K274 UTHUKULI PRIMARY AGRICULTURAL COOPERATIVE CREDIT SOCIETY LTD,TIRUPUR vs. ITO , NFAC , DELHI

आदेश /O R D E R

PER G. MANJUNATHA, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 25.08.2022 and pertains to assessment year 2018-19.

:-2-: ITA. No: 860/Chny/2022 2. The assessee has raised the following grounds of appeal: “1) The CIT(A)'s order is erroneous and unsustainable in law and opposed to the facts and circumstances of the case. Concept of Members and Deduction u/s 8OP 2. The CIT(A) erred in denying the benefit of sec.8OP in toto failing to see that a substantial part of the same i.e. Rs………….. was interest from its members and that the Hon'ble Tribunal in Assesee's own case in IT A No. 586 / Chny/2021 dated 18.07.2022 has allowed the claim of deduction u/s 80P(2)(a)(i) in regard to interest income earned from Associate Members also. 3. The CIT(A) ought to have seen that the ratio descending in the case of Citizen Cooperative Society Ltd .v. ACIT, [2017] 397 ITR 1 (SC) is that Section 80P of the Act, being a benevolent provision to encourage and promote the credit of the co-operative sector in general, must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. 4. The CIT(A) failed to see that the total amount claimed u/s BOP includes both interest earned from members as well as interest on bank deposit, and that the assessing officer erred in holding that the assessee has not made a claim regarding interest earned from members, instead of bifurcating the amount and giving relief accordingly. Interest Income not eligible u/s 80P 5. The Respondent ought to have seen that Section 80P(2)(d) of the Act envisages that a co- operative society can claim deduction towards income by way of interest or dividends derived by the co-operative society from its investments with any other cooperative society. 6. The Respondent has accepted that fact in Assessment Order dated 09.02.2021 that the Appellant is maintaining accounts with co-operative Bank (Erode District Co- operative Society- EDCC Bank Ltd.) and shown 7. The CIT(A) ought to have appreciated the facts that the Hon'ble Madras High Court in the case of CIT vs. Veerakeralam Primary Agricultural Co-operative Credit Society (2016) 388 ITR 492 (Mad), after referring to the decision of the Hon'ble

:-3-: ITA. No: 860/Chny/2022 Supreme Court in the case of Totagars Co-operative Sales Society Ltd., held that the benefit of deduction u/s.80P of the Act is excluded for co- operative banks but credit co- operative societies are entitled to claim deduction u/s.80P of the Act in respect of interest income earned from deposits kept in other co-operative banks.”

:-4-: ITA. No: 860/Chny/2022 “4. The assessee in its submission mentioned that it is eligible for the deduction u/s 80P(2)(a)(i) of the IT Act, but the assessee has not claimed in its Return of Income. Besides, the details that whether all members are eligible to contest in the elections and to vote of the society, and for receipt of dividend from the Society has also not been provided. This shows that the assessee does not want to provide the complete details. Besides, the assessee in its Audit Report mentioned its status as Co Operative Bank" not a co operative Society. Keeping in view of the decision of the l1on'ble Supreme Court in the case of M/s Goetzze of India vs CIT and facts of the case, the contention of the assessee is not acceptable.

:-5-: ITA. No: 860/Chny/2022 deposits with District central Co-operative Bank, which is eligible for deduction u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act. The CIT(A), after considering relevant submissions of the assessee and also by following certain judicial precedence rejected arguments of the assessee and sustained additions made by the AO towards disallowance of deduction u/s. 80P of the Act, on the ground that the interest income earned by the assessee from associate members and interest income earned from fixed deposits with other Co-operative banks is not entitled for deduction u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act. The relevant findings of the CIT(A) are as under: “6.1 I have carefully considered- the AO's viewpoint contained in the assessment order and the submission made by the appellant in the matter as part of the grounds of appeal.

6.2 The appellant is a Primary Agricultural Cooperative Society registered under the Tamil Nadu Cooperative Societies Act, 1983 and provides providing agricultural loans to its members (Class A and Class B). Further, it is seen that both types of members are eligible to avail loan from the society and pay interest on the same to the society and all the members have to renew their membership once in three years.

6.3 During the year under consideration, it is noticed that the appellant has claimed deduction u/s 80(P)(2)(d) of the IT. Act. It is also seen that the appellant is maintaining accounts with cooperative Bank (i.e. EDCC Bank Ltd) and shown deposits in EDCC Bank, therefore, it is clear that the appellant has made investment in Co. Operative Bank not in Cooperative Societies.

:-6-: ITA. No: 860/Chny/2022

6.4 During the course of assessment proceedings, the Assessing Officer relied on the judgement rendered by Hon'ble Supreme Court in the case of M/s. The Totgars' Cooperative Sale Society Limited versus Income Tax Officer, Karnataka [2010] 188 Taxman 282 (SC) in Civil Appeal No. 1622 of 2010 dated 08/02/2010. In Pages 9 and 10 of the said judgement, it is delivered as below:

“…….the question, before us, is - whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under Section 28 of the Act? In our view, such interest income would come in the category of "Income from other sources", hence, such interest income would be taxable under Section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze Section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain Incomes". The Headnote to Section 80P indicates that the said section deals with deductions in respect of income of cooperative Societies. Section 80P(1), inter alia, states that where the gross total income of a cooperative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee- Society. An income, which is attributable to any of the specified activities in Section 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under Section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word

:-7-: ITA. No: 860/Chny/2022 "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in Section 80P(2) of the Act. In the present case, as stated above, assessee-Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee- Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under Section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. 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 in Section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the

:-8-: ITA. No: 860/Chny/2022 interest income, indicated above, under Section 56 of the Act.

6.5 In the case of Citizens Co-operative Society Limited, Hyderabad vs Assistant Commissioner of Income Tax, Circle-9(1), Hyderabad in Civil Appeal No. 10245 of 2017 dated 08.08.2017 para 25 and 26 of the said judgement, it is reproduced hereunder:

“….. the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of ‘nominal members’. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co-operative Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction under Section 80P(2)(a)(i) of the Act.

:-9-: ITA. No: 860/Chny/2022 26) It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion:

“As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality; that no person can earn from him; that there a profit motivation; and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third party vis-a-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs].

In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all.”

:-10-: ITA. No: 860/Chny/2022 to distinguish the member and non members, as the benefits are enjoyed by the general public. The assessee is also running money transfer facilities to the general public, functioning as a commission agent for insurance companies, common service centre for downloading government related documents, certificates, Xerox facilities and funding to the self help group who are not necessarily the members of the society. Hence, the principal of mutuality is defeated in these contexts also.”

6.6 The AO has also relied upon the following case laws:

6.7 The relevant portion of Section 80P reads as follows: - [Deduction in respect of income of co-operative societies].

"8OP. (1) Where, in the case of an assessee being a co- operative Society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely – (a) in the case of a co-operative society engaged in (i) carrying on the business of bankíng or providing credit facilities to its members, or the whole of the amount

:-11-: ITA. No: 860/Chny/2022 of profits and gains of business attributable to any one or more of such activities"

6.8 In this regard, the provisions with regard to allowing deduction in respect of interest of income earned by a co- operative society are contained in section 80P(2)(d), which read as under: "in respect of any income by way of interest or dividends derived by the co-operative society from its investment with any other co-operative society, the whole of such income"

6.9 During the course of assessment proceedings, the Assessing Officer in his assessment order has stated that - "4. The assessee in its submission mentioned that it is eligible for the deduction u/s 80P(2)(a)() of the IT Act, but the assessee has not claimed in its Return of Income. Besides, the details that whether all members are eligible to contest in the elections and to vote of the society, and for recejpt of dividend from the Society has also not been provided. This shows that the assessee does not want to provide the complete details. Besides, the assessee in its Audit Report mentioned its status as Co Operative Bank" not a co operative Society. Keeping Scan @ 02 FEB 2023 03:49 PM in view of the decision of the Hon'ble Supreme Court in the case of M/s Goetzze of India Vs CIT and facts of the case, the contention of the assessee is not acceptable. 5. In view of the above facts and relying on the provisions of section 80P(2)(0) of the Act, the interest income earned by the assessee amounting to Rs. 72,58,525/ is hereby held to be not eligible for deduction u/s.80P of the Act. The Income of the assessee is modified by disallowing the claim of deduction u/s 80P(2)(d) of the IT Act. Penalty proceedings u/s. 2704 is initiated for under reporting of income as discussed above."

6.10 I have perused the matter and a perusal of various

:-12-: ITA. No: 860/Chny/2022 provisions of Section 80P indicates that the provisions are meant for deductions in respect of income of the co-operative societies. As clearly stated by the AO in his assessment order [pâra 4 &5. above], the assessee society Rs 72,58,525/- on funds has earned interest amounting to which are earned out of its cooperative activity. Hence the deduction under section 80P(2) would not apply to such interest. 6.11 In view of the above facts and circumstances, such interest income falls in the category of "Income from other sources' which has to be taxed u/s 56 of the lT Act 1961, for which also no deduction under appellant society, the AO has Chapter VIA is eligible. In the. case of the A Rs 72,58,525/- earned rightly held that the interest income by the appellant and is not eligible for deduction u/s 80P of the Act. Hence, Grounds of appeal are accordingly dismissed.”

:-13-: ITA. No: 860/Chny/2022 operative Banks, the issue has been set aside to the file of the AO with the directions to verify as to whether the assessee has earned interest from the Co-operative Banks governed by the Reserve Bank of India holding banking license under the Banking Regulations Act, 1949 or as to whether it is governed by the Tamilnadu Co-operative Societies Act, 1983 and to decide the issue of taxability of interest income u/s. 80P(2)(d) of the Act. She further referring to the paper book filed by the assessee submitted that, for this year although the assessee has claimed deduction u/s. 80P of the Act in total, but while filing the return of income, it has subsequently claimed deduction u/s. 80P(2)(a)(i) and 80P(2)(d) of the Act. Therefore, she submitted that except limited changes in facts, the facts considered by the Tribunal for earlier years is equally applicable to this year and thus, the additions made by the AO should be deleted.

:-14-: ITA. No: 860/Chny/2022 deduction towards interest income earned on fixed deposits with other Co-operative Banks and thus, the AO has rightly taxed interest income and their order should be upheld.

:-15-: ITA. No: 860/Chny/2022 covered by the decision of the Hon’ble Madras High Court in the case of The Principal Commissioner of Income Tax Vs. M/s.S-1308, Ammapet Primary Agricultural Cooperative Bank Ltd., in Tax Case Appeal Nos.882 and 891 of 2018, dated 06.12.2018 and by the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Limited vs. Commissioner of Income Tax, Calicut reported in [2021] 123 Taxmann.com 161, wherein the Hon’ble Supreme Court has held as under: “45. To sum up, therefore, the ratio dividend of Citizen Co-operative Society Limited (supra), must be given effect to Section 80P of the Income Tax Act, being 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, and if there is ambiguity, in favour of the Assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the world “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business, i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench Judgement is wholly incorrect in its reading of Citizen Co-operative Society Limited (supra). Clearly, therefore, once Section 80P(4) is out of harm’s way, all the

:-16-: ITA. No: 860/Chny/2022 Assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non- members, profits attributable to such loans obviously cannot be deducted. 46. It must also be mentioned here that unlike the Andhra Act that Citizen Co-operative Society Limited (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Limited vs Commissioner of Income Tax [1997] 11 SCC 287 referred to section 80P of the Income Tax Act and then held: “8. The expression “members” is not defined in the Act. Since a co-operative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in section 80P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the Co-operative Society claiming exemption has been formed. It is therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Co-operative Societies Act. The said provision reads as under: “2.(n). ‘Member’ means a person who joined in the application for registration of a Society or a person admitted to membership after such

:-17-: ITA. No: 860/Chny/2022 registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power have no such liability or duty; Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).” 6. On the other hand, the learned Senior Departmental Representative relied on the Assessment Order as well as the order of the CIT(A). 7. After hearing both the sides and on going through the facts and circumstances of the case, the Assessee’s issue is squarely covered with the facts of the decision of the Hon’ble Madras High Court in the case of The Principal Commissioner of Income Tax, Salem Vs. M/s.S-1308, Ammapet Primary Agricultural Co-operative Bank Ltd., (supra) and in the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Limited vs. Commissioner of Income Tax, Calicut (supra). Respectfully following the same, we direct the Assessing Officer to allow the claim of deduction u/s.80P(2)(a)(i) of the Act on the interest income amounting to Rs.68,79,255/- from the Associated Members. Thus, this issue in the Assessee’s appeal is allowed.”

:-18-: ITA. No: 860/Chny/2022 8. Considering facts and circumstances of the case and also by following the decision of the Tribunal in assessee’s own case for assessment year 2017-18, we are of the considered view that the AO is erred in disallowing deduction claimed u/s. 80P(2)(a)(i) of the Act, in respect of interest income earned from loans given to associate members and thus, we direct the AO to allow deduction as claimed by the assessee.

:-19-: ITA. No: 860/Chny/2022 under Banking Regulations Act, 1949 or as to whether it is governed by the Tamil Nadu Co-operative Societies Act, 1983 and decide the issue in accordance with law. The relevant findings of the Tribunal are as under: “9.1 It is to be seen as to whether the interest earned by the Assessee is from the Co-operative Bank which is governed and registered under the Tamilnadu Co-operative Societies Act, 1983 or as to whether it is governed by the Reserve Bank of India holding banking license under the Banking Regulations Act, 1949. This fact is not coming out of the order of the Assessing Officer or of the Commissioner of Income Tax. Hence, this issue is remanded back to the file of the Assessing Officer who will verify as to whether the Assessee has earned interest from the Co-operative Banks governed by the Reserve Bank of India holding banking license under the Banking Regulations Act, 1949 or as to whether it is governed by the Tamilnadu Co-operative Societies Act, 1983, the Assessing Officer will verify the facts and will decide accordingly. Thus, the appeal of the Assessee is partly allowed as indicated above.”

:-20-: ITA. No: 860/Chny/2022 directions given by the Tribunal in the order for the assessment year 2017-18 and decide the issue for the impugned assessment year.

Order pronounced in the court on 08th February, 2023 at Chennai. Sd/- Sd/- (वी दुगा� राव) (जी. मंजुनाथ) (V. DURGA RAO) (G. MANJUNATHA) �याियकसद�य/Judicial Member लेखासद�य/Accountant Member चे�ई/Chennai, �दनांक/Dated: 08th February, 2023 JPV आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF