2021 (8) TMI 68 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - HELD THAT - Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. and Ors. v. CIT Anr. 2021 (1) TMI 488 - SUPREME COURT had held that expression Members is not defined under the Income-tax Act, hence, it is necessary to construe the expression Members in section 80P(2)(a)(i) in the light of the definition of that expression as contained in the respective State Co-operative Societies Acts. The Hon ble Apex Court had settled many issues in the decision rendered by it in the case of Mavilayi Service Co-operative Bank Ltd. and Ors. v. CIT Anr. (supra). Facts prevailing in the instant case needs to be examined afresh in the light of the principles enunciated by the Hon ble Apex Court. We are of the view that the issue of deduction u/s 80P(2)(a)(i) of the I.T.Act requires de novo consideration by the A.O. Accordingly, we set aside the orders of the CIT(A) for the assessment years 2015-2016 and 2016-2017 and restore them to the files of the A.O. for fresh consideration. A similar view has been held by the Bangalore Bench of the Tribunal in the case of M/s.Kadaba Sahakari Vyavasayika Bank Ltd. 2021 (8) TMI 1 - ITAT BANGALORE - It is ordered accordingly. Deduction u/s 80P(2)(d) - HELD THAT - We noticed that the issue raised is an alternative contention to the claim of deduction u/s 80P(2)(d). Since we have already restored the issue of claim of deduction u/s 80P(2)(d) to the files of the A.O., the issue raised in ground No.8 relating to the allowability of expenditure on income assessed as income from other sources is also restored to the files of the A.O.

Issues Involved:
1. Denial of deduction claimed under section 80P(2)(a)(i) of the Income Tax Act.
2. Determination of whether the business of providing credit facilities to members qualifies under mutuality principles.
3. Classification of interest income under "Other Sources" instead of business income.
4. Allowance of deduction under section 80P(2)(d) of the Income Tax Act.
5. Allowance of expenditure under section 57(iii) of the Income Tax Act.
6. Imposition of interest under section 234-B of the Income Tax Act.

Detailed Analysis:

1. Denial of Deduction Claimed Under Section 80P(2)(a)(i):
The primary issue was whether the assessee, a primary agricultural credit society, was entitled to deductions under section 80P(2)(a)(i) of the Income Tax Act. The assessee argued that their main objective was to provide credit facilities to members to promote agricultural activities, and that interest income and dividend from District Co-operative Banks should be considered part of their banking business. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the deduction, citing the Supreme Court judgment in the case of Citizens Co-operative Society, which stated that dealings with nominal members violated mutuality principles.

2. Mutuality Principles and Business of Providing Credit Facilities:
The CIT(A) upheld the A.O.'s decision, stating that the inclusion of nominal and associate members, who could neither vote nor share in profits, violated mutuality principles. Therefore, the business of providing credit facilities could not be regarded as a business carried on by a co-operative society complying with mutuality principles. The assessee contended that admitting nominal and associate members was permissible under the Karnataka Co-operative Societies Act, 1959, and thus, the Supreme Court judgment in Citizens Co-operative Society was not applicable.

3. Classification of Interest Income:
The CIT(A) also upheld the classification of interest income earned by the assessee under "Other Sources" rather than business income. The assessee argued that the interest income was part of the business of providing credit facilities and should be entitled to deduction under section 80P(2)(a)(i). The CIT(A) relied on the judgment in the case of Totagars Co-operative Sale Society, which held that interest earned on surplus funds invested in short-term deposits and securities should be assessed under "Other Sources."

4. Deduction Under Section 80P(2)(d):
The assessee claimed an alternative deduction under section 80P(2)(d) for interest income derived from investments with co-operative banks. The CIT(A) rejected this claim, relying on the Supreme Court's judgment in Totagars Co-operative Sale Society. The Tribunal noted that the Bangalore Bench had previously restored similar matters to the A.O. for fresh consideration in light of the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd. Therefore, the issue of deduction under section 80P(2)(d) was restored to the A.O. for de novo consideration.

5. Allowance of Expenditure Under Section 57(iii):
The assessee argued that if the interest income was assessed under "Other Sources," the cost of funds should be allowed as a deduction under section 57(iii). The CIT(A) had arbitrarily allowed only 10% of the income as incidental expenses. The Tribunal restored this issue to the A.O. for fresh consideration, along with the claim under section 80P(2)(d).

6. Imposition of Interest Under Section 234-B:
The assessee denied liability for interest under section 234-B, arguing that it should be canceled under the circumstances of the case. The Tribunal did not specifically address this issue in the judgment.

Conclusion:
The Tribunal set aside the orders of the CIT(A) for the assessment years 2015-2016 and 2016-2017, restoring the issues of deduction under sections 80P(2)(a)(i) and 80P(2)(d) to the A.O. for fresh consideration in light of the Supreme Court's decisions. The appeals filed by the assessee were allowed for statistical purposes.

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