INCOME-TAX OFFICER, WARD-1, UDUPI, UDUPI vs. SHAANKARANARAYANA SAMAKARI, KUNDAPUR

Briefly stated, facts of the case are assessee is a Primary Agricultural Credit Society registered under the provisions of Karnataka Co-operative Societies Act, 1959. The assessee is in the business of providing credit facilities to its members. The assessee filed its return of income on 19.02.2019 for the Assessment Year 2017-18 declaring total income at Rs.1,45,37,492/- and has claimed deduction under section 80P of the Act. The case was selected for scrutiny through CASS and subsequently notice under section 143(2) of the Act dated 22.09.2019 was issued and served on the assessee. Thereafter, notice under section 142(1) of the Act dated 29.11.2019 was issued requiring the assessee to furnish the details. In response, assessee filed the details called for by the learned AO. On perusal of the information furnished by the assessee, the learned AO observed that there are 4 classes of Members in the society. Therefore, the learned AO, by relying on the decision in the case of Citizen Co-operative Society Ltd [Civil Appeal No. 10245 of 2017 reported in (2017) 397 ITR 1, disallowed the deduction under section 80P(2)(a)(i) of the Act, amounting to Rs.1,45,16,374/-. Further, the learned AO also disallowed a sum of Rs.5 lakhs which was debited to P & L A/c as provisions for building maintenance fund. Further, he also disallowed a sum of Rs.82,09,796/- being the provision for interest claimed in P & L A/c.

On being aggrieved by the above additions, assessee filed appeal before the learned CIT(A). The learned CIT(A) deleted the disallowance of Rs.5 lakhs and Rs. Rs.82,09,796/- stating that it will only increase the net profit of the assessee and the entire profit will consequently again qualify for deduction u/s 80P of the Act. With respect to deduction under section 80P(2)(a)(i) of the Act, the learned CIT(A), by relying on the decision rendered by Hon’ble Supreme Court in the case of The Mavilayi Service Co-op. Bank Ltd. & Ors. vs. C.I.T. Calicut & anr. [Civil Appeal No. 7343 7350/2019.] and deleted the addition made by the learned AO claimed by the assessee under section 80P(2)(a)(i) of the Act.

On being aggrieved by the Order of the learned CIT(A), Revenue is in appeal before us. The Revenue has raised various grounds out of which the following issues arise:

None appeared on behalf of the assessee but the learned AR has filed the written submissions.

The learned DR submitted that the learned CIT(A) erred in deleting the deduction disallowed by the learned AO amounting to Rs.1,45,16,374/-. He submitted that in the case of PCIT Vs. Totgar Co-operative Sales Society, the Hon’ble High Court of Karnataka has disallowed the deduction claimed under section 80P of the Act. On the issue of disallowance of provisions, the learned DR submitted that the provisions are not ascertained liabilities and hence cannot be allowed as an expenditure.

We have heard the learned DR and gone through the written submissions filed by the assessee. The assessee being a primary agricultural credit society registered under the Karnataka Co-operative Societies Act, provides credit facilities to its Members and has claimed deduction under section 80P(2)(a)(i) of the Act, amounting to Rs.1,45,16,374/-. According to the assessee, it was dealing with the Members and the interest received from all categories of Members shall be allowed as deduction under section 80P(2)(a)(i) of the Act, as it is part of income attributable to the activity of providing credit facilities to the Members. According to provisions of section 80P(2) of the Act, assessee carrying on the business of banking and providing credit facilities is allowed as deduction the whole of the amount of profits, gains of the business attributable to such activity. In Tumkur Merchants Souharda Credit Co-operative Ltd., Vs. Income-Tax Officer ([2015] 55 taxmann.com 447), the Hon’ble High Court of Karnataka held that a Co-operative Society engaged in providing of credit facilities to its Members, temporarily deposits the surplus funds in a bank and the interest earned thereon is attributable to the profits and gains of such business. The Hon’ble High Court also observed that society was not carrying any other activity to earn the interest otherwise interest from funds connected with the business of providing credit facilities to its Members. Accordingly, such interest is deductible under section 80P(2)(a)(i) of the Act and the assessee is entitled for deduction. It is also noted that in Principal Commissioner of Income-tax, Hubballi v. Totgars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka) / [2017] 395 ITR 611 (Karnataka) / [2017] 297 CTR 158 (Karnataka) [16.06.2017], the Hon'ble Karnataka High Court held that interest earned by a cooperative society, engaged in marketing its members' agricultural produce, from surplus deposits kept with a cooperative bank was not eligible for deduction under section 80P(2)(d). Thus, there appears to be a divergence in the decisions of the Hon'ble Karnataka High Court on this issue, both having considered the decision of the Hon'ble Supreme Court. In the instant case, we find that the assessee has claimed the entire interest income arising out of the business carried on by it under section 80P(2)(a)(i) of the Act which are similar to the facts as stated in the case of Tumkur Merchants Souharda Credit Co-operative Ltd., (supra). The issue before us is concerning the allowability of deduction under section 80P(2)(a)(i) of the Act and not under section 80P(2)(d) of the Act. Thus, the assessee’s claim is squarely covered by the decision of the Hon’ble High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd., (supra) which were rendered after considering the decision of the Hon’ble Supreme Court in Totgar’s Co-operative Sales Society Ltd., Vs. ITO, 322 ITR 283. It is also submitted by the assessee that it has not dealt with any non-members. The contention of the learned AO is that assessee has dealt with non-members and therefore not entitled for deduction under section 80P of the Act. The Hon’ble Supreme Court in the case Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 431 ITR 1 (SC) in para 45 held as follows:

The learned AO has not brought on record that assessee carried on any transaction with persons other than regular members or nominal members. Section 2 of the Karnataka Co-operative Societies Act, 1959, defines member as follows:

In totality of the facts discussed above, the assessee cannot be denied deduction under section 80P(2)(a)(i) of the Act. We, therefore, direct the learned AO to delete the addition of Rs.1,45,16,374/-. Further, with respect to disallowance of provisions, considering the same as unascertained liability, the learned CIT(A) has observed and held that the disallowance of provision shall have Nil tax effect. We agree with the findings of the learned CIT(A) and hence no interference is required in the Order of the learned CIT(A). Thus, the grounds raised by the Revenue is dismissed.

In the result, appeal of the Revenue is dismissed.