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Income Tax Appellate Tribunal, “SMC - A” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 21.09.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.
Grounds raised by the assessee read as follows:
The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence. probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in upholding the partial disallowance of Rs. 6,97,026/- from out of the deduction claimed u/s 80P[2][a][i] of the Act on the ground that the said income represented interest earned by the appellant from co-operative banks and thus, the same did not form part of the eligible income for deduction u/s. 80P[2][a][i] of the Act.
2.1 The learned CIT[A] ought to have appreciated that the interest income earned by the appellant was from out of investments required to be statutorily maintained by the appellant and thus, the appellant was entitled to the deduction u/s 80P[2][a][i] of the Act towards the same under the facts and in the circumstances of the appellant's case.
3. Without prejudice to the above, the learned CIT[A] ought to have appreciated that the interest income earned by the appellant to the tune of Rs. 6,82,017/- qualified for deduction uls.80P[2][d] of the Act since the aforesaid interest was earned from co-operative banks/societies under the facts and in the circumstances of the appellant's case.
Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234- B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled.
5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
Brief facts of the case are as follows:
Assessee is a co-operative society registered under the Karnataka Co- operative Societies Act, 1959. For the Assessment Year 2018-19, return of income was filed on 26.09.2018 declaring ‘Nil’ income after claiming deduction under section 80P(2)(a)(i) of the Act, amounting to Rs.1,02,85,865/-. The assessment was selected for limited scrutiny and notice under section 143(2) of the Act was issued on 23.09.2019. During the course of assessment proceedings, assessee was directed to justify its claim of deduction under section 80P(2) of the Act. Assessee submitted its reply dated 23.02.2021. After considering the reply of the assessee, AO noted that assessee had earned interest income of Rs.6,97,062/- from Kanara District Co-operative Bank. The AO was of the view that the said interest income received from Kanara District Co-operative Bank was not entitled to deduction under section 80P(2)(a)(i) nor under section 80P(2)(d) of the Act. Accordingly, the assessment was completed under sections 143(3) r.w.s. 143(3A) and 143(3B) of the Act vide order dated 18.03.2021. In holding so, the AO relied on the judgment on the Hon’ble Apex Court in the case of Totgar’s Co-operative Sales Society Ltd., Vs. ITO reported in 322 ITR 283.
4. Aggrieved by the Assessment Order, assessee filed appeal before the First Appellate Authority (FAA). The CIT(A) dismissed appeal of the assessee. The relevant finding of the CIT(A) reads as follows:
“6. Held:- I have considered the submission of the appellant and perused the order of the AO. It is an undisputed fact that the appellant has earned interest of Rs.95,451/- on deposits and interest of Rs.6,01.611/- on investments totaling to Rs. 6,97,062/-. It has been contended by the appellant that such interest income is earned out of reserve fund and statutory deposits maintained for carrying out its business and thus, it is business income of the appellant. On the contrary, the Assessing Officer has held that such interest income is not allowed as per the provisions of Section 80P(2)(d) as they are not income by way of interest of dividend derived by the Co-operative society from its investments with any other Co-operative society. The Ld. AO has relied upon the cases of Hon'ble Supreme Court in the case of M/s Totagar Co-operative Sales Society Ltd. vs. ITO 322 ITR 2023 (SC) and Banglore Club vs CIT 29 Taxmann.com 29 (SC) whereas the appellant has relied upon the cases of Hon'ble Supreme Court in the case of CIT vs. Karnataka State Co-operative Apex Bank 251 ITR 194 (SC) and Bagalkot District Central Co-operative Bank vs. Joint Commissioner, Bijapur Range 48 Taxmann.com 117 (Banglore-Tribunal) and PCIT Hubbali vs. Totagar Co-operative Sales Society 392 ITR 74. 6.1 The primary issue in this case is whether such interest income is eligible for the deduction u/s 80P(2)(a)(i) or u/s 80P(2)(d). The Hon'ble Karnataka High Court in a recent decision of PCIT Hubbali vs. Totagar Co- operative Sales Society 83 Taxmann.com 140 (Karnataka) had an occasion to examine this issue and held that where the assesse is a Cooperative society engaged in marketing of agriculture produce grown by its members and providing credit facilities to those members and has deposited its surplus funds in Co-operative Bank, the claim of deduction u/s 80P(2)(d) and 80P(2)(a)(i), both will be denied. Further, in the recent decisions of Hon'ble ITAT Banglore in the cases of M/s Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd. vs. Pr.CIT in decision dated 08.02.2022 and Shree Sharanabasaveshwar Credit Souhard Sahakari Ni., vs. The ITO, NeAC in ITA No.107/Bang/2023 date of decision 17.05.2023 had an occasion to adjudicate a similar issue and has held that such interest income is not eligible for deduction u/s 80P(2)(d). Respectfully, following the decisions of the jurisdictional High Court and the ITAT. I see no reason to interfere with the reasoned order of the Assessing Officer and thus, the grounds of appeal no.2 & 3 are dismissed.”
5. Aggrieved by the order of the CIT(A), assessee has preferred the present appeal before the Tribunal. The learned Counsel for the assessee has filed a Paper Book comprising of 33 pages enclosing therein the statement showing the interest income received on investments, copy of the ITR acknowledgment along with the computation of total income and financials, the case laws relied on, etc. The learned AR submitted that the interest income received out of investment made with District Co-operative Bank, are in compliance with requirements under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. It was submitted that if the amounts are invested in compliance with Karnataka Co- operative Societies Act, the same necessarily needs to be assessed as ‘income from business’ which entails the benefit of deduction under section 80P(2)(a)(i) of the Act. The learned AR further relying on the judgment of Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural Rural Development Vs. AO reported in 458 ITR 384 (SC) stated that assessee is entitled to benefit of deduction under section 80P(2)(d) of the Act. It was further contended that if the interest income is assessed as ‘income from other sources’ and is not granted the benefit of deduction under section 80P(2)(d) of the Act, the assessee ought to be granted deduction of the cost of funds for earning such interest income.
6. The learned Standing Counsel supported the orders of the AO and CIT(A).
I have heard the rival submissions and perused the material on record. The assessee’s claim of deduction under section 80P has been disallowed to the extent of Rs.6,97,062/- for the reason that such interest income is received on investments made with District Co-operative Bank. It is the contention of the assessee that investments in District Co-operative Bank are in compliance with the requirement under the Karnataka Co-operative Societies Act and the relevant Rules. Therefore, the interest income is entitled to deduction under section 80P(2)(a)(i) of the Act. On identical factual situation, the Bangalore Bench of the Tribunal in the case of Canara Bank Staff Credit Co-operative Societies Ltd., in (order dated 03.10.2023) had restored the matter to the AO to examine whether the amounts invested with the Co-operative Banks are out of compulsion under the Karnataka Co-operative Societies Act and the relevant Rules. It was further held by the Tribunal that if the investments are out of compulsion under the Act and the relevant Rules, the interest income received out of the investment made under such compulsion would be liable to be taxed as ‘income from business’ which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Bangalore Bench of the Tribunal reads as follows:
“7. I have heard the rival submissions and perused the material on record. The interest income is received out of investments made with Apex Co-operative Bank. It is the case of the assessee that the investments are made out of compulsions as per the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. The Hon’ble Apex Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank (supra) had held that when amounts are invested by the Co-operative Societies as per the statutory requirements, the same would be entitled to deduction under section 80P(2)(a)(i) of the Act. The Hon’ble Apex Court considered the following question of law:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961?
8. In considering the above question, the Hon’ble Apex Court rendered the following findings: “4. This judgment was cited before the Bench of two learned Judges which decided the case of the Bangalore District Co-operative Central Bank Ltd. (supra). It was considered as having been rendered on its own facts and not applicable to the case of Bangalore District Co-operative Central Bank Ltd. (supra) in view of the finding of the Tribunal that the income in question was attributable to the business of that assessee. The Court referred to the Banking Regulation Act, the Karnataka Co-operative Societies Act and the Karnataka Co-operative Societies Rules, which showed that the investments that had been made by the assessee were in compliance with the statutory -provisions and in order to carry on the business of banking. They were necessary and consequently, they were part of the business activities of the assessee falling within the scope of section 80P(2)(a)(i).
We do not agree with the finding of the Bench which decided the Bangalore District Co-operative Central Bank Ltd.'s case (supra) that the decision in the case of M.P. Co-operative Bank Ltd. (supra) was rendered on its own facts. The latter decision was clearly a reasoned decision.
The question is whether we agree with the reasoning in M.P. Co- operative Bank Ltd.'s case (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying the banking business, the income derived therefrom would be income from the assessee’s business. We are unable to take the view that found favour with the Bench that decided the case M.P. Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
7. In the premises, we take the view that the decision of this Court in the case of M.P. Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee.”
9. A similar view that has been held by the Hon’ble Andhra Pradesh High Court in the case of CIT-II, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., reported in 336 ITR 516 (AP).
The Bangalore Bench of the Tribunal in the case of M/s. The Bharathi Co-operative Credit Society Vs. ITO in (order dated 28.11.2022) for Assessment Year 2015-16, following its earlier order in the case of M/s. Vasavamba Co-operative Society Ltd., Vs. The PCIT in ITA No.453/Bang/2020 (Order dated 13.08.2021), had rendered a similar finding which 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 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 co- operative societies is to be allowed as deduction.”
In light of the aforesaid reasoning and the judicial pronouncements cited supra, we restore this issue to the files of the AO. The AO is directed to examine whether the amounts invested with Apex Co-operative Bank and other banks, are out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is found that the investments are made out of compulsions under the Act and the relevant Rules, the interest income received out of the investments made under such compulsions would be liable to be taxed as “business income” which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, we restore the matter to the AO. It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.”
In the event it is found that assessee is not entitled to get the benefit under section 80P(2)(a)(i) of the Act, the AO shall also examine whether it is entitled to deduction under section 80P(2)(d) of the Act in light of the recent judgment of the Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural Rural Development Vs. AO (supra). If the assessee is not entitled to benefit of deduction either under section 80P(2)(a)(i) or under section 80P(2)(d) of the Act, the AO shall consider the claim of deduction under section 57 of the Act in respect of the cost of funds for earning such interest income which is assessed as income under the head ‘income from other sources’. For the direction to grant deduction for the cost of funds, I rely on the judgment of the jurisdictional High Court in the case of Totgar’s Co-operative Sales Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka) (judgment dated 25.03.2015).
In the result, appeal filed by the assessee is allowed for statistical purposes.