Violation of the Andhra Pradesh Mutually Aided Co-operative Societies Act (APMACS Act), 1995.
3. Principle of mutuality and its relevance to the case.
4. Calculation and quantification of deductions under Section 80P(2)(a)(i) and Section 80P(2)(d).

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The main contention was whether the assessee, a co-operative credit society, was eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (AO) disallowed the deduction, arguing that the society violated the provisions of the APMACS Act by accepting deposits from non-members, which he equated to banking activities. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the society's bye-laws permitted the acceptance of deposits from non-members and that this did not disqualify the society from the benefits of Section 80P. The CIT(A) held that the source of funds was not a criterion for eligibility under Section 80P(2)(a)(i); what mattered was that the society was engaged in providing credit facilities to its members.

2. Violation of the APMACS Act, 1995:
The AO argued that the assessee violated the APMACS Act by accepting deposits from non-members and thus was not eligible for the deduction. However, the CIT(A) noted that the APMACS Act and the society's bye-laws permitted such activities. The CIT(A) concluded that mobilizing funds from outsiders was not a violation of the APMACS Act, and the society was not engaged in banking activities but was providing credit facilities to its members.

3. Principle of Mutuality:
The AO invoked the principle of mutuality to argue that the society was not eligible for the deduction, as it accepted deposits from non-members. The CIT(A) dismissed this argument, stating that the principle of mutuality was not relevant in this case because the society had not claimed any exemption on account of mutuality. The CIT(A) emphasized that the society was eligible for deductions under Section 80P(2)(a)(i) and Section 80P(2)(d), as the restrictions under Section 80P(4) applied only to co-operative banks and not to co-operative societies.

4. Calculation and Quantification of Deductions:
The CIT(A) quantified the deductions under Section 80P(2)(a)(i) and Section 80P(2)(d) and directed the AO to allow these deductions. However, the Tribunal found that the CIT(A) had not adequately examined whether the society had claimed deductions on transactions with non-members. The Tribunal noted that the CIT(A) had acknowledged that nominal and associate members were not regular members but had not excluded incomes from these members while calculating the deductions. The Tribunal restored the issue of quantification of deductions to the AO for a fresh examination, emphasizing that the AO should ensure that deductions were not claimed on transactions with non-members.

Conclusion:
The Tribunal upheld the CIT(A)'s decision in principle, affirming that the society was eligible for deductions under Section 80P(2)(a)(i) and Section 80P(2)(d). However, it set aside the quantification of deductions and directed the AO to re-examine the details of transactions to ensure that deductions were not claimed on incomes from non-members. The appeals were partly allowed for statistical purposes, and the order was pronounced in open court on March 4, 2015.