THE ISMAIL,IA CO-OPERATIVE CREDIT SOCIETY LTD., vs. ASSISTANT COMMISSIONER INCOME TAX

This Memorandum of Appeal is frled under Section 26OA of the lncome Tax Act, 1961 aggrieved by the orier of the Income Tax Appellate Tribunal, Hyderabad Ilench 'A' in l 2olfr PSKI&NN&I fiTA-732-2070 I.T.A.No. 1187 liHyd|2OOT (Assessment year 2OO4-05) dated 2s.o4.2008. 3 The brief facts of the case are that the appellant herern rs a cooperative societY engaged in the business of providing credit facilities to its members' Thg appellant filed returns for the assessment year 2OO4-OS showing an income of Rs'33'35'549/-' which included interest income of Rs'31'63'57a1- and claimed deduction under Section 80P of the Income Tax Act' 1961 (for short 'IT Act'), contending that the interest income derived from deposits was attributable to the business of providing credit to the members of the assessee society'

Further, it was contended that as part of activities of the society, the appellant deposited funds with the bank whenever their funds were not required and these funds were kept in a bank accor:nt for sa-fe custody so that the said deposits would yield some interest' The activity of keeping such funds in deposit and deriving interest income was a regrrlar activity of the society and submitted that investment of funds in short-term deposits and earning interest there from is an activity attributable to the 1 I il

The Assessing Offrcer, vide order dated,29.12.2o06has held that the interest income derived by a society indtrlged in banking business or in the business of providing credit. facilities to its members is exempt in its entiret5r. Section 8OP(2Xd) of the IT Act u,ill not have arry application, and not having found a place in the IT Act. [t was further held that Section 8OP(2Xd) of the IT Act clearly provides that arry interest income derived from investment w,ith co-operative societies alone is not taxable. Thereby, the contention of the appellant was rejected.

Being aggrieved by the same, tlre appellant preferred an appeal before the Commissioner of Income 'tax (Appeals)-V, Hyderabad, uide order dated 13.1 l.2OO7, has dismissed the (a -I 4ofm PS(I& NrN&I rTTA_732]010 appeal confirming the order of the CIT (A). The relevant order of the learned Commissioner is extracted below: " Relying on the ratio of the above decision of the Hon'ble jurisdiclional High Court in the case of Anakapalli Co-operative Marheting Society Ltd. (suPru), in my considered opinion, llg interest income to rhe extent of Rs.31,6j,578 earned by the appellanr from the inveslment made with Detelopment Credit Bank cannot be considered as income having been derived from the activity of providing credit facitity to its members and hence, lhe same is not enlilled for deduction u/s. 80PQ)@)(i) of the 'Act'. It may be furrher menrioned here lhat such interest income derived by the appellant from lhe above inveslment did not constitute one of the sources of income attributable ro activilies of providing credit facilities to its members lnthisviewof the matter, the Assessing affcer was justifed in disallowing the cloim of rhe appellant for &duction tt/s. 80P of the 'Act' and hence the ossessment order passed by him, bringing to tax the above amounl of interesl, is upheld. "

Aggrieved by the same, the present appeal is l-rled on the grounds that the learned Tribunal failed to consider that interest received from Devel,opment Credit Bank is attributable to the assessee's activity of providing credit facilities to its members' thereby erred in denying deduction under Section 8OP(2) of the lT Act and it is further contended that the learned tribunal ought to have appreciated that the expression "attributable to" ! ; i i I i I t ? il I I i ; i I II iI I t I t 5 f; E ii !1 ii iiii itll!t li ltllil I i IItI iri fr

Having perused the entire material on record and the following substantial question of law which would arise for the consideration before this Court is: "l4hetht'r ()n lhe lacts and circumstances of the case' the inleresl ilt(.()nt(, cu,ned bt, lhe assessee on bank depsils is eligible for deduction utt(lL't S.'dion 80PQ)b)0) ol the Income Tc -Act 1961?" g. The learned counsel for the appellant contended ttrat the Co-operative Society qualihes for and is entitled to claim deduction under Section SOP(2)(a)(i) of the IT Act' Whereas' the Assessing Offrcer treated the interest earned on deposits made with nationalised banks as "Income from Other Sources" and denied the deduction under Section 8OP' He further contended that the appellant is engaged only in providing credit facilities to -__#:--_

Further, the appellant argued and contended that the judgment of the Hon'ble Supreme Court relied upon by the Revenue in Totgars Cooperative Sale Soctety Limitedl, is not applicable to the present set of facts and further relied upon the judgment of the jurisdictional High Court in the case State Bank Cooperative Society, which has extensively analysed Section SOP and its scheme and clarifies ttrat Section 8OP confers different categories of benelits such as activity based and inves tment based deductions. 'l2z rrn zg:

The learned counsel for the appellant also relied upon the judgment in IT'|A No.292 ol 20 l0 and reference was also made to a judgment from rhe rhen High Court of Telangana aad Andhra Pradeshz. tzotT 390 tta 321

The learned Senior Standing Counsel for Income Tax Department appearing for the respondent has argued and contended that the appellant is a Co-operative Credit Society engaged in providing credit faciJities to its members and is not a co-operative bank. The deduction claimed under Section 8OP(2)(a)(i) is only in respect of interest earned on deposits placed with non-co-operative bank (Development Credit Bank)' In fact, Section SOP(l) allows deduction only in respect of income referred to in Section 8OP(2), subject to statutory condition and under Section 8OP(2Xa)(i), the deduction is confined to profits and gains of business attributable to carrying on the business of banking or providing credit facilities to its members.

He further contended that the interest income earned is not from the members but from the deposits pl,aced with a third- party bank, which is not a co-operative society or cooperative bank and such income does not quali$ for deduction under Section 8OP(2)(a)(i). Under Section 14 of the IT Act' income must be classified under specific heads; income not falling under 'Profits and Gains of Business" is taxable under the head

The Hon'ble Supreme Court in Totgars Co-operative Sale Soclety Linited case held that interest earned on surplus funds invested in deposits, not immediately required for business purposes, is taxable under "lncome from Other Sources." The principle laid down in Totgare Co-operatlve Sale Soclet5r Lintted applies squarely, as rhe interest income in the present case arises from the investment of strrplus funds and not from core lending activity and allowing such a deduction would defeat the statutory scheme and pernit co-operative societies to divert funds into unrelated irLvestments while claiming blanket exemption. The Court a,:knowledged the frndings of the Assessing Officer and the Appr:llate Authorities, who righfly held that interest earned from a non-co-operative bank is ineligible for deducrion under Section 8op(2)(a)(i) or Section 80P(2Xd) ald finally prayed to dismiss r,he appeal. I I

The learned Senior Standing Counsel for the respondent has relied upon the Honble Supreme Court judgrnent in The Citizens Co-operative Societ5r Llmtted va' Asslstant Comnissioaer of Income Taxs. L7. Having heard the rival contentions of both the parties and also material placed on record, it is undisputed that the appellant is a registered co-operative credit society engaged in providing credit facilities to its members and the dispute is whether the appellant's society is entitled for the deduction of the income accrued from deposits in a development co-oPerative bank and whether the income arrived can be said to be out of the business or income attributable to t]le nature of the business and derived from the business' 18, Admittedly, the surplus funds deposited in banks represent the appellant's own funds generated from its business operations. The case of the appellant is that tlle appellalt being a co-operative socletv is entitled to ctaim deduction under Section 80P(2)(a)(i) of the lT Act t(c.A.No.10215 of 2otz)

The classes of societies covered by Section 9r)-P of tht' Att are as follows: (a) Engaged in business of bank.ing and pnriding t.radir Iacilities to its members;w ){x )'x

We malt notice that the provision is inlroductd v,ith u t tr:tl lo encouraging and promoting grou'th of coopcrativc scckrr in thL, economic life of the country and in pursuonce ol'tfu d:clarctl p, itr. o/ the Government. The conect way of reading lhe lifJ:rant haurts o./. exemption enumerated in lhe section would be lo tn'ut cuch us u separate and distinct head oJ exemption. lVhenever u q,uastion .lt.i\tt as to whether any particuhr category of an incone <tl o cottpen itt, society is erempl from tax what has to be seen is whathcr incomc lell wilhin any of the several heads of exemption. If it -fell ttithin urlt rtttt hcod of exemption, it would be free from tar notw,ithsttrnding thur tha conditions of another head of eremption are nol soti:;/icd und .sut.h income is not free from tax under that head of exemprknr...', Undoubtedly, if one has to go by the afore:uil dc/initittn o/ 'c<t-operalive bank', lhe appellant does not gel covercl therehy. lt it ra 14 of 20 PSrCJ& rvN&I rrrA_732J,070 also a matter of common btowledge that in order to do the busiruss of a co-operative banh it is imperalive to have a licence from the Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, the Reserve Bonk of Indio has itsel,f clarfied that the business of the appellant does nol umount lo that of a co- oryrative bank The appellant, therefore, would not come within the mischief of sub-section (4) ofSection 80P. So Jar so good. However, il is signirtcant to poinl oul thal the main reason for disentilling the appellant from getting the deduclion provided under Seclion 80P of the Act is not sub-section (4) thereoJ. mrat has been noticed by the Assessing Officer, after discussing in detail the actiities of the appellant, is thut the aclivities oI the appellant are in violations of the provision.t of the MACSA under v,hich it is forrned. It is pointed out bv the Assessing Officer that the assessee is calering to tv/o distinct culcgories of people. The first category is thol of resident members or ordinury members. There may not be any difiictlty as for as this category is concerned. However, the assessee had carved out onolher culcg{,r't oJ 'nominal members'. Ihese are those members who arc moking dcpttsits with the assessee for tlu purpose of obtaining louns. etc. und. n fact, lhey ore not members in real sense. Most of the busincss <'f the appellant was with this second calegory of persons u'ho hovc bct'n giving deSnsits which are kept in Fix.ed Deposits with a motit'c to eurn matimum returns. A prtion of these deposits is utilised to udvuncc gold loans, etc. lo the members of the firsl category. lt is .fttund. us d mutter of .fact, that the depositors and borrowers are quicl distinct. ln reality, such aclivity of the appellant is that offnoncc husintss und c'unru be termed os co' oryrdttve society. Il is also found thut thc qtpellant is engaged in lhe actiyity of granting loans to generul puhlit u.t well. All this is done without any approval lron the Regi.';tntr of the Societies. With indulgence in such kind of uctivit b) tha uppllunt. it is remarked by the Assessing Oficer that the aclivilv oJ the uppellant is in violation of the Co-oprative bcieties Act. Morcovcr. it is a co-oPerolive credit society which is nol entitled to dedttction under Section 80P(2)(a)(i) oI the Act.

The said judgment of the Hon'ble Supreme Court is distinguishable on the ground that the facts therein involved an appellant engaged in the activity of granting loans to the general public. Although, this was done vyithout the approval of the Registrar of Societies, the activity of tJ e appellant therein was characterized as a finance business. Consequently, they could not be termed a co-operative society because the principle of mutuality was missing in that case.

In the present case, there was a finding that the appellant could not be treated as a co-operative society providing credit facilities exclusively to its members. As such, the Honble Supreme Court held that the societ5r in that instance could not claim the benel-rt of Section 8OP of tJ..e Act and 'rith due respect, that judgment is not applicable to the present set of facts and does not come to t.Ile rescue of t}Ie respondent.

Learned counsel for the respondent submitted that Section SOP was interpreted in Vannent Co-operatioe Ruro,l Bo,nk Llmited. u. ChieJ Commlssloner of Income Tqx (str, cited

The appellant contended that its society falls within Section 80P(2)(a), which pertains to a co-operative sociery carrying on the business of banking or providing credit facilities to its members. The very nomenclature of tJre appellant,s society is "The Ismailia Co-operative Credit Society Limited" and regarding the nature of the activities, while the appellalt is not carrying on banking activities, but admittedly providing credit to its members out of the income ard interest yielded from bank deposits kept for safe custody.

It is settled law that if a society makes ary profit or gain from business attributable to such activity, then such income qualifies for deduction under Section gOpr2)(a)(i) and the -_l (d) Interest or dividends derived by the co-operative society fiom its investments with any other co.operative society; (e) Any income derived by the co-operative society from the letting of godowns or warehouses for storage, rocessl or facilitatin the marketi of commodities The whole of such income The incorne by way of interest on securities and the income from I ho*" p."p..ty chargeable under s€ction 22. (i I I I i j ! r I I i I tt i iI II It t t I tI t 1 i I I f E F! t B et II r I 18 of 20 PSrCle rvN&, rfTA 732_W10 judgment of the Andhra Pradesh High Court b Anakapallt Co' operathre Marlcetiltg Societg Ltmtb&. CITe has held that to claim the deduction under Section 8OP(2XaXi), providing credit facilities must be one of the assessee's activities and the income must be towards profits or gains therefrom. It is also the case of the appellant that the amounts received by the appellant's societ5r are kept in the bank for the purpose of earnings interest thereon.

The learned Senior Standing Counsel for the respondent pointed out that the society would fall under Section 8OP(2)(c) and Section 80P(2Xd) based on the tabular form presented earlier. However, upon perusal of that section, it applies to any co=operetive socieQr other than consurner co-operative societies engaged in activities other than those specifred in clause (a) and clause (b). Section 8OP(2Xc) is not applicable to the present set of facts as it relates to co-operative societies in general and does not apply to a co-operative society providing credit- Since clause (a)(i) specifically covers cooperative societies providing credit " zooo lzos rrn ero;

It is clear that eligibility for deduction under Section 80P(2)(a) requires that the claim must relate to the profrts and gains of business attributable to one or more of the activities specified therein. In the present case, the appellant is a co- operative society providing credit facilities, which falls directty under the specihed activities. Consequenfly, the appellant is entitled to claim the deduction under Section 80P(2)(a) of the IT Act. 2a. This Bench is of the considered view that the frndings given by the Assessing Offrcer, the Commissioner and tJle Appellate Tribunal do not hold good and that t.Ile appellant is pima facie entitled to the deduction under Section 80P(2)ia) of lncome Tax Act. Accordingly, the substantial question of law is answered in favour of the appellant and against the respondent.

With the aforementioned reasons, tlle appeal is allowed setting aside the orders passed by the Income Tax Appellate Tribunal (ITAT), the Commissioner of Income Tax (Appeals) and the Assessing Offrcer, Hyderabad Bench ,A, in I.T.A.No. I187 /Hyd/2OO7 (assessment year 2OO4-O5) dated 25.04.20O8.The respondents are directed to reconsider the case of the appellant for the deduction of their income earned by way of interest accrued from deposits kept in the bank and pass appropriate orders within a period of three (3) months from the date of receipt of a copy of tl.is order by gving a fair opportunity of hearing to the appellant and cornrnr ulicate the same to the appellant. There shall be no order as to costs. As a sequel, miscellaneous applications, if any pending, shall stand closed. M. RAMANA KRISH JOINT EGIS NA AR //// SECTI OFFICER

Two CD Copies '1. lncome Tax Appellate Tribunal, Hyderabad, Bench_A.

One CC to Sri A. V. Krist . ,*",:: ;;;; #:i::il::Ilf,#:ffi;iT.,,..1., F.r 'nc.me rax) To, l^ bt VII/PSL I i i *iI I t IIt t i j i :