SARDAR NAGRIK SAHAKARI BANK LTD.,VADODARA vs. ITO, WARD 3(1)(3), BARODA

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeals have been filed at the instance of the Assessee against the two order of the Commissioner of Income Tax (Appeals)- 3, Vadodara [CIT(A) in short] of even dated 31/07/2017 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in- after referred to as "the Act") dated 18/03/2016 relevant to Assessment Years (AY) 2013-14 & 2014-15. 2. There is a common issue raised by the assessee in both the appeals.

Therefore we heard them together for the sake of brevity. Accordingly, we are ITA nos.2156 & 2157/AHD/2017 disposing of the same by way of passing the consolidated order for both the appeals.

‘’1. The Ld.CIT(A) erred on facts and in law in confirming disallowance of deduction claimed u/s.80P amounting to Rs.15,14,410/- The appellant craves permission to add, alter, amend or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.’’

ITA nos.2156 & 2157/AHD/2017 6.1 The assessee also submitted that the RBI had canceled its application for the banking activities. As such without having the valid registration certificate from the RBI, it cannot carry out banking activities.

‘’5. I have considered the grounds of appeal, submission of the appellant and the order of the Assessing Officer. This issue came for consideration recently before Hon'ble Gujarat High Court in the case of State Bank of India (SBI) Vs CIT [2016] 72 taxmann.com 64 (Gujarat) wherein all cases on this issue including Apex Court decision in the case of Totgars Co-operative Sale Society v. ITO [2010] 322 ITR 283(SC) and CIT vs jafari Momin in Vikas Co-op. Credit Society Ltd. [2014] 362 ITR 331 (Guj.) were considered. Hon'ble Gujarat High Court has followed Totgars Co-operative Sale Society (Supra) and distinguished Jafari Momin Vjkas Co-op. Credit Society Ltd. (Supra) as well as CIT Vs Baroda Peoples Co-op. Bank Ltd. [2005] 280 !TR 282 (Guj.). Another landmark decision of Tumkur Merchants Souharda Credit Co-operative Ltd. Vs ITO [2015] 23C Taxrnan 309 (Kar.) was also considered. In case of State Bank of: India (SBI (Supra), it has been held by the Gujarat High Court as under:

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The question therefore would arise as to whether any distinction can be drawn between so called surplus funds/idle funds and statutory investments. It is necessary to bear in mind that a reserve per se does not yield any income. It is the investment of the fund backing a reserve which would yield income. Therefore, whatever be the nomenclature of a particular reserve, the funds of an assessee in totality are conglomerate of the total amount of deposits/investments, profits and other realizations.

ITA nos.2156 & 2157/AHD/2017 Money has no colour and the nomenclature used to segregate different funds is only for the sake of administrative convenience. Otherwise it is not possible to state that a particular portion of the fund emanates from the deposits received or from the profits earned in the earlier years. Thus, these funds are utilized, are invested, to earn further profits by way of interest. The only caveat, as can be seen running through the entire case law commencing from the Privy Council decision is that such funds must be invested-in easily realizable securities. The "win objective as laid down by this Court is not to lose interest by keeping the funds idle and invested in securities so as to en cash them readily in case of need. This is in consonance with the definition of the term 'Banking'. The deposits are accepted as payable on demand or otherwise, and also permitting withdrawal by cheques and other prescribed modes. On a plain reading of the above paragraphs of the decision of this court in Baroda Peoples Co-operative Bank Ltd. (supra), it is clear that the court has held that investing funds to earn further profit is in consonance with the term banking. The court has further held that the business of banking is primarily a business of trust, a business of putting trust in a banker. How does a bank ensure that the customer places trust. It has to offer not only good returns but also safety and liquidity. In other words, the depositor must be ensured that the depositor will get good returns on its deposit, the deposits would be safe and deposits would be available for withdrawal as and when required, subject to the terms of the contract between the parties. The court held that it is in this context that the requirement of investment being in easily .realizable securities or money being readily available for meeting the demand made by the depositor is taken as the touchstone of the business of banking. Thus, the above decision having been rendered in the context of banking business does not have any applicability to the facts of the present case. Under the circumstances, the said decision does not in any manner come to the aid of the appellant.

ITA nos.2156 & 2157/AHD/2017 other batiks, .money would be its stock-in-tracle'6r circulating capital and its normal business is to deal in money and credit. The bust-ness of such a bank does not consist only of receiving deposits and lending money to its members or such other societies as are mentioned in the objects. When such a society lends out its monies so that they may be readily available to meet the demands of its depositors if and when they arise, it is n legitimate mode of carrying on its banking business. In case of a credit society like the present one, the business of the society is limited to providing credit to its members and the income that is earned from providing such credit, facilities to its members is deductible under section 80P(2)(a)(i). However, investing its surplus funds with the nationalized banks is no part of the business of the appellant of providing credit to its member and hence, it cannot be said that the interest income derived from depositing surplus funds with the nationalized banks is profits and gains of business attributable to the activities of the appellant society. The character of the interest is different from the income attributable to the business of the society of providing credit facilities to its members. The interest income derived from investing surplus funds with the nationalized banks must be closely linked with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. Therefore, the profits and gains can be said to be directly attributable to the business of providing credit facilities to its members if there is a direct and proximate connection between the profits gains and the business of the appellant. In the present case there, is no obligation upon the appellant to invest its surplus funds with the nationalized banks. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members.

ITA nos.2156 & 2157/AHD/2017

“(d) 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”

ITA nos.2156 & 2157/AHD/2017 Cheque and the insurance cover from the Deposit Insurance and Credit Guarantee Corporation but the same are not available for society deposit accounts and have limitation by RBI to not to use Banks in their name.

“23. Thus, the aforesaid judgments supports the view taken by this Court that 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. The case in Udaipur Sahakari Upbhokta Thok Bhandar Ltd. (supra) was that of Section 80P(2)(e) of the Act, whereas in the present case, it is under Section 80P(2)(d) 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 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 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, as held by the Hon'ble Supreme Court.”

ITA nos.2156 & 2157/AHD/2017 respectfully following the same we hold that the interest income earned by the assessee on the deposits made with the co-operative banks is not eligible for deduction under section 80P(2)(d) of the Act.

“9. Second ground of revenue's appeal relates to disallowance of deduction u/s. 80P(2)(d) of the Act. During the assessment proceedings, AO observed that assessee has claimed deduction of Rs. 2,51,35,500 u/s. 80P(2)(d) of the Act in respect of interest and dividend earned from co- operative societies and banks during the year under appeal. AO disallowed an amount equivalent to 50% of interest expenses out of the claim of the assessee on the basis that details of exact source of investment made during the year under consideration as well as in the earlier years have not been furnished, the assessee was having huge borrowed and huge amount of interest on the same and that in absence of any satisfactory details of source of investment out of own funds it could be inferred that the assessee- company has invested interest bearing funds to earn interest and dividend income which was claimed as deduction u/s. 80P(2)(d).”

ITA nos.2156 & 2157/AHD/2017 to place our reliance on the judgment of this tribunal in case of The peoples Co-operative Credit Society Ltd Vs. ACIT B.K. Circle (supra) and Hon’ble

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 juri ictional 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 ITA nos.2156 & 2157/AHD/2017 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 societyis deductible u/s. 80P(2)(d). We find that the Hon’bleHigh 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 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 ITA nos.2156 & 2157/AHD/2017 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] 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 ITA nos.2156 & 2157/AHD/2017 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.

ITA nos.2156 & 2157/AHD/2017 12.3 In view of the above, we do not find any infirmity in the order of the authorities below and accordingly decline to interfere in their orders.

ITA nos.2156 & 2157/AHD/2017

Order pronounced in the Court on 01/01/2019 at Ahmedabad.

- - (MS MADHUMITA ROY) ACCOUNTANT MEMBER () Ahmedabad; Dated 01/01/2019 manish

आदेश क" ""त"ल"प "े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant