INCOME TAX OFFICER WARD-1, CHHINDWARA vs. M. P. RASTRIYA KOYLA KHADAN MAJDOOR SANGH COLLIERY EMPLOYEE COOPERATIVE SOCIETY, CHHINDWARA

IN THE INCOME TAX APPELLATE TRIBUNAL JABALPUR BENCH, JABALPUR (through web-based video conferencing platform) BEFORE SHRI SANJAY ARORA, HON‘BLE ACCOUNTANT MEMBER & SHRI MANOMOHAN DAS, HON'BLE JUDICIAL MEMBER I.T.A. No. 4/JAB/2021 (Asst. Year: 2017-18) Income Tax officer, vs. M.P. Rastriya Koyla Khadan Ward-1, Chhindwara Mazdoor Sangh Colliery Employee Cooperative Society [PAN : AABAM 6460 C] (Appellant) (Respondent) Appellant by : Sh. G.N. Purohit, Sr. Advocate & Ms. Uma Parashar, Adv. Respondent by : Smt. Maya Maheshwari & Sh. Shravan K. Gotru, CIT-DRs

Date of hearing : 14/10/2022 Date of pronouncement : 11/01/2023

O R D E R Per Sanjay Arora, AM: This is an Appeal by the Revenue, agitating the disallowance, since deleted in first appeal by the Commissioner of Income Tax (Appeals)-1, Jabalpur (‗CIT(A)‘, for short) vide his order dated 08/07/2020 in respect of the assessee‘s assessment under section 143(3) of the Income Tax Act, 1961 (‗the Act‘ hereinafter), dated 12/12/2019 for the Assessment Year (AY) 2017-18.

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS 2. Whether on the facts and in the circumstances of the case the ld. CIT(A) was justified in deleting the addition of Rs. 7,49,50,575/- since the earning of interest income was outside the principle of mutuality. 3. The appellant craves to leave, add, amend, alter, substitute or delete the grounds urged herein above as and when found necessary.‖ 3. Opening the arguments for and on behalf of the assessee-respondent; the ld. CIT-DR relying on the assessment order, it was submitted by Sh. Purohit, the ld. senior counsel, that the assessee is a cooperative society registered under the Madhya Pradesh Cooperative Societies Act, 1960 (MPCSA), formed for encouraging thrift amongst it‘s Members, being the employees or ex-employees of Madhya Pradesh Rashtriya Koyla Khadaan Ltd., who subscribe thereto by way of monthly deductions from their salaries. The corpus so formed, and arising, is deployed toward meeting their defined credit needs by lending thereto. Thus, on one hand, it promotes saving among it‘s Members and, on another, it funds their genuine needs at a nominal cost. There is no question of the assessee, which does not accept deposits from the members of the public, being in the business of banking, as defined u/s. 5(b) of the Banking Regulation Act, 1949 (‗the BR Act‘). No cheque books are issued to the depositors. The investment of it‘s funds is, in view of s. 44 of the MPCSA (PB-II, pg. 33), the governing Act, to be in defined avenues of investment. The assessee is thus not a cooperative bank, excluded from the purview of s. 80-P since AY 2007-08, and is entitled to deduction u/s. 80P(1) inasmuch as it extends credit to it‘s Members, an activity specified u/s. 80-P(2), listing the qualifying activities, income from which is eligible for deduction u/s. 80P(1). And which, falling u/s. 80P(2)(a)(i), is rather it‘s only activity, so that it‘s entire income is, as claimed, deductible u/s. 80P(1). The assessee‘s case is in fact fully covered by the decision by the Apex Court in Mavilayi Service Cooperative Bank Ltd. & Ors. v. CIT [2021] 431 ITR 1 (SC). On being questioned by the Bench on this in view of the decision in Totgars Cooperative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC), he would submit that said decision in

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS distinguishable as in that case the surplus funds, interest on which was held as assessable as income from other sources and, accordingly, not exigible for deduction u/s. 80P(1), arose qua the activity of marketing of the agricultural produce of it‘s Members. The principal, nay, the sole, activity in the instant case, on the other hand, is the extension of credit by the assessee-society to it‘s Members, with the investment of funds being regulated by sec. 44 of the governing law. The same could not therefore be deemed ‗surplus‘, for interest earned thereon, on investment thereof in, among others, fixed deposit receipts with banks, to be regarded as income from other sources. The ld. CIT-DR, would, in rejoinder, submit that apart from the clear operation of s. 80-P(4), the deduction u/s. 80-P(1) would not in any case extend to the entire receipt, but only to the income attributable to the provision of credit to it‘s Members. Reliance was placed by him on the decision in Pr. CIT v. Peroorkada Service Cooperative Bank Ltd. & Ors. [2022] 442 ITR 141 (Ker), rendered following Mavilayi Service Cooperative Bank Ltd. (supra). As explained therein, in the context of a primary agricultural credit society engaged in the business of banking and providing credit facilities to it‘s members, it is only the income from the activity specified in s. 80P(2)(a)(i) that would qualify for deduction u/s. 80P(1), and not the entire income of the assessee-society. Accordingly, while the interest income on loans to members and investment with cooperative banks was deductible, interest from treasury, which was in the nature of interest from non-members, was held as not. 4. We have heard the parties, and perused the material on record. 4.1 We may begin by reproducing section 80-P of the Act, which deals with computation of income of co-operative societies, reads as under in its relevant part: 80P. 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. 3 | P a g e

ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS (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) to (vii), the whole of the amount 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:…. (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— …., 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 ….; (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, …..

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS Explanation.—For the purposes of this section, an "urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. (3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC…... (4) The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation.—For the purposes of this sub-section,— (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities." Section 80P provides for a deduction in computing the total income of a non- excluded co-operative society in respect of incomes referred to, and to the extent mentioned, therein. Sub-section (1) provides the deduction on the income specified in, including its extent, sub-section (2). Sub-section (3) provides for non- overlapping of deduction with other specified deductions u/s. VI-A, and sub- section (4) specifies the excluded entities. Sub-section (2), as shall be seen, is divided into six parts, categorised as clauses (a), (b), (c), (d) (e) and (f). Each one of these clauses deals with different types of co-operative societies engaged in different types of activities. The benefit made available to each one of them is also different. The deduction available under clauses (a) to (c) is activity-based. The deduction available under clauses (d) and (e) is investment-based, and the deduction under clause (f) is institution-based. Under section 80P(2)(a)(i) the whole of the profits and gains from the business of banking or providing credit facilities to the members of the society is entitled to deduction.

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS 4.2 As shall be apparent from the foregoing, the issue arising has two aspects to it. Firstly, if the assessee is an entity covered u/s. 80P(4) which, since AY 2007-08, excludes a cooperative bank for a deduction u/s. 80P(1). An exception, however, is made for a Primary Agricultural Credit Society and a Primary Cooperative Agricultural and Rural Development Bank, so that the same shall, despite being a cooperative bank, continue to eligible for deduction u/s. 80P. The assessee admittedly not falling under either exception, for which we have perused it‘s charter (PB-II, pgs. 1-32), it would therefore stand to be excluded for the benefit u/s. 80P(1) if it is a cooperative-bank. The Revenue has for the purpose relied on the provisions of sections 5(ccii), 5(ccv) & 5(ccvi) of the BR Act (refer pg. 7 of the assessment order). The ld. CIT-DR could not, despite our asking therefor (and even granting time for the purpose; the relevant provisions of the said Act being not on record), substantiate his reliance on the said provisions. This, despite time being specifically granted for the purpose, with he even failing to bring the relevant provisions of the said Act, relied upon, on record, and which also explains the mention the name of two CIT-DRs in the cause title. The same is unfortunate, and were it not for the fact that each of them pleaded ignorance of the instructions by the Bench, which we have no reason to doubt, we would have considered imposing cost on the Revenue, even as it is surely indicative of a lack of a proper system in place. Further, the said provisions – and besides which there could be others that may be relevant, being not an evidence in the possession of the Revenue, but an enactment, i.e., which would, where applicable, hold, the assessee‘s refrain in not bringing the same on record was again incomprehensible and, rather, recalcitrant, particularly considering, also explained during hearing, that the ld. CIT(A) having not issued any finding in the matter there is no merger qua the same in the impugned order, so that in absence of a rebuttal, the AO‘s finding would hold. The BR Act, being in the public domain, it was considered only proper under the circumstances to proceed with the hearing, securing a copy thereof for 6 | P a g e

ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS the purpose, rather than keeping the same on hold indefinitely, or making it subject to production thereof. The Apex Court in Mavilayi Service Cooperative Bank Ltd. (supra) clarified that cooperative banks, which therefore require a licence from the Reserve Bank of India (RBI) for banking business, would, w.e.f. AY 2007-08, stand excluded for the benefit u/s. 80P(1). We have perused the stated sections, falling under Part V of the said Act, inserted on the statute w.e.f. 01/3/1966, and shall, where applicable, override anything (to the contrary) in the said Act (s. 56 of the BRA). None of them, however, is applicable inasmuch as all of them, perused by us, provide as a condition for their application the cooperative society to be in the business of banking – a term defined u/s. 5(b), the essential ingredient of which is the acceptance of deposits from the public, missing in the instant case. Our finding as to the non-application of the relevant provisions of the said Act follows our said perusal thereof, and is not in the least in consequence of any assistance provided by the parties. The assessee, accordingly, is not an entity covered u/s. 80P(4) and, consequently, is entitled to deduction u/s. 80P in respect of income from activities specified u/s 80P(2)(a)(i), where-under the claim u/s. 80P(1) stands preferred by it.

4.3 There being no disputing the fact that the assesssee-society extends credits to it‘s Members, an activity specified u/s. 80P(2)(a)(i), earning interest thereon, the next aspect before us is the quantum of deduction. As afore-noted, and even as unambiguously clear from the statutory mandate, it is only the income from the activity specified u/s. 80P(2)(a) that would qualify for deduction u/s. 80P(1). Toward this, once again, we find computation of income not on record. This assumes relevance as the assessee has, as per the assessment order, claimed deduction u/s. 80P(1) at Rs. 13,76,224, while the Assessing Officer (AO) has disallowed, in addition thereto, rs. 7,49,40,575, being the interest on bank deposits, duly credited to it‘s Profit & Loss Account (PB pgs. 15-16). How could that be, i.e., the disallowance exceeding the deduction claimed which, being qua income,

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS could at best be claimed at the total income. Sure, the assessee has despite claiming the entire net profit as deductible, returned a net income of rs. 2060. The same may perhaps be on account of a suo motu disallowance/s, and which remains undisturbed in assessment, nor dilated upon at any stage. That is, the deduction could not possibly be claimed in a sum higher than the income earned, which is, by definition, net of expenses claimed toward the same, and which is also the purport of s. 80AB. The disallowance u/s. 80P (for rs. 749.41 lacs) is, thus, without any basis on facts or in law. Even assuming that the said income, which would though have to be worked out at net of expenses there-against, is regarded as assessable separately as ‗income from other sources‘, it would only imply a corresponding reduction in the income assessable as ‗business income‘, resulting in the same gross total income, only on which deduction u/s. 80P is to be allowed and, therefore, to no effect. We are unable to understand the said disallowance, sought to be justified by the Revenue per its Grounds of Appeal in terms of mutuality, even as there is no reference thereto in the orders by the Revenue authorities, nor were any pleadings toward the same made during hearing and, per contra, not responded to by the assessee. The same is directed for deletion.

4.4 Coming to the aspect of disallowance of the deduction claimed, i.e., rs. 13.76 lacs, the question before us is if the assessee is entitled thereto at the full amount, i.e., as claimed by it, or at a lower sum. This lower sum could be nil, as the Revenue claims, only if the income on the qualifying activity is nil or in a negative sum, qua which, a matter of fact, there is in fact no claim by it. Section 80P(2)(a) restricts of allowance of deduction 80P(1) to the income arising from the activities specified thereunder. The answer to the question posed thus lies in determining the income from the activity of providing credit facility/s by the assessee-society to it‘s members. On the Bench so observing during hearing, Sh. Purohit would submit that the income from the interest on Bank Deposits is integral to that of provision of credit facilities to its members. The funds with the

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS assessee, and which are placed with Bank/s, including in FDRs, are for the reason of subscriptions being received unabated by the assessee from its members, thereby inculcating a habit of saving amongst them – one of it‘s objects. The need for funds cannot be predicted. It is not for any purpose that a loan, being on soft terms, is given to the Members, but only that which represents a genuine need, thereby also enabling them to tide over their financial obligations. The argument, impressive on the face of it, does not in our view help the assessee‘s case. Whether the monies invested by the assessee are out of the monthly subscriptions received from its Members, or not, matters little from the stand-point of extending credit to them, the sole activity falling u/s. 80P(2)(a), the income from which is deductible, in full, u/s. 80P(1). The interest on borrowings, be it from the members or non- members, would be in either case eligible for being deducted in computing the income from the activity of extending credit to its members. That it is from the members, sure, serves in promoting thrift as well as rewarding them with interest, which inures to them, the employees/ex-employees of a company, by being members of the assessee-society under the terms of its charter. Similarly, that the society is obliged by law to place it‘s monies, deemed surplus for the time being, in defined investment avenues, is again an incident of the law it is governed by. A Society, or any other Institution for that matter, is bound by the terms of charter, as by the law regulating it. That would not per se make any income arising to it, much less on monies deemed surplus for the time being for it‘s activity/s, as the income therefrom, only which, where specified, is exigible for deduction u/s. 80P(1), which is to be in terms of the Act. Rather, for all we know the activity/s being undertaken, while surely in terms of it‘s mandate, is not specified u/s. 80P(2), so that income therefrom would not be deductible u/s. 80P(1). We may here clarify that the income on monies lent to co-operative banks was considered as deductible u/s. 80P(1) in Peroorkada Service Cooperative Bank Ltd. (supra) as the same fell within the business of banking and, further, the assessee-respondent being a primary agricultural credit society (PACS), was not 9 | P a g e

ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS excluded by s. 80P(4) from the purview of s.80P. We may also note that the Apex Court in Mavilayi Service Cooperative Bank Ltd. (supra) held that interest on loans to members not for agricultural purposes was also entitled to deduction u/s. 80P(1). This, as explained therein, is so as it is not permissible for the Revenue to change the status of the appellant-society from that of PACS, which is sole prerogative of the Registrar of Co-operative Societies, who alone could examine if the assessee- society is, or continues to be, a PACS, or not. As such, as long as it is classified and registered as a PACS, not excluded u/s. 80P(4), income on the provision of credit to its members, falling u/s. 80P(2)(a)(i), would be eligible for deduction u/s. 80P(1) in full. The question arising in the instant case, on the contrary, is the extent of income arising to the assessee-society on the provision of credit to it‘s members, the sole qualifying activity u/s. 80P(2). The same cannot be stretched to the income on placement of investible surplus with the assessee, i.e., not required for the said eligible activity for the time being, in other investment avenues deemed by law, concerned as it is with the safety of public funds, as low risk and, thus, ‗safe‘. And which would be so independent and irrespective of the nature of activity being pursued. This is as the same would, for that reason, not be liable to be deemed as invested in the said activity, but only in excess thereof. This explains our statement aforesaid that, in principle, we find no difference between the investible surplus arising to the assessee-society in Totgars CSS Ltd. (supra), wherein the qualifying activity/s was, as in the instant case, the provision for credit facilities to members, as also marketing their agricultural produce. The said decision, in ratio, provides for deduction u/s. 80P only on operational income. Sure, it would be a different matter where the amount so placed in bank FDRs, etc. is to be, in terms of the governing law, at a certain percentage of it‘s working capital; section 44 of MPCSA only specifies the permissible mode/area/s of investment. This is as in that case the same would, to that extent, be necessarily required to be considered as a part of it‘s working capital. As explained in CIT v. Karnataka State Cooperative Apex Bank [2001] 251 ITR 194 (SC), also referred to 10 | P a g e

ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS in Peroorkada (supra), there is nothing in the phraseology of s. 80P(2)(a)(i) which makes it applicable only to working capital, so that it would rather apply to income from both the working and fixed capital. The investible surplus in the instant case, however, cannot be regarded as either. Our decision is supported by the decisions in Totgars (supra), and Peroorkada (supra), passed following Mavilayi (supra).

4.5 For computing the income from the activity specified u/s. 80P(2)(a)(i), to which the deduction u/s. 80P(1) is to be restricted, the net income, being the gross total income (GTI), is to be proportioned between the gross interest arising from the members and from deployment in specified modes of investment u/s. 44. The same, as apparent, is being taken as a surrogate for the funds deployed on an average during the year on the two activities, i.e., the provision of credit to the members and the said investment/s. A more refined approach is though proposed as the rate of interest on different investments, which include saving deposit accounts as well, could vary significantly. As such, for example, if the monies lent to the members fetch an interest rate (a) (say), and the other investments (b) (say), and the total (gross) interest earned on the former is rs. 100 (say), and that on the latter rs. 200 (say), the estimated (net) income earned from the members, rather than being proportioned in the rate of 1/3 (of the total income), would be in the ratio of (100b/(100b + 200a)), i.e., by taking a weighted average. In practice, a much easier way would be to compute the average deployment of funds on each investment avenue, including on monies lent to members, by adopting the interest rate obtaining (on an average) in its respect for the relevant year. For example, an interest on saving deposit – which is substantial in the instant case, of rs. 100 (say), at the rate of 4% (say), would imply an average capital deployment therein during the year at rs. 2500 (rs. 100 / 4%). Aggregation thereof would yield the total funds deployed across all avenues, i.e., on an average, during the year. The borrowing cost as well as the administrative cost is to be applied uniformly. The net interest income from a particular source could thus be easily worked out on the basis of the

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ITA No. 4/JAB/2021 (AY: 2017-18) ITO v. MP Rastriya Koyla Khadan ECS proportion of the total funds invested therein. The interest income on provision of credit to members, thus worked, would be liable to be allowed, and the balance, disallowed. No other disallowance could be made. We are conscious that interest income on investment in other cooperative societies is also liable to be deducted u/s. 80P(1) r/w s. 80P(2)(d). There is, however, no claim in its respect nor anything on record to so suggest. Rather, District or State co-operative banks, though registered as co-operative societies, operate under licence from the RBI under the BR Act, so that income on deposits therewith would not qualify for deduction u/s. 80P(2)(d). Reference for the purpose stands also made to ss. 5 & 7 of the BR Act. 4.6 We decide accordingly. 5. In the result, the Revenue‘s appeal is disposed on the afore-said terms. Order pronounced in open Court on January 11, 2023 Sd/- Sd/- (Manomohan Das) (Sanjay Arora) Judicial Member Accountant Member Dated: 11/01/2023 vr/- Copy to: 1. The Appellant: M.P. Rastriya Koyla Khadan Mazdoor Sangh Colliery Employee Cooperative Society, Chandemata, Parasia, Chhindwara. 2. The Revenue: Income Tax officer, Ward-1, Chhindwara, Shraddha Saburi Bhawan, Opp. Danielson College, Nagpur Road, Chhindwara. 3. The Principal CIT-1, Jabalpur (MP) 4. The CIT(A)-1, Jabalpur. 5. The CIT-DR, ITAT, Jabalpur. 6. Guard File. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Jabalpur.

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