2020 (3) TMI 933 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) eligibility - Society has accepted deposits from non-members by opening savings bank account, FD Account and R.D. Account of non-members AND has staked surplus funds in the long-term deposits with Co-operative Bank, Sirhind and had earned interest on such deposits - HELD THAT - In the facts of M/s Totgar Co-op Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT the assessee was a Co-operative Society engaged in providing credit facilities to its members and marketing the agricultural products of the members. The interest earned by the assessee-society by investing the surplus funds in short-term deposits and government securities was held to be taxable under the head income from other sources u/s 56 of the Income Tax Act and the Apex Court affirmed the principle that it cannot be said to be attributable to the activities of the society and hence did not qualify for deduction u/s 80P(2)(a)(i) of the Act. The Apex Court affirmed the principle that income in respect of which deduction is sought, must constitute the operational income and not other income which accrues to the society. Accordingly, the arguments de hors facts that the decision of the Apex Court in the case of M/s Totgar Co-op Sale Society Ltd. is not applicable, we unambiguously hold is incorrect and of no relevance whatsoever. Its non-applicability to the facts of the case has to be established by the assessee. The reasons for applying the said decision to the facts of the present case, in the light of the specific reasons are set out by the AO succinctly. On consideration of facts as available on record, we find that prima facie they do not appear to be incorrect, however since the parties argue that the by-laws are not discussed which shortcoming we also notice on record and the request for remand has been made. Thus, the said exercise has to be done by the assessee in terms of the by-laws of the assessee-society wherein the assessee has been required to explain its acts of collecting deposits from non-members on which interest is being paid and address its arguments on whether it is a banking co-operative society, licensed to do so which stand has not been clarified by the assessee-society since 29.04.2019, despite the fact that the appeal came up for hearing thereafter on 10.06.2019, 07.08.2019 and finally on 26.09.2019. In the circumstances, agreeing to the request of the parties, the matter is remanded back with the aforesaid directions. Appeals of the assessee are allowed for statistical purposes.

Summary

Issues:
Appeals challenging CIT(A) orders for assessment years 2014-15 and 2015-16; Denial of 80P deduction to a Co-operative House Building Society; Mutuality principle application; Non-member deposits and interest earnings; By-laws compliance and remand request.

Analysis:
1. The appeals contested the correctness of separate orders of CIT(A) for the assessment years 2014-15 and 2015-16. The parties agreed that arguments in one appeal applied to both. The core issue was the denial of 80P deduction to a Co-operative House Building Society for these years.

2. The appellant argued that they were granted 80P deduction in previous years but denied in the current years. They claimed to operate on the principle of mutuality, advancing housing loans to members only. The increase in loans to members was highlighted, seeking relief based on mutuality amongst members.

3. The Assessing Officer (AO) observed that the society did not conform to Section 80P scheme due to accepting deposits from non-members and earning interest on long-term deposits. The appellant emphasized their cooperative nature and eligibility for deduction under Section 80P(2)(a)(i).

4. The AO pointed out discrepancies in the society's activities, such as earning interest on non-member deposits and lower interest rates for members, suggesting the absence of mutuality. The appellant was directed to address these concerns, including the purpose of non-member deposits.

5. The appellant's submissions stressed operating on cooperative and mutual principles, but the AO raised questions about the society's banking activities and compliance with its by-laws. The lack of clarity on these aspects led to a request for remand to assess the society's operations in detail.

6. The Tribunal acknowledged the distinction between the facts of the present case and the precedent case of M/s Totgar Co-op Sale Society Ltd. The decision emphasized the need for the appellant to establish the non-applicability of the precedent to their case, especially regarding income sources and compliance with by-laws.

7. Ultimately, the Tribunal allowed the appeals for statistical purposes, remanding the case to the AO for a thorough examination of the society's activities, adherence to by-laws, and compliance with Section 80P provisions. The decision highlighted the importance of factual clarity and adherence to legal principles in determining the eligibility for tax deductions.