Deduction u/s 80 P of the Income Tax Act and Related issues

Introduction

All that I want to share is a important issue faced by the co-operative societies, which appears to be surfacing more frequently in the assessments especially in the era of faceless assessments but long due to be addressed and resolved that is “Deduction under section 80 P of the Income Tax Act.” The objective of this article is to share the glitches that the assessee faces to prove the validity of his claim for deduction u/s 80 P and the judicial interpretation in regards to the provision that could clear controversy with respect to such genuine claims.

Back ground of Cooperative Society

The people of India, an agrarian nation with democracy at its core aimed at achievement of the economic and social goals together which resulted in a group of people to voluntarily come together to address the issues of the group members.”Alone we can do little; together we can do so much” was the ideology and thus cooperation became the principal factor. This association was extended to the development of an enterprise i.e. Cooperative society which was jointly owned by the members and democratically controlled for the welfare of the members and mostly limiting liability of the member to the extent of contribution made by the member. In the pre independence period itself The Cooperative Credit Societies Act of India was enacted i.e. in 1904 to alleviate the plight of poor farmers who were dependent on moneylenders for agriculture finance and it later became a state subject in 1919. The registered Cooperative Societies acquired a separate independent legal identity and gained momentum by becoming an integral part of the 97th Constitution of India too. As per Article 19 the Right to form cooperative societies is a fundamental right in India. Article 43-B provides for the promotion of cooperative societies and states that the State shall endeavor to promote voluntary formation, autonomous functioning, democratic control, and professional management of co-operative societies.

The Registrar of a Cooperative Society (RCS) acts as a controlling authority over the society right from registration till cancellation and ensures the functions are in accordance with the Cooperative Act. The cooperative societies are broadly classified by Registrar in 9 classes. Class 1- Agricultural Society with sub class as (a) Marketing Society, (b) Other Agricultural Societies,

Class 2 as Consumers’ Society,

Class 3 as Consumers’ Society with sub class as (a) Central Bank, (b) Other Banks,

Class 3A Land Development Bank,

Class 4 as Farming Society with sub class as Farming Society, (b) Joint Farming Society, (c) Dairy Farming Society,

Class 5 as Housing Society with sub class as (a) Tenant Ownership Housing Society, (b) Tenant Co- partnership Housing Society, (c) Other Housing Societies House,

Class 6 as Processing Society sub class as (a) Agricultural Processing Society, (b) Industrial Processing Society,

Class 7 as Producers’ Society with sub class as (a) Industrial Producers’ Society,

Class 8 Resource Society with sub class as (a) Credit Resource Society, (b) Non-Credit Resource Society, (c) Service Resource Society,

Class 9 as General Society.

The definition of such classes of societies, Apex society, Central Bank, Co-operative bank, Members are given in the Cooperative Act of the respective state under section 2.

Concept of mutuality

Though the societies are conducting activities and surplus might be generated, the objective of the society is for benefit of the members itself. Thus the concept of mutuality is underpinned which offers tax shelter to the societies. The doctrine of mutuality in Bangalore Club vs. Commissioner of Income Tax, (2013) 350 ITR 509 (SC) refers to “The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax”. The fundamental of the principle of mutuality which lies in the commonality of the contributors and the participants who are also the beneficiaries is the basis of the functioning of the cooperative society.

In Simon’s Taxes Vol.B 3rd Edition, paragraphs B 1.218 and B1.222 has emphasized that “if the persons carrying on a trade so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore, no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered..”

Consequently, the section 81 of the Income Tax Act originated to exempt income of the cooperative societies which later on was incorporated under deduction under section 80 P after omission by the Finance (No. 2) Act, 1967.

Scope of Section 80P of Income Tax Act

Section 80 P of Income Tax Act allows deduction from gross total income for income derived by the cooperative societies. However, the deduction is not uniform for all the societies and the nature of income thereof. The deduction of the whole amount of profits and gains of business attributable to any one or more of such activities is available for societies engaged as per sec 80 P(2)(a). The whole of the amount of profits and gains of such business is available as deduction in case of primary cooperative society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members under sec 80 P(2)(b). Consumers’ co-operative society can claim deduction per sec 80 P (2)(c ) of so much of its profits and gains attributable to such activities to the extent of rupees one lakh and rupees fifty thousand for any other society than the above mentioned. Deduction of whole income derived by the society in the form of interest or dividends is available under sec 80 P(2)(d). Deduction of whole income derived by the society in from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities is available under sec 80 P(2)(e). For co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power and where the gross total income does not exceed twenty thousand rupees deduction for the amount of any income by way of interest on securities or any income from house property chargeable under section 22 is available.

The other deductions claimed if any under Chapter VI A would also take precedence for computing eligible amount of deduction under sec 80 P.

The exception to the said provisions of this section 80 P is of the Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank whereby the deduction is not available to such cooperative societies.

Any cooperative society needs to satisfy the following conditions to claim the deduction under section 80 P of the Act:

  1. It has to be a cooperative society registered under the Cooperative Societies Act and the Certificate of registration should be valid.

  2. It should not have a banking license to operate as bank under the Banking Regulation Act from RBI.

  3. The interest or dividend income has to be derived from another cooperative society only

  4. The principle of mutuality should be emphasized in the objects of the byelaws of the society as well as conduct of its business. The principal object should also be to undertake credit activities for agricultural purpose in case of agricultural credit societies. The functioning should be for the members of the society primarily.

  5. The gross total income of the assesee should include the income first that is referred in sub section of 80 P and then the deduction can be claimed. Thus the accounting method is important and it is preferable to route the income in Profit and Loss account of the society and not directly credit to reserves other than for statutory requirements which might have chances of being treated as of ‘Income from other sources’ and not considered to be a Business Income.

  6. Since the burden lies on the assesee to establish the facts for claim of deduction, the evidence should include copy of Registration Certificate of the society from Registrar of Cooperative Society, adopted Bye Laws copy with main objectives highlighted, Judicial decisions favorable for the claim, related CBDT circulars , Audited Financial Statements, the copy of subsidiary books reflecting transactions undertaken primarily with members only, the copy of Registration certificate of the Cooperative Bank from which interest or dividend received etc. The assesee also has to correctly fill the ITR 5 form and reflect correct income under the head “Profits from Business and Profession” and then claim the deduction under the section 80 P under ‘Schedule 80 P Deductions under section 80P’ under correct sub categories. Filing the ITR in time diligently should be accepted as a responsibility.

Few controversial issues raised by the department are:

  • The department to restrict the deduction to the cooperative society other than a Cooperative Bank holding license under RBI, generally concludes that this society falls under the ambit of a Cooperative bank for the purpose of sec 80P (4).

    The department traverses the prime proof of Registration Certificate granted under the relevant statute challenging the authorities of the RBI to decide that the assesee is a Bank under the Banking Regulation Act 1949 and the Registrar of cooperative Societies over the status of the assesee society.

    The Department relies on the decision of Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad [2018] 252 Taxman 374 (SC) which was subsequently followed in The Mavilayi Service Cooperative v. Commissioner Of Income Tax [2021] 279 Taxman 75 (SC) dt 12 January, 2021 wherein it provides that, “the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub- section (4) of section 80P.”

    A contrary view can be read in Chirakkal Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker.), held that “Once a Co- operative Society is classified by the Registrar of Co-operative Societies under the Kerala Act as being a primary agricultural credit society, the authorities under the IT Act cannot probe into whether agricultural credits were in fact being given by such societies to its members, thereby going behind the certificate so granted.”

    As per sec 2 (19) of the Income Tax Act, “Co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies.

    Section 5 (b) of the Banking Regulation Act 1948 defines Banking as ‘the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order, otherwise.

    The CBDT circulars issued is an additional positive hint that the proviso 80 P(4) is just for the Cooperative Banks and not other Cooperative Societies. CBDT Circular No 133/2007 dated 09.05.2007 clarified that if the assessee does not fall within the meaning of Cooperative Bank as defined in part V of the Banking Regulation Act, 1949. then sec 80P (4) will not apply in this case. CBDT Circular No. 14, dated 28.12.2006 also states that the purpose behind enactment of sub-section (4) of Sec. 80P was to provide that the co operative banks which are functioning at par with other banks would no more be entitled for claim of deduction under Sec. 80 P(4) of the Act.

    CBDT Circular No. 6/2010, dated September 20, 2010 clarified that Regional rural Banks are not allowed deduction u/s 80 P.

    The distinction between the status of the society as a Bank as per RBI or a pure Cooperative society is controversial. The claim of deduction should be supported by the CBDT circulars which clearly clarifies the distinction of the status of the society and the eligibility of deduction. The department needs to agree upon the fact that the not all cooperative societies are permitted to hold license from RBI to operate as bank and hence cannot assume that all societies to be a Bank for disallowance of claim of the deduction under sec 80 P(4) of the Act.

    At the same time the provision allows that the income derived by one cooperative society from another cooperative society irrespective of it being a bank is allowed for deduction u/s 80 P(2)(d).

    Further to note that the proviso under sec 80 P (4) was inserted by sec 19 of the Finance Act, 2006 (21 of 2006) w.e.f 01.04.2007 and is a benevolent proviso to demarcate the exception of cooperative banks only who are commercially functioning and thus not fulfilling the mutuality aspect in its entirety.

    The department again considers this insertion as separate from the main section overlooking the cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. The time-honored golden rule, to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction is probably understated.

    Bajaj Tempo Ltd. v. CIT [(1992) 3 SCC 78]) can be referred for interpretation of proviso with the main section liberally which stated, “a provision in taxing state granting incentives for promoting growth and development should be construed liberally. Consequently, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it.”

    M/s Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Limited v. Pr. CIT 17, Mumbai -Supreme Court Order Civil Appeal No. 8719/2022 dt. April 20,2023, a recent landmark decision for deduction u/s 80 P (2) interpreted in true spirit the proviso for non-application of section 80 P (4) for this society. It stated, “merely giving credit to its members only cannot be said to be the Co-operative Banks/Banks under the Banking Regulation Act. The banking activities under the Banking Regulation Act are altogether different activities. There is a vast difference between the credit societies giving credit to their own members only and the Banks providing banking services including the credit to the public at large also”. Pr. CIT v. Ekta Co- op Credit Society Ltd(2017) 402 ITR 85 (Guj HC) and Palm Court M Premises Cooperative Society Limited v. PCIT 30 Mumbai dt Sep 9,2022 followed the same rule and allowed deduction under sec 80P(2)(d).

  • Divergent decisions and conflicting views by High Courts: .

    For instance, The Hon’ble High Court of Karnataka in the case of Pr. CIT Shilpa Mangaonkar Totagars co-operative Sale Society (2017) 395 ITR 611 (Karn), had concluded that a co-operative society would not be entitled to the claim of deduction under Sec. 80P(2)(d) at the same time of Hon’ble High Court of Gujarat in the case of State Bank Of India Vs. CIT (2016) 389 ITR 578 (Guj), which had observed that the interest income earned by a co-operative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act.

    K. Subramanian and Anr. v. Siemens India Ltd. and Anr (1985) 156 ITR 11 (Bom) can be relied upon to support the claim that if different decisions exist then decision favoring assesee can be given preference. The legal position to be taken was stated as “the ITO would be bound by a decision of the Supreme Court as also by a decision of the High Court of the State within whose jurisdiction he is (functioning), irrespective of the pendency of any appeal or special leave application against that judgment. He would be bound by a decision of another High Court on the point, because not to follow that decision would be to cause grave prejudice to the assessee. Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is (functioning), but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him. Similarly, if the ITAT has decide a point in favour of the assessee, he cannot ignore that decision and take a contrary view, because that would equally prejudice the assessee.”

  • The income from investments of surplus funds of the society is not assessed as business income but treated as Income from other sources by the department and often places reliance on decisions in case of Totgars Co-operative Sale Society Ltd. vs. ITO [2010] 322 ITR 283 (SC)

    The decision in this case stated, ”The word “income” has been defined under Section 2(24) (i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically “business profits” into the definition of the word “income”. Therefore, we are required to give a precise meaning to the words “profits and gains of business” mentioned in Section 80P(2) of the Act. In the present case, as stated above assessee- Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression “profits and gains of business”. Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. The words “the whole of the amount of profits and gains of business” emphasize that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society.” The assessee in this case did not pay to its members the proceeds of the sale of their produce, but invested the same in banks resulting in the amounts payable to members and shown as liabilities in the financial statements. The income derived from such investments made by the society dropped out of the meaning of income termed as profits and gains of business and thus went against the assesee.

    Thus the nature of income eligible for deduction in the provision is not having any specification as to the source of income as along as it is derived by the cooperative society from another cooperative society.

    Also it is not necessary that the surplus is to be utilized immediately by the members and does not have a statutory time frame for its distribution among the members as it is mutually agreed by the members in the bye laws of the society.

    The investment of surplus funds in another cooperative bank is done for the economic benefit of the members only than to keep the funds idle with no income from it. The Cooperative society act also directs the society to invest in specific funds as a statutory requirement. This is therefore an investment in course of business and the benefits can be reaped any time by the society either in short run or long term.

  • Income directly credited to reserves by the assesee is added back to the gross total income and then deduction is disallowed by the department considering the said income as Income from other sources and ineligible for deduction under section 80 P of the Act.

    Actually the statutory requirements of the Cooperative Societies Act to invest surplus funds to Sinking Fund Reserve, Repair Fund Reserve etc have to be abided by the assesee and therefore is accounted directly to Reserve as per the accounting policy The deduction of this amount is not claimed and therefore not taken in gross total income by the assesee. The nature of income in Reserves is actually same as of the income reflected in Profit and Loss Account and absolutely eligible for deduction u/s 80 P (2)(d).

    In case of Oberoi Spring Co-op Housing Society Ltd. v. ITO, Mumbai ITA no. 598/ MUM/ 2023, the addition of interest income made by the department in return of income of the assesee which was directly credited in Reserves as a per the accounting method adopted by the assesee for statutory purpose was also considered to be eligible for deduction u/s 80 P(2)(d).

    The ambiguity in justifying the nature of interest income received from investments not made from direct credit activities is done during the course of business only and is to be assessed under “Income from Business” and not “Income from other sources” still persists at the department level.

    In the judicial decisions in case of Shree Keshorai Patan Sahakari Sugar Mill v. ITO ITA Nos. 418 & 419/JP/2017. deduction was disallowed to the society under liquidation. The income had arisen due to sale of land and was reinvested in fixed deposits by such societies. The interest income was only source of income from these investments with other cooperative bank. The department refused deduction on the ground that no credit activity was undertaken for members.

    This activity of society of investments in cooperative bank of the amount belonging to members is only to generate some revenue in this form when the credit operations are at standstill. The purpose of the society to conduct this activity for the benefit of society within the provisions of the Cooperative Society Act is misunderstood by the department to be out of purview of the activity mentioned under section 80 P.

    The Chirakkal Service Co-Op Bank v. The ITO, Kannur Income Tax Appellate Tribunal – Cochin dt 31 May, 2018 dealt with the issue of whether interest income received on investments made with District Service Co-operative Bank and sub-treasuries is entitled to deduction u/s 80P(2)(a) (i). The judicial pronouncements, held that :the assessee in the instant case had made investments with sub-treasuries in the course of its business of banking / providing credit facilities to its members and was entitled to deduction u/s 80P(2) (a)(i) in respect of interest income that was received on such investments.”

    The Tirumala Tirupati Devasthanams Employees Co Op Credit Society v/s ITO dt April 11, 2023 for section 80P(2) (a)(i) concluded that ,”the interest on credit balance in the account dealt with is Income from other sources and not accepted as a result of normal business activity”.

    The provision itself does not make any distinction in regard to source of the investment and covers any income derived by the co-operative society from any investment. Thus such income is attributable to the activities of the society and eligible for deduction u/s 80P(2)(a)(i).

    Kaliandas Udyog Bhavan Pemises Co-op. Society Ltd. v. ITO, 21(2)(1) 2020, Land and Cooperative Housing Society Ltd. v. ITO (2017) 46 CCH 52 (Mum), M/s Sea Green Cooperative Housing and Society Ltd. v. ITO- 21(3)(2), Mumbai (ITA No. 1343/Mum/2017, dated 31.03.2017 judicial pronouncements held that the surplus funds invested does not change the nature of income as long as it is derived by the cooperative society.

    Lok Mangal Nagari Path Sanstha Maryadit v. PCIT-4 Pune ITA No.231/PUN/2022 dt 29/11/2022 was a favorable decision with regard to deduction u/s 80P(2)(a) (i) for income from fixed deposits with the nationalized Bank of Baroda. This is a special bonus to the assesee of a very liberal interpretation of income derived from bank or third parties eligible for deduction claim u/s 80 P(2)(a)(i).

  • The agricultural credits given by the assessee-societies to its members were assessed to be negligible or for non agricultural purpose by the department. Hence whether the whole of the amounts of profits and gains of business attributable to any one or more such activities under the sub-section 80 P is to be given or not is the concern if the assesee does not prove.

    The Mavilayi Service Co-operative Bank Ltd. & Ors v. CIT Calicut & Anr – Supreme Court Order [2021] 431 ITR 1 (SC) dt Jan 12,2021 is a comprehensive order for section 80P(2)(a) which covers claim of deduction by multi state cooperative society in addition to the primary agricultural credit societies. The decision further stated, “that once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in subsection (2) of section 80P must be given by way of deduction; and if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied. This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so – which is not the case with section 80P(2)(a)(i).”

  • Non adherence of principle of mutuality by the society is the department findings in many cases.

    The department opines that the credits extended to associate members and nominal members do not meet the Co- operative principles and hence do not satisfy the principle of mutuality. The Citizen Co-operative Society Ltd. v. ACIT Hyderabad [2018] 252 Taxman 374 (SC) held that where assessee society was engaged in activity of finance business and was also engaged in activity of granting loans to general public as well, it could not be termed as co-operative society meant only for providing credit facilities to its members, hence not entitled to deduction under section 80P and violates the Cooperative Society Act. The department takes the view that deduction under section 80P(2)(a)(i) of the Act should be restricted to the regular members, excluding the nominal and associate members. Further, if a society carries on both activities based on mutuality and otherwise then deduction would apply to only those activities, which satisfy the test of mutuality.

    The principles of mutuality are not defined under the Act specifically but have been reiterated in the several judicial rulings like Commissioner of Income Tax, Bihar v. Bankipur Club Ltd., (1997) 226 ITR 97 (SC ) and Bangalore Club v. Commissioner of Income Tax and Another, (2013) 350 ITR 509 (SC).

    • Further Commissioner of Income Tax, Bihar v. Bankipur Club Ltd., (1997) 226 ITR 97 (SC) decision stated “Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. Members clubs are an example of a mutual undertaking, but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting…….. “

    The test of mutuality is tested at many fronts by the department. A classic example is a. that the department derecognizes that loans given to non- members or nominal members of the society are not valid loans so the society becomes ineligible to claim the deduction.

    The definition of members in absence of the same in Income tax act is not taken as under the State Legislature by the department which would permit to qualify for the deduction u/s sec 80P(2) (a)(i).The proviso below sub- section (vii) of section 80P of the Act is normally assumed by the department as it provides that the deduction shall be available only to the societies subject to the conditions that the rules and byelaws of the society restrict the voting rights to the specified classes of its members.

    As per sec 2. (n) of the Cooperative Societies Act ‘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;””.

    b. transactions of the society with members and non nonmembers is often questionable for grant of the deduction. The income from collective disposal of labours by members as well as nonmembers for claim under sec 80P(2)(a) (vi), purchase of materials and equipment for fishing and allied activities made for supply to its members as well as nonmembers for claim of deduction under section 80P(2)(a)(vii) of the Act is probed during the assessment proceedings.

    Niligiri Engineering Co-op Society Ltd. v. CIT [1994] 208 ITR 326 (Orissa) raised the moot question that all the works undertaken by the society were executed by deployment of outside labour through sub-contractors who are not members. All the three forums held that the words “collective disposal of the labour of its members” would mean rendering of actual labour by the members and that no labour was exercised by the members and that they had acted like any other businessmen. A mere overall supervision by them would not entitle them to the benefit of the section.

    c. Deposits accepted by the society from nominal members which are treated as nonmembers by the department hinders the eligibility criteria of the society for such deduction.

    In Metro City Criminal Courts Employees v. ACIT Hyd ITA Nos.1581 and 1582/Hyd/2016 firmly sated “that the mobilization of funds is permitted under section 14(2) of Andhra Pradesh Mutually Aided Cooperative Societies Act, and hence mobilizing funds from outsiders is not a violation of the provisions of governing Act i.e., APMACS Act. Even otherwise, it was 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.”

  • Interest paid for borrowed funds is netted usually by department to slash the deduction amount with interest income received from investments in cooperative society from interest free funds.

    However, under sec 80P(2)(d) deduction is for whole amount of interest and dividend without adjusting the out goings from it. Commissioner Of Income-Tax v. Doaba Co- Operative Sugar Mills, 24 April, 1997 puts light on this view.

  • If the assesee has filed a belated return of income, then the deduction claimed u/s 80P is not allowed on the grounds that the return has to be filed within time frame provided under section 139. No condonation of genuine delay request accepted. This was the stand taken in case of The Parabada Co-op. Milk Producers v. ITO (1) Guj dt 17/5/2023, Nileshwar Rangekallu Chethu v. CIT (KeralaHighCourt) ddt March 2023 and Veerappampalayam Primary Agricultural Cooperative Credit Society Ltd. v. DCIT [2022] 138 taxmann.com 571 (Madras) [Para No. 7.3 of CIT(A) Order].

    The assesee is denied deduction as the return of income is not filed. The reason by the department is backed with provisions of section 80A (5) and 80AC.

    As per sec 80A (5) that if the claim under sec 10 provisions or deduction under heading C for certain income is not made by the assesee in his return of income the deduction is denied. As per sec 80AC deduction is allowed only if in computing the total income of an assessee of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 but before the 1st day of April, 2018 if return is filed within due date specified under sec 139.

    Further the return of income filed in compliance to notice u/s 148 is accepted for assessment by the Income Tax Act considering it to be filed before the completion of assessment and on this basis the delayed return can be treated as a valid return for the purpose of assessment of the deduction.

    M/s. Mararikulam Service Co-Op Bank Ltd v. The ITO, Ward-2, Alappuzha accepted the belated return of income tax as valid and stated “that return filed beyond the period stipulated u/s 148 can also be accepted and acted upon provided further proceedings in relation to such assessments are pending in the statutory hierarchy of adjudication in terms of the provisions of the I.T.Act.” Krishi Pattina Sahakara Sangha Ltd. v. ITO ITA No.614/ Bang/2021 dt 13/06/2022, Fibrefill Engineers v. CIT (2017) 177 TTJ 556 (Del.) stated section 80A (5) are directory in nature and not mandatory. Also 80P is not one of the section which is mentioned in the section 80AC.Thus deduction cannot be denied for non filing of ITR or delay in filing.

    Circular No. 341, dt 10/5/1982 quiet an old one too states that the section 80AB in the earlier Act for deduction claimed has been made effective from 1.4.1981 and not retrospectively.

  • Improper use of power by CPC u/s 143(1) (a)(v) to disallow the deduction for cases prior to the amendment of the section from A.Y. 2021-2022 by Finance Act, 2022.

    In case of Jila ALP Sankhyak Bachat Sahakari Sakh Samiti Maryadit v. DCIT CPC dt 15/12/2022 decision it was stated, “that as the CPC, had clearly traversed or, in fact exceeded its jurisdiction for disallowing u/s.143(1)(a)(v) of the Act the assessee’s claim for deduction u/s.80P de hors any power vested with it at the relevant point of time, thus, the same cannot be sustained and is liable to be vacated. Appeal of the assesee was allowed.” Further in case of New Ideal Cooperative Housing Society ITA No. 2681/MUM/2019 also stated that, “the adjustment made by CPC is not falling in any of the adjustment permitted by 143(1)(a) of the Act.”

    The assesee can prefer rectification under section 154 at the onset and request to rectify this error at CPC level itself.

  • The department stresses upon the requirement of credit activities to claim deduction u/s 80P(2)(a)(i) and that it should be for agricultural purpose only.

    Sec 80 P (2) (a) (i) states, carrying on the business of banking or providing credit facilities to its members. Thus this sub section and sub clause of the provision does not require that it should be specifically for agriculture.

  • The expression “engaged in the marketing of the agricultural produce of its members” is interpreted by the department as produced by members only and not to be extended to members who act as traders dealing in agricultural produce.

    Assam Co-operative Apex Marketing Society Ltd. v. Commr. of Income Tax (Addl.) 1993 AIR SCW 3235 stated the expression “agricultural produce of its members” only and not eligible if taken from others who are growers but not members of the Apex Society. Also U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 disallowed deduction for ‘members’ expression differentiating between Apex Society and Primary Society members.

    The disparity is with reference to the marketing of agricultural produce grown by the members of the society or that purchased from non-members. The marketing as the function for the agriculture industry as a whole if is viewed then probably the intention of the benefit is for the members only can be construed. The underlying ownership that it belongs to members is noted then irrespective of how the member got it should not be important.

    This is well supported in case of Kerala State Coop. Mktg. Federation Ltd. [(1998) 5 SCC 48] for section 80P(2)(a) where it is widely stated, “the provision had been incorporate bearing in mind that the exemption had been granted to encourage vital national activity in the nature of rural economy in the co-operative sector and therefore, the incorporated be placed on the provision should advance that intention. Explaining the meaning of marketing as was done by the Karnataka High Court to which we have adverted to earlier, the Kerala High Court was of the view that once the co-operative society buys the agricultural produce of the members of the society that buying is the first activity in the several links of the activities to constitute marketing by the co-operative society is entitled to exemption.” This beneficial decision in favor of assesee was also extended to Apex society like primary societies.

  • Though deduction was allowed in earlier assessment years but refused in consequent years with the reasoning that the burden is on the assesee to establish by facts that it is eligible for the said deduction in every assessment year. In Radhasoami Satsang v. CIT [1992] 193 ITR 321/ 60 Taxman 248, the view taken was that “its findings should not  be taken as a general proposition of law to be followed in every case as it was confined to the facts of that particular case.”

    Thus the application of Principle of Consistency is to be justified by tax payer in such cases if the facts remain unchanged.

    The Department seems to have a casual approach based on surmise and conjecture for the disallowance of the deduction u/s 80P which has resulted in so many assesee societies in our country awaiting the appropriate decisions which can reduce the cost of appeal monetarily and otherwise it faces.

    Please note that tax payer must not include the profit after deduction of Section 80P in computation of Alternate Minimum Tax. The deduction is not available if tax payer avails special rate under sec 115 BAD of the Income Tax Act for income tax purpose.

    The attempt is made to enable the tax professionals to handle the assessments cases of cooperative society with more vigor and a solid groundwork and to resolve these controversial issue relating to section 80P deduction.