VISA BHARATI CO-OPERATIVE CREDIT SOCIETY LIMITED. ,SANTINIKETAN vs. ITO, WARD-3($), SURI, BIRBHUM, SURI WEST-BENGAL

Present for: Appellant by : Shri Miraj D. Shah, Advocate Respondent by : Shri Sailendra Kumar Pandey, Addl. CIT, Sr.DR Date of Hearing : 15.06.2023 Date of Pronouncement : 28.08.2023 O R D E R

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16

3.1. Assessee explained its case in respect of deduction u/s. 80P which included this interest income. However, Ld. AO held that interest income is not part of its operational business income but is an income from other sources, not deductible u/s. 80P of the Act. While holding so, he placed reliance on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO, [2010] 188 Taxmann 285 (SC) as well as decision of Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. Punjab State Co- operative Federation of Housing Building Societies Ltd. [2011] 11 taxmann.com 488 (P&H) as also of Hon’ble High Court of Gujarat in the case of State Bank of India Vs. CIT [2016] 72 taxmann.com 64 (Guj.). Ld. AO thus, by observing that assessee regularly invested funds not immediately required for business purposes, disallowed the claim and made an addition of Rs.48,29,721/- as income from other sources. Aggrieved, assessee went in appeal before the Ld. CIT(A).

“The assessee is a co-operative society and during the previous year 2013-14, relevant to A.Y. 2014-15 was engaged in the business of providing loans among the members of the society and obtaining deposits from the members.

It observed from the audited accounts of the assessee for the A.V. 2014-15 that it has disclosed interest income of Rs. 2,40,327/- on savings a/c and Rs. 45,62,565/- earned on the FD/TDs with BDCC Bank Ltd. and other scheduled banks. In the return of income the assessee claimed deduction of this interest income u/s 80(2)(a)(i)/80P(2)(d) of the Act.”

4.1. Pursuant to this show cause notice, an order u/s. 263 of the Act dated 09.08.2018 was passed wherein detailed submissions of the assessee were considered and the revisionary proceedings so initiated were dropped. In the submissions made by the assessee before the Ld. PCIT in the revisionary proceedings, application of decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (supra) was distinguished by making the following submissions:

“11. The A/R of the assessee also stated that the decision of the Hon’ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. –Vs- ITO Karnataka (2010) [322 ITR 272] does not have any relevance in the case of the assessee for the following reasons and the provision u/s. 80P(2)(a)(i) of the Act is fully applicable in its case.

1) Totgars Co-operative Sale Society is a Co-operative Society engaged in the business of marketing of agricultural produce grown by its members

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16 apart from providing credit facilities to its members. Whereas your assessee is only engaged in the business of providing credit facilities to its members and nothing else. 2) The amount invested by “Totgars Co-operative Sale Society” in short term deposit/securities was arrived from sales consideration of agricultural produces of its members which was retained and was payable to its members therefore to the extent such interest income cannot be attributable either to the activity mentioned in section 80P(2)(a)(i) of the Income Tax Act, 1961 and taxable under section 56 of the Income Tax Act, 1961.

Whereas your assessee, the amount invested in banks to earn interest was not an amount due to its members. This amount is profit and gains in nature and was not immediately required by your assessee for lending money to its members as there is no taker. So the interest income attributable to carry on the business of banking and therefore is liable to be deductible u/s. 80P(2)(a)(i) of the Act.”

4.2. While dropping this revisionary proceeding for AY 2014-15, ld. PCIT held that decision of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (supra) is not applicable in the facts of the case. The observations so made are reproduced as under:

“14. I have heard the case and gone through the facts and circumstances of the case as well as records available and judicial pronouncements referred therein. It is apparent from the different case laws as referred above on the issue that the decision of the Hon’ble Apex Court in the case of Totgars Co- operative Sale Society Ltd. –Vs- ITO (2010)[322 ITR 273] is not applicable in the facts of the case.

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16 rightly taxed u/s. 56 of the Act. He thus, dismissed the appeal of the assessee. Aggrieved, assessee is in appeal before the Tribunal.

6.1. According to him, since the sole basis of disallowance made by Ld. AO is the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (supra), he invited the attention of the Bench to the issue which was dealt with by the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (supra). The same is extracted as under:

"What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purposes? The assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16 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... "

6.2. In this regard, Hon’ble Supreme Court observed that –

“(On page 286) 7…. Before the assessing officer, it was argued by the assessee(s) that it had invested the funds on short term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence, these civil appeals have been filed by the assessee(s)"

6.3. Explaining the case before the Hon’ble Supreme Court, Ld. Counsel submitted that it was a case where the Co-operative Society apart from providing credit facilities to the members was also in the business of marketing of agricultural produces, 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 paid, 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 could not be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) or section 80P(2)(a)(iii) of the Act. According to Ld. Counsel, therefore, in these set of facts, the Hon’ble Court held that AO was right in taxing the interest income u/s. 56 of the Act. Ld. Counsel also pointed out to the observation made by the Hon’ble Supreme Court wherein it was made clear by the Hon’ble Court that it is confining the said judgment to the facts of that case. Thus, this decision of the Hon’ble Supreme Court does not lay down any law.

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16 6.4. The submissions made by the Ld. Counsel are extracted below for ease of reference:

“(a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits;

(b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members;

(c) that assessee carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii) marketing the agricultural produce; and (d) that the surplus had arisen emphatically from marketing of agricultural produces.

19.3. In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds.

19.4. While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely:

(1.) in the case of the assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds;

- in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members;

(2) in the case of present assessee, it did not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such;

-in the case of Totgars, the Hon'ble Supreme Court had not spelt out anything with regard to operational funds;”

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16

8.1. In the case of Totgars Co-operative Sale Society Ltd. (supra), an important fact which has been noted is that assessee had invested the fund on short term basis since they were not required immediately for business purposes. In the present case, the funds available are for the business purpose of providing credit facilities to its members. It is only because in a given point of time, there is no demand for loan that they have been parked with the banks as fixed deposit. The only fund available with the assesses are out of deposits from its members and Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16 there is no surplus funds as such. This fund of the assessee is the operational fund.

8.2. Furthermore, by taking into consideration the revisionary proceedings in the assessee’s own case for the immediately preceding assessment year on identical set of facts whereby Ld. PCIT has accepted the distinguishing features pointed out by the assessee vis-a- vis decision of Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. (supra) and the same being dropped which suggests the acceptance of the submissions made by the assessee as to non- applicability of the decision of Totgars Co-operative Sale Society Ltd. (supra) by the department. While dropping the revisionary proceeding, ld. PCIT has given a categorical finding as extracted above that decision of Hon’ble Apex Court in the case of Totgars Co-operative Sale Society Ltd. (supra) is not applicable in the facts of the case of assessee.

Visva Bharati Co-operative Credit Society Ltd. AYs: 2015-16