THE MAHALAXMI CREDIT CO. OP. SOCIETY LTD.,,KHEDA vs. THE ITO, WARD- 3,, NADIAD

Revenue by: Shri N.K. Goyal, Sr. D.R. Assessee by: Shri Parth Shah, A.R. Date of hearing : 21-01-2020 Date of pronouncement : 31-01-2020 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-

This assessee’s appeal for A.Y. 2015-16, arises from order of the CIT(A)-2, Vadodara dated 23-10-2018, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

Page No 2 Mahalaxmi Credit Co-op. Society Ltd. vs. ITO

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in disallowing the claim of Rs.8,12,108/- on account of disallowance u/s 80P(2)(a)(i) of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in disallowing the claim of Rs.1,90,077/- on account of disallowance u/s 80p(2)(d) of the act.”

capital of more than rupees one lac can be considered to be that of Primary Co-operative Bank and hence it is not eligible for deduction u/s. 80P r.w.s. 80P(4) of the Act. b) As per definitions mentioned in Section 56 of the Banking Regulation Act, the difference between the "Co- operative bank" and "Co-operative Credit Society" is only the amount of paid-up share capital and reserves of the co-operative credit society. The threshold limit is one lakh rupees, so cooperative credit society having paid up share capital and reserve as per balance sheet is one lakh rupee or more then such co-operative credit society may be considered as cooperative bank, as per Banking Regulation Act, 1949. c) Since, the threshold limit is very much clear and there is no room for ambiguity in interpretation, the benefit of section SOP is controlled by exception of section 80P(4) of the Act. d) The provisions of Income Tax Act have nothing to do with compliance of other legal requirements mandated by the Reserve Bank of India for banking business. Hence, so far-deduction u/s. SOP is concerned the section 80P(4) has to be applied for deciding the allowability of deduction u/s. SOP of t the Act. if the .assessee proves ^that there is .nq, banking activity done by the assessee then application of section 80P(4) is attracted automatically. e) The section 80P(2)(a)(i) granting deduction of profit from banking business has limited applications for granting benefit of deduction from profit from banking activities only to small co-op credit society having paid up share capital and reserves less than rupees one lakh only after introduction of section 80P(4) of the IT Act, 1961. . -. 6.4 In view of the above discussion, assessee is not entitled for claiming any deduction u/s. SOP of the Act. Accordingly, deduction of Rs. 19,49,051/- claimed u/s. SOP of the Act is disallowed and added back to the total income of the assessee. Penalty proceedings u/s. 271(l)(c) rws 274 of the Act initiated separately for furnishing inaccurate particulars of income. [Disallowance Rs.19,49,051]"

Page No 4 Mahalaxmi Credit Co-op. Society Ltd. vs. ITO

The case laws relied upon by the asssessare distinguishable on facts and are of no help to the assessee in the present case. In the case of Sabarkantha District Co-operative Milk Producers Union relied upon the by the assessee as referred above the issue involved was pertaining to disallowance of expenditure u/s. 14A of the Act. In that case, the assessing officer has disallowed 50% of the expenditure claimed by the assessee on the reason that interest expenses incurred by the asssessee on borrowed funds might have been used for the purpose of making investment for earning exempt income u/s. 80P(2)(d) of the act. In that case, before the ld. CIT(A) the assessee’s submission was that they are having sufficient funds of Rs. 50.19 crores as on 31-03-2009 in the form of capital of Rs. 10.19 crore and reserves and surplus of Rs. 40 crore against the deposit made with the co-op societies of Rs. 36.28 crore only. Therefore, ld. CIT(A) has deleted the disallowance. Considering the above fact on the issue of disallowance of expenses u/s. 14A of the Act the ITAT has held that assessee was having mixed funds and the interest funds were more than Page No 6 Mahalaxmi Credit Co-op. Society Ltd. vs. ITO investment in co-operative bank and cooperative societies no disallowance was called for from eligible deduction u/s. 80P(2)(d) of the Act. It is clear from the decision of the Hon’ble Jurisdictional High Court in the case laws cited by the assessee vide of 2014 is pertained to the the fact and issue of disallowance of claim of deduction u/s. 80P(2)(d) on the basis of attracting provision of section 14A of the Act as narrated above as per the order of ITAT Vide ITA No.2613/Ahd/2012 dated 27.09.2013 in the case of ACIT vs. Sabarkantha District Co- operative Milk Producers Union Ltd. On the other hand, the issue involved in this case of the assessee is claim of deduction of interest income u/s. 80P(2)(d) of the act earned on idle funds placed with co-operative bank. However, on the issue of earning similar nature of interest from the commercial bank the Jurisdictional Hon’ble High Court in the case of SBI vs. CIT (2016) 72 taxman.com 64 has held that interest income on deposit placed with the commercial bank is not entitled for deduction u/s. 80P(2)(a)(i) of the act. In the light of the above, we are of the view that the income by way of interest earned by deposit of idle fund does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co- operative bank. The identical issue on the similar facts has been adjudicated by the Co-ordinate Bench of the ITAT after considering the decision of Hon’ble High Court of Karnatka in the case of Pr. CIT s. Tatagars Co-operative Sale Society (2017) 83 taxman.com 140 (Karnataka) dated 16th June, 2017. On the same proposition the Co-ordinate Bench of the ITAT vide ITA Nos. 1992/Ahd/2017, 1313/Ahd/2018, 1314/Ahd/2018, 1295/Ahd/2018 & 1296/ahd/2018 dated 29/08/2018 in the cases of The Narsanda Mercantile Co.Op. Credit Society Ltd., The Sant Taluka Teachers Co-op. Credit Society Ltd., The Satyaprakash Co-op. Credit Society Ltd., Shri Friends Co-op. Credit Society Ltd. and Shri Shramjivi Nagrik Sahakari Mandli Ltd. has adjudicated the identical issue on similar fact and held that earning of interest income either from nationalized or co-operative bank is not entitled for deduction u/s. 80P(2)(d) of the act. The relevant part of decision of Co-ordinate Bench is reproduced as under:- “7. We have heard both the sides and perused the material on record carefully. The assessee is engaged in the business of providing credit facilities to its members. The assessing officer has noticed that in addition to the interest income earned on loan and advances to its members, the assesse has claimed deduction u/s. 80P(2)(a)(i) of the act on interest income earned from fixed deposit maintained with the commercial bank and cooperative banks. As per section 80P(2)(a)(i) of the act the interest income earned on providing credit facility to its members is deductible u/s. 80P(2)(a)(i) of the act. After perusal of the aforesaid provision of the act we observe that deduction u/s 80P(2)(a)(i) is not available on the interest earned on deposit maintained with the commercial bank. We find that the Hon’ble jurisdictional high court has decided the identical issue in favour of the Revenue vide State Bank of India vs. CIT (2016) 72 taxmann.com 64 (Gujarat) wherein it is held that interest income on deposit placed with the commercial banks is not exempt u/s. 80P(2)(a)(i) of the act. In respect of the claim of the Ld. Counsel that interest earned from investment of surplus funds with the cooperative bank is entitled for deduction u/s 80P(2)(d) of the act we have noticed that as per section 80P(2)(d) of the act, the whole of interest and dividend income derived by a co-operative society from its investment in any other co- operative society is deductible u/s. 80P(2)(d). We find that the Hon’ble High Court of Karnataka, in the case of (2017) 83 taxmann.com 140 (Kar) Principal CIT vs. Tatagars Co- operative Sale Society on identical issue and facts has held that it is only primary agricultural credit society with its limited work of providing credit facilities to its member which is governed by ambit and scope of deduction u/s. 80P and further stated that interest income earned from surplus deposit with co-operative bank is not entitled for deduction 80P(2)(d). The relevant part of the decision of the Hon’ble High Court of Karnataka, in the case of (2017) 83 taxmann.com 140 (Kar) Principal CIT vs. Tatagars Co-operative Sale Society on identical issue and facts is reproduced as under:- “Admittedly and undoubtedly, the assessee is a co-operative Society engaged mainly in the activity of marketing of agricultural produces grown by its members. The assessee co-operative society also accepts deposits from its members and provides credit facility to its members, runs Page No 7 Mahalaxmi Credit Co-op. Society Ltd. vs. ITO

Kirana Stores, rice mills, live stocks, van section, medical shops, lodging, plying and hiring of goods carriage, etc. [Para 10] The assessment years involved in the instant appeals are assessment years 2007-08 to 2011-12. The bone of contention is that the deduction under section 80P(2) is now claimed by the assessee under section 80P(2)(d) and not under section 80P(2)(a) of the Act. The reason is that now the investments and deposits after the Supreme Court's decision against the assessee in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC), the assessee herein has shifted the deposits and investments from Schedule Banks to Co- operative Bank and such Co-operative Bank is essentially a Co-operative Society also and clause (d) allows deduction of income by way of interest or dividends derived by the assessee co-operative Society from its investments with any other co-operative Society. [Para 11] The sheet anchor of the contention of the assessee misses two essential points required for claiming the deduction from gross total income for a co-operative society; (i) that the character or nature of income, namely interest on investments or deposits, does not change irrespective of the fact whether it is earned or received from a Schedule Bank or Co-operative Bank, (ii) that What the Supreme Court held in the case of the assessee itself, against assessee, was that such interest income on its surplus and idle funds not immediately required for its business, is not income from business taxable under section 28 of the Act, but was taxable as 'income from other sources' under section 56, whereas for availing the exemption or 100 per cent deduction under section 80P, the income is specified in clauses (a) to (f) of sub section (2) of section 80P which should be its business or operational income. [Para 12] What section 80P(2)(d) which was though not specifically argued and canvassed before the Supreme Court, envisages is that such interest or dividend earned by an assessee co-operative society should be out of the investments with any other co-operative society. The words 'Co- operative Banks' are missing in clause (d) of sub section (2) of section 80P. Even though a cooperative bank may have the corporate body or skeleton of a co-operative society but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation Act, 1949. Only the primary agricultural credit society with their limited work of providing credit facility to its members continued to be governed by the ambit and scope of deduction under section 80P of the Act. [Para 13] 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 was to exclude the applicability of section 80P 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 assessee, a co-operative society from a Co-operative Bank. This exclusion by section 80P(4) even though without any amendment in section 80P(2)(d) is sufficient to deny the claim of the assessee for deduction under section 80P(2)(d). The only exception is that of a primary agricultural credit society. The depository Kanara District Central Bank Limited in the present case is admittedly not such a primary agricultural credit society. [Para 14] The amendment of section 194A(3)(v) excluding the Co-operative Banks from the definition of 'Co-operative Society' by Finance Act, 2015 and requiring them to deduct tax at source under section 194A 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. [Para 15] Page No 8 Mahalaxmi Credit Co-op. Society Ltd. vs. ITO

If the legislative intent is so clear, then it cannot be 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-operatve bank, even though the Supreme Court's decision in the case of assessee itself is otherwise. [Para 16] As stated above, it is the character and nature of income which determines its taxability or exemption from taxability. It is needless to say that the provisions relating to exemption and deduction need to be strictly construed and no liberal interpretation or intendment can be inferred in such provisions. What was clearly held to be not exempt and not deductible under section 80P(2)(a) by the Supreme Court in the case of assessee, cannot be contrarily held as exempted and deductible now for these years, merely because the depository bank, with whom the investments were made by the assessee happens to be a co-operative bank. One cannot appreciate this distinction so as not to apply the binding precedent of the Supreme Court for subsequent years merely on account of the change of the bank where such deposits were made by the assessee, all other facts remaining the same, particularly the nature and character of the income earned by it. The interest income of assessee continues to be not attributable to its business operations even in these subsequent years. [Para 17] The character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified clauses of section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under section 80P(2) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a scheduled bank or a co-operative bank and, thus, clause (d) of section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under section 80P of the Act. [Para 23] In view of the aforesaid, the appeal filed by the revenue deserves to be allowed.:” [Para 24]

In the light of the above facts and legal findings we consider that the income by way of interest earned by deposit or investment of idle or surplus does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus clause (d) of section 80P(2) of the act would not apply in the facts and the circumstances of the present case. The assessee has earned interest income on surplus funds deposited with nationalized bank and the cooperative Bank and the same is not attributable to business operation of the assessee co-operative society as interest earned on the fund invested with the commercial bank is not operational income from providing credit facilities to its members. We consider that earning of such interest income either from nationalized or cooperative bank will not change nature and character of the income. On perusal of the provision of section we observe such deduction is pertinent to the operational income earned by the co-operative society from the activities in which it is engaged and not the other income which accrues to the society in the form of interest from investment of surplus funds with the cooperative bank. After considering the facts and legal finding, we do not find any merit in the appeal of the assessee, therefore, the same is dismissed. However as decided in the various decision of the Co-ordinate Benches of ITAT Ahmedabad we direct the assessing officer to allow pro rata expenses in respect of interest earned from deposit held with nationalized bank to the assessee for computing the deduction u/s. 80P after examining/verification and affording adequate opportunity to the assessee. Therefore, the appeal of the assessee is partly allowed for statistical purposes.” In the light of the facts/findings narrated in para no. 8 of this order after taking into consideration the decision of the Co-ordinate Bench on the similar issue on identical facts as Page No 9 Mahalaxmi Credit Co-op. Society Ltd. vs. ITO reported supra , we do not find any merit in the appeal of the assessee, therefore, the same is dismissed.” Respectfully following the decision of the Co-ordinate Bench as cited above, we do not find any infirmity in the decision of Ld. CIT(A). Therefore, the appeal of the assessee is dismissed.