2024 (1) TMI 844 - AT - Income Tax

Disallowance u/s 80(P)(2)(a)(i) - assessee society has violated section 18 of the Karnataka Co-operative Societies Act, 1959 by having more than 15% associate members (other than regular members) - CIT(A) deleted addition - HELD THAT - Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. 2021 (1) TMI 488 - SUPREME COURT had held that the expression members , since it is not defined under the Income-Tax Act, the meaning/expression members must be considered n the context of the provision of the law enacted by the State legislature under which Co-operative Society claiming exemption has been formed. It is, therefore, necessary to consider the expression member in section 80P(2)(a)(i) of the Act in the light of definition as contained in section 18 of the Karnataka Co-operative Societies Act, 1959. As per amendment, w.e.f. 01.06.2014, Co-operative Societies registered under the Karnataka Co-operative Societies Act, 1959, is allowed to have nominal / associate members (non-members) up to 15% of its total membership. In the instant case, as mentioned earlier, the assessee society is providing credit facilities to non-members exceeding 15% of its total membership. Therefore, assessee would not be entitled to deduction u/s 80(P)(2)(a)(i) of the Act on income arising from dealing with non- members. Only profits attributable to non-members alone would not be entitled to deduction u/s 80P(2)(a)(i) of the Act. Thereby meaning proportionate deduction is to be allowed in respect of the income arising out of business with the members of the assessee society. In the light of the above said judgment of the Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., (supra), we restore the issue to the AO to determine the proportionate deduction under section 80P(2)(a)(i) of the Act with regard to the income earned from the assessee s dealings with its regular members. Addition u/s 68 - cash deposit of the Specified Bank Notes (SBN) from period 10.11.2016 to 31.12.2016 - as per AO assessee society was not authorized to accept the SBNs subsequent to the demonetization announced by virtue of the order of Government of India (Refer Gazette Notification No.2652 dated 8.12.2016) - assessee had claimed that this money was deposited by its customers in its bank accounts and the AO was provided with party-wise details, the identity of the creditors from whom the amounts is collected etc - CIT(A) has deleted the addition made u/s 68 - HELD THAT - The assessee had furnished the details such as from whom the amounts are collected, where it is accounted and the details of the loans and deposits. Hence, the assessee cannot be made liable u/s 68 of the Act as unexplained credit. The evidence produced by the assessee was rejected only on the basis that assessee was not authorized to collect the SBNs subsequent to 8.11.2016. On identical factual situation, in the case of Bhageeratha Pattina Sahakara Sangha Niyamita 2022 (2) TMI 1243 - ITAT BANGALORE we hold that ld. CIT(A) was justified in deleting the addition made u/s 68 of the Act. Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under section 80P(2)(a)(i) of the Income-tax Act.
2. Addition under section 68 of the Income-tax Act.

Issue 1: Deduction under section 80P(2)(a)(i) of the Income-tax Act:

The revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 45,52,542/- under section 80P(2)(a)(i) of the Income-tax Act, arguing that the assessee society violated section 18 of the Karnataka Co-operative Societies Act, 1959 by having more than 15% associate members. The AO had denied the deduction, asserting that the assessee was dealing substantially with non-members, thus failing to comply with the principle of mutuality, as supported by the Supreme Court's decision in Citizen Co-operative Credit Society Ltd. vs. ACIT.

The CIT(A) had ruled in favor of the assessee, relying on the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd. vs. CIT, which held that if the State Act does not prohibit giving credit facilities to non-members, the deduction under section 80P cannot be denied. The revenue argued that the CIT(A) misinterpreted this judgment.

The Tribunal noted that the amendment to section 18 of the Karnataka Co-operative Societies Act, limiting associate members to 15%, was effective from 6.9.2014. Since the assessee provided credit facilities to non-members exceeding this limit, it was not entitled to the deduction under section 80P(2)(a)(i) on income from non-members. However, following the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd., the Tribunal held that the assessee is entitled to a proportionate deduction for income earned from regular members. The issue was restored to the AO to determine the proportionate deduction.

Issue 2: Addition under section 68 of the Income-tax Act:

The AO added Rs. 1,47,17,500/- under section 68, noting that the assessee had deposited Specified Bank Notes (SBN) post-demonetization, which was not authorized. The CIT(A) deleted the addition, following the ITAT's decision in Bhageeratha Pattina Sahakara Sangha Niyamita vs. ITO.

The Tribunal observed that the assessee had provided detailed information about the creditors and transactions, satisfying the conditions under section 68. The AO's sole reason for the addition was the unauthorized collection of SBNs. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had stopped collecting SBNs after the RBI's notification and had duly recorded the transactions in its books.

Conclusion:

The revenue's appeal was partly allowed for statistical purposes, and the Cross Objection filed by the assessee was dismissed as infructuous. The Tribunal ordered the AO to determine the proportionate deduction under section 80P(2)(a)(i) for income from regular members and upheld the deletion of the addition under section 68.