Once income had been treated as unexplained cash credit under section 68, it could not be treated as business income and, therefore, deduction under section 80P(2) could not be allowed

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Once income had been treated as unexplained cash credit under section 68, it could not be treated as business income and, therefore, deduction under section 80P(2) could not be allowed

short overview :  Once income had been treated as unexplained cash credit under section 68 it could not be treated as business income and, therefore, deduction under section 80P(2) could not be allowed for unexplained income assessed as under section 68.

Assessee was a society registered under Kerala Co-operative Societies Act as Primary Agricultural Credit Society. AO made addition of deposits received from members by treating the same as unexplained cash credits under section 68. Assessee contended that addition under section 68 resulted in increase in income which had to be treated as business income for deduction under section 80P.

it is held that Once income had been treated as unexplained cash credit under section 68, it could not be treated as business income and, therefore, deduction under section 80P(2) could not be allowed for unexplained income assessed as under section 68.

Decision: Against the assessee.

IN THE ITAT, COCHIN BENCH

CHANDRA POOJARI, A.M. & GEORGE GEORGE K., J.M.

ITO v. Mundela Service Co-Operative Bank Ltd.

I.T.A. Nos. 151/Coch/2018, 128/Coch/2019 & 143/Coch/2019, I.T.A. No. 80/Coch/2018

23 May, 2019

Assessee by: K.P. Pradeep, CA

Revenue by: A.S. Bindhu, Sr. DR

ORDER

Chandra Poojari, A.M.

These appeals filed by the Revenue in ITA No. 143/Coch/2018 for the assessment year 2011-12, ITA Nos. 128/Coch/2019 and 151/Coch/2019 for the assessment years 2014-15 and 2015-16 are directed against the different orders of the Commissioner (Appeals), Trivandrum. The appeal filed by the assessee in ITA No. 80/Coch/2018 for the assessment year 2014-15 is directed against the order of the Commissioner (Appeals), Trivandrum dated 19-2-2018.

2. The Revenue has raised the following common grounds of appeals :–

(1) The learned Commissioner (Appeals), Trivandrum erred in concluding that “the appellant, being a Primary Agricultural Credit Co-operative Society registered under the Kerala Co-operative Societies Act is entitled for exemption of its entire income under section 80P(2)(a)(i) of the Act as originally claimed and they cannot be treated as Primary Co-operative Bank so as to invoke the provisions of section 80P(4) of the Act”.

(2) It is respectfully submitted that the respondent is essentially, a Cooperative bank and not merely a primary agricultural credit society and hence the allowance of deduction under section 80P to the respondent assessee while computing the total income was irregular in nature and also against law.

(3) The present appeal involves substantial question of law :–

(i) The learned Commissioner (Appeals) ought to have seen that the Hon’ble Supreme Court in the case of in the case of Sabargantha Zilla Kharid Vechar Sangh Ltd. v. CIT (1993) 203 ITR 1027 (SC) : 1993 TaxPub(DT) 1481 (SC) has held that eligible deduction under section 81(1)(d) (substituted by section 80P by Finance Act (No. 2) Act, 1967 with effect from 1-4-1968) of the Income Tax Act, 1961 in respect of co-operative societies/banks doing both agricultural and non agricultural activities should not be 100% of the gross profits and gains of business of such societies etc. but would be limited to the profits generated from agricultural activities alone performed by such assessee”.

(ii) The learned Commissioner (Appeals) ought to have seen that the above decision of the Apex Court is in sharp contrast to the decision of the Kerala High Court in the case of M/s. Chirakkal Service Co-operative Bank & Ors. in ITA No. 212 of 2013, wherein it was held that the authorities under the Income Tax Act cannot probe to question whether the assessee co-operative society is a ‘primary agricultural credit society’ by the competent authorities under the provisions of the Kerala Co-operative Societies Act, 1969.

(iii) The learned Commissioner (Appeals) ought to have brought his attention to the decision of Hon’ble High Court of Kerala in the case of Perinthalmanna Service Co-operative Bank Ltd. reported in (2014) 363 ITR 268 (Kerala) : 2014 TaxPub(DT) 1572 (Ker-HC) wherein it was held that with introduction of section 80P(4) necessarily, an enquiry has to be conducted into factual situation whether co-operative bank is conducting business as a primary agricultural and rural development Bank and depending upon transactions, assessing officer has to extend benefits available, and he would not merely look at the registration certificate issued under the Cooperative Societies Act or at nomenclature of co-operative bank.

(iv) The appeal involving similar question is pending before the Hon’ble Supreme Court of India in the case of Karakulam Service Co-operative Bank Ltd. [Civil Appeal No. 11288 of 2016, dt. 25-11-2016] : 2018 TaxPub(DT) 3397 (SC) and the learned Commissioner (Appeals) should have awaited decision of Hon’ble Supreme Court.

(v) Among others, the following judicial ratios also indicate that carte blanche deductions under section 80P are not available to the assesses merely on the basis of professed agricultural credits —

(a) Rodier Mill Employees Co-operative Stores Ltd. v. CIT (1982) 135 ITR 355 (Mad) : 1982 TaxPub(DT) 0978 (Mad-HC)

(b) CIT v. Kerala State Co-operative Marketing Federation Ltd. (1998) 234 ITR 301 (Ker) : 1998 TaxPub(DT) 0460 (Ker-HC)

(c) Kerala State Co-operative Agricultural Rural Development Bank Ltd. v. ACIT [ITA No. 506/Coch/2010 & S.P. No. 67/Coch/2010] : 2011 TaxPub(DT) 0946 (Coch-Trib)

For these and other grounds that may be advanced at the time of hearing the order of the learned Commissioner (Appeals), Trivandrum on the above points may be set aside and that of the assessing officer restored.

3. The facts of the case for the assessment year 2014-15 are that the assessee is a Primary Agricultural Co-operative Society engaged in the business of providing credit facilities to its members apart from accepting loan from members as well as non members. They claimed to have given loans and advances for both agricultural and non agricultural purposes. The major source of income was interest income earned from loans and advances given both for agricultural and non agricultural purposes. The assessing officer denied the claim of deduction under section 80P(2)(a)(i) holding that the assessee had been doing banking business rather than getting involved in advancing loan for agricultural activities.

4. On appeal, the Commissioner (Appeals) held that the issue of eligibility of Primary Agricultural Credit Society to claim deduction under section 80P was covered in favour of the assessee by the judgment of the High Court of Kerala in the case of Chirakkal Service Cooperative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker) : 2016 TaxPub(DT) 1770 (Ker-HC) wherein it was held that the assessee being a Primary Agricultural Credit Co-operative Society registered under the Kerala Co-operative Societies Act is entitled for deduction under section 80P(2)(a)(i) as originally claimed and accordingly, they cannot be treated as Primary Co-operative Bank so as to invoke the provisions of section 80P(4) of the Act.

5. Against this, the Revenue is in appeal before us.

5.1 The first issue raised by the Revenue is as follows :–

“(2) It is respectfully submitted that the respondent is essentially a Cooperative bank and not merely a primary agricultural credit society and hence, the allowance of deduction under section 80P to the respondent assessee while computing the total income was irregular in nature and also against law.”

6. The learned AR submitted that the assessee is a primary agricultural credit cooperative society and providing credit facilities to its members who are primarily agriculturists. It was submitted that the assessee had obtained a certificate dt. 13-3-2014 from Assistant Registrar of Co-operative Societies (General), Nedumangad claiming to be only a Primary Agricultural Credit Co-operative Society registered under the Kerala Co-operative Societies Act, 1969 and not engaged in banking business as defined in Banking Regulation Act. The learned AR further relied on the decision of the Jurisdictional High Court in the case of Chirackal Service Cooperative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker) : 2016 TaxPub(DT) 1770 (Ker-HC) wherein it was held that Primary Agricultural Credit Societies registered as such under the Kerala Co-operative Societies Act and classified so under the Act are entitled for deduction under section 80P(2) of the Act.

7. We have heard the rival submissions and perused the record. In our opinion, the issue was considered by the Jurisdictional High Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT [ITA No. 97/2018, dt. 19-3-2019] wherein it was held that the assessing officer is not obliged to grant deduction by merely looking at the certificate of registration issued by the competent authority under the Co-operative Societies Act. Instead, he has to conduct an enquiry into the factual situation as to the activities of the assessee and arrive at a conclusion whether the benefits of section 80P can be extended or not. Thus, the Full Bench overruled the earlier judgment of the Jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker) : 2016 TaxPub(DT) 1770 (Ker-HC). The Full Bench had followed the judgment of the Supreme Court in the case of Citizen Co-operative Society Ltd. v. ACIT (2017) 397 ITR 1 (SC) : 2017 TaxPub(DT) 2053 (SC). In view of the latest judgment of the Jurisdictional High Court cited supra, this issue is remitted to the file of the assessing officer with the direction to examine the actual activities carried on by the assessee so as to grant deduction under section 80P of the Act. Accordingly, the issue in dispute is remitted to the file of the assessing officer for fresh consideration in accordance with the above direction. This ground of appeals of the Revenue is partly allowed for statistical purposes.

8. The next issue is with regard to deduction under section 80P(2)(a)(i) of the Act. This issue was allowed by the Commissioner (Appeals) in the light of the order of the Tribunal in the case of Kizhathadiyoor Co-operative Bank Limited for assessment year 2009-10 in ITA No. 525/Coch/2014, Order, dt. 20-7-2016 wherein it was held that the interest income earned from the investment in Treasury and Banks is part of the banking activity and therefore, the said income is eligible for deduction under section 80P(2)(a)(i) of the Act.

9. Against this, the Revenue is in appeal before us. The learned DR relied on the order of the assessing officer.

10. We have heard the rival submissions and perused the record. With regard to the interest income earned by the assessee from other Banks and Treasury on which deduction under section 80P(2)(i)(a) of the Act is to be granted, there is no dispute that the assessee has made investments in the course of banking activities and such interest income was received on investments made with cooperative banks and other scheduled banks. The co-ordinate bench of the Tribunal in the case of Kizhathadiyoor Co-operative Bank Limited cited supra had held that such interest income received by the assessee should be assessed as “income from business” instead of “income from other sources”. In view of the order of the co-ordinate bench, we hold that the Commissioner (Appeals) is justified in holding that interest income received by the assessee should be assessed as “income from business”.

10.1 As regards grant of deduction under section 80P(2)(i)(a) of the Act, the assessing officer shall follow the law laid down by the Larger Bench of the Jurisdictional High Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT cited supra and examine the actual activities of the assessee so as to grant deduction under section 80P(2)(i)(a) of the Act. Accordingly, we remit this issue to the file of the assessing officer for fresh consideration in accordance with the above direction. Thus, this ground of appeals of the Revenue is partly allowed for statistical purposes.

10.2 In the result, the appeals of the Revenue are partly allowed for statistical purposes.

11. Next we shall take up the assessee’s appeal in ITA No. 80/Coch/2018 for the assessment year 2014-15.

11.1 Though the assessee has raised numerous grounds, the assessee has pressed only the following grounds :–

(i) Addition made on deposits received from members and treating the same as unexplained cash credits under section 68 of the Act.

(ii) Disallowance of deduction under section 80P(2) of the Act on such income.

11.2 All other grounds raised by the assessee in its grounds of appeal are in support of the order of the Commissioner (Appeals) which do not require any adjudication in view of our findings in the Revenue appeals.

12. The first ground is with regard to addition made on unexplained cash credits under section 68 of the Act.

12.1 The facts of the case are that on verifying the financial statement audited by the Co-operative Department, the assessing officer found that there was an increase in fixed deposits received by the assessee in cash during year under consideration to the tune of Rs. 4,17,39,766. The assessee was requested to furnish the details of such deposits received in cash to examine the correctness of the claim of interest paid. Instead of filing the requisite details, the assessee preferred to file a letter stating that the income is exempted from tax since they are a society registered under the Kerala Co-operative Societies Act as Primary Agricultural Credit Society and are eligible for the deduction under section 80P as per the judgment of the Jurisdictional High Court in W.P.(C) 188/2014, dt. 15-2-2016 and other connected cases. However, in the absence of satisfactory explanation and details filed by the assessee, the assessing officer relying on the decisions of the Supreme Court in the case of A. Govindarajalu Mudaliar v. CIT and Kale Khan Mohammed Hanif v. CIT brought to tax the above amount under section 68 of the Act as unexplained credits.

12.2 On appeal, the Commissioner (Appeals) observed that section 68 of the Act provides that where the as offers no explanation about the nature and source of the credits in the books of account, all the amounts so credited or where the explanation offered by the assessee is not satisfactory in relation to it then such credits may be charged to tax as income of the assessee. The conditions that are required to be established by the assessee are the identity of the creditors, genuineness of the transactions and the creditworthiness of the creditors and once these three essential requirements are proved by the assessee, the onus would shift to the Department. According to the Commissioner (Appeals), opportunities were given to the assessee to establish the identity of the creditors, genuineness of the transactions and the credit worthiness of the creditors on 28-10-2016, 18-11-2016, 1-12-2016, 16-12-2016 and 22-12-2016. Instead of establishing the above mentioned conditions, the assessee stated that the addition would result in income which in turn is to be exempted from tax under section 80P(2)(a)(i) of the Act. The Commissioner (Appeals) rejected the argument of the assessee that its books of account were audited as per Kerala Cooperative Societies Act as the assessee was directed to explain source for the cash deposits made during the year under consideration under the extant provisions of the Income Tax Act, the responsibility of which was not at all discharged by the assessee. The Commissioner (Appeals) observed that without establishing the identity of the creditors, genuineness of the transactions and the credit worthiness of the creditors, the assessee cannot claim that the cash deposits cannot be brought to tax. Hence, the income which was brought to tax under section 68 of the Act is justified. Similarly, the Commissioner (Appeals) was of the view that the decisions of this Tribunal relied on by the assessee are not applicable to its case as the income which was brought to tax was not earned from the regular business activities carried out by the assessee, i.e., advancing loan to members and earning interest therefrom. Once the income is not brought to tax as earned from regular business activities then, the said income is not entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. According to the Commissioner (Appeals) cash deposits received by the assessee during the year under consideration had nothing to do with the business income which alone can be considered for the exemption to be claimed under section 80P(2)(a)(i) of the Act. It was observed that the unexplained cash credits which was brought to tax under section 68 should necessarily be treated as income to be taxed but not as business income to be exempted under section 80P(2)(a)(i). In view of all the above, the Commissioner (Appeals) confirmed the decision of the assessing officer to bring to tax a sum of Rs. 4,17,39,766 as unexplained cash credit under section 68 of the Act in the absence of assessee’s explanation about the nature and source of the cash deposits received during the year under consideration. The Commissioner (Appeals) placed reliance on the latest decision of the High Court of Kerala in the case of CIT v. Universal Empire Educational Society (2017) 393 ITR 502 (Ker) : 2017 TaxPub(DT) 1054 (Ker-HC) wherein the income which was brought to tax under section 68 of the Act in the absence of establishing the identity of the creditors, genuineness of the transactions and the credit worthiness of the creditors was confirmed.

12.3 Against this, the assessee is in appeal before us.

12.4 The learned AR submitted that the assessee being a co-operative society, was carrying on the business of providing credit facilities and accepts different kinds of deposits for lending or investment purposes and therefore, the assessing officer was not justified in considering these deposits as unexplained cash credit. It was submitted that the assessing officer did not make proper enquiries before making the addition under section 68 of the Act. He relied on the judgment of Gauhati High Court in the case of Khandelwal Constructions v. CIT (1997) 227 ITR 900 (Gau) : 1997 TaxPub(DT) 0701 (Gau-HC) wherein it was held that the assessee being a co-operative society, was keeping proper books of account which were subjected to audit as per Kerala Co-operative Societies Act, 1969 and therefore, there was no undisclosed transaction. The learned AR relied on the decision of the ITAT, Hyderabad in the case of Citizen Co-operative Society Ltd. v. Department of Income Tax, dt. 3-5-2012 wherein it was held that deposits received by the co-operative societies shall not be considered as unexplained cash credits for the failure to provide the details of depositors. The learned AR also relied on the decision of the ITAT, Delhi in the case of New Rising Star Co-operative Society v. Department of Income Tax (Order, dt. 17-10-2014). He also relied on the decision of the ITAT, Pune and Nagpur in the case of Buldana and Karad Merchant Co-operative Society wherein it was held that the disallowance under section 68 should be treated as business income and is eligible for deduction under section 80P(4) of the Act. The learned AR also relied on the decisions of the ITAT, Cochin Bench in the case of Ettumanoor Service Co-operative Bank Ltd. and Kadakkarapilly Service Cooperative Bank Ltd. and various co-operative banks have got benefit from these orders societies. It was submitted that in all these decisions, the addition under section 68 resulted in increase in income which is to be treated as business income for deduction under section 80P of the Act and covered by the decision of the learned AR relied on the CBDT Circular No. 37/2016 wherein it was stated that disallowance which will increase the total income of the assessee is eligible for deduction under various provisions of Chapter VI-A does not affect taxable income. Therefore, addition under section 68 of the Act only increases the total income which is allowable for deduction under section 80P of the Act.

12.5 The learned DR relied on the order of the authorities below.

12.6 We have heard the rival submissions and perused the record. A similar issue was considered by the Commissioner (Appeals) for the assessment years 2011-12 and 2015-16 wherein he has remitted the issue to the file of the assessing officer by observing as follows :–

“The assessee has also raised the ground that the additions made under section 68 of the Act are eligible for deduction under section 80P of the Act. The claim of the Appellant is on the basis that the income assessed under section 68 of the Act is to be treated as business income and accordingly, deduction under section 80P to be allowed. However, the Hon’ble High Court of Kerala in the case of Kerala Sponge Iron Ltd., (2017) 79 taxmann.com 350 (Ker) : 2015 TaxPub(DT) 3551 (Ker-HC), has considered the issue of treatment of income under section 68 of the Act held as under :–

4. We heard the Senior Counsel for the Revenue and also the learned counsel appearing for the assessee.

5. As we have already noticed in paragraph 7.3 of its order, the Tribunal has confirmed the order passed by the assessing officer treating the commodity profit shown by the assessee as unexplained cash credit on the basis that the transactions showing generation of commodity trading profit were sham and bogus transactions without any element of genuineness. The Tribunal also upheld addition of the commodity treating profit as unexplained cash credit under section 68 of the Act. The question is whether having confirmed the addition of the alleged commodity trading profit as unexplained cash credit under section 68 of the Act, whether the Tribunal was justified in allowing set off.

6. In our view, answer to this question should be in the negative. This is evident from the judgment of the Gujarat High Court in Fakir Mohammed Haji Hasan (supra) distinguished by the Tribunal itself where it has been held that when income cannot be classified under any one of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. Insofar as this case is concerned, admittedly the income has been treated as unexplained cash credit under section 68 of the Act. Once it is so done for the purpose of set off or any other purpose, the said unexplained income cannot be treated as business income under any one of the head provided under section 14 in which case the question of set off does not arise.

7. Insofar as the Supreme Court judgment in Lakhmichand Baijnath v. CIT (1959) 35 ITR 416 (SC) : 1959 TaxPub(DT) 0117 (SC) relying on which the Calcutta High Court has rendered its judgment in Daulatram Rawat Mull case (supra) is concerned, reading of the judgment itself show that the disputed income therein was assessed by the assessing officer as concealed profits of the business. This finding of the assessing officer was confirmed by the First Appellate Authority, Tribunal, High Court and the Supreme Court. Therefore, the decision rendered on the basis of such a conclusion could not have been of any assistance to arrive at the conclusion of the Tribunal entitled to set off the unexplained income under section 68 of the Act in accordance with the provisions of the Act relating to set off.

8. We, therefore, set aside the order passed by the Tribunal, to the extent it has set aside the order of the Commissioner (Appeals) directing the assessing officer to allow the set off of current year business loss as well as brought forward business loss/unabsorbed depreciation against income assessed under section 68 of the Act. Therefore, answering the question of law raised in favour of the Revenue, this appeal is disposed of.” [Emphasis Supplied]

12.7 However, the Commissioner (Appeals) has taken a different view for this assessment year 2014-15 which is not proper. Judicial discipline requires consistency in its proceedings. Being so, we are inclined to remit this issue to the file of the assessing officer for this assessment year in conformity with the order of the Commissioner (Appeals) with a direction to the assessee to provide details of the depositors along with the proof of identity to the assessing officer. The assessing officer is directed to verify the identity of the depositors and if the assessee proves the identity of the parties, then the addition is to be deleted in view of the order of the Tribunal in the case of this ground of appeal of the assessee is partly allowed for statistical purposes.

13. With regard to non granting of deduction under section 80P(2) of the Act, treating the unexplained credits as ‘income from other sources’, this issue was considered by the Jurisdictional High Court in the case of Kerala Sponge Iron Ltd., (2015) 379 ITR 330 (Ker) : 2015 TaxPub(DT) 3551 (Ker-HC) wherein “the income had been treated as unexplained cash credit under section 68. Once it was so done for the purpose of set off or any other purpose, the unexplained income could not be treated as business income under any one of the heads provided under section 14 in which case the question of set off did not arise. Therefore, the order of the Tribunal to the extent it had set aside the order of the Commissioner (Appeals) directing the assessing officer to allow the set off of the current year’s business loss as well as brought forward business loss and unabsorbed depreciation against income assessed under section 68 was to be set aside.” In view of this, we are of the opinion that deduction under section 80P(2) of the Act cannot be allowed for the unexplained income assessed as under section 68 of the Act and the said income cannot be treated as business income. With this observation, we remit this issue to the file of the assessing officer with reference to the addition made under section 68 of the Act. This ground of appeal of the assessee is partly allowed for statistical purposes.

14. In the result, the appeals filed by the Revenue as well as the appeal filed by the assessee are partly allowed for statistical purposes.

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