No Section 80P deduction on insurance activities as not fall under Banking business

Indur Intideepam Producers MA Cooperative Societies Federation Limited Vs ITO (ITAT Hyderabad)

Conclusion: Deduction claimed by assessee in return of income which was directly relatable to the insurance activities, as it did not fall under section 80P(2) i.e., Insurance activities. Accordingly, the matter was remanded back to the file of AO for the limited purposes of verifying the deduction claimed in return of income and to pass a fresh order after affording due opportunity of hearing to the assessee in accordance with law.

Held:  Assessee-cooperative society was providing credit facilities to its members. It filed return of income along with claiming deduction under section 80P. AO noted that assessee was mainly in the business of lending services for guarantee payments. Since the income earned by assessee was from business which was not covered under section 80P, AO opined that assessee was not eligible for deduction. Hence, he disallowed the deduction claimed by the assessee and added it to the returned income of the assessee and thus, completed the assessment u/s 143(3) of the Act and passed assessment order. It was held that assessee could claim the deduction in respect of the gross total income earned by assessee from the activities mentioned in sub-section (2) of Section 80P. Undoubtedly, the activities of the insurance did not form a part and parcel of carrying on the business of banking and providing credit facilities to its members. The activities of the insurance did not fall within the realm of the banking activities as banking activities were separate and distinct from the insurance activities. There was no reason to state that assessee was entitled to any deduction under section 80P. AO was only entitled to disallow the deduction claimed by assessee in the return of income with respect to insurance business. It was proper to remand back the matter to the file of AO for the limited purpose with a direction to disallow the deduction claimed by the assessee in return of income which was directly relatable to the insurance activities, as it did not fall under section 80P(2) i.e., Insurance activities. Accordingly, the matter was remanded to the file of AO for the limited purposes of verifying the deduction claimed in return of income and to pass a fresh order after affording due opportunity of hearing to the assessee in accordance with law.  In case, assessee failed to file any documents in support of its case, AO should decide the matter in accordance with the law.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal is filed by the assessee feeling aggrieved by the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dt.24.09.202 1 invoking proceedings under section 143(3) of the Income Tax Act, 1961 (in short, “the Act”).

2. The captioned appeal filed by the assessee is barred by limitation by 581 days. The assessee has moved a petition requesting the bench to condone the delay. In this connection, the assessee has filed an affidavit for condonation of the said delay wherein, it was, inter-alia, affirmed that due to lock down imposed by the central government as preventive measures to contain the spread of Covid- 19 form 23/03/2020, caused the impugned delay in filing the appeal belatedly. We rely on Case law Collector Land Acquisition Vs. Mst. Katiji & Ors, 1987 AIR 1353 (SC) and University of Delhi Vs. Union of India, Civil Appeal No. 9488 & 9489/2019 dated 17 December, 2019, hold that such a delay; supported by cogent reasons, deserves to be condoned so as to make way for the cause of substantial justice. We accordingly hold that impugned delay in filing this appeal is neither intentional nor deliberate but due to the circumstances beyond its control. The same stands condoned. Case is now taken up for adjudication on merits.

3. The grounds raised by the assessee read as under :

“1) The order of the learned CIT (A) is erroneous both on facts and in law.

2)The learned CIT (A) erred in confirming the action of the Assessing Officer in rejecting the deduction u/s 80P(2) of the T. Act.

3)The leaned CIT (A) ought to have seen that the appellant is entitled for deduction u/s 80P of the I. T. Act and the claim for deduction of Rs.38,22, 78 1/- should have been allowed by the learned CIT (A).

4) The learned CIT (A) erred in holding that the appellant is not eligible for deduction u/s 80P (2) on the ground that the activities of the appellant also include micro insurance premium, NPS contribution, loan insurance premium etc.

5) The learned CIT (A) ought to have seen that the exemption is allowable u/s 80P and in the alternate on the principles of mutuality and the learned CIT (A) ought to have allowed the exemption in total.

6) The learned CIT (A) ought to have seen that it is a credit society formed for working on the co-operative principles and, therefore, is eligible for deduction.”

4. The brief facts of the case are that assessee is a Co-operative Society providing credit facilities to its members. It has filed its return of income for A.Y. 20 17-18 on 03.11.2017, declaring a total income of Rs. 12,21,740/- after claiming deduction of Rs.38,22,781/- u/s 80P of the Act. The case was selected for Limited Scrutiny under CASS. Thereafter, notice u/s 143(2) of the Act was issued to the assessee on 14/09/20 18 and E-proceedings were initiated. Thereafter, notice u/s. 142(1) dated 29.01.2019 was issued to the assessee. In response, the assessee vide reply dated 06.12.2019 submitted computation sheet and Registration certificate. Thereafter, a notice u/s 142(1) dated 28.06.2019 was issued to the assessee whereby the assessee was requested to file certain particulars as called for on or before 05.07.20 19. However, the assessee failed to furnish any information. Assessee was accorded final opportunity through the issuance of show cause notice dated 11.12.2019 requesting to furnish the reply/information on or before 16.12.2019 as called for by the notice u/s 142(1) dated 28.06.20 19.

4.1. In response, the assessee filed replies dated 12.12.2019 and 21.12.2019. The assessee vide letter dated 21.12.2019 stated that the society has been operating on the same line as that of several previous years. Thus, Assessing Officer noticed that the assessee was mainly in the business of lending services for guarantee payments i.e. services like life security investment policies, like insurance and pension funds and other related services and earning commission. From the Receipts and Payments Statement, Assessing Officer observed that major receipts were received under the heads “Miro Insurance premium from MACS, NPS contribution from MACS, etc., Since the income earned by the assessee was from business which was not covered under section 80P of the Act, Assessing Officer opined that the assessee was not eligible for deduction. Hence, he disallowed the deduction claimed by the assessee and added it to the returned income of the assessee and thus, completed the assessment u/s 143(3) of the Act and passed assessment order dt.23. 12.2019.

5. Feeling aggrieved with the order of Assessing Officer, assessee filed appeal and thereafter, it was migrated to the ld.CIT(A), NFAC, Delhi, who dismissed the appeal of the assessee by observing as under :

“6.5 During the appellate proceedings, the appellant has mainly relied on the argument that these incidental services were provided to members like provident fund, Life Insurance for the benefit of members and were in a bona fide faith claimed as allowable. The appellant has also stressed that it has provided services to members only.

6.6 From the records, it is seen that out of total receipts of Rs.16,01,11,047/-, interest on loan is only Rs.91,66,381/- whereas receipts related to the income from services narrated by Assessing Officer are given below :

Therefore, it is apparent that the activities of the appellant ire mainly related to Micro Insurance premium from MACS, NPS contribution from MACS, Loan Insurance premium for 1 & 2 year – Aviva Insurance charges from MACS, Commission from LIC, Jana Suraksha Premium from MACS, NPS, remuneration from PFRDA etc.”

6. Aggrieved with the order of ld.CIT(A), assessee is now in appeal before us.

7. Before us, ld. AR has drawn our attention to paras 6 and 7 of the assessment order which are to the following effect :

“6. In response, the assessee filed replies dated 12.12.2019 and 21.12.2019. The assessee vide letter dated 21.12.2019 stated that the society has been operating on the same line as that of several previous years. Thus, it is noticed that the assessee is mainly in the business of lending services for guarantee payments ie. services like life security investment policies, like insurance and pension funds and other related services and earning commission. From the Receipts and Payments Statement, it is seen that the assessee’s major receipts are received under the heads “Miro Insurance premium from MACS, NPS contribution from MACS, Loan Insurance premium for 1 & 2 year — Aviva, Insurance charges from MACS, Commission from LIC, Jana Suraksha Premium from MACS, NPS remuneration from PFRDA.”

7. The section 80P of the I. T. Act very clearly provides for the deduction which are attributable to the activity specified in the sub section (2) of the section 80P, the providing of insurance coverage and new pension scheme and earning the commission on the same is not an activity and the income specified in the section 80P. The earning of commission on account of the said activities is like working as an agent, definitely not a banking business. The activity of the agent is not envisaged or covered under the section 80P. Therefore, the assessee is working at the most as an agent and the said income of commission on account of the aid activity cannot be called an income derived out of an activity pertaining to credit cooperative society and this is an activity outside the p purview of the objects for which the deduction was allowed.

The assessee claimed deduction u/s 80P to the extent of Rs.38,22, 78 1/-. Since the income was earned from the businesses which are not covered u/s 80P of the Act, the assessee is not eligible for deduction u/s 80P by the assessee is disallowed and the same is added back to the returned income.”

8. The contention of the ld. AR before us is that the Assessing Officer has disallowed the receipt instead of the income earned by the assessee on the said amount. Therefore, the order passed by the ld.CIT(A) is not in accordance with the law.

9. Per contra, the ld.DR has submitted that the assessee has been earning income from the activities which are not fallen within the purview of section 80P of the Act as the primary activities of the assessee are referring to the insurance services and therefore, the Assessing Officer was rightly denied the deduction claimed by the assessee.

10. We have heard the rival submissions and perused the material on record.

10.1 Section 80P of the Act provides as under :

Deduction in respect of income of co-operative Societies.

(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely :—

(a) in the case of a co-operative society engaged in—

(i) carrying on the business of banking or providing credit facilities to its members, or

(ii) a cottage industry, or

(iii) the marketing of agricultural produce grown by its members, or

(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

(v) the processing, without the aid of power, of the agricultural produce of its members, or

(vi) the collective disposal of the labour of its members, or

(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,

the whole of theamount of profits and gains of business attributable to any one or more of such activities :

Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:—

(1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;

(2)m the co-operative credit societies which provide financial assistance to the society;

(3) the State Government;

(b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to—

(i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or

(ii) the Government or a local authority; or

(iii) a Government company 11 as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),

the whole of the amount of profits and gains of such business;

(c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,—

(i) where such co-operative society is a consumers’ co-operative society, one hundred thousand rupees; and

(ii) in any other case, fifty thousand rupees.

Explanation.—In this clause, “consumers’ co-operative society” means a society for the benefit of the consumers;

(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;

(e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;

(f) in the case of a 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, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22.”

10.2. From the reading of provisions of section 80P of the Act, it is abundantly clear that if the assessee has carried out any of the activities mentioned in sub-section (2) of section 80P, then the gross total income earned from the said activity shall be an allowable deduction. Now the moot question before us is whether the assessee has claimed deduction of Rs.38,22,781/- in the return of income.

11. In the present case, the assessee has not filed any document showing that the assessee has not claimed the deduction as indicated by the Assessing Officer in Paras 6 and 7 reproduced hereinabove. The ld. AR submitted that the Assessing Officer has included the total receipts from insurance business as against the income from said activity. It was contended that even perusing that that the activities of assessee are not eligible under section 80P of the Act, then also the Assessing Officer has required to disallow only the income even for the reason that the activities of the assessee does not fall within the purview of section 80P(2) of the Act.

12. In our view, admittedly, the assessee can only claim the deduction in respect of the gross total income earned by the assessee from the activities mentioned in sub-section (2) of Section 80P of the Act. Undoubtedly, the activities of the insurance do not form a part and parcel of carrying on the business of banking and providing credit facilities to its members. In our considered opinion, the activities of the insurance do not fall within the realm of the banking activities as banking activities are separate and distinct from the insurance activities. The banking activities are regulated by the Banking Regulations Act, 1949 and the insurance activities are governed by the Insurance Regulation of Development Authority Act, 1999. The banking and insurance activities are two separate and distinct activities, governed by two different Acts and hence, it cannot be presumed that insurance activities were subsumed in banking activities. The banking activities are quite different than the insurance activities and therefore, the contention of the assessee that the activities carried out by the assessee, being the insurance activities, would fall within the banking activities is devoid of merit and we do not agree with the said contention.

13. The activities of the assessee are primarily in the nature of insurance activities as mentioned by the Assessing Officer and confirmed by the ld.CIT(A). In view of the above, we do not find any reason to state that the assessee is entitled to any deduction under section 80P( 1) of the Act. Having held that in our opinion, the Assessing Officer is only entitled to disallow the deduction claimed by the assessee in the return of income with respect to insurance business. For the above said purposes, we deem it proper to remand back the matter to the file of Assessing Officer for the limited purpose with a direction to disallow the deduction claimed by the assessee in return of income which is directly relatable to the insurance activities, as it do not fall under section 80P(2) of the Act i.e., Insurance activities. Accordingly, we remand back the matter to the file of Assessing Officer for the limited purposes of verifying the deduction claimed in return of income and to pass a fresh order after affording due opportunity of hearing to the assessee in accordance with law. Further, the assessee is directed to appear before the Assessing Officer on the date of hearing fixed by the Assessing Officer and shall file all the documents / evidence in support of its case. In case, the assessee failed to file any documents in support of its case, Assessing Officer shall decide the matter in accordance with the law. Accordingly, the appeal of assessee is allowed for statistical purposes.

14. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the Open Court on 17^th October, 2023.