2018 (8) TMI 129 - AT - Income Tax

Tribunal directs reassessment of Section 80P deduction eligibility, emphasizing fair opportunity for assessee

The tribunal partially allowed the appeal, directing the AO to reassess the eligibility for deduction under Section 80P. The tribunal emphasized the ... Deduction under section 80P(2)(a)(i) for cooperative credit societies - distinction between a cooperative society and a primary cooperative bank - principle of mutuality and loss of identity between contributors and participants - application of section 80P(4) excluding cooperative banks from deduction - limited remand for verification of nominal members in light of Citizen Co operative SocietyDeduction under section 80P(2)(a)(i) for cooperative credit societies - distinction between a cooperative society and a primary cooperative bank - application of section 80P(4) excluding cooperative banks from deduction - Whether the assessee is a cooperative society (eligible for deduction under section 80P(2)(a)(i) and 80P(2)(d)) or a primary cooperative bank (excluded by section 80P(4)) for AY 2012-13. - HELD THAT: - The Tribunal examined the materials placed on record, the bye laws and audited accounts and noted absence of evidence that the society provided typical banking services to the public or held an RBI banking licence. The authorities below had not shown that the appellant satisfied the cumulative conditions in the Banking Regulation Act definition of a primary cooperative bank - in particular the primary business being banking and a prohibition on admission of other cooperative societies as members - both of which were not established. Transactions with non members were insignificant and the bye laws confined membership to present and past employees. In these circumstances the Tribunal agreed with the CIT(A) that the assessee cannot be characterised as a cooperative bank for the purposes of section 80P(4) and is therefore eligible to claim deduction to the extent income arises from providing credit facilities to its members; any income attributable to dealings with non members would not be covered by section 80P. [Paras 6]Assessee is a cooperative society and not a primary cooperative bank for AY 2012-13; deduction under section 80P(2)(a)(i) and 80P(2)(d) allowed to the extent income is from credit facilities to members.Principle of mutuality and loss of identity between contributors and participants - limited remand for verification of nominal members in light of Citizen Co operative Society - Whether the existence and role of 'nominal members' breaches the principle of mutuality (as discussed in The Citizen Co operative Society) and thereby disentitles the assessee to deduction under section 80P. - HELD THAT: - The Tribunal observed that the assessee's bye laws create categories of members including 'nominal members' (post retirement members who may deposit savings but do not borrow) and that the Supreme Court's decision in The Citizen Co operative Society requires scrutiny of whether such arrangements destroy the identity between contributors and participants. Because the Assessing Officer had not examined or decided this question on the present materials, and given the potential impact on entitlement to section 80P, the Tribunal directed a limited remand to the AO to verify the rights, roles and financial interplay of nominal members and to determine whether mutuality is breached. The AO is to afford the assessee opportunity to produce evidence and be heard; the remand is for fresh consideration of this specific issue, not for rehearing matters already decided. [Paras 6]Issue remanded to the Assessing Officer for limited verification of the position and role of 'nominal members' and to decide whether principles of mutuality are breached, in light of The Citizen Co operative Society; AO to afford full opportunity to the assessee.Final Conclusion: The Tribunal upheld the CIT(A)'s finding that the society is not a primary cooperative bank and allowed deduction under section 80P(2)(a)(i) and 80P(2)(d) for AY 2012-13 to the extent income arises from credit facilities to members, but remanded for limited verification whether 'nominal members' breach mutuality (per The Citizen Co operative Society), directing the AO to decide that discrete issue after affording the assessee an opportunity to be heard. Issues Involved:1. Eligibility for deduction under Section 80P of the Income-tax Act, 1961.2. Classification of the assessee as a cooperative credit society or a cooperative bank.3. Applicability of Section 80P(4) and Section 2(24)(viia) of the Income-tax Act.4. Consideration of the Supreme Court decision in M/s Totgar Co-op Sales Society Ltd.Detailed Analysis:1. Eligibility for Deduction under Section 80P:The assessee filed its return of income declaring total income at 'Rs. Nil' after claiming deduction under Section 80P of the Income-tax Act, 1961, asserting that it is a cooperative credit society providing credit facilities to its members. The AO denied this deduction, holding that the assessee is engaged in the business of banking or providing credit facilities to its members, thus falling under Section 80P(4). The CIT(A) reversed this decision, stating that the AO failed to demonstrate that the assessee was engaged in banking business and that the activities were restricted to its members only.2. Classification of the Assessee:The AO classified the assessee as a cooperative bank based on the provisions of the Banking Regulation Act, 1949, and Section 80P(4) of the Income-tax Act. The CIT(A) disagreed, noting that the assessee's activities were limited to its members and did not involve the general public. The CIT(A) emphasized that the assessee did not possess a banking license and was not authorized to accept deposits from the public, thus classifying it as a cooperative credit society rather than a cooperative bank.3. Applicability of Section 80P(4) and Section 2(24)(viia):The AO argued that the assessee was a primary cooperative bank and thus ineligible for deductions under Section 80P(2)(a)(i) due to Section 80P(4). The CIT(A) found that the AO failed to provide evidence that the assessee engaged in banking activities or accepted deposits from the public. The CIT(A) cited case laws and the jurisdictional Bombay High Court decision in Quepem Urban Cooperative Credit Society to support the conclusion that the assessee was not a cooperative bank and was eligible for the deduction.4. Supreme Court Decision in M/s Totgar Co-op Sales Society Ltd.:The AO referenced the Supreme Court decision in M/s Totgar Co-op Sales Society Ltd., which held that interest received from the investment of surplus funds by a cooperative society is assessable as 'Income from Other Sources' and not eligible for deduction under Section 80P. The CIT(A) distinguished the facts of the present case, noting that the assessee's activities were confined to its members and did not involve banking services to the general public.Tribunal's Decision:The tribunal reviewed the material on record, including the assessee's bye-laws and financial statements. It found no evidence that the assessee engaged in banking business or dealt with the public at large. The tribunal noted that the AO allowed the deduction under Section 80P in the preceding assessment year and agreed with the CIT(A)'s detailed reasoning. However, the tribunal highlighted the recent Supreme Court decision in The Citizen Co-operative Society Ltd., which discussed the principle of mutuality and the eligibility of cooperative societies for deductions under Section 80P. The tribunal remanded the case to the AO to verify the roles and responsibilities of the 'Nominal Members' in light of this Supreme Court decision.Conclusion:The tribunal allowed the appeal partly for statistical purposes, directing the AO to re-examine the eligibility for deduction under Section 80P, considering the Supreme Court's guidance on mutuality and the classification of members. The tribunal emphasized the need for proper and adequate opportunity for the assessee to present its case.