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TMI Blog2024 (6) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... e Societies Act, 1959 defines Members to include nominal / associate members u/s. 2(f). Considering the definition of Member under the Karnataka Co-operative Societies Act, the present assessee qualifies for deduction u/s. 80P(2)(a)(i) - Thus we allow the claim of the assessee u/s. 80P(2)(a)(i) of the act in respect of the interest earned by the assessee from credit facilities extended to members that includes nominal / associate members. Disallowance of interest u/s 80P(2)(a)(i) earned by the assessee from staff loans - The arguments advanced by the Ld.AR do not support the scheme of the Act under section 80P(2)(a). What is allowable under the section has been expressly provided for therein. As per section 80P, an income which is attributable to any of the specified activities in Section 80P(2) of the Act could be only eligible for deduction. Providing loan to the employees cannot be considered as, attributable to the business of the assessee, as the term attributable to the business is much narrow term, which is directly connected to the objects of the assessee for which it has been established. We therefore hold that, the interest earned by the assessee from loan give to its emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compute the deduction under section 80P(2)(a)(i)/(d) in accordance with law. Disallowance of guarantee commission u/s 43B - AR submitted that, the guarantees in the present case were extended by the Government to the assessee as a part of the executive power of the state under article 293(1) of the Constitution and section 43B contemplates that, a law must levy a tax, duty, cess or fee, and that there is no such levy in the case of a guarantee commission, thus Section 43B does not cover guarantee commission - HELD THAT:- Section 43B falls in Part-V of the Act. What is apparent is that the scheme of the Act is such that Sections 28 to 38 deal with different kinds of deductions, whereas Sections 40 to 43B spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme, Section 40 (which too starts with a nonobstante clause overriding Sections 30-38), deals with what cannot be deducted in computing income under the head Profits and Gains of Business and Profession Each of these deductions, has its contours, depending on the expressions used, and the conditions that are to be met. It is therefore nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri D.K. Mishra, CIT DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals arise out of the following orders of the L.CIT(A) passed independently for Assessment Years 2012-13 to 2018-19 2020-21. The details of the impugned orders are as under: Appeal No. Assessment Year Impugned order dated ITA No.1052/Bang/2023 2012-13 29/05/2023 ITA No.1053/Bang/2023 2013-14 11/05/2023 ITA No.1054/Bang/2023 2013-14 11/05/2023 ITA No.1055/Bang/2023 2014-15 11/05/2023 ITA No.1056/Bang/2023 2015-16 16/05/2023 ITA No.1057/Bang/2023 2016-17 16/05/2023 ITA No.1058/Bang/2023 2017-18 29/05/2023 ITA No.1059/Bang/2023 2018-19 29/05/2023 ITA No.1060/Bang/2023 2020-21 29/05/2023 2. Brief facts of the case are as under: 2.1 The Ld.AR at the outset submitted that the facts and circumstances of the appeals under consideration are based on identical facts and on the disallowance of assessee s claim under section 80P(2)(a)(i)/(d) of the Act. Therefore all the appeals are considered in a consolidated manner on the principle issue. 2.2 It is submitted that the assessee is a state-level non-banking co-operative credit society established in the year 1929, well before the enactment of the Karnataka Co-operative S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld.AO thus denied the contention of the assessee that, the interest earned from investment made may be considered under section 80P(2)(a)/(d) of the Act. 2.7 The Ld.AO was thus of the opinion that assessee is into Banking business and principle of Mutuality did not satisfy. He placed reliance on the decision of Hon ble Supreme Court in case of Citizens Cooperative Society Ltd., reported in (2017) 397 ITR 1. 2.8 Aggrieved by the orders of the Ld.AO, the assessee preferred appeals before the Ld.CIT(A). 3. The Ld.AR submitted that for assessment years 2012-13, 2018-19 and 2020-21, the orders of the Ld.CIT(A) were passed ex-parte. 3.1 For AY 2013-14, assessment order was passed on 26.02.2016. In first appeal, an order was passed by the Ld.CIT(A) on 14.02.2017, against which the assessee preferred appeal before this Tribunal who passed order dated 06.04.2018 remanding the matter to the file of the CIT(A). Thereafter, the Ld.CIT(A) passed two orders, both on 11.05.2023 at different time with different DIN. In both these orders passed by the Ld.CIT(A) on merits, the disallowance by the Ld.AO was upheld. For remaining assessment years, orders were passed upholding the disallowance by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of assessee in not filing the present appeals within time. In our opinion there is a sufficient cause for condoning the delay as observed by Hon ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji Ors., reported in (1987) 167 ITR 471 in support of his contentions, wherein, Hon ble Court observed as under:- The Legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits . The expression sufficient cause employed by the Legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice that being the life-purpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message does not appear to have percolated down to all the other courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that : 1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the opinion that, two appeals need not be adjudicated on the same issue filed for AY 2013-14. Accordingly we dismiss ITA No.1053/Bang/2023 in limine containing the impugned order passed by the Ld.CIT(A) subsequently for AY 2013-14. DISALLOWANCE OF CLAIM U/S. 80P(2)(a)(i) 8. The Ld.AR submitted that, the claim of deduction disallowed under section 80P(2)(a)(i) in the pending appeals has been challenged by the assessee for the years under consideration in following grounds: Appeal No. Assessment Year Ground Number ITA No. 1052/Bang/2023 2012-13 2, 5, 6 ITA No. 1054/Bang/2023 2013-14 3, 6, 7 ITA No. 1055/Bang/2023 2014-15 2, 5, 6, 7 ITA No. 1056/Bang/2023 2015-16 2 ITA No. 1057/Bang/2023 2016-17 2 ITA No. 1058/Bang/2023 2017-18 2 ITA No. 1059/Bang/2023 2018-19 2 ITA No. 1060/Bang/2023 2020-21 2 9. The Ld.AR submitted as under: 9.1 The assessee is a State Level Federal Agriculture and Rural Development Credit Society registered under the provision of the Karnataka Co-op Societies Act, 1959. It is submitted that the assessee is not governed by the provisions of the Banking Regulation Act, 1949 (Central Act), and is a non-banking Co-op Society. The word Bank is used in its registere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of not less than one year and to the extent of its financial net worth only. He further submitted that the assessee is not in a position to mobilize termed deposits of considerable amount because firstly the assessee is not allowed to collect deposits from the individuals and institutions that are not enrolled as its members and secondly the deposit insurance and guarantee scheme is not applicable to the deposit collected by the assessee. The assessee is also not sound financially due to poor recovery of Agriculture Loans from the farmers to the PCARD Bank resulting in poor recovery from the PCARD Banks to the bank also. Hence, assessee cannot attract the depositors in the competitive financial market. The Ld.AR thus submitted that, the core function of the Bank is as follows: a. Collection of share capital from its members that is the PCARD Banks. b. Availing refinance assistance from NABARD subject to the NABARD s refinances norms. c. Disbursement of Long Term agriculture and Allied loans to the farmers through its member s constituent s viz, the PCARD Banks. d. Management of recoveries at village levels. e. Over all supervision of functioning of the PCARD Banks. 10. It is subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s own case for AY 2012-13. The decision of Hon ble Supreme Court in Mavilayi which specifically holds that co-operative societies not licensed by the RBI cannot be regarded as banks within the meaning of section 80P(4). Reliance was also placed on the decision of Hon ble jurisdictional High Court in case of, Shree Mahila Credit reported in (2017) 88 taxmann.com 712 and Sri Biluru Gurubasava reported in (2014) 369 ITR 86. 12. The Ld.AR submitted that the assessee claimed 80P(2)(a)(i) in respect of the interest income earned by it by providing credit facilities to its members which has been disallowed by the authorities below relying on the ratio of Hon ble Supreme Court in case of Citizen Co-operative Society Ltd. (supra). The Ld.AR submitted that assessee is a co-operative society registered under Karnataka Co-operative Societies Act whereas Citizen Co- operative Society has been observed to be a mutually aided co- operative society and was functioning as a bank that had a RBI approval. He thus submitted that the ratio laid down therein is not applicable to assessee as assessee does not have a RBI approval to function like a bank. 13. The Ld.AR submitted that insofar as the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression members in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under: 2. (n) 'Member' means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to 'members' anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty; Considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i). 47. Further, unlike the facts in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i(supra), noted that the distinction between eligibility of deduction and attributability of amount of profits and gains to an activity is a real one. He submitted that the Hon ble Court made this observation after noting that once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The Ld.AR thus submitted that the assessee would be eligible to the deduction, as it is engaged in providing credit facilities to its members, and thereafter, the interest from staff loans would be attributable to this business of providing credit facilities to its members. 15. DISALLOWANCE OF INTEREST EARNED FROM INVESTMENT u/s. 80P(2)(a)(i)/(d) 15.1 In respect of the investments made by assessee from which interest / dividend has been earned, assessee submitted that deduction u/s. 80P(2)(a)(i)/(d) is available to assessee. This issue arises in the following manner. I.T.A. No. AY Ground 1052/Bang/2023 2012-13 N/A 1053/Bang/2023 2013-14 8 1054/Bang/2023 2013-14 8 1055/Bang/2023 2014-15 8 1056/Bang/2023 2015-16 3 1057/B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st under section 80P(2)(a)(i) earned by the assessee from staff loans III) Disallowance of interest under section 80P(2)(a)(i)/(d) earned by the assessee from investments made. Admittedly, the assessee is not a bank as per the definition of Section 5(c) of the Banking Regulation Act. We infer this view from the reply to the RTI application issued by RBI vide its letter dated 07/09/2018. Thus in our considered view, the assessee do not fall under the exception as per section 80P(4). 16. In respect of the observation of the authorities below regarding the violation of Principle of Mutuality since the facilities are extended to associate members and nominal members are concerned, the ratio by Hon ble Supreme Court in case of Mavilayi (supra) read with section 2(f) of Karnataka Co-operative Act 1959 covers the issue. 16.1 We note that, Karnataka Co-operative Societies Act, 1959 defines Members to include nominal / associate members u/s. 2(f). Considering the definition of Member under the Karnataka Co-operative Societies Act, the present assessee qualifies for deduction u/s. 80P(2)(a)(i). At the cost of repetition, we draw reference from following observations of Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80P, an income which is attributable to any of the specified activities in Section 80P(2) of the Act could be only eligible for deduction. Providing loan to the employees cannot be considered as, attributable to the business of the assessee, as the term attributable to the business is much narrow term, which is directly connected to the objects of the assessee for which it has been established. We therefore hold that, the interest earned by the assessee from loan give to its employees cannot be considered for deduction under section 80P(2)(a)(i) of the Act. It has to be treated as income form other sources. Accordingly we hold that the interest earned from the credit activities of the assessee to its members including nominal / associate is allowable under section 80P(2)(a)(i ) of the act. We also hold that the interest earned by the assessee from loan to its employees are to be treated as Income from other sources, not eligible for deduction under the provisions of Section 80P. 17. In respect of deduction available to the assessee on interest earned from investments, Hon ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor- General, it has used the expression derived from , as, for instance, in section 80J. In our view, since the expression of wider import, namely, attributable to , has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. (emphasis supplied) 17.3 Therefore, the word attributable to is certainly wider in import than the expression derived from . Whenever the legislature wanted to give a restricted meaning, they have used the expression derived from . The expression attributable to being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Co- operative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey had deposited the money out of which interest was earned. The said interest is thus attributable to carrying on the business of the assessee and therefore it is liable to be deducted in terms of Section 80P(2)(d) of the Act. In fact similar view is taken by the Hon ble Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State Co-operative Bank Ltd. reported in [2011] 12 taxmann.com 66. 17.6 We note that recently Hon ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. AO reported in (2023) 154 taxmann.com 305 has in detail analysed the allowability of deduction u/s. 80P(2)(d) of the Act. Hon ble Court observed and held as under: 15.8 Since the words 'bank' and 'banking company' are not defined in the NABARD Act, 1981, the definition in sub- clause (i) of clause (a) of section 56 of the BR Act, 1949 has to be relied upon. It states that a co-operative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co-operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of section 5 of the BR Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of the said chapter. For the purpose of these cases, what is relevant is that throughout the BR Act, 1949, unless the context otherwise requires, - references to a banking company or the company or such company shall be construed as references to a co- operative bank. Therefore, while considering the meaning of a co-operative bank inherently, such a co-operative society must be a banking company then only it would be construed as a co-operative bank requiring a licence under section 22 of BR Act, 1949 in order to function as such a bank. 15.10 Further, while considering the definition of a co- operative bank under section 56(cci) of the BR Act, 1949, to mean a state co-operative bank, a central co-operative bank and a primary co-operative bank which is defined in (ccviii) thereof, to have meanings respectively assigned to them in the NABARD Act, 1981 would imply that if a state co-operative bank is within the meaning of NABARD Act, 1981 then it would be excluded from the benefit under section 80P of the Act. Conversely, if a co-operative society is not a cooperative bank within the meaning of section 56 of the BR Act, 1949, it would be entitled to the benefit of dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se were extended by the Government to the assessee as a part of the executive power of the state under article 293(1) of the Constitution. It is submitted that, section 43B contemplates that, a law must levy a tax, duty, cess or fee, and that there is no such levy in the case of a guarantee commission. The Ld.AR thus submitted that Section 43B does not cover guarantee commission. 18.3 The Ld.AR submitted that the commission is paid as consideration/ recompense for a promise to repay in the event of default. It is to compensate the guarantor for the risk undertaken in extending the guarantee. He submitted that this is also demonstrated by the Central Government s guarantee policy and Rule 246 of the General Financial Rules, 2005 of the Government of India, both of which contemplates risk profiling and prioritisation and estimation of the credit-worthiness of the principal debtor before extending guarantees. 18.4 The Ld.AR further submitted that, if the primary claim of the assessee for the deduction in respect of the assessee s income from extending credit facilities under section 80P(2)(a)(i) is allowed, this disallowance will only go to increase the income for which deduction shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u Minerals Lts. Vs.CIT reported in (2019) 107 taxmann.com 214, wherein the issue was one in which the amount paid was of nomination charges by means of a Government order under some rules promulgated by the state Government. Hon ble Madras High Court observed that, despite this, the payment actually arose out of a lease agreement entered into by the assessee with the state and that the payment was therefore contractual. Hon ble Court held held that; other levies made by the State Government in the realm of contractual laws Hon ble Court thus held that other levies, cannot come within the scope of section 43B(a) and that the the provision was to be interpreted literally, and not liberally, so that the scope of the provision was not widened. Hon ble Court was of the opinion that the application of section 43B would depend on, whether the payment involved was statutory or contractual (non-statutory). 18.6 The Ld.AR also relied on a circular of CBDT Circulat No.372 dated 08/12/1983 explains why the terms cess and fees were added to clause (a) of section 43B with effect from 01.04.1989 in the following terms: Modification of the provisions relating to deduction in respect of certain lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the Assessee to State Government can be said to fall within the ambit of sec.43B of the Act. We have perused the decisions relied on by the Ld.AR. To consider the submissions of the Ld.AR it is necessary to analyse section 43B that reads as under: 43B. [Certain deductions to be only on actual payment. [Inserted by Act 11 of 1983, Section 18 (w.e.f. 1.4.1984).] Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a)[ any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or] (b)any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, [or] [ Inserted by Act 4 of 1988, Section 15 (w.e.f. 1.4.1989).] (c) [any sum referred to in clause (ii) of sub-section (1) of section 36, (d) [any sum payable by the assessee an interest on any loan or borrowing from any public financial institution or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances. 18.13 Section 43B falls in Part-V of the Act. What is apparent is that the scheme of the Act is such that Sections 28 to 38 deal with different kinds of deductions, whereas Sections 40 to 43B spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme, Section 40 (which too starts with a nonobstante clause overriding Sections 30-38), deals with what cannot be deducted in computing income under the head Profits and Gains of Business and Profession 18.14 Each of these deductions, has its contours, depending on the expressions used, and the conditions that are to be met. It is therefore necessary to bear in mind that, specific enumeration of deductions, dependent upon fulfilment of certain conditions, that would qualify as allowable deductions, and failure by the assessee to comply with those conditions, would render the claim to be rejected. 18.15 In the present case, it is apparent that, the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in 40 (a) (iib). Therefore we are persuaded to hold that the disallowance made with respect to the licence fee and shop rental (kist) paid with respect to the FL1 licences granted to the appellant for retail trade in foreign liquor, cannot be sustained. 14. We therefore accept the argument of the Assessee that for applying the provisions of sec.40(a)(iib) of the Act there should be a levy of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called , which is levied exclusively on State Government undertaking by the State Government. Guarantee commission is not paid directly to the State Government and they are not levies imposed exclusively on the Assessee. The State Government issues Guarantees on behalf of the Government Departments, Public Sector Undertakings, Local Authorities, statutory Boards and Corporations and Co-operative Institutions. Consequently, we hold that the disallowance made u/s.4- (a)(iib) of the Act cannot be sustained. 15. We are also of the view that Guarantee Commission is not in the nature of a levy on a state Government undertaking by the State Government. It is purely a contractual payment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of this Tribunal. Accordingly this issue in ITA No.1058/Bang/2023 for AY 2017-18 in ground no. 10 stands remanded for necessary verification. 20. ADDITION OF E-STAMPING INCOME This issue has been raised in the following grounds. I.T.A. No. AY Ground Number 1052/Bang/2023 2012-13 Issue does not arise. 1053/Bang/2023 2013-14 Issue does not arise. 1054/Bang/2023 2013-14 Issue does not arise. 1055/Bang/2023 2014-15 Issue does not arise. 1056/Bang/2023 2015-16 5 1057/Bang/2023 2016-17 Issue does not arise, but see below. 1058/Bang/2023 2017-18 9 1059/Bang/2023 2018-19 5 1060/Bang/2023 2020-21 5 20.1 The Ld.AR submitted that the Ld.AO observed that since the Appellant renders e-stamping services and receives income from non-members, the deduction under section 80P(2)(a)(i) will not be allowable. However, no disallowance of the deduction under section 80P was made specifically as it relates to e-stamping income. 20.2 The income from e-stamp vending does not alter the position with respect to the deduction under section 80P. (h)The revenue from e-stamping is ₹ 2,11,580 as opposed to the Appellant s total revenue of ₹ 171,68,04,506. Thus, the e-stamping revenue constitutes a ..... 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