The order of the Bench was delivered by
Smt. P. Madhavi Devi, J.M.-
Both the above appeals are filed by the assessee for the A.Ys 2012-13 & 2013-14 respectively. At the outset it is noticed that there is a delay of 9 days in filing of the above appeals and the assessee has filed an application for condonation of delay along with an affidavit of the Counsel for the assessee, Shri K.A. Sai Prasad. It is stated in the affidavit that the papers of the Assessee’s Society along with challans were handed over to him on 14/11/2016 but to misplacement of the relevant papers in his office, the appeal could be filed only on 24.11.2016 causing a delay of 9 days.
2. The learned Counsel for the assessee reiterated the submissions made above. We have gone through the copy of the challans and find that the payment of appeal fee was made on 12.11.2016. Therefore, we accept the contentions of the assessee and condone the delay of 9 days in filing of the appeal before us.
3. The assessee is aggrieved by the order of the CIT (A) in confirming the disallowance of deduction claimed u/s 80P of the I.T. Act of Rs. 2,08,70,799.
4. Brief facts of the case are that the assessee, a cooperative society deriving income from the activity of providing credit facilities to the members/nominal members, filed its return of income for the relevant A.Y. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has admitted nominal members in violation of the rules of the A.P. Cooperative Societies Act, 1964 and further by accepting the deposits from the nominal members, but not allowing any loans to these people, there is no co-operative spirit followed by the assessee. He therefore, disallowed the claim of deduction u/s 80P of the Act and brought the entire amount to tax. Aggrieved, the assessee preferred an appeal before the CIT (A) who dismissed the same and further aggrieved, the assessee is in appeal before us.
5. The learned Counsel for the assessee, Shri K.A. Sai Prasad, submitted that the assessee is a registered cooperative society and has been carrying on the business of banking and is allowing credit facility to its members. He submitted that there are three categories of members i.e. (i) Permanent Members; (ii) Associate Members & (iii) Nominal Members. He submitted that the nominal members are the surities of the accused facing trials before the criminal courts, who deposit the surety amount as prescribed by the criminal court by way of fixed deposits as the credit society is within the court premises. He submitted that the deposits so collected from the Members are used for giving housing loans/education loans etc., to the permanent members but no such facility is extended to the nominal members as no recovery can be made from such members. He submitted that only the interest income received from the permanent members and also the interest income from other cooperative societies with whom the assessee has deposited its funds, has been claimed as a deduction u/s 80P of the Act. He submitted that similar issue had arisen in the caseof Ranga Reddy Judicial Employees Mutually Aided Co-operative Credit Society Ltd and the Coordinate Bench of this Tribunal vide orders dated 4.3.2015 as reported in (2015) 60 Taxmann.com 261 has considered the issue at length and has allowed the appeal. He also placed reliance upon the decision of the Hon'ble Madras High Court in the case of Salem Agricultural Cooperative Marketing Societies Ltd wherein similar issue has been considered and allowed. The other decisions relied upon by him are as under:
(i) ACIT vs. Metrocity Criminal Courts Employees Mutually Aided Cooperative Credit Society Ltd (ITA Nos.1328, 1329 & 1330/Hyd/2012 dated 4.3.2015).
(ii) ACIT vs. The Advocates Mutually Aided Coop Society Hyderabad (ITA No.546, 547 & others dated 20.02.2015)
(iii) Order by the CIT (A)-VI Hyderabad dated 28.12.2011 in the case of R.R. Distt. Judicial Employees Mutually Aided Coop. Credit Society Ltd.
6. The learned DR, on the other hand, supported the orders of the authorities below and placed strong reliance on the findings of the CIT (A).
7. Having regard to the rival contentions and the material on record, we find that the very same issue had arisen in the case of Ranga Reddy Judicial Employees Mutually Aided Coop. Credit Society Ltd (cited Supra) and at Para 4 to 11, the Coordinate Bench of this Tribunal held as under:
“4. The learned Commissioner of Income-tax (Appeals) having noticed that the assessee is registered under APMACS Act and bye laws permit acceptance of deposits from the non-members also did not find any merit in the Assessing Officer's contentions. Since mobilisation of funds is permitted under section 14(2) of APMACS Act, the Commissioner of Income-tax (Appeals) was of the opinion that mobilising funds from outsiders is not a violation of the provisions of governing Act i.e., APMACS Act. Even otherwise, the learned Commissioner of Income-tax (Appeals) held that the acceptance of deposits from non-members cannot said to disqualify the assessee from the benefits of section 80P. Since section 80P(2)(a)(i) specifies only that the assessee should be engaged in the business of providing credit facilities to its members ; what should be the source of funds of such credit is not specified in the section. The learned Commissioner of Income-tax (Appeals) also held that the principle of mutuality relied on by the Assessing Officer is not relevant to the facts of the assessee's case as the assessee has not claimed any exemption on account of mutuality. The learned Commissioner of Income-tax (Appeals) also held that there is no bar to categorise of members as general, nominal and associate. By virtue of section 19(3) of the Act, the learned Commissioner of Income-tax (Appeals) was of the opinion that the assessee has not violated the provisions of APMACS Act and also not covered by the Banking Regulation Act as the assessee is not engaged in banking activity but only providing credit facilities to its members. Analysing the issue in detail, the learned Commissioner of Income-tax (Appeals) held that the assessee is eligible for deduction under section 80P(2)(a)(i) on its profits and gains attributable to the business of providing credit facilities to its members. Thereafter, the learned Commissioner of Income-tax (Appeals) went on to calculate the eligible deduction vide para 9.1 and directed the Assessing Officer to allow deduction under section 80P(2)(a)(i) at Rs. 14,66,822 and section 80P(2)(d) of Rs. 14,61,250 in the assessment year 2008-09. Similarly, in other years also, the deductions were quantified and directed to be allowed by the Commissioner of Income-tax (Appeals) in the order. The Revenue has raised the following grounds commonly for the assessment years 2008-09 and 2009-10 :
“1. The observation of the learned Commissioner of Income-tax (Appeals) that the assessee is a co-operative society does not emanate from the assessment order as she has failed to give a clear finding whether the assessee is a cooperative society though it has violated the principles of the Andhra Pradesh Mutually Aided Cooperative Societies Act (APMACSA), 1995.
2. The observation of the Commissioner of Income-tax (Appeals) is misplaced with regard to deduction under section 80P(2)(a)(i), is even otherwise given to the assessee even if it accepts deposits from non-members.
3. The principle of mutuality relied upon by the Assessing Officer emanate to distinguish that the assessee has violated the principles of mutuality, which the Commissioner of Income-tax (Appeals) fails to comprehend. Having established on record that the assessee has deposited money in Regional Rural Banks, the status of which is not recognised in the Income-tax Act, as co-operative bank, can the interest arising out of the deposit of this regional rural bank would qualify for deduction under section 80P(2)(d).”
5. As can be seen from the above, the ground No. 1 is misplaced. The assessee-society is clearly a co-operative society and the Assessing Officer herself has stated that the assessee is a co-operative society, but violated the provisions of the Co-operative Societies Act. Therefore, ground No. 1 in our view is misconceived.
6. Ground No. 2 is also not maintainable as there is no restriction of getting any deposits from outsiders, leave alone from nominal members and associate members. As rightly pointed out by the learned Commissioner of Income-tax (Appeals), the source of funds for doing the business is not a criteria. What is required to be examined by the Assessing Officer is whether the deduction under section 80P(2)(a)(i) is from the profits and gains of providing credit facilities to its members. To that extent the Assessing Officer can examine the assessee's transactions. Just because the assessee has deposits from non-members, it does not prevent being a cooperative society nor it prevents claiming deduction under section 80P(2)(a)(i), if it is otherwise eligible on the said incomes.
7. Ground No. 3 raised on principle of mutuality is also does not apply because the assessee has not claimed any exemption of income on the principle of mutuality. As far as deduction under section 80P(2)(d) is concerned, they are eligible under the Act. The assessee can claim deduction under section 80P(2)(d) on the deposits of money made in regional rural banks, co-operative societies etc. as per the provisions. The restrictions placed under section 80P(4) does not apply to the facts of the case as the said provision is applicable only in the case of incomes received by a cooperative bank and not by a co-operative society. This issue is also discussed in the coordinate bench at Hyderabad decision in the case of Asstt. CIT v. Advocates Mutually Aided Co-operative Society [2015] 4 ITR (Trib)-OL 313 (Hyd.) pronounced on February 20, 2015 as under (page 326) :
“28. The ground No. 3 regarding deduction under section 80P(2)(d) is in respect of interest received from cooperative societies and the co-operative banks. We are unable to understand why the co-operative banks are not considered as co-operative societies in banking business. The sub-section (4) introduced by the Finance Act, 2006 with effect from April 1, 2007 is as under :
'(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank.
Explanation. - For the purposes of this sub-section,-
(a) 'co-operative bank' and 'primary agricultural credit society' shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949).
(b) primary co-operative agricultural and rural development bank' means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.'
29. As per this section, the exemption provided under sub-section (2) or sub-section (3) does not apply to the incomes of the co-operative bank other than a primary agricultural co-operative society or a primary cooperative agricultural and rural development bank. However, the above provision applicable in the case of co-operative bank is not in respect of interest received from co-operative banks by a co-operative credit society/co-operative society. Section 80P(2)(d) is applicable to the assessee-society in respect of incomes by way of interest or dividends received by the co-operative society from its investments with any other co-operative society. Therefore, in the case of the assessee-society, sub-section (4) is not applicable and deduction under section 80P(2)(d) is certainly eligible to the assessee. In the assessment of a co-operative bank, the incomes may not be exempt after April 1, 2007 by virtue of sub-section (4), but the assessee is not a co-operative bank. Therefore, the Revenue ground is not only illogical but also not supported by the facts of the case. Moreover as seen, the recommendation made by the Assessing Officer to the learned Commissioner of Income-tax in their internal correspondence is extracted as a ground. This also indicates non-application of mind either by the Assessing Officer or by higher authority like Commissioner of Income-tax. This sorry state of affairs should come to an end and Officers should act responsibly while preferring second appeal on the orders of the senior officer like the learned Commissioner of Income-tax (Appeals). The Revenue's appeal is dismissed”.
8. In view of this, we did not find any merit in the Revenue's grounds, per se.
9. However, we are unable to approve the calculations resorted by the learned Commissioner of Income-tax (Appeals) in quantifying and allowing the deductions. While holding that the assessee has transactions with non-members, it was incumbent on the Commissioner of Income-tax (Appeals) to examine whether the assessee has claimed any deduction under section 80P(2)(a)(i) on the transactions with non-members also. There seems to be no examination of the above aspect.
10. As can be seen from the order of the Assessing Officer, members are allowed with admission of minimum number of shares and face value of Rs. 10, whereas the nominal members/associate members are allowed with a share valued at Re. 1. Moreover, nominal members/associate members does not have any voting rights. The learned Assessing Officer discussed the bye laws of the society but the full text of the bye laws are not placed on record. We had an occasion to examine the bye laws of the “Advocates Mutually Aided Coop Society, Hyderabad”, wherein it was noticed that bye law (3)(iv)(b) defines “associate member” and “nominal member” to mean other than shareholder of the society. Even the learned Commissioner of Income-tax (Appeals) gives a finding that the associate members and nominal members are not regular members, but the deposits from non-members does not prevent the co-operative society in claiming deduction under section 80P. When the bye laws distinguish a member and nominal member/associate member, the later being not a shareholder of a society, deduction under section 80P cannot be allowed to the extent of incomes/ profits and gains on providing credit facilities to associate members and nominal members. There may be restrictions that the society shall not induct more than a certain number of members as associate members/ nominal members. When the bye laws pertaining to “membership” define that the members of the co-operative society and nominal/associate members cannot be treated shareholder/member, as they having only a right to pay admission fee and take loans from society and make deposits with society without other privileges, they cannot be considered equal to the members of the society. There are certain judgments given under the Co-operative Societies Act in the case of societies involved in banking business, by virtue of which distinction between members and non-members was not considered material and their equal treatment as far as business of banking is concerned was accepted. However, as rightly pointed out by the learned Commissioner of Income-tax (Appeals), the assessee is not involved in business of banking and has only involved in providing credit facilities to the members of the society.
11. In view of this it is to be examined whether there are incomes from the credit facilities provided to non-members i.e., nominal/associate members. If so, the assessee is not eligible for deduction on those profits. In the case of Advocates Mutually Aided Co-operative Society, (supra) it was noticed that the said cooperative society was claiming only proportionate deduction under section 80P excluding the transactions with the non-members. We did not find any such working in this case. Since the Commissioners of Income-tax (Appeals) took open themselves to quantify section 80P, we are not sure whether, having given a finding that nominal/associate members are not members of the society, the incomes from them are excluded while calculating deduction under section 80P(2)(a)(i)”.
8. As it is clearly seen from the facts of the case before us that the assessee has claimed income of interest from the permanent members and also from the other Cooperative Societies only as deduction u/s 80P of the Act, the case is clearly covered by the above decision. In view of the same, grounds of appeal raised by the assessee are allowed.
9. In the result, assessee’s appeals for the A.Ys 2012-13 & 2013-14 are therefore, allowed.
The order pronounced in the open court on 31st July, 2017.