2019 (1) TMI 740 - AT - Income Tax

Claim of deduction u/s 80P(2) - appellant is a Co-Operative Bank or not - interest income earned by the appellant out of the deposits kept in the in the Banks - all monies belong to the members of the appellant society - Karnataka State has notified Karnataka Co-operative Societies Act, 1959 as well as the Karnataka Souharda Sahakari Act, 1997 and even at present both the Acts are in force simultaneously - Held that - As decided in assessee s own case 2018 (8) TMI 1063 - ITAT BANGALORE assessment order was passed in the name of Udaya Souharda Credit Co-operative Society Ltd., whereas no certificate of registration was placed before us in the name of Udaya Souhardha Credit Co-operative Society ltd. Therefore, we are unable to understand how the assessee can claim it to be the co-operative society in the absence of proper registration under the Karnataka Co-operative Societies Act. Creation of Co-operative Society under the co-operative societies Act is doubtful. Thus the claim of deduction under section 80P cannot be allowed. Since all these new points have been raised during the course of hearing before us and according to us all these points goes to the root of the case, we are of the view that proper adjudication of the issues is required by the AO - Matter remanded back. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Denial of deduction under section 80P(2) of the Income Tax Act.
2. Classification of the appellant as a primary co-operative bank.
3. Applicability of section 80P(4) of the Act.
4. Eligibility for deduction on interest income from deposits.
5. Proportional allowance of deductions and expenditures.
6. Opportunity for hearing and principles of natural justice.
7. Levy of interest under sections 234A and 234B of the Act.

Detailed Analysis:

1. Denial of Deduction under Section 80P(2) of the Income Tax Act:
The appellant contested the denial of their claim for deduction under section 80P(2) of the Act by the Commissioner of Income Tax (Appeals) [CIT(A)]. The appellant argued that they should not be assessed on a total income of ?3,02,67,590/- as their returned income was NIL after claiming the eligible deduction under section 80P(2). The CIT(A) confirmed the disallowance made by the Assessing Officer (AO), who determined that the appellant's principal business was banking, thus classifying it as a primary co-operative bank, ineligible for the deduction under section 80P(2).

2. Classification as a Primary Co-operative Bank:
The AO disallowed the deduction on the grounds that the appellant's principal business was banking and its paid-up capital exceeded ?1 lakh, classifying it as a primary co-operative bank. This classification was based on the judgment of the Apex Court in the case of Totgars Co-operative Sale Society Ltd. vs. ITO, which held that interest earned on surplus funds invested in short-term deposits in banks and government securities is not eligible under section 80P.

3. Applicability of Section 80P(4) of the Act:
The appellant argued that they are not a co-operative bank within the meaning of Part-V of the Banking Regulation Act, 1949, to which section 80P(4) refers, and thus, section 80P(4) should not apply to them. The CIT(A) did not accept this argument, maintaining that the appellant's activities and financial structure classified it as a primary co-operative bank.

4. Eligibility for Deduction on Interest Income from Deposits:
The appellant contended that the interest income earned from deposits kept in banks was from the monies of its members and should be eligible for deduction under section 80P(2). However, the AO, supported by the CIT(A), denied this claim, referencing the judgment in Citizen Co-operative Society Ltd. vs. ACIT, which held that advancing loans to the general public without approval from the Registrar of Societies violates the co-operative societies Act, disqualifying the society from the deduction.

5. Proportional Allowance of Deductions and Expenditures:
The appellant argued that, even if not fully eligible, they should be allowed deductions proportionately for income attributable to activities not in violation of section 80P(2). They also contended that corresponding expenditures should be allowed proportionately on income earned from investments claimed under section 80P(2)(d). The CIT(A) did not concede to these arguments.

6. Opportunity for Hearing and Principles of Natural Justice:
The appellant claimed that they were not given a reasonable opportunity to present their case and produce supporting documents, which violated the principles of natural justice. The Tribunal noted that proper adjudication of these issues required further examination by the AO.

7. Levy of Interest under Sections 234A and 234B of the Act:
The appellant also contested the levy of interest under sections 234A and 234B, arguing that the period, rate, quantum, and method of calculation were incorrect and not discernible. The Tribunal did not address this issue in detail, as the primary matters were remanded for re-examination.

Tribunal's Decision:
The Tribunal, following the decision of the Co-ordinate Bench in the appellant's own case for the previous assessment year, set aside the orders of the CIT(A) and AO. The matter was remanded to the AO for re-examination of all aspects, including the eligibility for deduction under section 80P(2), classification as a co-operative society, and the nature of interest income. The AO was directed to conduct necessary enquiries and investigations, providing the appellant with an adequate opportunity to present their case. The appeal was allowed for statistical purposes, and the Tribunal refrained from adjudicating the grounds on merits at this stage.