2018 (12) TMI 906 - AT - Income Tax

Disallowance u/s.40A(2)(b) - assessment of co-operative society - excess benefit beyond reasonableness to the member having substantial interest - Held that - No disallowance under that section can be made in the assessment of co-operative society. The Hon ble Bombay High Court also in the case of CIT vs Manjara Shetkari Sahakari Sakhar Karkhana Ltd. 2007 (8) TMI 260 - BOMBAY HIGH COURT has held that the section 40A(2) does not apply to the co-operative society hence no disallowance under that section can be made in the assessment of the Cooperative society . Further it is also noticed that assessee has explained that an individual shareholder cannot have beneficial interest of more than 0.05% in the shares of the co-operative society. It is also noticed that authorized capital in the case of assessee was 5 Cr. and an individual member cannot subscribe more than 25, 000/- worth of shares without approval from the Government. These facts were not disputed/disproved by the AO. We are of the view that the provisions of section 40(A)2(b) are not applicable to co-operative society. Therefore we are inclined with the decision of CIT(A) that the provision of section 40(A)2(b) of the Act were not applicable to the case of the assessee therefore we do not find any merits in the appeal of the revenue and the same is dismissed. - Decided against revenue.

Summary

Issues Involved:
Disallowance under section 40A(2)(b) of the Income Tax Act for excess payment to farmers by a cooperative society.

Analysis:
The appeal before the ITAT Surat concerned the disallowance of excess payment made by a cooperative society to farmers under section 40A(2)(b) of the Income Tax Act for the assessment year 2009-10. The Assessing Officer observed that the society paid a price for sugarcane to farmers above the statutory minimum price, leading to the disallowance of ?5,92,19,981. The assessee contended that section 40A(2)(b) did not apply to cooperative societies, as supported by the decision of ITAT Pune Bench in a similar case. The ld.CIT(A) allowed the appeal, relying on the ITAT and Bombay High Court decisions that the provision did not apply to cooperative societies.

During the appellate proceedings, the ld.DR supported the Assessing Officer's order, while no representation was made from the assessee's side. The ITAT noted that the ITAT Pune Bench had previously held that cooperative societies have a special status and are distinct entities under the Income Tax Act. It was emphasized that cooperative societies are formed for social purposes and not for entrepreneurial profits, distinguishing them from business associations. The ITAT also highlighted that the Bombay High Court had ruled that section 40A(2) does not apply to cooperative societies, further reinforcing the non-applicability of the provision to such entities.

The ITAT found that the cooperative society in question had specific characteristics, such as limitations on individual shareholders' beneficial interests and restrictions on share subscriptions without government approval. These facts were not disputed by the Assessing Officer. Considering the legal precedents and the unique nature of cooperative societies, the ITAT concluded that section 40(A)2(b) of the Act did not apply to cooperative societies. Therefore, the ITAT upheld the decision of the ld.CIT(A) and dismissed the revenue's appeal.

In conclusion, the ITAT Surat held that the provisions of section 40(A)2(b) of the Income Tax Act were not applicable to cooperative societies. The appeal filed by the revenue was consequently dismissed, affirming the decision of the ld.CIT(A) in favor of the assessee.