T 1349 MADUKKUR PACCS LTD.,THANJAVUR vs. ITO, WARD-1,, THANJAVUR

The Brief facts of the case for AY 2018-19 are that the assessee is a Primary Agricultural Cooperative Credit Society [registered under Sub- Rule-8 of Rule-9 of Tamil Nadu Cooperative Rules 1988 as Primary Agricultural Cooperative Credit Society]. The assessee has filed its return of income at Rs. Nil on 30.01.2019. The return was selected for scrutiny and the AO noted that the assessee society inter alia earned income of Rs.97,16,970/- from the deposits made with the Central Cooperative Bank, Thanjavur and has incurred expenses to the tune of Rs.37,84,356/- during the relevant year. Therefore, AO denied the claim u/s 80P(2)(d) of the Income Tax Act 1961 (hereinafter the “Act”) in respect of the net interest income of Rs.59,32,614/- which was treated as ‘income from other sources’ u/s 56 of the Act and added to the total income of the assessee, by passing the assessment order dated 27.04.2021 (during Covid-19 pandameic). Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who partly allowed the appeal of the assessee by restricting the addition at Rs 27,90,875/- in place of Rs.59,32,614/-as made by AO [ refer para-7 to 15 of CIT(A)]. Still not satisfied by the impugned action of the Ld.CIT(A), the assessee is before us.

Heard both the parties. The main grievance of the assessee is against the action of the Ld.CIT(A) not allowing the interest income earned on investments in Cooperative Bank. We note that the assessee has earned interest income from the Central Cooperative Bank, Thanjavur which is a Cooperative Society. Hence, the interest or dividend income received by an assessee/Cooperative Society from its investment with any other Cooperative Society is an allowable deduction under section 80P(2)(d) of the Act. Hence, the Ld.CIT(A) erred in disallowing the interest income earned or dividend income received by the assessee society from its investments with a Central Cooperative Bank, Thanjavur which is basically a Cooperative Society, hence the interest earned from its investment with such a Cooperative Society is entitled to deduction u/s. 80P(2)(b) of the Act. The Ld.CIT(A) erred in not understanding correctly the decision of the Supreme Court in the case of Totgar’s Co- operative Sale Society Ltd Vs ITO[322 ITR 283(SC)]. In this regard, we note that the Hon’ble Karnataka High Court had an occasion to deal with similar issue and have distinguished the Hon’ble Supreme Court decision in Totgar’s Cooperative Sale Society Limited supra by order dated 05.01.2017, held as under :-

Briefly the facts of the case are that the respondent assessee is a Co-operative Credit Society providing credit facilities to its members, and marketing the agricultural produce of its members; it runs a kirana section, rice mills, van section, medical shop, Arecanut trading section, lodging in the name of Samrat Hotels in Sirsi, and is also involved in plying and hiring of goods carriage. After claiming a deduction of Rs. 4,09,34,404/- under Section 80P of the Income Tax Act, ('the Act' for short), along with deduction under Section 10(34) of the Act, the assessee filed its returns. While assessing the income tax returns, the Assessing Officer disallowed the claim of deduction under Section 80P(2)(d) of the Act, to the extent of Rs. 3,34,970/-. The said deduction was disallowed ostensibly on the ground that the said amount of income was earned by the assessee in the form of interest from deposits in the Co-operative Banks. Thus, it should be brought to tax under the head "other sources". Therefore, the assessee was not eligible for deduction under Section 80P(2)(d) of the Act, on this count. Therefore, the Assessing Officer made an addition of the interest earned by the assessee from the Co-operative Banks by denying deduction under Section 80P(2)(d) of the Act.

Since the assessee was aggrieved by the assessment order passed by the Assessing Officer, it filed an appeal before the Commissioner of Income Tax (Appeals). Before the CIT(A) the assessee argued that it is entitled to claim deduction u/S 80P(2)(d) of the Act. By order dated 30.03.2015 the CIT(A) allowed the appeal filed by the assessee, and deleted the additions made by the Assessing Officer.

Since the Revenue was aggrieved by order dated 31.03.2015, it further filed an appeal before the ITAT. However, by order dated 22.01.2016, the learned Tribunal has dismissed the appeal filed by the Revenue. Hence, the present appeal before this Court.

The learned counsel for the Revenue has pleaded that two substantial questions of law are raised in the present appeal, namely, '

According to the learned counsel, the present appeal should be admitted on these two substantial questions of law.

However, the contention being taken by the learned counsel is untenable. For the issue that was before the ITAT, was a limited one, namely whether for the purpose of Section 80P(2)(d) of the Act, a Co- operative Bank should be considered as a Co-operative Society or not? For, if a Co-operative Bank is considered to be a Co-operative Society, then any interest earned by the Co-operative Society from a Co- operative Bank would necessarily be deductable under Section 80P(1) of the Act.

The issue whether a Co-operative Bank is considered to be a Co- operative Society is no longer res integra. For the said issue has been decided by the ITAT itself in different cases. Moreover the word "Co- operative Society" are the words of a large extent, and denotes a genus, whereas the word "Co-operative Bank" is a word of limited extent, which merely demarcates and identifies a particular species of the genus Co-operative Societies. Co-Operative Society can be of different nature, and can be involved in different activities; the Co- operative Society Bank is merely a variety of the Co-operative Societies. Thus the Co-operative Bank which is a species of the genus would necessarily be covered by the word "Co-operative Society".

Furthermore, even according to Section 56(i)(ccv) of the Banking Regulations Act, 1949, defines a primary Co-Operative Society bank as the meaning of Co-Operative Society. Therefore, a Co-operative Society Bank would be included in the words 'Co-operative Society'.

Admittedly, the interest which the assessee respondent had earned was from a Co-operative Society Bank. Therefore, according to Sec. 80P(2)(d) of the I.T. Act, the said amount of interest earned from a Co-operative Society Bank would be deductable from the gross income of the Co-operative Society in order to assess its total income. Therefore, the Assessing Officer was not justified in denying the said deduction to the assessee respondent.

The learned counsel has relied on the case of Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC). However, the said case dealt with the interpretation, and the deduction, which would be applicable under Section 80P(2)(a)(i) of the I.T. Act. For, in the present case the interpretation that is required is of Section 80P(2)(d) of the I.T. Act and not Section 80P(2)(a)(i) of the I.T. Act. Therefore, the said judgment is inapplicable to the present case. Thus, neither of the two substantial questions of law canvassed by the learned counsel for the Revenue even arise in the present case.

For the reasons stated above, this Court does not find any merit in the present appeal. Hence, the appeal is dismissed.

From a reading of the above order, it is clear that the Hon’ble Karnataka High Court has taken note of the Hon’ble Supreme Court decision in the case of Totgars Co-operative Sale Society Ltd. (supra) [relied upon by the AO/CIT(A) in the present case] and clarified that the Hon’ble Supreme Court decision was in the context while deciding the applicability of Section 80P2(a)(i) of the Act and not Section 80P(2)(d) of the Act. Thus, we find that the Ld.CIT(A) while passing the impugned order has not understood the correct position of Law and hence erred in denying the deduction u/s 80P(2)(d) of the Act. Therefore, the interest or dividend income received by an assessee/Cooperative Society from its investment with any other Cooperative Society is an allowable deduction under section 80P(2)(d) of the Act. Hence, in the present case since the assessee had earned interest income (i) on deposit in Central Cooperative Bank, Thanjavur which bank is basically Co-operative Society, therefore the interest income earned from deposit, and (ii) dividend from such society/bank, hence they are eligible for deduction u/s.80P(2)(d) of the Act and we direct the AO to grant deduction for Rs 27,90,875/- for AY 2018-19. On the same reasoning appeal of assessee for AY 2020-21 is allowed.

ITA No.910/Chny/2026 is an appeal emanating from the penalty levied u/s. 270A since the claim for deduction u/s 80P(2)(d) was denied to the assessee for AY 2018-19. Since we have already allowed the appeal of the assessee qua quantum assessment, the penalty levied cannot survive. For such a proposition, we rely on the legal maxim “Sublato Fundmento Credit opus” meaning in case a foundation is removed, the super-structure falls. In Badarinath v. Tamil Nadu AIR 2000 SC 3243, the Hon’ble Supreme Court held that once the basis of proceedings is gone, all consequential orders & acts would fall on the ground automatically which is applicable to judicial and quasi-judicial proceedings. Therefore, it is held that the penalty order passed under 270A is cancelled.

In the result, appeals filed by the assessee are allowed.