M/S. VITTAL VYAVASAYA SEVA SAHAKARI BANK NIYAMITH ,VITTAL vs. INCOME-TAX OFFICER, WARD-2(5), MANGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 640/Bang/2023 Assessment Year : 2017-18 M/s. Vittal Vyavasaya Seva Sahakari Bank Niyamith, The Income Tax Reg. No.; 2612/76- Officer, 77, Ward – 2(5), Puttur Road, Mangaluru. Vittal, Vs. Dakshina Kannada – 574 243. PAN: AAAAV4194K APPELLANT RESPONDENT

Assessee by : Shri Rajagopalan, CA : Smt. Priyadarshini Baseganni, Revenue by JCIT DR Date of Hearing : 02-11-2023 Date of Pronouncement : 08-11-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order dated 30.06.2023 passed by NFAC, Delhi for A.Y. 2017-18 on following grounds of appeal: “1. The order passed by the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi, passed under section 250 of the Income Tax Act, 1961 (hereafter "the Act") is in so far as it is against the appellant is opposed to law,

Page 2 ITA No. 640/Bang/2023 equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The appellant denies itself liable to be assessed at Rs. 66,81,813/- as against the Nil returned income for the impugned assessment year 2018-19 on the facts and circumstances of the case. 3. The learned Commissioner (Appeals) was not justified in disallowing the deductions of Rs. 64,16,217/- claimed under section 80P(2)(a)(i) of the Act, on the facts and circumstances of the case. 4. The Ld. Commissioner (Appeals) failed to appreciate that Co-operative Banks are primarily Co-operative Societies and the interest earned needs to be allowed as a deduction u/s 80P(2)(d) of the Act, on the facts and circumstances of the case. 5. The Ld. Commissioner(Appeals) failed to appreciate that the interest of Rs.64,16,217/- was alternatively allowable under section 80P(2)(a)(i) of the Act as business income, on the facts and circumstances of the case. 6. The Authorities below erred in the order in interpreting and applying provisions of section 80P(2). 7. The Authorities below failed in the order by not appreciating the submissions made by the Appellant. 8. The initiation of penalty u/s 270A of the Act is not tenable in law as the appellant has not under reported the particulars of income. 9. The levy of interest u/s 234B of the Act is excessive and ought to be deleted. 10. Each ground is mutually exclusive and the appellant craves leave to add, alter, modify, delete, or substitute any or all of the grounds. 11. In view of the above and other grounds that may be taken at the time of the hearing the appeal, the appellant prays that the appeal be allowed in the interest of justice and equity.” 2. Brief facts of the case are as under: 2.1 Assessee is a co-operative society registered under the Karnataka Co-operative Societies Act and engaged in the business of banking and providing credit facilities to its members. For the year under consideration, assessee filed return of income on 23.10.2017 declaring Nil income after claiming exemption of Rs.66,81,813/- u/s. 80P(2) of the act. The return was processed u/s. 143(1) of the act and the case was

Page 3 ITA No. 640/Bang/2023 selected for scrutiny. Subsequently, notices were issued to the assessee in response to which representative of assessee filed the submissions from time to time. 2.2 After considering the submissions of the assessee, the Ld.AO concluded the assessment by denying the deduction claimed u/s. 80P(2)(a)(i) by holding that, the assessee’s activities are contrary to the principles of mutuality by relying on the decision of Hon’ble Supreme Court in case of Citizen Co-operative Society Ltd. reported in (2017) 397 ITR 1. 2.3 The Ld.AO also held that the deduction is not available to the assessee u/s. 80P(2)(d) by relying on the decision of Hon'ble Karnataka High Court in case of Totagars Co-operative Sale Society reported in (2017) 83 taxmann.com 140. 2.4 Against the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A) who held that assessee’s activities are in accordance with the principles of mutuality and is eligible for deduction u/s. 80P(2)(a)(i) by distinguishing the facts with that of Citizen Co-operative Society Ltd. (supra). However the deduction u/s. 80P(2)(d) of the act was denied and the Ld.AO’s view was upheld in that respect. 2.5 Aggrieved by the order of the Ld.AO, assessee has preferred appeal before this Tribunal. 3. Ground Nos.3-5 are regarding disallowance of claim u/s.80 P(2)(a)(i)/80P(2)(d). The Ld.AR submitted that assessee received interest of Rs.64,16,217/- from co-operative banks and other co- operative societies. He relied on the following details that forms part of the assessment order wherein the co-operative societies

Page 4 ITA No. 640/Bang/2023 with which assessee had made deposits has been enlisted as under: Name of the co-operative society ADARSHA VIVIDHODDESHA SAHAKARI 25,625.00 SANGHA MASS LTD 62,500.00 ADARSHA VIVIDHODDESHA SAHAKARI 37,813.00 SANGHA TEACHERS CR. CO-OPERATIVE SOCIETY 1,31,250.00 TEACHERS CR. CO-OPERATIVE SOCIETY 50,000.00 TEACHERS CR. CO-OPERATIVE SOCIETY 65,625.00 ADARSHA VIVIDHODDESHA SAHAKARI 37,812.00 SANGHA TEACHERS CR. CO-OPERATIVE SOCIETY 50,000.00 ADARSHA VIVIDHODDESHA SAHAKARI 37,813.00 SANGHA TEACHERS CR. CO-OPERATIVE SOCIETY 59,375.00 SCDCC BANK LTD 58,58,404.00 64,16,217.00 3.1 The ld.AR submitted that the cooperative societies /cooperative banks with which assessee had made investments, are registered with the Karnataka Cooperative Societies Act and, therefore, the interest/dividend earned by the assessee from such investments, made with such cooperative banks are eligible for deduction u/s 80P(2)(d) of the Act. He relied on the decision of Hon’ble Karnataka High Court in case of PCIT vs. Totagars Co- operative Sales Society reported in (2017) 392 ITR 74, wherein the Hon’ble Court observed and held as under:- “The word "Co-operative Society" are the words of a large extent, and denotes a genus, whereas the word "Co- operative Bank" is a word of limited extent, which merely demarcates and identifies a particular species of the genus Co-operative Societies. Co-Operative Society can be of different nature and can be involved in different activities; the Cooperative Society Bank is merely a variety of the Co- operative Societies. Thus, the Co-operative Bank which is a species of the genus would necessarily be covered by the word "Co- operative Society.”

Page 5 ITA No. 640/Bang/2023 4.2 On the contrary, the ld.DR relied on the orders of the lower authorities and decision of Hon’ble Supreme Court in case of Totagars Co-operative Sale Society Ltd. vs. ITO reported in (2010) 322 ITR 283. He also referred to recent decision of Hon’ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs. The Assessing Officer, Trivandrum & Ors. in Civil Appeal Nos. 10069 of 2016 dated 14.09.2023 submitted that the assessee cannot be allowed deduction on the interest earned from deposits made in cooperative banks under section 80 P (2) (d) of the Act. 5. We have perused the submissions advanced by both the sides in the light of the records placed. When we look at the decision of Hon’ble Supreme Court in case of Totgars Co-operative Sale Society's case reported in (2010) 322 ITR 283, relied by the Ld.DR, Hon’ble Supreme Court was dealing with a case where the assessee therein, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. On these facts Hon’ble Supreme Court held the assessing officer was right in taxing the interest income indicated above

Page 6 ITA No. 640/Bang/2023 under Section 56 as income from other sources of the Act. Hon’ble Supreme Court, also clarified that, they are confining the said judgment to the facts of that case alone. Accordingly the issue raised by the assessee in Ground nos. 3 & 5 does not have any merit. 5.1 Further the adjudication by the Hon’ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. vs. ITO(supra) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction under Sec.80P(2)(d) on the interest income on the investments/deposits parked with a cooperative bank. Therefore, reliance was placed by the Ld.DR on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. vs. ITO (supra) is distinguishable on facts. 5.2 In the instant case, the amount which was invested with other co-operative societies and SCDCC bank to earn interest was not any amount due to its members. This is very clear from the submissions reproduced in the assessment order wherein the assessee has submitted that it is due to the statutory obligation to keep the reserve fund of the society in SCDCC Bank that such deposits are made, and therefore, such fixed deposit has to be maintained. Further the claim of the assessee in u/s 80P(2)(d) was not any liability due to its members. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to its members, as there were no takers. Therefore they had deposited the money in a co-operative

Page 7 ITA No. 640/Bang/2023 bank/other co-operative societies against which interest/dividend was earned. 5.3 At this juncture, we refer to subsequent decision of Hon'ble Karnataka High Court in the case of PCIT Vs. Totagars cooperative Sale Society reported in (2017) 395 ITR 611, wherein Hon’ble Court held that, a co-operative society would not be entitled to claim of deduction under Sec. 80P(2)(d). At the same time, we find, that the Hon'ble Karnataka High Court in the case of PCIT & Anr. vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, held, that the interest income earned by a co-operative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. 5.4 The Ld.DR relied on a recent decision of Hon’ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd., KSCARDB Vs. AO & Ors (Supra), in support of the disallowance of interest claimed by the assessee before us from the investments made in other Co-operative Banks/Sahakari Sangha etc. We have gone through this decision of Hon’ble Supreme Court. In para 3 of the decision, the issue that was under consideration before the Hon’ble Court reads as under:- “The issue involved in these cases is, whether, the appellant/assessee, a co-operative society, is entitled to claim deduction of the whole of its profits and gains of business attributable to the business of banking or providing credit facilities to its members who are all co- operative societies under Section 80P of the Income Tax Act,

Page 8 ITA No. 640/Bang/2023 1961 (hereinafter referred to as "the Act", for the sake of brevity).” 5.5 In other words Hon’ble Supreme Court in the said decision analyzed, whether the assessee therein could be treated as a “co- operative Bank” within the meaning of sec. 80P(4) of the Act. The Hon’ble Supreme Court considered the above issue in case of an assessee who is a state level Agricultural and Rural Development Bank, governed as a cooperative society, under the relevant state cooperative societies Act, and was engaged in providing credit facilities to its members who were cooperative societies only. On facts, the assessee therein claimed deduction under Section 80P (2)(a)(i) of the Act. The Ld.AO disallowed the deduction under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Ld.AO therein heald that the appellant/assessee is a "co-operative bank" and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. This was upheld by the Ld.CIT(A) and the Tribunal. The decision of the Tribunal was confirmed by Hon’ble Keral High Court. 5.6 The Hon’ble Supreme Court analyzed the legal framework, relevant provisions under relevant co-operative societies Act, NABARD Act, provisions of sec. 80P under the Income Tax Act, 1961, RBI Act, the Banking Regulation Act and the various judicial precedents on similar issues. The observations of Hon’ble Supreme Court in para 14.3 and 15.8 are of relevant that reads as under:- “14.3. While analysing Section 80P of the Act in depth, the following points ere noted by this Court: i) Firstly, the marginal

Page 9 ITA No. 640/Bang/2023 note to Section 80P which reads "Deduction in respect of income of co-operative societies" is significant as it indicates the general "drift" of the provision. ii) Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society" iii) Thirdly, the gross total income must include income that is referred to in sub-section (2). iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being "engaged in", inter alia, carrying on the business of banking or providing credit facilities to its members. v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. vi) Sixthly, the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. vii) Seventhly, under Section 80P(1) (c), the co-operative societies must be registered either under Co-operative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other co-operative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co- operative movement as a whole. ….……….. 15.8. Since the words `bank' and `banking company' are not defined in the NABARD Act, 1981, the definition in sub-clause (i) of clause (a) of Section 56 of the BR Act, 1949 has to be relied upon. It states that a co-operative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co-operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of Section 5 of the BR Act, 1949 is seen, it means any company which transacts the business of banking in India and as already noted banking business is defined in clause (b) of Section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co- operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank

Page 10 ITA No. 640/Bang/2023 and in such a case, Section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co-operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci). Whereas a co-operative bank is in the nature of a banking company which transacts the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949. But if a co-operative society does not transact the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co- operative bank. Then the definitions under the NABARD Act, 1981 would not apply. If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would Not be entitled to the benefit of deduction under sub-section (4) or Section 80P of the Act.” 5.7. In any event Hon’ble Supreme Court in the decision relied by the Ld.DR has elaborately analysed the requirement of a cooperative bank that could fall within the exception of section 80 P(4) of the Act. Based on such principle analysed by Hon’ble Supreme Court and respectfully following the view taken by the Hon'ble Karnataka High Court in the case of PCIT & Anr. Vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, we hold that, the interest income earned by a cooperative society on its investments held with a cooperative bank that do not have licence under section 22 of the Banking Regulation Act 1949, falls outside the definition the term, ‘Banking Company” as per section 2(c ) of the Banking Regulations Act, 1949, would be eligible for claim of deduction under Sec.80P(2)(d) of the Act.

Page 11 ITA No. 640/Bang/2023 The Ld.AO is thus directed to carry out necessary verification in respect of the that same to consider the claim of deduction u/s.80 P(2)(d) of the Act. 5.8 It is directed that in the event it is found that the interest is earned by the assessee from such commercial/cooperative banks that fall within the definition of “banking company’ as per section 2(c ), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head ‘income from other sources’ however, relief may be granted as available to the assessee u/s 57 of the Act in accordance with law.With the above directions, we remit this issue to the Ld.AO. Accordingly, Ground No.4 stands partly allowed for statistical purposes and Ground Nos.3 and 5 stands dismissed. 6. Ground nos.1,2,6,7,10,11 are general in nature and therefore do not require any adjudication. 7. Ground nos. 8-9 are consequential in nature and therefore do not require any adjudication. In the result, the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 08th November, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 08th November, 2023. /MS /

Page 12 ITA No. 640/Bang/2023 Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order

Assistant Registrar, ITAT, Bangalore