2025 (5) TMI 618 - AT - Income Tax

Cooperative Society Wins Tax Battle: Section 80P Deduction Shields Against Penalties and Arbitrary Reassessment

The SC/Tribunal ruled in favor of the cooperative society, quashing penalties and reassessment demands for AY 2012-13 and 2013-14. The key findings were: ... Penalty u/s 271A - holdings the assessee guilty of concealment of income - assessee had not maintained books of account u/s 44AA - HELD THAT:- The return of income in response to notice u/s 148 of the Act was filed by the assessee declaring total income. In the return of income, the assessee has also claimed deduction u/s 80P of the Act which was duly granted by the ld AO in the assessment. While this is so, without mentioning any reason, AO simply initiated penalty proceedings u/s 271A on the ground the assessee had not maintained books of account u/s 44AA of the Act. This notice culminated in the levy of penalty u/s 271A which was also upheld by the ld NFAC. We are unable to comprehend ourselves to accept to the aforesaid levy of penalty u/s 271A of the Act for the simple reason that when books of account are not maintained by the assessee according to the lower authorities, then how the deduction claimed by the assessee u/s 80P of the Act was granted? This itself becomes a clinching evidence that books of account were indeed maintained by the assessee and hence, there is no question of violation of provisions of Section 44AA of the Act. Consequentially there could be no levy of penalty u/s 271A of the Act. Demand raised u/s 147 r.w.s 144 holdings the assessee guilty of concealment of income -denial of deduction claimed by the assessee u/s 80P(2)(a)(i) - The assessee has claimed deduction u/s 80P(2)(a)(i). No deduction or exemption whatsoever was claimed by the assessee in respect of interest earned by it on fixed deposits from banks. The deduction claimed u/s 80P(2)(a)(i) of the Act is with regard to the business of providing loans to its members out of deposit accepted from the members. The surplus derived from this activity would be eligible for deduction u/s 80P of the Act as well as exemption from tax on the principles of mutuality as the transactions are only with the members. Hence, there is absolutely no question of denying the deduction claimed by the assessee u/s 80P(2)(a)(i) in the instant case. Appeals of the assessee are allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:(a) Whether the penalty imposed under Section 271A of the Income-tax Act, 1961 for non-maintenance of books of account as prescribed under Section 44AA of the Act was justified for AY 2012-13, given that the assessee claimed and was granted deduction under Section 80P of the Act;(b) Whether the reassessment proceedings initiated under Section 147 read with Section 144 of the Act for AY 2013-14, culminating in demand on the ground of concealment of income, were valid and justified, particularly regarding the claim of deduction under Section 80P(2)(a)(i) of the Act and treatment of interest income earned on fixed deposits;(c) Whether the principles of mutuality and the cooperative society's status as a no-profit entity were properly considered in the assessment and penalty proceedings;(d) Whether the orders of the National Faceless Appeal Centre (NFAC) confirming penalty and demand were legally sustainable.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Validity of penalty under Section 271A for non-maintenance of books of account (AY 2012-13)Legal framework and precedents: Section 44AA mandates maintenance of books of account by certain categories of assessees, and Section 271A prescribes penalty for failure to maintain such books. The assessment and penalty proceedings must be based on clear evidence that prescribed books were not maintained. The deduction under Section 80P, which is available to cooperative societies maintaining proper accounts, is a relevant factor.Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer (AO) accepted the return of income and granted the deduction under Section 80P, which implicitly indicates that the books of account were maintained as required. The AO's order simultaneously accepted the return but initiated penalty proceedings on an alleged failure to maintain books under Section 44AA without specifying that books were called for or were not produced. The Tribunal found this approach vague and contradictory.Key evidence and findings: The assessee is a registered cooperative society maintaining proper books as per the Cooperative Societies Act and audited by a Chartered Accountant appointed by the Registrar of Cooperative Societies. The audit report confirmed proper maintenance of books. The AO's own acceptance of the return and allowance of deduction under Section 80P was inconsistent with the penalty claim.Application of law to facts: Since the deduction under Section 80P was granted, which requires proper books, the Tribunal concluded that the assessee did maintain the books as prescribed. Therefore, the initiation and confirmation of penalty under Section 271A was unwarranted.Treatment of competing arguments: The AO and NFAC relied on a vague assertion of non-maintenance of books without concrete evidence. The Tribunal rejected this, emphasizing the contradiction inherent in granting deduction and simultaneously imposing penalty.Conclusion: The penalty under Section 271A for AY 2012-13 was quashed, and the appeal was allowed.Issue (b): Validity of reassessment and demand under Section 147 read with Section 144 for concealment of income (AY 2013-14)Legal framework and precedents: Section 147 authorizes reassessment if income has escaped assessment, and Section 144 pertains to best judgment assessment. The cooperative society's income from mutual transactions with members is exempt or deductible under Section 80P(2)(a)(i), subject to conditions. The Supreme Court's ruling in Citizen Coop Society v. ACIT (2017) was cited, which clarifies the treatment of income of cooperative societies on principles of mutuality.Court's interpretation and reasoning: The Tribunal observed that the assessee declared income from interest earned on fixed deposits separately and did not claim deduction for this income under Section 80P. The deduction claimed pertained solely to income from loans to members, which is consistent with the principles of mutuality. The AO affirmed the income declared and the deduction claimed. The Tribunal emphasized that surplus funds invested in fixed deposits generate interest income which is taxable and was not claimed for exemption.Key evidence and findings: The return filed disclosed total income including interest income from banks. Deduction under Section 80P was claimed only for the business of providing loans to members. The AO's order upheld this treatment and did not deny the deduction claimed.Application of law to facts: The Tribunal applied the principle that cooperative societies earn exempt income only on transactions with members and that income from fixed deposits is taxable. Since the assessee correctly declared and separated these incomes and claimed deduction only on eligible income, the reassessment and demand on grounds of concealment were unjustified.Treatment of competing arguments: The AO and NFAC relied on the Supreme Court decision to justify reassessment but failed to distinguish between exempt mutual income and taxable interest income on fixed deposits. The Tribunal found the reassessment and demand arbitrary and unwarranted.Conclusion: The reassessment and demand for AY 2013-14 were quashed, and the appeal allowed.Issue (c): Treatment of cooperative society status and principles of mutualityLegal framework: Cooperative societies registered under the Cooperative Societies Act are no-profit entities operating on mutuality principles. Income arising from transactions with members is exempt or deductible under Section 80P, subject to prescribed conditions.Court's interpretation and reasoning: The Tribunal recognized that the assessee society operates as a no-profit entity to financially assist its members and maintains proper books as per the Cooperative Societies Act. The income from loans to members is eligible for deduction under Section 80P. Income from fixed deposits is not exempt and was correctly treated as taxable.Application to facts: The Tribunal's findings on issues (a) and (b) reflect proper application of mutuality principles, confirming that the society's status and activities were appropriately considered.Issue (d): Sustainability of orders of NFACThe Tribunal found that the NFAC erred in confirming penalty under Section 271A and demand under Section 147/144 without adequately considering the evidence of maintained books and proper declaration of income and deductions. The NFAC's confirmation of penalty and demand was set aside.3. SIGNIFICANT HOLDINGS'We are unable to comprehend ourselves to accept to the aforesaid levy of penalty u/s 271A of the Act for the simple reason that when books of account are not maintained by the assessee according to the lower authorities, then how the deduction claimed by the assessee u/s 80P of the Act was grantedRs. This itself becomes a clinching evidence that books of account were indeed maintained by the assessee and hence, there is no question of violation of provisions of Section 44AA of the Act.''The society is earning income from interest on loan to its members and surplus funds are being kept in bank FDRs. Interest income is bound to accrue on surplus funds and it is used for the objects for which the society is established. The deduction claimed u/s 80P(2)(a)(i) of the Act is with regard to the business of providing loans to its members out of deposit accepted from the members. The surplus derived from this activity would be eligible for deduction u/s 80P of the Act as well as exemption from tax on the principles of mutuality as the transactions are only with the members.'Core principles established include:Grant of deduction under Section 80P is indicative of proper maintenance of books of account, negating penalty under Section 271A for non-maintenance.Income from mutual transactions with members of a cooperative society is eligible for deduction/exemption under Section 80P, but interest income from fixed deposits is taxable.Reassessment and demand under Sections 147/144 must be based on clear evidence of concealment; mere invocation of reassessment provisions without distinguishing income streams is improper.Proper consideration of cooperative society status and principles of mutuality is essential in assessment and penalty proceedings.Final determinations on each issue were in favour of the assessee, allowing both appeals and setting aside penalty and demand orders confirmed by NFAC.