KUNDAPURA VYAVASAYA SEVA SAHAKARI SANGHA,UDUPI vs. INCOME TAX OFFICER, WARD-1 & TPS, UDUPI

Assessee is aggrieved and the only issue involved is the allowability of deduction u/s. 80P as well as the confirmation of disallowance of various expenses.

For AY 2017-18 The Assessee filed its return of income on 27.10.2017 at a gross total income of Rs. 53,19,074/- and returned income of Rs. 1,46,620/- after claiming deduction u/s. 80P of the Act of Rs. 51,72,452/-. The case of the Assessee was selected for scrutiny and thereafter the Assessment was made disallowing claim of deduction u/s. 80P of the Act. The Ld. Assessing Officer further disallowed provision of interest expenditure and disallowance of provision of expenses debited to the profit and loss account. The Assessed income of the Assessee arrived at Rs. 1,48,07,000/- by Assessment Order dated 13.11.2019.

The Assessment Order was challenged before the Ld. CIT(A), Bengaluru who has partly allowed the Appeal of the Assessee directing the Ld. Assessing Officer to verify that only the profits and gains from credit facility given to members is allowable as deduction u/s. 80P.

Assessee preferred an Appeal before the ITAT which has remitted the matter back to the file of the Ld. Assessing Officer with respect to the claim of deduction u/s. 80P of the Act. The disallowance of provision of interest expenditure of Rs. 78,87,620/- and disallowance of various provision of expenses of Rs. 16,00,308/- was also restored.

Based on this, the Ld. Assessing Officer framed the Assessment Order. He noted that the Assessee has earned interest income from investments in scheduled banks and cooperative banks amounting to Rs. 48,33,777/-. The Ld. Assessing Officer further noted that Assessee has made provision of interest in past year of Rs. 2.87 crores and for this year of Rs. 3.66 crores and therefore there is an excess provision of Rs. 78,87,620/-. Further, the Ld. Assessing Officer noted that that there are certain provisions of agricultural fund etc., of Rs. 16,00,308/-. The Ld. Assessing Officer further asked the

For Assessment Year 2018-19 also, the order was made wherein the Assessee was denied deduction u/s. 80P of the Act ofRs. 62,25,778/- against the returned income of the Assessee of Rs. 2,14,240/- following Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/ [2017] 395 ITR 611 (Karnataka)/ [2017] 297 CTR 158 (Karnataka) [16-06-2017]. In this case, the Assessee has earned interest from various banks of Rs. 1,04,65,386/-.

For Assessment Year 2020-21, the facts also show that Assessee filed its return of income at Rs. 1,08,410/- wherein the claim of deduction u/s. 80P(2)(a)(i) of the Act was made of Rs. 63,91,514/-. The Ld. Assessing Officer after granting the deduction of the cost held that a sum of Rs. 8,18,047/- as interest income received from SCDCC bank is not allowable to the Assessee u/s. 80P based on Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017] and computed the Assessed income of Rs.9,26,457/-

Identically, the Appeals were filed before the Ld. CIT(A) for all these 3 years. For Assessment Year 2017-18, the Assessee pleaded that its claim is deduction u/s. 80P(2)(a)(i) of the Act, the issue is covered by the decision of

Similarly, for other Assessment Years also, Assessments of the Assessee were confirmed.

The Assessee aggrieved in all these 3 Appeals has submitted a paper book containing 59 pages. The submission of the Assessee with respect to the Assessment Year 2017-18 is that the Assessee is a credit cooperative society and is eligible for deduction u/s. 80P(2)(a)(i) of the Act so far as the income of the Assessee is attributable to the business of providing credit facilities to its members. This issue is squarely covered in favor of the Assessee by the decision of the Hon’ble Karnataka High Court. It is specifically claimed by the Assessee that it has not claimed any deduction u/s. 80P(2)(d).

On the issue of excess interest expenditure claimed by the Assessee he submitted that the Ld. Assessing Officer has wrongly compared the interest expenditure provision of earlier year with the current year. The provision made by the Assessee is based on a scientific method and the amount of outstanding loans of the members. It is not the method which is considered to be a hybrid method but accrual method only.

With respect to the interest provision of expenditure, the Assessee further submitted that provision of expenditure is made based on accrued liability and therefore it cannot be disallowed. In the end, it was also submitted that there is no more denying even if the expenditure is disallowed of excess provision of interest or the disallowance of provision of expenditure, it will go to increase the profits of the business of the Assessee and therefore Assessee would be entitled to higher deduction u/s. 80P(2)(a)(i).

The Ld. Departmental Representative vehemently supported the order of the Ld. lower authorities and also stated that decision of the Hon’ble Karnataka High Court in Principal Commissioner of Income-tax, Hubballi vs. Totagars

We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities and decision relied upon by the parties.

We find that Assessee is a credit member’s cooperative society. It deals with only its members; the amount of funds deposited in the bank account is also part of the reserve funds of the Assessee and further the interest income earned on the bank is also part of the business income of the Assessee. There is no evidence placed by the Ld. lower authorities that the interest income earned by the Assessee is chargeable to tax under the head income from other sources. The only attempt made bythe Ld. revenue authorities is to charge the bank interest, holding it to be income from other sources and thereby denying the deduction to the Assessee u/s. 80P(2)(d) of the Act. It is not the case of the Assessee that it is claiming deduction u/s. 80P(2)(d). For all these 3 years, the claim of the Assessee claimsthat it is claiming deduction only u/s. 80P(2)(a)(i) of the Act.

We find that the issue is squarely covered in favor of the Assessee by the decision of the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10- 2014] holding that co-operative society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. Society is not carrying on any separate business for earning such interest income. The income derived is the amount of profits and gains of business attributable to

Assessee has never claimed the interest income earned by it from the cooperative societies is chargeable to tax under the head income from other sources. Therefore, the decision relied up on by the ld. Revenue authorities does not apply to the facts of the case. Further even the Honourable Karnataka Highcourt in Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] 78 taxmann.com 169 (Karnataka)// [017] 392 ITR 74 (Karnataka) [05-01-2017] which has not been overruled by larger bench.

In the result, we are of the opinion that respectfully following the decision of the Hon’ble Karnataka High Court Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10- 2014]on the issue of availability of deduction u/s. 80P(2)(a)(i) of the Act, we allow all these 3 Appeals to the extent of allowing deduction u/s. 80P(2)(a)(i) to the Assessee of the business income attributable to the business of providing credit to the members.

Further, the disallowance of interest expenditure and disallowance of provision of expenses is merely made on the surmises and conjunctures. In fact, the Assessee has made provision of interest expenditure as well as

Accordingly, we reverse the orders of the Ld. lower authorities, direct the Ld. Assessing Officer to delete the disallowance of provision of expenses and provision of interest expenditure and allow the Assessee deduction u/s. 80P(2)(a)(i) of the Act as claimed by the Assessee.

In the result, all these 3 Appeals filed by the Assessee are allowed.