2018 (8) TMI 129 - AT - Income Tax

Deduction U/s 80P - breach of principles of mutuality as identity between contributor and participant was lost - Held that - The assessee society has carved out two classes of members namely Active Members and Nominal Members . The Active Members as per bye laws are those who have attended General Meeting of the society once in last five years and they have given deposits to assessee society or availed loan from assessee society atleast once in five year but there is another class namely Nominal Members are those society members who as per bye laws are given membership after retirement. These members do not avail loan nor give deposits. While as per audited financial statements which are placed on record these nominal members are allowed to keep their post retirement benefits savings with the assessee society. These nominal members are not allowed to borrow from assessee society based on material on record which is before the tribunal. This aspect whether there is any breach of principles of mutuality on account of loss of complete identity between contributors and participants of surplus requires to be verified from records of the assessee society in context of recent decision of Hon ble Supreme Court in the case of The Citizen Co-operative Socierty Limited (2018 (1) TMI 290 - SUPREME COURT OF INDIA) so far as these Nominal Members are concerned and to determine whether the assessee society gets disentitled to deduction u/s 80P based on breach of principles of mutuality as identity between contributor and participant was lost which the AO shall determine in set aside proceedings. The Constitution of India vide Article 265 provides that taxes not to be imposed save by authority of law . No tax shall be levied or collected except by authority of law. The mandate being to levy and collect correct taxes on correct income computed under authority of law. The tribunal has wide powers to pass such orders as it deems fit which is the mandate of Section 254(1) of the 1961 Act . Thus in our considered view under these circumstances in the interest of justice and fairness to both the parties the matter need to be restored to the file of the AO for limited purposes of verifying as to the rights roles entitlements duties and responsibilities of these Nominal Members in context of the decision of the Hon ble Supreme Court in the case of The Citizen Co-operative Society Limited(supra) as per our elaborate discussions above. Appeal of the Revenue is allowed partly for statistical purposes

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P of the Income-tax Act, 1961.
2. Classification of the assessee as a cooperative credit society or a cooperative bank.
3. Applicability of Section 80P(4) and Section 2(24)(viia) of the Income-tax Act.
4. Consideration of the Supreme Court decision in M/s Totgar Co-op Sales Society Ltd.

Detailed Analysis:

1. Eligibility for Deduction under Section 80P:
The assessee filed its return of income declaring total income at 'Rs. Nil' after claiming deduction under Section 80P of the Income-tax Act, 1961, asserting that it is a cooperative credit society providing credit facilities to its members. The AO denied this deduction, holding that the assessee is engaged in the business of banking or providing credit facilities to its members, thus falling under Section 80P(4). The CIT(A) reversed this decision, stating that the AO failed to demonstrate that the assessee was engaged in banking business and that the activities were restricted to its members only.

2. Classification of the Assessee:
The AO classified the assessee as a cooperative bank based on the provisions of the Banking Regulation Act, 1949, and Section 80P(4) of the Income-tax Act. The CIT(A) disagreed, noting that the assessee's activities were limited to its members and did not involve the general public. The CIT(A) emphasized that the assessee did not possess a banking license and was not authorized to accept deposits from the public, thus classifying it as a cooperative credit society rather than a cooperative bank.

3. Applicability of Section 80P(4) and Section 2(24)(viia):
The AO argued that the assessee was a primary cooperative bank and thus ineligible for deductions under Section 80P(2)(a)(i) due to Section 80P(4). The CIT(A) found that the AO failed to provide evidence that the assessee engaged in banking activities or accepted deposits from the public. The CIT(A) cited case laws and the jurisdictional Bombay High Court decision in Quepem Urban Cooperative Credit Society to support the conclusion that the assessee was not a cooperative bank and was eligible for the deduction.

4. Supreme Court Decision in M/s Totgar Co-op Sales Society Ltd.:
The AO referenced the Supreme Court decision in M/s Totgar Co-op Sales Society Ltd., which held that interest received from the investment of surplus funds by a cooperative society is assessable as "Income from Other Sources" and not eligible for deduction under Section 80P. The CIT(A) distinguished the facts of the present case, noting that the assessee's activities were confined to its members and did not involve banking services to the general public.

Tribunal's Decision:
The tribunal reviewed the material on record, including the assessee's bye-laws and financial statements. It found no evidence that the assessee engaged in banking business or dealt with the public at large. The tribunal noted that the AO allowed the deduction under Section 80P in the preceding assessment year and agreed with the CIT(A)'s detailed reasoning. However, the tribunal highlighted the recent Supreme Court decision in The Citizen Co-operative Society Ltd., which discussed the principle of mutuality and the eligibility of cooperative societies for deductions under Section 80P. The tribunal remanded the case to the AO to verify the roles and responsibilities of the 'Nominal Members' in light of this Supreme Court decision.

Conclusion:
The tribunal allowed the appeal partly for statistical purposes, directing the AO to re-examine the eligibility for deduction under Section 80P, considering the Supreme Court's guidance on mutuality and the classification of members. The tribunal emphasized the need for proper and adequate opportunity for the assessee to present its case.