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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU
Per George George K, Vice President:
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 08.08.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.
There is a delay of four days in filing this appeal. Assessee has filed a petition for condonation of delay and also an affidavit of the General Manager of the assessee society stating there in the reasons for the belated filing of this appeal. We have perused the reasons stated in the affidavit of the General Manager of the assessee society and we are of the view that there is reasonable cause for the delay
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in filing this appeal and no latches can be attributed to the assessee. Hence, we condone the delay of four days in filing this appeal and proceed to dispose off the appeal on merits.
The solitary issue raised is whether the CIT(A) is justified in confirming the part of the disallowance made by the AO under section 80P of the Act.
Brief facts of the case are as follows:
Assessee is a co-operative society registered under the Karnataka Co- operative Societies Act, 1959. It is mainly engaged in the business of providing credit facilities to its members. For the Assessment Year 2017-18, return of income was filed on 31.10.2017 declaring total income of Rs.8,51,310/- after claiming deduction under section 80P of the Act, amounting to Rs.2,20,14,797/-. The assessment was completed under section 143(3) of the Act, vide order dated 28.12.2019. The AO disallowed claim of deduction under section 80P of the Act, for the reason that assessee was dealing with non-members and had violated the principle of mutuality. The AO also disallowed 30% of interest paid to nominal members on their investment in FDs. The AO held that nominal members are not regular members of assessee society and assessee ought to have deducted tax at source under section 194A(3)(v) of the Act, on the interest payments. Since assessee society has failed to deduct tax at source on the interest payment, the AO, by invoking section 40(a)(ia) of the Act, disallowed 30% of the total interest paid by assessee society to its nominal members.
Aggrieved by the Order of Assessment, assessee filed appeal before the First Appellate Authority (FAA). The CIT(A) partly allowed the appeal of the assessee. The CIT(A) held that AO was not justified in disallowing 30% of
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interest on FDs paid to nominal members. However, with regard to interest received from co-operative banks /scheduled banks, the CIT(A) confirmed the disallowance made by the AO. The CIT(A) also denied the deduction claimed under section 80P(2)(d) of the Act.
Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed multiple Paper Books enclosing there in the case laws relied on, the additional evidence to prove its case that investments are made with Central Co-operative Banks on account of compulsion under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, etc. The learned AR’s limited submission is that interest income that is received out of investments with Central Co-operative Banks are mainly on account of compulsion under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules; consequently, the same is entitled to benefit of deduction under section 80P(2)(a)(i) of the Act. In this context, the learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of M/s. Kachur Credit Co- operative Society Ltd., Vs. ITO in ITA No.478/Bang/2023 (order dated 26.09.2023).
Further, the learned AR submitted that the assessee is entitled to cost of funds for the interest income that is assessed as income from other sources. In support of his contention, the learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of Sri Jihveshwara Credit Co-op. Society Ltd., Vs. ITO in ITA Nos.547 to 551/Bang/2023 (order dated 29.09.2023).
Learned DR supported the orders of the AO and the CIT(A).
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We have heard the rival submissions and perused the material on record. The first contention of the learned AR is that investments are made with the Central Co-operative Bank and is in compliance with the requirements under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was contended that such interest income received on investments made under compulsion under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, is entitled to benefit of deduction under section 80P(2)(a)(i) of the Act. We find that this issue has been considered by the Bangalore Bench of the Tribunal in the case of M/s. Kachur Credit Co-operative Society Ltd., Vs. ITO (supra). The Bangalore Bench of the Tribunal had followed its earlier orders. The relevant finding of the Bangalore Bench of the Tribunal reads as follows:
“8. I have heard the rival submissions and perused the material on record. The solitary issue for adjudication is whether a sum of Rs.5,07,822/- can be allowed as a deduction under sections 80P(2)(a)(i) of the Act. Admittedly, the amount of Rs.5,07,822/- has been received by the assessee from South Canara District Central Co-operative Bank Ltd. It is the claim of the assessee that the amounts are invested in compliance with the relevant Acts and Rules. On identical facts, the Bangalore Bench of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) by following the Co-ordinate Bench’s order in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT in ITA No.453/Bang/2020 (order dated 13.08.2021) had stated that if the investments made with the Central Co-operative Bank is out of compulsions under Karnataka State Co-operative Societies Act, 1959 and Rules, the income received from such investments would be entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) reads as follows: “7.1 In the instant case, it was contended that majority of the interest income is earned out of investments made with Cooperative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co-operative Societies Act, necessarily, the same is to be assessed as income from business, which
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entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction.” 9. In view of the above order of the Tribunal, I restore the issue to the files of the AO to examine whether interest income received amounting to Rs.5,07,822/- from South Canara District Central Co-operative Bank Ltd., is out of compulsions and in compliance with the Karnataka State Co- operative Societies Act, 1959 and the relevant Rules. If it is so, the same interest income is to be assessed as income from business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, I restore the matter to the AO. It is ordered accordingly.”
In light of the above orders of the Tribunal, we direct the AO to examine whether the interest income received on investment with Central Co-operative Bank is out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is so, the same may be considered as ‘business income’ and entitled to deduction under section 80P(2)(a)(i) of the Act. In other words, if assessee society does not comply with the relevant provisions of the Act, and the Rules of Karnataka Co-operative Societies Act, 1959, it cannot carry on its co- operative activities, namely carry on the business of banking or providing credit facilities to its members. Therefore, if the investments are out of compulsion under the Act and relevant Rules, necessarily it is part of assessee’s business activity entailing the benefit of section 80P(2)(a)(i) of the Act.
The second contention of the learned AR is that assessee is entitled to cost of funds with respect to interest income that is assessed as income from other sources. We find that this contention of the assessee is also covered by the order of the Bangalore Bench of the Tribunal in the case of M/s. Deepa Credit Co- operative Society Ltd., Vs. ITO in ITA No.750/Bang/2023 (order dated
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07.12.2023). The Bangalore Bench of the Tribunal had followed the dictum laid down by the Hon’ble jurisdictional High Court in the case of Totgars Co-operative Sale Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka). The relevant finding of the Bangalore Bench of the Tribunal in the case of M/s. Deepa Credit Co-operative Society Ltd., Vs. ITO (supra) reads as follows:
“6. I have heard the rival submissions and perused the material on record. Assessee had earned interest income of Rs.18,48,817/- on account of investments with co-operative banks / scheduled banks. The limited prayer of the assessee before the Tribunal is to allow the interest cost as a deduction under section 57 of the Act for earning interest income which is to be assessed under the head ‘income from other sources’. The Hon’ble Karnataka High Court in the case of Totgars Co-operative Sale Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka) had categorically held that where an assessee, a co-operative society, earns interest on deposits kept with scheduled banks; only the net interest income can be taxed under section 56 of the Act (i.e., the interest income reduced by the administrative expenses and other proportionate expenses to earn the said income). 7. The relevant find of the Hon’ble jurisdictional High Court reads as follows: “11. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as "other income" falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from "other sources", the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee.
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Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits. In the result, we pass the following: ORDER (i) Appeals are allowed in part. (ii) Order of the Tribunal in disallowing deduction in respect of cost of funds and proportionate administrative and other expenditure in respect of funds placed in deposit is set aside. (iii) All other contentions urged by the parties are kept open. (iv) Matter is remanded to the adjudicating authority for quantification of the cost incurred by the appellant and deduction thereof under Section 57(3) of the Act and to pass orders in accordance with law. (v)Ordered accordingly.” 8. In view of the aforesaid judgment of the Hon’ble High Court, we restore the matter to the AO. The AO is directed to calculate the cost of funds for earning the interest income which has to be assessed under section 56 of the Act and allow the same as deduction under section 57 of the Act. It is ordered accordingly.”
In light of the aforesaid reasoning and the judicial pronouncements cited supra, we restore the matter to the AO. The AO is directed to follow the dictum laid down in judicial pronouncements cited supra and take a decision in accordance with law. The AO is also directed to afford a reasonable opportunity of hearing to the assessee, before a decision is taken in the matter. It is ordered accordingly.
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In the result, appeal filed by the assessee is allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President Bangalore. Dated: 12.12.2023. /NS/*
Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order
Assistant Registrar, ITAT, Bangalore.