SAMPKHAND GROUP SEVA SAHAKARI SANGH LIMITED,SAMPHKAND vs. PRINCIPAL COMMISSIONER OF INCOME TAX, HUBLI, HUBLI

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 366/Bang/2022 Assessment Year : 2017-18 M/s. Sampkhand Group Seva Sahakari Sangh Ltd., The Principal No. 104, Sahakari Commissioner of Sangh, Kumta Road, Income Tax, Janmane, Hubli. Vs. Samphkand – 581 315. PAN: AANAS3902K APPELLANT RESPONDENT : Shri S.V. Ravishankar, Assessee by Advocate : Shri Sumer Singh Meena, CIT Revenue by DR-1 Date of Hearing : 11-08-2022 Date of Pronouncement : 23-08-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee against the order dated 29/03/2022 u/s. 263 passed by the Ld.Pr.CIT, Hubli relating to Assessment Year 2017-18 on following grounds of appeal: “1. The order of the learned Principal Commissioner of Income-tax Hubli, passed under section 263 of the Act in so far as it is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case.

Page 2 of 25 ITA No. 366/Bang/2022 2. The notice issued for initiation of proceedings under section 263 of the Act, is bad in law. 3. The learned PCIT failed to appreciate that the appellant does not have associate members and the inference that the appellant has associate members, demonstrates the lack of appreciation of record and application of mind by the CIT, on the facts and circumstances of the case. 4. The learned PCIT is not justified in law in invoking the jurisdiction under section 263 of the Act and setting aside the order of the AO, as being "erroneous and prejudicial to the interest of the revenue", which is contrary to fact, on the facts and circumstances of the case. 5. The learned PCIT is not justified in law in holding that the order passed by the Assessing officer is bad in law, without appreciating that there was no error in the order passed, much less prejudicial to the interest of revenue, on the facts and circumstances of the case. 6. The learned PCIT was not justified in appreciating that the provision of section 263 of the Act shall be attracted only when the order is both erroneous and prejudicial to the interest of revenue and since the order passed under section 143(3) of the Act was not erroneous, much less prejudicial, the invoking of section 263 was not warranted, on the facts and circumstances of the case. 7. The learned PCIT was not justified in appreciating that the claim of deduction under section 8oP(2)(a)(i) of the Act, was allowed after a proper appreciation of facts, on the facts and circumstances of the case. 8. The PCIT was not justified in holding that the claim of deduction under section 8013(2)(d) of the act, was not in order and was to be disallowed, which is contrary to fact, on the facts and circumstances of the case. 9. The learned PCIT was not justified in appreciating that the interest income on fixed deposits, when considered under the head other sources, the interest paid was also required to be set off against the income, on the facts and circumstances of the case. 10. The appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal.

Page 3 of 25 ITA No. 366/Bang/2022 11. For these grounds that may be urged at the time of hearing of appeal, the appellant prays that appeal may be allowed for the advancement of substantial cause of justice and equity.” 2. Brief facts of the case are as under: 2.1 The assessee is a cooperative bank. For the assessment year 2017-18, the return of income was filed on 28/09/2017 declaring total income of Rs.90,210/- after claiming deduction under Chapter VIA u/s. 80P(2)(a)(i) of Rs.48,67,097/-. The case was selected for CASS to verify the deduction claimed under Chapter VI-A. Subsequently order u/s. 143(3) was passed by computing the income in the hands of the assessee at Rs.1,52,976/- by disallowing Rs.62,770/- claimed u/s. 80P of the Act. 2.2 Subsequently the Ld.CIT(A) proposed to invoke revisionary proceedings u/s. 263 of the Act for following reasons and the notice u/s. 263 was issued to assessee.

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2.3 The assessee in response to the said notice submitted as under:

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2.4 After considering the submissions of the assessee, the Ld.Pr.CIT passed the impugned order on 29/03/2022 by observing as under: “17. As discussed above, the assessee is not eligible for deduction u/s 80P(2)(a)(i) following the decision of the Hon'ble Supreme Court in Citizen Co-op Society Ltd. (supra) and the decisions of the Hon'ble ITAT Bangalore discussed above. The Assessing Officer instead of disallowing the entire deduction 80P(2)(a)(i) has allowed the deduction, which is not in accordance with law. The AO has not examined the other issues discussed above. The Assessing Officer has not conducted necessary inquiries and has not made the additions required as per law. Considering these facts, the assessment order is erroneous and prejudicial to the interests of Revenue in terms of section 263. 18. As further discussed above, interest income should have been taxed u/s 56 and deduction u/s 80P(2)(a)(i) and

Page 17 of 25 ITA No. 366/Bang/2022 u/s 80P(2)(d) was not allowable. The Assessing Officer has not examined this issue at all and has not conducted necessary enquiries. He has not made the addition required as per the binding judicial decisions discussed above. Considering these facts, the assessment order is erroneous and prejudicial to the interests of Revenue in terms of section 263. 19. The Hon'ble Gujarat High Court in State Bank of India (389 ITR 578) have upheld the order u/s 263 in a similar case. The Hon'ble High Court held that the ITAT was justified in upholding invocation of powers under section 263 by the Commissioner of Income Tax, and was also justified in holding that interest income on deposits placed with SBI was not exempt under section 80P. 20. This view is also supported by the following judicial decisions: 1. Malabar Industrial Co. Ltd [2000] 243 ITR 83 (SC) 2. Daniel Merchants P. Ltd. 2017- TIOL-455-SC-IT 3. Rajmandir Estates P Ltd. (2017) 245 Taxman 127 (SC) 4. Ashok Logani (2012) 347 ITR 22 (Delhi) 5. Gee Vee Enterprises (1975) 99 ITR 375 (Delhi) 6. Vedanta Ltd. (2021) 279 Taxman 358 (Born) 7. V. K. Bharathi (2019) 102 taxmann.com 255 (Kar) 8. Rajalakshmi Mills Ltd. v. ITO (2009) 121 ITD 343 (Chennai)(SB) 9. Lokesh M. (2021) 187 ITD 342 (Bang) 21. In this case, the assessee has not given any information regarding filing of appeal. No appellate order has been received. As per information available, the assessee has not filed any appeal. In view of these facts. this order is in accordance with Explanation 1(c) below section 263 which says that the powers u/s 263(1) shall extend to such matters as had not been considered and decided in such appeal. 22. In view of the above discussion, the aforesaid assessment order is erroneous and prejudicial to the interests of Revenue in terms of section 263. The assessment order is accordingly, set aside for this purpose and the AO is directed under section 263, to make a fresh assessment in accordance with law, after considering the above. The AO shall examine the deduction u/s 80P and conduct necessary inquiries in accordance with law and CBDT guidelines. He shall give the assessee an opportunity to furnish necessary evidence to establish his claim and explain why the proposed additions should not

Page 18 of 25 ITA No. 366/Bang/2022 be made. The AO shall consider the facts, and the judicial decisions on this subject including the decisions discussed above, as well as the explanation furnished by the assessee. and make a fresh assessment in accordance with law.” 2.5 Aggrieved by the order of Ld.Pr.CIT, assessee is in appeal before this Tribunal. 3. The Ld.AR at the outset submitted that the basis on which the review of the assessment order dated 22/12/2019 has been made is recorded in para 2 of the impugned order. For the sake of convenience, the same is reproduced as under: “2. It has been observed that the assessee had claimed deduction u/s. 80P(2)(a)(i) of Rs.48,67,097/-. The society has 603 regular members and 417 associate members. The number of associate members in the society exceeds 15% of the total members and this is in violation of Sec. 18 of the Karnataka Co-operative Societies (Amendment) Act. 2014. The co-operative Societies of Karnataka are registered under the Karnataka Co-operative Societies Act. Section 18 of the Karnataka Co-operative Societies Act allows a cooperative society to admit a nominal or associate member. The Karnataka Co-operative Societies (Amendment) Act, 2014 inserted the following proviso below section 18(1)(d) of the Karnataka Co-operative Societies Act:......................” 4. The Ld.AR submitted that the Ld.Pr.CIT has assumed wrong facts as assessee only had two classes of members being share members and nominal members and there was no associate members as on 31/03/2017. He referred to page no. 28 of the paper book wherein the category wise bifurcation has been placed.

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Page 20 of 25 ITA No. 366/Bang/2022 respect of nominal members in a particular co-operative society has been considered by Hon’ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT reported in 431 ITR 1 and the dictum laid down by Hon’ble Court is binding. 7. Hon’ble Court 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 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

Page 21 of 25 ITA No. 366/Bang/2022 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;" 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."

Page 22 of 25 ITA No. 366/Bang/2022 8. 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). 9. In respect of deduction u/s. 80P(2)(d) being interest claimed by the assessee, we modify the directions as under. 10. The Ld.AO shall consider the interest claimed based on the principles laid down by the Coordinate Bench of this Tribunal in case of Thannirupantha Primary Agricultural Credit Co-operative Society Ltd. Vs. ITO in ITA Nos. 276 & 277/Bang/2020 by order dated 30/07/2021 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

Page 23 of 25 ITA No. 366/Bang/2022 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 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

Page 24 of 25 ITA No. 366/Bang/2022 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 the files of the A.O. Hence ground Nos.6 and 7 are allowed for statistical purposes.” 11. 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). 12. 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 assessee stands partly allowed. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 23rd August, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 23rd August, 2022. /MS /

Page 25 of 25 ITA No. 366/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