SINDHU CREDIT SOUHARDHA SAHAKARI NIYAMITA SINDHANUR,SINDHANUR vs. THE INCOME TAX OFFICER- WARD I, RAICHUR

Aggrieved by the order, the assessee preferred this appeal, contending that interest income of ₹ 31,25,550 earned from cooperative banks and cooperative societies was wrongly denied as a deduction under section 80P of the Act.

Briefly, the assessee is registered under the Karnataka Souharda Sahakari Act, 1997, and is primarily engaged in accepting deposits from, and providing credit facilities to, its members. It filed its return of income on 6 January 2021, and a revised return on the same date, declaring nil income after claiming deduction of ₹ 32,61,581 under section 80P of the Act. The return was selected for scrutiny to verify this deduction claim, and statutory notices were issued. The learned Assessing Officer observed that the assessee had earned interest income from investments in cooperative banks and scheduled banks, along with e-stamping commission and dividend income. He held that these receipts were not eligible for deduction under section 80P(2)(a)(i) or section 80P(2)(d), as they were not derived from the assessee‟s core activity of providing credit facilities to its members, but were taxable as income from other sources. Accordingly, the assessment order was passed denying the deduction claimed.

The assessee preferred an appeal before the learned CIT(A). Relying on the decision of the Hon‟ble Supreme Court reported in 2010] 322 ITR 283 ( SC), [2010] 188 Taxman 282 ( SC) and 2017 (7) TMI 1049 - KARNATAKA HIGH COURT Other Citation: [2017] 395 ITR 611, [2017] 83 taxmann.com 140 (Karnataka)The Pr. Commissioner of Income Tax, Income Tax Officer Versus The Totagars Co-Operative Sale Society, the learned CIT(A) held that the income in question was taxable as income from other sources and that the assessee was not entitled to deduction. The learned CIT(A) also rejected the assessee‟s contention that interest earned on funds required to be maintained as statutory reserves should be treated as business income. He held that the statutory requirement to maintain such funds does not alter their tax character, and the interest earned thereon remains taxable under the head “income from other sources”. Accordingly, deduction under section 80P (2) of the Act was denied. The claim relating to interest in staff loans was also disallowed, and the assessee‟s appeal was dismissed.

Aggrieved by the said order, the assessee is in appeal before us.

We have heard the rival contentions and find that the assessee is a cooperative society primarily engaged in accepting deposits from, and providing credit facilities to, its members. The dispute relates to the treatment of interest income, namely ₹ 11,161 received on staff loans, ₹ 31,25,550 received from cooperative banks, and ₹ 1,23,170 received as e-stamping commission. The assessee also received dividend income of ₹ 1,250 from a cooperative bank. The learned Assessing Officer treated all these receipts as income from other sources. The assessee contends that they constitute business income attributable to its activity of providing credit facilities to members. The learned Authorized Representative submitted that the issue is covered in favour of the assessee by the decisions of the Hon‟ble Karnataka High Court in 2015 (2) TMI 995 - KARNATAKA HIGH COURT TUMKUR MERCHANTS SOUHARDA CREDIT COOPERATIVE LIMITED Versus THE INCOME TAX OFFICER, WARD-1, TUMKUR [2015] 55 taxmann.com 447 (Karnataka)and 2017 (1) TMI 1100 - KARNATAKA HIGH COURT The Pr. Commissioner of Income Tax, Versus The Totagars Co-operative Sale Society,

The learned Departmental Representative, however, strongly contended that the issue is covered in favour of the Revenue by the decision of the Hon‟ble Karnataka High Court in 2010] 322 ITR 283 ( SC), [2010] 188 Taxman 282 ( SC) and 2017 (7) TMI 1049 - KARNATAKA HIGH COURT Other Citation: [2017] 395 ITR 611, [2017] 83 taxmann.com 140 (Karnataka)The Pr. Commissioner of Income Tax, Income Tax Officer Versus The Totagars Co-Operative Sale Society.

Under section 80P, where the assessee is a cooperative society and its gross total income includes income specified in sub- section (2), such income is eligible for deduction. In the case of a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the profits and gains attributable to such activity aredeductible. The issue, therefore, is whether interest of ₹ 11,161 received on staff loans and interest received from cooperative banks qualifies for deduction under section 80P(2)(a)(i) of the Act. The assessee contends that these receipts are taxable as business income and are attributable to its activity of providing credit facilities to members. We find that this issue is squarely covered in favour of the assessee by the decisions of the Hon‟ble Karnataka High Court.

We also note that the learned Assessing Officer relied on another decision of the Hon‟ble Karnataka High Court, which held that interest income earned by the assessee from cooperative banks is not taxable as business income but as income from other sources. It was further held that, since the interest was earned from cooperative banks, deduction under section 80P(2)(d) of the Act is not allowable to the assessee.

Several coordinate bench decisions have held that, where conflicting decisions of the Hon‟ble Karnataka High Court exist, the decision whose facts are closer to those of the case before the Tribunal should be followed. In the present case, we find that the facts are closer to the decisions relied upon by the assessee. Accordingly, the interest income is eligible for deduction under section 80P (2)(a) (i) of the Act, and the assessee‟s claim is allowed.

As regards the claim for deduction on interest income received from loans advanced to staff, we find that such income constitutes business income of the assessee. Accordingly, the assessee is entitled to deduction under section 80P(2)(a)(i) of the Act in respect of the same. 12. With respect to the e-stamping commission, we find that such income is not attributable to the assessee‟s business of providing credit facilities to its members. Therefore, the assessee is not eligible for deduction on this income under section 80P(2)(a)(i) of the Act. The claim also does not fall within section 80P(2)(c). Accordingly, the deduction claimed on e-stamping charges is disallowed.

However, as regards the dividend income received by the assessee, we find that the claim falls under section 80P(2)(d) of the Act and, to that extent, the deduction is allowable.

In the result, the appeal filed by the assesseeis partly allowed.