M/S. PRATHAMIKA KRUSHI PATTINA SAHAKARA NIYAMITA,HOSAPETE vs. INCOME TAX OFFICER, WARD-2, BALLARI

Prathamika Krishi Pattina vs The Income Tax Officer Sahakara Sangha Niymit Ward - 2 No. 350, Ward No. 15, Hospet 583201 Amaravathi Village, Hospet Tq. Ballari - 583201 PAN – AAAJP0326N (Appellant) (Respondent) Assessee by: Shri Siva Prasad Reddy, IRS (Retd) Revenue by: Shri Ganesh R. Ghale, Standing Counsel Date of hearing: 13.02.2023 Date of pronouncement: 14.02.2023 O R D E R Per: Laxmi Prasad Sahu, A.M. This is an appeal filed by the assessee against the order passed by the learned CIT(A)/NFAC, Delhi in appeal DIN and order No. ITBA/NFAC/S/ 250//2022-23/1047496227(1) dated 18.11.2022 for AY 2017-18.

2. The learned CIT(A) failed to appreciate: (i) That the interest income accruing from the investments made in statutory compliance of the provisions of the State Co-operative Societies Act, 1959 is eligible for the deduction as business income u/s 80P(2)(a)(i) of the Act.

Prathamika Krishi Pattina Sahakara Sangha Niymit (ii) That the decision of the Hon'ble Jurisdictional Tribunal in the assessee's own case for the AY 2014- 15 in order dated, 22-11- 2021 was binding on him and therefore, the interest income was eligible for the deduction u/s 80P(2)(a)(i) of the Act.

3. The learned assessing officer erred in charging interest u/s 234A & 234B of the Act.

4. During the course of assessment proceedings the learned A.R. of the assessee briefed about the provisions of Section 80P(2)(d)/ 80P(2)(a)(i) of the Act . It was asked to explain how the above amount Rs.36,55,182/- qualify for deduction under Chapter VIA and in response the learned A.R. submitted that the above interest is part of the society’s business income and it is qualified for deduction under Section 80P(2)(a)(i) of the Act. The provisions of section 80P(2) were also discussed. It was also noted that the main object of the Prathamika Krishi Pattina Sahakara Sangha Niymit society is to provide credit facility to the members and any sum earned by way of interest from the activities carried out among the members is eligible for deduction under Section 80P(2)(a)(i) of the Act. The AO did not accept the claim of the assessee and he treated it at as income from other sources. The AO also discussed the provisions of Section 80P(2) of the Act as well as the distinction between cooperative bank and cooperative society. He also relied on the judgement of the Hon'ble Supreme Court in the case of Totagars Co- operative Sale Society (2017) 395 ITR 611 (Kar). The AO also upheld that the income by way of interest earned on deposit or investment on ideal surplus funds does not change its characteristics irrespective of the fact that whether such interest income earned from scheduled bank or a cooperative bank, thus clause (d) of Section 80P(2) of the Act would not apply in the case of the assessee. Alternatively, the assessee also claimed expenditure under Section 57 of the Act for earning income under Section 56 of the Act but the AO denied it by observing that the assessee would not have incurred expenditure towards earning of income and accordingly disallowed the claim of expenditure under Section 57 of the Act and denying the deduction under Section 80P of Act & completed the assessment. Aggrieved by the order of the AO assessee filed appeal before the CIT(A). Before the CIT(A), assessee filed detailed written submission which has been incorporated by the CIT(A) in his order. The learned CIT(A) also did not accept the arguments advanced by him and dismissed the appeal of the assessee. Aggrieved by the order of the learned CIT(A)/NFAC, Delhi assessee filed appeal before the Tribunal.

Prathamika Krishi Pattina Sahakara Sangha Niymit Act and Rule 28. He also referred to the statement of facts submitted before the CIT(A) which is placed in the appeal set. He also referred to pages 92 to 96 in which he has given details on the legal issues according to which he was required to maintain liquidity positions and in page 96 he has given details of the calculations. The learned A.R. further submitted that in assessee’s own case in for AY 2014-15 order dated 22.11.2021 the coordinate bench has decided the case in favour of the assessee. Accordingly he submitted that the case is similar as decided by the coordinate bench. Therefore the ratio laid down in that judgement should be followed. He also relied on the judgement in the case of Mayura Credit Co-operative Society Ltd. vs. ITO in ITA No. 741/Bang/2021 for AY 2016-17 order dated 24.05.2022 placed in appeal set pages 121 to 123 in which he submitted that similar issue has been decided in favour of the assessee by the coordinate bench of the ITAT Bangalore. The ld. AR also relied on the statement of facts submitted which is as under:-

4.1. It is submitted that the Hon'ble Jurisdictional Tribunal in the assessee's own case for the AY 2014-15 in order dated, 22-11-2021 has held that the interest income on statutory investments is eligible for the deduction u/s 80P of the Act. Para 7.2 of pages 14 & 15 of the said order is as under: "7.2. In the instant case, it was contended that majority of the interest income is earned out of investments made with Central Co-operative 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 cooperative societies is to be allowed as deduction." 4.2. It may be necessary to mention here that the Hon'ble Tribunal has relied on the judgment of the Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. (Supra) and mentioned the gist of the said judgment vide para 7,3 of its order which is as under: "7.3 Moreover, the Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (supra) had settled various issues for claiming deduction u/s 80P(2)(a)(i) of the I. T. Act. The gist of the judgment of the Hon'ble Apex Court are as follows:- (i) Section 80P is a benevolent provision enacted by the Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, if there is ambiguity, in favour of the assessee (para 45of the judgment). (ii) The co-operative societies extending credit facilities are entitled to deduction u/s 80P(2)(a)(i) and if there are loans to non-members, only profits attributable to the transactions with the non-members alone is liable to be excluded from the deduction. That is to say that the Prathamika Krishi Pattina Sahakara Sangha Niymit transactions with non-members per se would not disentitle a co-operative society from claiming the deduction under the section. If the state Act (the Cooperative Law) provides for enrollment of 'nominal members', the loans given to such nominal members would qualify for the purpose of deduction u/s80P(2)(a)(i). (Para 30 to 46 of the Judgment) (iii) Under clause (d) of section 80P(2), the interest or dividend income derived by a co- operative society from investments with other co-operative society is also eligible for the deduction whole of such income. (Para 35 of the Judgment) (iv) The restrictive clause in sub-section (4) of section 80P applies only a co-operative bank and not to cooperative societies or to co-operative societies extending credit facilities to its members. Further, only a bank having obtained the license under the Banking Regulation Act, 1949, shall be covered under the said restrictive clause u/s 80P(4). The Hon'ble Court has also elaborately explained the correct meaning & scope of the Proviso under the said sub-section (4) of section 80P declaring that the proviso carves out an exception to the exclusion in sub-section (4)." 4.3. Reference is also invited to the decision of the Hon'ble Jurisdictional Tribunal in the case of M/s. Mayura Credit Co-operative Society Ltd., in order dated, 24-05-2022. Relying on the decision of the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. (Supra), the Hon'ble Tribunal held that the interest income on statutory investments is eligible for the deduction u/s 80P(2)(a)(i) of the Act and directed the AO to allow the deduction u/s 80P(2)(a)(i) of the Act on the interest income earned on the statutory investments. For the sake of ready reference, the directions of the Hon'ble Tribunal are reproduced hereinbelow (para 5 of page 3 of the decision): "Accordingly, there is merit in the prayer of the assessee. Accordingly, we set aside the order of the CIT(A) on this issue and restore the same to the file of the AO with the direction to allow the deduction u/s 80P(2)(a)(i) of the Act on the interest income earned from investments made with the banks in compliance with the requirements under the Karnataka Co-operative Societies Act and Rules. The assessee should be given adequate opportunity of being heard." (Emphasis added) 4.4. It is submitted that the detailed submissions on the covered issues relying on the afore- mentioned decisions of the Hon'ble Tribunal in assessee's own case & others were made before the learned CIT(A) vide Written Submissions dated, 17-11-2022. However, the learned CIT(A) has not commented upon the same for the reasons not known.

6. On the other hand, the learned D.R. relied on the orders of the lower authorities and he submitted that both authorities had examined the issue in detail and relied on the judgement of the Hon'ble Supreme Court in the case of Totgar’s Co-operative Sale Society. The learned D.R. also submitted that the learned CIT(A) has rightly distinguished the judgement of Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. as per para 4.2.6 of the order of the CIT(A).

7. After hearing both the parties and perusing the entire material available on record and orders of the authorities below I observe that the assessee is a primary agricultural credit society and its income is derived from trading in food grains, fertilizers and providing credit facilities to it members. It has Prathamika Krishi Pattina Sahakara Sangha Niymit received interest from BDCC bank of Rs.36,55,182/- as noted supra on which it has claimed deduction under Chapter VIA but the AO has denied the claim and the CIT(A) has also confirmed the order of the AO that the assessee is not eligible to claim deduction under Section 80P(2) of the act on interest received from BDCC bank. The learned A.R. has also submitted that the assessee has to maintain an investment as per the requirement of the Karnataka Co-operative Societies Act and therefore it is a business income. I observed during the course of hearing that the learned A.R. relied on assessee’s own case for AY 2014-15 order dated 22.11.2021 in ITA No. 1724/Bang/2019. Similar issue was raised by the learned Pr.CIT applying Section 263 of the Act and in the judgement the coordinate bench decided similar issue is assessee’s own case. Relevant part of the judgement is as under: -

Prathamika Krishi Pattina Sahakara Sangha Niymit claimed that the said interest amount is attributable to the business of providing credit facilities by the assessee and forms part of profits and gains of business. The Hon’ble Karnataka High Court after considering SC judgment in case of Totgars(supra) held that since the word income is qualified by the expression “attributable” to the business of Banking is used in Sec.80P(2)(a)(i) of the Act, it has to receive a wider meaning and should be interpreted as covering receipts from sources other than the actual conduct of business. The Court held a Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. The Hon’ble Court also distinguished the decision of the Hon’ble Supreme Court in the case of Totgars (supra) by observing that the Supreme Court was dealing with a case where the assessee-Cooperative Society, 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 which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society 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. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. The Court also observed that even the Hon’ble Supreme made it clear that they are confining the said judgment to the facts of that case. The Court therefore concluded that Hon’ble Supreme Court was not laying down any law. Similar view taken in Guttigedarara Credit Co-operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 392 ITR 0074 (Karn) in the context of deduction u/s.80P(2)(d) of the Act, it was held that Sec.80P(2)(d) of the Act allows deduction 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. The Hon’ble Court held that that the aforesaid Supreme Court's decision in the case of Totgars (supra), was not applicable to deduction u/s.80P(2)(d) of the Act, because the said decision was rendered with regard to deduction under Section 80P(2)(a)(i) of the Act and not under Section 80P(2)(d) of the Act.

"(I)Whether the assessee, Totagar Co-operative Sale Society, Sirsi, is entitled to 100% deduction under Section 80P(2)(d) of the Income Tax Act, 1961 (for short 'the Act') in respect of whole of its income by way of interest earned by it during the relevant Assessment Years

Prathamika Krishi Pattina Sahakara Sangha Niymit from 2007-2008 to 2011-2012 on the deposits or investments made by it during these years with a Co-operative Bank, M/s. Kanara District Central Co-operative Bank Limited?

(II) Whether the Supreme Court decision in the case of the present respondent assessee, Totgar Co-operative Sale Society Limited itself rendered on 08th February 2010, in Totgar's Co-operative Sale Society Limited v. Income Tax Officer, reported in (2010) 322 ITR 283 SC : (2010) 3 SCC 223 for the preceding years, namely Assessment Years 1991-1992 to 1999-2000 (except Assessment Year 1995-1996) holding that such interest income earned by the assessee was taxable under the head 'Income from Other Sources' under Section 56 of the Act and was not 100% deductible from the Gross Total Income under Section 80P(2)(a)(i) of the Act, is not applicable to the present Assessment Years 2007-2008 to 2011-2012 involved in the present appeals and therefore, whether the Income Tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100% deductible under Section 80P(2)(d) of the Act?"

1.

2. The banking business, even though run by a Co-operative bank is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act. The purpose of bringing on the statute book sub-section (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any co-operative bank and to exclude the normal banking business income from such exemption/deduction category. The words used in Section 80P(4) are significant. They are: "The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society …..". The words "in relation to" can include within its ambit and scope even the interest income earned by the respondent-assessee, a co-operative Society from a Co-operative Bank. This exclusion by Section 80P(4) of the Act even though without any amendment in Section 80P(2)(d) of the Act is sufficient to deny the claim of the respondent assessee for deduction under Section 80P(2)(d) of the Act. The only exception is that of a primary agricultural credit society. (Paragraph-14 of the judgment) 3. The amendment of Section 194A(3)(v) of the Act excluding the Co-operative Banks from the definition of "Co- operative Society" by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A of the Act also makes the legislative intent clear that the Co-operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act. (Paragarph 15 of the Judgment) 4. If the legislative intent is so clear, then it cannot contended that the omission to amend Clause (d) of Section 80P(2) of the Act at the same time is fatal to the contention raised by the Revenue before this Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon'ble Supreme Court's decision in the case of Respondent assessee itself is otherwise.(Paragraph 16 of the Judgment) 5. On the decision of the earlier decision of the Hon’ble Karnataka High Court referred to in the earlier part of this order, the Court held that it did not find any detailed discussion of the facts and law pronounced by the Hon'ble Supreme Court in the case of the respondent assessee (Totagars Sales Co-operative society) and hence unable to follow the same in the face of the binding precedent laid by the Hon'ble Supreme Court. The Hon’ble

Prathamika Krishi Pattina Sahakara Sangha Niymit Court observed that in paragraph 8 of the said order passed by a co- ordinate bench that the learned Judges have observed that "the issue whether a co-operative bank is considered to be a co- operative society is no longer res integra, for the said issue has been decided by the Income Tax Appellate Tribunal itself in different cases…………..". No other binding precedent was discussed in the said judgment. Of course, the Bench has observed that a Co-operative Bank is a specie of the genus co- operative Society, with which we agree, but as far as applicability of Section 80P(2) of the Act is concerned, the applicability of the Supreme Court's decision cannot be restricted only if the income was to fall under Section 80P(2)(a) of the Act and not under Section 80P(2)(d) of the Act.(Paragraph-18 of the Judgment)

Prathamika Krishi Pattina Sahakara Sangha Niymit earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act.

6. Without prejudice to the above, the learned Principal Commissioner ought to have taken note of the submissions made by the appellant that interest received by it amounting to Rs. 1,32,726 from deposits with Mysore & Chamarajanagar District Central Co-operative Bank made in compliance with section 58 of the Karnataka Co- operative Societies Act, 1959 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961 in respect thereof was rightly allowed by the Income Tax Officer.

7. Without prejudice to the above, the learned Principal Commissioner ought to have considered the submissions of the appellant to the effect that the interest received by it amounting to Rs. 1,32,726 from deposits with Mysore & Chamarajanagar District Central Co-operative Bank made in compliance with rule 28 of the Karnataka Co-operative Societies Rules, 1960 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the appellant was eligible for deduction thereof under section 80-P(2)(a)(i) of the Income Tax Act, 1961.”

18. The issue raised by the Assessee in the aforesaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments

Prathamika Krishi Pattina Sahakara Sangha Niymit have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised in ground No.5 to 7 alone to the AO for examination afresh. In other respects we confirm the order of the CIT.” 7.2 In the instant case, it was contended that majority of the interest income is earned out of investments made with Central Co-operative 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. 7.3 Moreover, the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (supra) had settled various issues for claiming deduction u/s 80P(2)(a)(i) of the I.T.Act. The gist of the judgment of the Hon’ble Apex Court are as follows:- (i) Section 80P is a benevolent provision enacted by the Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, if there is ambiguity, in favour of the assessee (para 45 of the judgment). (ii) The co-operative societies extending credit facilities are entitled to deduction u/s 80P(2)(a)(i) and if there are loans to non-members, only profits attributable to the transactions with the non-members alone is liable to be excluded from the deduction. That is to say that the transactions with non-members per se would not disentitle a co-operative society from claiming the deduction under the section. If the state Act (the Co- operative Law) provides for enrollment of 'nominal members', the loans given to such nominal members would qualify for the purpose of deduction u/s 80P(2)(a)(i). (Para 30 to 46 of the Judgment)

(iii) Under clause (d) of section 80P(2), the interest or dividend income derived by a co- operative society from investments with other co-operative society is also eligible for the deduction whole of such income. (Para 35 of the Judgment) (iv) The restrictive clause in sub-section (4) of section 80P applies only a co-operative bank and not to co-operative societies or to co-operative societies extending credit facilities to its members. Further, only a bank having obtained the license under the Banking Regulation Act, 1949, shall be covered under the said restrictive clause u/s 80P(4). The Hon'ble Court has also elaborately explained the correct meaning & scope of the Proviso under the said sub-section (4) of section 80P declaring that the proviso carves out an exception to the exclusion in sub-section (4). 7.4 In the light of the above judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (supra), the matter needs to be examined afresh by the A.O. de hors the observations of the CIT. The A.O. is directed to follow the dictum laid down by the Hon’ble Apex Court in framing the fresh assessment. It is ordered accordingly.

8. In the result, the appeal filed by the assessee is allowed for statistical purposes. Dictated and pronounced in the open Court on 14th February, 2023.