2020 (8) TMI 361 - AT - Income Tax

Eligibility for deduction u/s.80P(2) - from the order of the CIT(A) it is clear that the assessee is eligible for deduction u/s.80P(2) and not engaged in banking business - HELD THAT - Co-operative society which is a member of a federated co-operative society - In section 80P(2) when Parliament has used the word 'members', it has used it in the normal sense of a member of a co-operative society. The intention was to extend the exemption to co-operative societies directly extending credit facilities to their members. There is nothing in the said provision to show that the intention was to grant exemption to co-operative societies which were extending credit facilities to persons, who, though not members of the said society, were members of another co-operative society which is a member of the co- operative society seeking exemption. The meaning of the expression 'member' cannot therefore be extended to include the members of a primary co-operative society which is a member of the federated co-operative society seeking exemption. The principle of lifting the corporate veil cannot have any application in the context of the provisions contained in section 80P(2)(a)(z) of the Act - U.P. Co-operative Cane Union Federation Ltd v. CIT 1997 (1) TMI 7 - SUPREME COURT . Assessee is eligible for deduction u/s.80P(2)(a)(i). AO has disallowed two additions i.e. provision for bad doubtful debts and provision for gratuity - These two additions are resulting to enhancement of profit of the assessee society which are specific disallowances related to the business of the assessee. Circular issued on 02.11.2016, whereas the case of the assessee is pertaining to A.Y.2009-2010 2010-2011. The Circular is clarificatory in nature. Therefore, it would be presumed that the benefit of Circular will apply to the assessee. It is also clear that the additions made by the AO is covered by this Circular. The above mentioned additions are eligible for deduction under Chapter-VIA and under section 80P of the Act. In support of our above view, we also rely on the decision of the coordinate bench of the Tribunal in the case of Ozone Pharmaceutical 2019 (4) TMI 1302 - ITAT DELHI wherein the assessee has got deduction under Chapter VIA if the profit from business has been increased by the AO by making certain disallowance. Accordingly, we allow the appeal of the assessee.

Summary

Issues Involved:
1. Disallowance of provision for bad debts and provision for interest.
2. Disallowance of provision for gratuity.
3. Eligibility for deduction under Section 80P of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Bad Debts and Provision for Interest:
The assessee challenged the disallowance of ?10,00,000 for bad debts and interest provisions for the assessment year 2009-2010, and ?10,50,000 for the assessment year 2010-2011. The Assessing Officer (AO) disallowed these provisions because no debt/overdue principal was written off during the year, as confirmed by the Secretary of the Society. The AO made the disallowance under Section 36(1)(vii) of the Act and added the amounts to the total income of the assessee. The CIT(A) upheld this disallowance. The ITAT noted that these disallowances resulted in the enhancement of the assessee's profit, which is eligible for deduction under Section 80P(2)(a)(i) of the Act, as per the CBDT Circular No. 37/2016, which allows for deductions on enhanced profits due to such disallowances.

2. Disallowance of Provision for Gratuity:
The AO disallowed the provision for gratuity amounting to ?1,47,351 for the assessment year 2009-2010 and ?51,952 for the assessment year 2010-2011, on the grounds that it was not in accordance with the provisions of Section 36(1)(v) of the Act. The CIT(A) upheld this disallowance as well. The ITAT observed that these gratuity amounts were transferred to the LIC of India on the approved gratuity fund maintained by the LIC. The ITAT held that these disallowances also resulted in the enhancement of the assessee's profit and are eligible for deduction under Section 80P(2)(a)(i) of the Act, as per the CBDT Circular No. 37/2016.

3. Eligibility for Deduction under Section 80P:
The primary issue was whether the assessee, a co-operative society, was eligible for deduction under Section 80P(2) of the Act. The AO disallowed the deduction, asserting that the assessee was engaged in banking business and thus fell under Section 80P(4) of the Act, which denies the benefit to co-operative banks. However, the CIT(A) concluded that the assessee was not a co-operative bank but a co-operative society providing credit facilities to its members, as defined under Section 80P(2)(a)(i) of the Act. The ITAT agreed with the CIT(A), noting that the assessee's bye-laws specifically restricted banking activities to its members, and the society did not extend banking facilities to the general public. The ITAT concluded that the assessee is eligible for deduction under Section 80P(2)(a)(i) of the Act.

Conclusion:
The ITAT allowed both appeals of the assessee for the assessment years 2009-2010 and 2010-2011, holding that the assessee is eligible for deduction under Section 80P(2)(a)(i) of the Act. The disallowances made by the AO for provisions for bad debts, interest, and gratuity resulted in enhanced profits, which are eligible for deduction under the CBDT Circular No. 37/2016. The ITAT's decision was pronounced in the open court on 14/08/2020.