2019 (12) TMI 1180 - AT - Income Tax

Claim of exemption u/s 44A - mutual concern - for the benefit of members - profit motive - the activities is to get quality grocery, clothes, stationery and durable items at a very reasonable rate to the employees of Ordanance Factory - HELD THAT - Members of the society are employees of the Ordnance Factory, Ambarnath and they become members by subscribing to the share capital of the Society; the Managing Committee of the Stores effects purchases of various goods from the manufacturers/wholesellers at competitive price and sales are effected to members only, either on cash or on credit basis ; credit sales proceeds are recovered from members through their employer i.e. Ordnance Factory and its allied establishment, Ambarnath from salaries. Thus it is observed by us that the object is not to earn profit but to provide best possible consumer goods at best price to its members only. It is a case of mutual entity running on principles of mutuality. The essence of mutuality lies in the return for what one has contributed to a common fund. The fund should fulfill the essential requirements that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus should be contributors to the common fund. There must be complete identity between the contributors to the fund and the participators in the surplus. We hold that the essence of mutuality has been established by the appellant. Therefore, we are inclined to set aside the order of the Ld. CIT(A).- Decided in favour of assessee. Deduction u/s 80P(2)(d) in respect of interest earned on fixed deposits - AO allowed net interest deduction after deducting proportionate expenses for earning such interest income received from another Co-operative Bank - HELD THAT - As evident from the accounts, the appellant is not enjoying any credit facilities from any financial institution. In order to develop the habit of savings, the appellant is collecting thrift deposit from salaries on monthly basis since its inception and these funds are utilized for the business purpose of the appellant. During the year under consideration, the appellant invested ₹ 11,05,000/- out of interest income and surplus in the fixed deposits against various funds. There is no merit in the action of the AO to disallow the expenses @ 87.54%. Also there is no merit in the order of the CIT(A) in restricting it to 50%. It is well settled that section 80P(2)(d) of the Act allows whole deduction of an income by way of interest or dividends derived by the Co-operative Societies from its investment with any other Co-operative Society. Having regard to the above provisions, we are of the considered view that there is no basis to restrict the disallowance to 50% as held by the Ld. CIT(A). The apportioning of the expenditure to the interest income is not justified and the appellant is entitled to deduction u/s 80P(2)(d) of the entire interest of ₹ 7,70,784/-. The order of the Ld. CIT(A) therefore reserves to be set aside.- Decided in favour of assessee.

Summary

Issues:
1. Denial of exemption based on the principle of mutuality.
2. Disallowance of proportionate expenses from interest income under section 80P(2)(d).

Issue 1: Denial of exemption based on the principle of mutuality

For the Assessment Year (AY) 2012-13, the appellant, a Co-operative Consumers Stores, claimed exemption under section 44A but later sought exemption based on the principle of mutuality for interest income earned from a Co-operative Bank. The Assessing Officer (AO) did not accept the principle of mutuality and taxed the business income. The Commissioner of Income Tax (Appeals) upheld the AO's decision, allowing only a partial deduction under section 80P(2)(c)(i). However, the appellant argued that its activities were conducted on a no-profit basis for the benefit of its members, who were employees of the Ordnance Factory. The Tribunal examined the Bye-laws of the appellant and found that it operated on the principles of mutuality, providing goods to members at competitive prices without profit motive. The Tribunal held that the essence of mutuality was established, setting aside the CIT(A)'s order and allowing the appeal.

Issue 2: Disallowance of proportionate expenses from interest income under section 80P(2)(d)

In the AY 2013-14, the appellant declared income as exempt based on mutuality principles and claimed a deduction under section 80P(2)(d) for interest earned from a Co-operative Bank. The AO allowed a net interest deduction after deducting proportionate expenses. The CIT(A) agreed with the AO but reduced the disallowance percentage. The appellant contended that section 80P(2)(d) did not differentiate based on the source of investment and argued for the full deduction of interest income. The Tribunal noted that the appellant operated a Co-operative Consumer Stores solely for its members' benefit, investing funds in fixed deposits as per Co-operative Societies Act rules. It found no justification for the AO's disallowance percentage or the CIT(A)'s reduction, holding that the appellant was entitled to the full deduction under section 80P(2)(d). Consequently, the Tribunal allowed the appeals for both AYs 2012-13 and 2013-14.

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