2013 (9) TMI 558 - AT - Income Tax

Disallowance of Deduction u/s 80P(2)(a)(i) - granting the status of Cooperative Society - providing credit facilities to its members - Spcial auditor u/s 142A concluded that the assessee was not a primary agricultural credit society and was also not a cooperative bank. - Held that - the assessee is primary co-op agriculture and rural development bank, entitled to benefit of deduction u/s 80P(2)(a)(i) of the Act. Merely because certain deficiencies were noted in not holding the meetings on periodic intervals or the membership number of members were not available in particular list, etc., does not make the activities under taken by the assessee society to be not in the nature of providing credit facilities to its members. The basic activity carried on the assessee society as enshrined in its bye laws was to provide long term loans to its members for specified purposes and the assessee admittedly is doing so. Once the primary activity of providing loans to its members has been undertaken by the assessee society, its entitlement for exemption u/s 80P(2)(a)(i) of the Act merits to be allowed. Commissioner Of Income-Tax Versus Pondicherry Co-operative Housing Society Limited 1990 (11) TMI 132 - MADRAS High Court - various objects of the society were distinct and independent objects - A perusal of clause 2(j) of the bye-laws of the society showed that to obtain a loan from the society, it was not necessary that the member should have constructed the house through the society or under its supervision - The restriction imposed on the user of the credit facilities extended by the assessee-society for house building could not be construed as means intended to secure one of the objects of the society, viz., house building - At best it could be regarded as imposition of a condition for obtaining credit facilities - The activity of the assessee-society in making funds available to its members had to be regarded as one of providing credit facilities to its members - the assessee was entitled to the benefit of special deduction under section 80P(2)(a)(i). The object of the assessee-society was to give long term loans to its members for its utilization for specific purposes and the assessee was carrying on such activities and had earned interest income on such loans provided to its members under various schemes - The Special Auditors have also admitted to the above said facts that the assessee had generally given credit to the members for agriculture and rural development activities - Once the assessee was found to be carrying on its primary activity and similar activity was being carried on in earlier years and accepted by the department from year to year, we find no merit in rejecting the claim of the assessee vis- -vis its status under section 80P(2)(a)(i) of the Act - The deficiencies pointed out by the Special Auditors and even the Auditors of Govt. of Punjab which have been complied with by the assessee, does not justify the rejection of exemption under section 80P of the Act - Thus we direct the Assessing Officer to allow deduction under section 80P(2)(a)(i) of the Act Decided in favour of Assessee. Disallowance u/s 14A Held that - Following CIT Vs Kings Exports 2009 (8) TMI 54 - PUNJAB AND HARYANA HIGH COURT - Where the income had not been claimed as exempt, we find no merit in applying the provisions of section 14A of the Act in computing the disallowance of expenses which were attributable to the earning of dividend income Assessing Officer was directed to delete the disallowance made in view of the provisions of section 14A of the Act Decided in favour of Assessee.

Summary

Issues Involved:
1. Legality of the order under section 143(3) of the I.T. Act, 1961.
2. Legality of the special audit under section 142(2A).
3. Status of the appellant as a Cooperative Society.
4. Disallowance of expenditure under section 14A.
5. Additional ground regarding denial of deduction under section 80P(2)(a)(i).

Detailed Analysis:

1. Legality of the order under section 143(3) of the I.T. Act, 1961:
The appellant claimed that the order of the Assessing Officer (AO), upheld by the CIT(A), was "bad in law and beyond all the cannons of law and justice." However, this ground was dismissed as it was general in nature.

2. Legality of the special audit under section 142(2A):
The appellant challenged the special audit of accounts initiated under section 142(2A). The appellant's representative admitted that the issue of the special audit had become academic after the completion of the assessment, and thus, this ground was dismissed.

3. Status of the appellant as a Cooperative Society:
The appellant contested the denial of its status as a Cooperative Society, which affected its eligibility for deductions under section 80P. The CIT(A) and AO had concluded that the appellant did not qualify as a primary agricultural credit society or a cooperative bank. The tribunal found that the appellant was indeed a cooperative society registered under the Punjab Cooperative Society Act, 1961, and was engaged in providing credit facilities to its members. The tribunal noted that the appellant's activities were confined to a taluka, and the primary object was to provide long-term credit for agricultural and rural development activities. The tribunal held that the deficiencies pointed out by the auditors did not justify the rejection of the appellant's claim. Therefore, the appellant was entitled to the status of a primary cooperative agricultural and rural development bank and the corresponding deductions under section 80P(2)(a)(i).

4. Disallowance of expenditure under section 14A:
The appellant argued that the disallowance under section 14A was not applicable as the dividend income was not exempt under section 115-O and was deductible under section 80P(2)(d). The tribunal agreed, noting that the appellant had not claimed the dividend income as exempt. The tribunal found that similar issues in the appellant's case for the assessment year 2008-09 had been resolved in the appellant's favor, and thus, directed the AO to delete the disallowance made under section 14A.

5. Additional ground regarding denial of deduction under section 80P(2)(a)(i):
The tribunal admitted the additional ground raised by the appellant, which was a continuation of the original ground regarding the denial of deduction under section 80P(2)(a)(i). The tribunal examined the appellant's activities and found that the appellant provided long-term loans to its members for agricultural and rural development activities, thus qualifying for the deduction under section 80P(2)(a)(i). The tribunal noted that the appellant's primary activity was providing credit facilities to its members, and deficiencies in procedural compliance did not affect the nature of its activities. Consequently, the tribunal directed the AO to allow the deduction under section 80P(2)(a)(i).

Conclusion:
The tribunal partly allowed the appeal, directing the deletion of the disallowance under section 14A and granting the deduction under section 80P(2)(a)(i), while dismissing the general and academic grounds. The order was pronounced in the open court on December 30, 2011.