THE METROPOLITAN CO-OPERATIVE HOUSING SOCIETY LTD,BANGALORE vs. INCOME-TAX OFFICER, WARD-1(2)(1), BANGALORE

There is a delay of 48 days in filing this appeal. The assessee has filed an application for condonation of delay stating therein the reasons for belatedly filing this appeal. On perusal of the same, I am satisfied that there is reasonable cause in filing this appeal belatedly and no latches can be attributed to the assessee. Hence, I condone the delay of 48 days in filing this appeal and proceed to dispose off the same on merits.

Brief facts of the case are as follows:

Aggrieved by the order of the assessment, assessee filed appeal before the First Appellate Authority. The CIT(A), vide the impugned order, dismissed the appeal of the assessee and confirmed the view taken by the AO. The CIT(A) held that interest income from deposits kept with scheduled banks and co-operative banks are to be taxed under the head “Income from Other Sources” and the nature of income cannot be changed to business income. Therefore, it was concluded that assessee is not entitled to the benefit of deduction under section 80P(2)(d) nor under section 80P(2(a)(i) of the Act in respect of interest income earned out of investments with scheduled banks and co-operative banks.

I have heard the rival submissions and perused the material on record. Out of the claim of deduction under section 80P(2)(d) of the Act, the learned AR submitted that a sum of Rs.18,08,198/- is received from Apex Co-operative Bank. It was submitted that these investments with the Apex Co-operative Bank is on account of compulsions as per the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was contended that the said amount is entitled for deduction under section 80P of the Act. The learned AR relied on the judgment of the Hon’ble Apex Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank (supra). The Hon’ble Apex Court considered the following question of law:

In considering the above question, the Hon’ble Apex Court rendered the following findings:

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.

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.”

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:

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 interest income of Rs.18,08,198/- received from Apex Co-operative Bank are on account of investments made 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”. Further, AO shall also examine whether assessee society is entitled for deduction of such interest income under section 80P(2)(a) of the Act. It is ordered accordingly.

In so far as the interest income received from Canara Bank amounting to Rs.27,87,387/-, the learned AR submitted that the same is not taxable and is covered under the principle of mutuality. It was stated that deposits were made on account of orders of court to provide bank guarantee to release land of around forty sites which were in legal dispute. It was stated that the assessee was forced to make the fixed deposit in the Canara Bank, M. G. Road and the letter of the BDA requiring performance of bank guarantee is placed on record at page 9 of the Paper Book filed by the assessee. It was contended that the same is out of business compulsion since assessee was into the business of building houses and necessarily the sites were to be released which were in dispute. I am of the view that this issue also needs to be examined by the AO afresh. If investments are made for the purpose of obtaining a bank guarantee out of business compulsions, the same can be treated as business income and if the same is to be treated as business income, whether the assessee is entitled to benefit of deduction under section 80P(2)(a)(i) of the Act also requires to be examined. With the aforesaid observations, I restore the issue to the files of the AO

In the result, appeal filed by the assessee is allowed for statistical purposes.