2019 (7) TMI 1207 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) - alleged that co-operative society carrying on the business of baking - scope of clause no.(4) of section 80P - HELD THAT - According to the revenue the Hon ble Supreme Court in the case of Citizens Co-operative Society Ltd. 2017 (8) TMI 536 - SUPREME COURT has also held it is also important to ascertain as to what is the nature of income which is claimed as exempt and as to how the principle of mutuality is not violated in respect of such income. According to the revenue the principle of mutuality will not be satisfied, if the person from whom income from providing credit facilities is derived is a nominal member who has no right to participate in the profits of the Assessee. Such grievance would be addressed by setting aside the issue of deduction u/s.80P(2)(a)(i) to the AO for consideration afresh, with a direction to the Assessee to produce a certificate from RBI that it does not possess license from it for doing banking business and further that the business carried on by the Assessee is not akin to business of a co-operative bank. Further the first part of Sec.80P(2)(a)(i) allows deduction in respect of income derived by a co-operative society from the business of banking. Even the claim of the Assessee for deduction requires to be examined under the first part of Sec.80P(2)(a)(i). The relevant law governing co-operative societies of the concerned State providing status of different categories of members in so far as the affairs of the co-operative society are concerned, is also required to be examined. It is only income which arises from dealing with members and which is either in the nature of banking or providing credit facilities to members that would be allowed as deduction. All these aspects also require examination. - remanded to AO with directions Disallowance u/s 40(a)(ia) - no exception to co-operative societies for non deduction of tax for pigmy commission payments - HELD THAT - The disallowance u/s 40(a)(ia) was made on account of non-deduction of tax at source on payment of pigmy commission and therefore, it had direct nexus with the business income of the assessee on which deduction u/s 80P(2)(a)(i) was claimed. Aggrieved by the order of the CIT(Appeals), the revenue has raised ground No.6. In our view, the aforesaid ground of appeal would depend on the outcome on grounds No.1 to 6 in the set aside proceedings. If the disallowance u/s.40(a)(i) results in increase in income of the Assessee which would otherwise go to enhance the income on which the Assessee is eligible to claim deduction u/s.80P(2)(a)(i), then the CBDT Circular referred to by CIT(A) would be applicable. Therefore this issue is also set aside to the AO to decide afresh in the light of the decision on the eligibility of Assessee for deduction u/s.80P(2)(a)(i).

Summary

Issues Involved:
1. Allowance of deduction u/s 80P(2)(a)(i) of the Income-tax Act,1961.
2. Disallowance of tax deduction for pigmy commission payments under section 40(a)(ia) of the Act.

Analysis:

Issue 1: Allowance of deduction u/s 80P(2)(a)(i) of the Income-tax Act,1961:
The dispute revolved around the claim of deduction u/s 80P(2)(a)(i) by a credit co-operative society engaged in banking activities. The Assessing Officer (AO) disallowed the deduction based on the provision of section 80P(4) of the Act, stating that the society did not qualify as a co-operative bank. Additionally, the AO rejected the deduction on interest income earned on investments, categorizing it as 'income from other sources' following a Supreme Court decision. However, the Commissioner of Income Tax (Appeals) allowed the deduction, citing a Supreme Court ruling that a co-operative society must hold a banking license to be considered a co-operative bank. The CIT(A) also permitted the deduction on interest income, aligning with a CBDT Circular and a Supreme Court decision. The Tribunal directed a fresh examination by the AO to verify the society's banking status, nature of income, and compliance with mutuality principles before allowing the deduction.

Issue 2: Disallowance of tax deduction for pigmy commission payments under section 40(a)(ia) of the Act:
The AO disallowed a sum for non-deduction of tax at source on pigmy commission payments under section 40(a)(ia) of the Act. The assessee argued, supported by a CBDT circular, that deduction u/s 80P(2)(a)(i) should be permitted on the enhanced income due to this disallowance. The CIT(A) accepted this plea. The Tribunal linked the outcome of this issue with the decision on the eligibility for deduction u/s 80P(2)(a)(i) and set it aside for the AO to reconsider in light of the primary deduction issue.

In conclusion, the Tribunal allowed the appeal filed by the revenue for statistical purposes, emphasizing the need for a detailed assessment of the society's banking status, income nature, and compliance with statutory requirements before granting deductions under the relevant sections of the Income-tax Act.