PANCHAGANGA RAITHARA SEVA SAHAKARA SANGHA LIMITED,UDUPI vs. INCOME TAX OFFICER, WARD-2, UDUPI

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) Assessment Year : 2017-18 M/s. Panchaganga Raithara Seva Sahakara The Income Tax Sangha Ltd., Officer, Hemmady, Ward 2, Kundapura Taluk Udupi. Udupi Dist. – 576 230. Vs. PAN: AAAAP0513A APPELLANT RESPONDENT

: Shri Mahesh R Uppin, Assessee by Advocate : Shri K.R. Narayana, Addl.CIT Revenue by (DR) Date of Hearing : 05-08-2022 Date of Pronouncement : 16-08-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee was filed by assessee against the order dated 23/06/2022 u/s. 250 passed by the National Faceless Appeal Centre (NFAC), Delhi relating to Assessment Year 2017-18 on following concise grounds of appeal: “1. In the facts and circumstances of the case, whether the below authorities were justified in holding that Interest on

Page 2 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) Investments derived by the appellant is chargeable under Sec. 56 of the Act and not under Sec. 28 of the Act ; 2. Whether or not the impugned order passed by the appellate authority is bad in law in so far as not considering the fact that the number of Associate members in appellant society (being 286 in number) was within the threshold of 15% of the total membership as stipulated under Sec. 18(1) of Karnataka Co-operative Societies Act, 1959 and consequently the 'condition of mutuality' stood satisfied in appellant society ; 3. Whether the appellate authority was within his powers in holding that the 'provision for interest payable on deposits' was ineligible for deduction u/s. 80P of the Act even when the provision contained in Rule 22 of Karnataka Co-operative Societies Rules, 1960 mandates accounting of interest payable on deposits on accrual basis and charging off the same to profits while it requires accounting of interest received on actual realisation basis ; 4. The C.I.T. (A) erred in holding that the decisions relied upon by the appellant, viz: TCA No. 882/2018 — The Commissioner of Income Tax vs. Ammapet Primary Agricultural Co-operative Bank Ltd. (Hon'ble High Court of Madras) and the orders of this Hon'ble Tribunal in - (a) Kodavoor Vyavasaya Seva Sahakari Sangha Ltd. & Ors. vs. ITO, Ward-2, Udupi (ITA- 707/Bang/2019 dt. 26.08.2019) ; (b) Shri Parvati Parameshwar Pattina Sahakara Sangha Ltd. vs. ITO, Ward 1, Bagalkot (ITA-172/Bang/2020 dt. 21.01.2021) — were of no assistance in deciding the condition of 'principle of mutuality' ; 4. Does the finding that the Provisions for interest of Rs. 1,32,350/- was ineligible for deduction u/s. 80P of the Act is not opposed to Sec. 40A(7) and Sec. 43(2) of the Act and run contrary to CBDT Circular No. 37/2016 dated 02-11- 2016 which gives the relief in respect of any disallowance of business expenditure by way of deduction under Chapter —VI A of the Act to the extent profits so enhanced by such disallowance ; and 5. The appellate authority failed to consider that the appellant being a primary agricultural credit society, its entire profits and gains of business is chargeable u/s. 28 of the Act and eligible for deduction u/s. 80P(2)(a)(i) of the Act as per the judgement of Hon'ble Apex Court dated 12- 01-2021 in — The Mavilayi Service Co-op. Bank Ltd. & Ors. vs. C.I.T. Calicut & anr. vis-a-vis the judgment in The Citizen Co-operative Society Ltd. Hyderabad.

Page 3 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) 6. The appellant craves leave to add, delete, to amend, modify and / or to alter any of the foregoing grounds and also urge such other grounds at the time of hearing.” 2. Brief facts of the case are as under: 2.1 The assessee is a co-operative society engaged in carrying on the business of banking by providing credit facilities to its members who are mainly farmers. For the assessment year 2017-18, the return of income was filed on 27/10/2017 declaring total income of Rs. Nil after claiming deduction u/s. 80P of Rs.75,08,065/-. The assessment u/s 143(3) of the I.T.Act was completed vide order dated 17/12/2019 disallowing the deductions claimed by the assessee u/s. 80P(2)(a)(i) / 80P(2)(d) of the Act. The Ld.AO was of the view that the % of nominal members exceeded 15% of the regular members and therefore the assessee was not eligible to claim the deduction u/s. 80P(2)(a)(i). The Ld.AO referred to the decision of Hon’ble Supreme Court in case of Citizen Co- operative Society Ltd. vs. ACIT reported in (2017) 84 taxmann.com 114. Further the Ld.AO noted that the assessee claimed interest from investment in Scheduled Banks, Co-operative Banks and other Banks amounting to Rs.84,91,374/- which is shown in the computation of deduction. The Ld.AO disallowed the interest claimed u/s. 80P(2)(d). 2.2 Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A). 2.3 The Ld.CIT(A) upheld the disallowance as under: a) Disallowance u/s. 80P(2)(a)(i) – Rs.75,08,065/- b) Disallowance u/s. 80P(2)(d) – Rs.84,91,374/- by relying on the ratio of the judgment of the Hon'ble Karnataka High Court in the case of Pr.CIT & Anr. v. Totagars Co- operative Sale

Page 4 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) Society reported in (2017) 395 ITR 611. The Ld.CIT(A) also held that the assessee is not entitled to deduction u/s 80P(2)(d) of the I.T.Act since the interest income was not received from investments with other co-operative societies. 2.4 Aggrieved by the order of the Ld.CIT(A), the assessee has preferred this appeal before this Tribunal. 3. The Ld.AR submitted that all the issues alleged are in respect of disallowance upheld by the Ld.CIT(A) u/s. 80P2(a)(i)/(d) of the Act. 3.1 The Ld.AR at the outset submitted that, identical issue was considered by the ITAT in ITA No.490/Bang/2021 in the case of M/s. Kakkabe VSSN BAnk Ltd.vs. Pr.CIT by order dated 28.02.2022 for Assessment Year 2015-16. The Ld.AR submitted that, this Tribunal in above cited case, directed the Ld.AO to consider the dictum laid down by the Hon'ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT reported in 431 ITR 1, de horse the observation of the Ld.CIT, u/s 263 of the I.T.Act. 4. The Ld.DR did not raise any objection for giving a similar direction in the instant case. 5. We have heard the submissions advanced by both sides based on the material placed on record. Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT (supra) held that, when the assessee is registered as a Co-operative Society under the respective State Acts, the interest income received for providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act. The relevant finding of the Hon'ble Supreme Court reads as under:- "45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and

Page 5 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) promote the credit of the co- operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word "agriculture" into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes cooperative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm's way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to nonmembers, profits attributable to such loans obviously cannot be deducted. 46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, `nominal members' are 'members' as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions' Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 referred to section 80P of the IT Act and then held: "8. The expression "members" is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression "members" in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression "members" in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under: "2. (n) 'Member' means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to`members' anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;"

Page 6 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) Considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i). 47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non- members under section 59(2) and (3), which reads as follows: "59. Restrictions on loans.- (1) A society shall not make a loan to any person or a society other than a member: Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society. (2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit. (3) Granting of loans to members or to non-members under subsection (2) and recovery thereof shall be in the manner as may be specified by the Registrar." Thus, the giving of loans by a primary agricultural credit society to nonmembers is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra). 48. Resultantly, the impugned Full Bench judgment is set aside. The appeals and all pending applications are disposed of accordingly. These appeals are directed to be placed before appropriate benches of the Kerala High Court for disposal on merits in the light of this judgment." 6. In view of the recent judgment of the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT (supra), we remit the issues raised in this appeal to the file of Ld.AO. The Ld.AO is directed to examine the deduction u/s 80P(2)(a)(i) of the I.T.Act in the light of the dictum laid down by the Hon'ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. v. CIT (supra). 7. The Ld A.R also submitted that the issue of deduction u/s 80P(2)(d) is being restored to the file of A.O. by the Bangalore bench of Tribunal with certain directions and accordingly prayed that this issue may be restored to the file of the A.O for examining afresh by considering all the contentions of the assessee.

Page 7 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) 8. We heard Ld. D.R. and perused the record. We notice that an identical issue was restored to the file of the A.O. by the Coordinate Bench in the case of Thannirupantha Primary Agricultural Credit Co- operative Society Ltd. Vs. ITO with the following observations: “9.1 As regards the claim of deduction u/s 80P(2)(d) of the I.T.Act, the Bangalore Bench of the Tribunal in the case of M/s.The Jayanagar Cooperative Society Ltd. (supra), on identical facts, had restored the issue to the files of the A.O. for de novo consideration. The narration of facts, contentions and the findings of the Tribunal in the case of M/s.The Jayanagar Cooperative Society Ltd. (supra) reads as follow:- “4. The issues that arise for consideration in this appeal by the assessee are as to whether the Revenue authorities were justified in holding that the assessee was not entitled to the benefit of deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 (in short ‘the Act’) on interest income earned and under section 80P(2)(d) of the Act in respect of interest received from Co-operative institutions. The Assessing Officer (AO) denied the claim of the assessee on the ground that interest income earned by making investment of surplus funds has to be assessed under the head “Income from Other Sources” and not income from business and since interest income is not assessed as business income, the claim for deduction under section 57 of the Act cannot be allowed. In upholding the above conclusions, the CIT(A), inter alia, relied on the decision of the Hon’ble Supreme Court in the case of The Totgar’s Co-operative Sales Society Ltd., Vs. ITO 322 ITR 283 (SC) wherein the Hon’ble Supreme Court held that the benefit of deduction under section 80P(2)(a)(i) of the Act is only on income which is assessable under the head “Income from Business”. Interest earned on investment of surplus funds not immediately required in short term deposits and securities by a Co-operative Society providing credit facilities to members or marketing agricultural produce to members is not business income but income from other sources and the society is not entitled to special deduction. 5. While learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Tumukur Merchants Souharda Credit Co-operative Ltd., 230 taxman 309 (Karn), the DR relied on a subsequent decision of the Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Cooperative Sale Society Ltd., 395 ITR 611 (Karn.). We have carefully gone through the said judgment. The facts of the case before the Hon’ble

Page 8 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) Karnataka High Court was that the Hon’ble Court was considering a case relating to Assessment Years 2007-08 to 2011-12. In case decided by the Hon’ble Supreme Court in the case of the very same assessee, the Assessment Years involved was Assessment Years 1991- 92 to 1999-2000. The nature of interest income for all the Assessment Years was identical. The bone of contention of the Assessee in AY 2007-08 to 2011-12 was that the deduction under Section 80P(2) of the Act is claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act which was the claim in AY 1991-92 to 1999- 2000. The reason given by the Assessee was that in AY 2007-08 to 2011-12 investments and deposits after the Supreme Court's decision against the assessee Totgar's Co-operative Sale Society Ltd. (supra), were shifted from Schedule Banks to Cooperative Bank. U/s.80P(2)(d) of the Act, income by way of interest or dividends derived by a Co-operative Society from its investments with any other Co-operative Society is entitled to deduction of the whole of such interest or dividend income. The claim of the Assessee was that Co-operative Bank is essentially a Co-operative Society and therefore deduction has to be allowed under Clause (d) of Sec.80P(2) of the Act. The Hon'ble Karnataka High Court followed the decision of the supreme Court in The Totgars Co-operative Sales Society Ltd. (supra) and held that interest earned from Schedule bank or cooperative bank is assessable under the head income from other sources and therefore the provisions of Sec.80P(2)(d)of the Act was not applicable to such interest income. It is thus clear that the source of funds out of which investments were made remained the same in AY 2007-08 to 201112 and in AY 1991-92 to 1999- 2000 decided by the Hon'ble Supreme Court. Therefore whether the source of funds were Assessee's own funds or out of liability was not subject matter of the decision of the Hon'ble Karnataka High Court in the decision cited by the learned DR. To this extent the decision of the Hon'ble Karnataka High Court in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra) still holds good. Hence, on this aspect, the issue should be restored back to the AO for a fresh decision after examining the facts in the light of these judgment of the Hon'ble Apex Court rendered in the case of The Totgars Co-operative Sale Society Ltd. (supra) and of Hon'ble Karnataka high Court rendered in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra).” 9.2 In the light of the above order of the Tribunal, we deem it appropriate on the facts of the instant case, to restore the issue of claim of deduction u/s 80P(2)(d) of the I.T.Act to

Page 9 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) the files of the A.O. Hence ground Nos.6 and 7 are allowed for statistical purposes.” 9. Following the above said decision we restore this issue to the file of the A.O. for examining it afresh in the light of discussions made (supra). 10. The Ld A.R also put up an alternative claim that the expenses incurred to earn the interest income should be allowed u/s 57(iii) of the Act, if it claim for deduction u/s 80P(2)(a)(i) or 80P(2)(d) is not allowed. Since we have already restored the issue of claim of deduction u/s 80P(2)(d) of the Act, we restore this alternative contention also to the file of the A.O., since the claim of the assessee gets support from the decision rendered by Hon’ble Karnataka High Court in the case of Totgars Co-operative Sales Society Ltd.Vs. ITO reported in (2015) 58 taxmann.com 35. Accordingly the grounds raised by the assessee stands allowed for statistical purposes. As we have remanded the appeal to the Ld.AO, the stay petition filed by the assessee stands in fructuous. In the result, the appeal filed by the assessee stands partly allowed for statistical purposes and the stay petition stands dismissed as in fructuous. Order pronounced in the open court on 16th August, 2022.

Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 16th August, 2022. /MS /

Page 10 of 10 ITA No. 589/Bang/2022 & S.P. No. 35/Bang/2022 (in ITA No. 589/Bang/2022) Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore