2019 (12) TMI 1 - AT - Income Tax

Tribunal Disallows Deductions, Violation of Cooperative Act, Remands Case for Fresh Decision

M/s. Athmashakthi Multipurpose Co-operative Society Ltd. Versus The Income-tax Officer, Ward – 1 (4), Mangalore.

The tribunal upheld the disallowance of deductions under Section 80P(2)(a)(i) for AY 2016-17, finding the violation of the Karnataka Cooperative Societies ... Deduction u/s. 80P - HELD THAT:- The Citizen Co-operative Society Ltd. Vs. ACIT [2017 (8) TMI 536 - SUPREME COURT] is not applicable in Assessment Year 2016-17 in the present case. In reply, the ld. AR of assessee made various submissions such as no power to remove any existing associated member and no/negligible transaction with good no. of associated members but find no merit in these contentions because I find that till Assessment Year 2015-16, the number of associated members was well within the limit prescribed as per the provisions of section 18 of the Karnataka Cooperative Societies Act, 1959 amended w.e.f. 06.09.2014 and thereafter, the assessee has admitted 233 new associated members in violation of the provisions of the Karnataka Cooperative Societies Act, 1959 and hence, it is seen that in the present case in Assessment Year 2016-17, the assessee society has intentionally violated the provisions of the Karnataka Cooperative Societies Act, 1959 and hence, this judgment of the Hon’ble Apex Court rendered in the case of The Citizen Co-operative Society Ltd. Vs. ACIT (supra) is squarely applicable in this year and respectfully following the same, I hold that the present assessee is not eligible for deduction u/s. 80P in Assessment Year 2016-17. In the result, the appeal filed by the assessee for Assessment Year 2016-17 is dismissed. Number of associated members is well within the prescribed percentage of 15% of regular members and hence, on this aspect, there is no violation of the provisions of the Karnataka Cooperative Societies Act, 1959 in Assessment Year 2015-16. In Assessment Year 2015-16 also, the AO and ld. CIT(A) has followed the same judgment of the Hon’ble Apex Court rendered in the case of The Citizen Co-operative Society Ltd. Vs. ACIT (supra) without any specific finding as to which provisions of the Karnataka Cooperative Societies Act, 1959 is being violated by assessee society in Assessment Year 2015-16. Hence, I feel it proper to restore the matter back to the file of ld. CIT(A) for fresh decision in Assessment Year 2015-16. Hence set aside the order of ld. CIT(A) in Assessment Year 2015-16 and restore the matter back to his file for fresh decision. Issues Involved:1. Disallowance of deductions under Section 80P(2)(a)(i) of the Income Tax Act.2. Violation of the Karnataka State Co-operative Societies Act, 1959.3. Applicability of the principles of mutuality.4. Charging of interest under Section 234B of the Income Tax Act.Detailed Analysis:1. Disallowance of Deductions under Section 80P(2)(a)(i):The assessee, a co-operative society, claimed deductions under Section 80P(2)(a)(i) for the Assessment Years (AY) 2015-16 and 2016-17. The Assessing Officer (AO) disallowed these deductions, citing that the principles of mutuality were violated, referencing the Supreme Court decision in the case of Citizen Co-operative Society Ltd. The AO held that the interest income was income from other sources and not eligible for deduction, relying on the Karnataka High Court decision in Totgar's Cooperative Sale Society Ltd.2. Violation of the Karnataka State Co-operative Societies Act, 1959:For AY 2015-16, the number of associated members was within the 15% limit of regular members as per Section 18 of the Karnataka Cooperative Societies Act, 1959. However, for AY 2016-17, the number of associated members exceeded this limit, leading to a violation of the Act. The tribunal noted that the assessee admitted 233 new associated members after the amendment on 06.09.2014, which was in direct violation of the Act.3. Applicability of the Principles of Mutuality:The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the principles of mutuality were violated. The CIT(A) cited the Supreme Court's judgment in the case of Citizen Co-operative Society Ltd., which held that a society violating the provisions of the respective cooperative societies act cannot be termed a cooperative society and thus is not eligible for deductions under Section 80P.4. Charging of Interest under Section 234B:The assessee argued against the charging of interest under Section 234B, claiming that it should be waived given the circumstances of the case. However, this issue was not elaborated upon in the tribunal's decision.Judgment:For AY 2016-17:The tribunal upheld the disallowance of the deduction under Section 80P(2)(a)(i), agreeing with the CIT(A) that the assessee violated the Karnataka Cooperative Societies Act, 1959, by exceeding the prescribed limit of associated members. The tribunal found no merit in the assessee's arguments and dismissed the appeal for AY 2016-17.For AY 2015-16:The tribunal noted that the number of associated members was within the prescribed limit for AY 2015-16. The CIT(A) did not provide specific findings on which provisions of the Karnataka Cooperative Societies Act were violated. Therefore, the tribunal set aside the CIT(A)'s order and remanded the case back to the CIT(A) for a fresh decision. The CIT(A) was directed to provide a reasoned order specifying any violations of the Act. If no violations were found, the eligibility for deduction under Section 80P should be decided on merit.Conclusion:The appeal for AY 2016-17 was dismissed, and the appeal for AY 2015-16 was allowed for statistical purposes, with the matter remanded to the CIT(A) for further examination.