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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 19.03.2019 passed by Ld.CIT(A), Mangaluru on following grounds of appeal: Tax Effect in Sl.No. Grounds of appeal Rs. a) The orders of the authorities below in so far as these are against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's 1. case. b) The appellant denies itself liable to be assessed on a total income of Rs.82,17,400/- as against the returned income of Rs.1,99,640/- under the facts and circumstances Page 2 of of the case. a) The learned assessing officer erred in denying the deduction claimed by the appellant under section 80P(2)(a)(i) of the Income- Tax Act, 1961 (the Act) of Rs.79,20,599/- under the facts and circumstances of the case. b) The authorities below erred in following the decision of Supreme Court in the case of Citizen Co- operative Society Ltd. vs. AC1T, reported in397 ITR lthough the facts of the appellant's case are totallydifferent and thus the orders passed needs to be set aside on the facts of the case. c) The learned assessing officer is not justified in holding that the nominal members of the society are not members in real sense and consequently erred in not allowing the deduction under section 80P(2)(a)(i) under the facts and 2. circumstances of the case. 24,47,465/- d) The authorities below erred in not appreciating the fact that interest earned from fixed deposits made in other banks, is attributable to carrying on the business activities and therefore the appellant is eligible for deduction under section 80P(2)(a)(i) of the Act under the facts of the case. e) The authorities below failed to appreciate that the appellant is a Primary Agricultural Credit Co- operative Society as per section 80P(4) of the Act and therefore the ratio of the decision of the Karnataka High Court in the case of PCIT vs. Totgars Co-operative Sales Society Limited reported in 395 ITR 611 do not apply to the appellant under the facts and circumstances of the case. f) The learned assessing officer failed to appreciate that the Page 3 of surplus funds which is not immediately required for business activity is invested and the interest on such deposits is eligible for deduction under section 80P of the Act under the facts and circumstances of the case. g) Without prejudice, if the interest income earned from deposits is considered as income from other sources, then the learned assessing officer ought to have allowed the deduction towards the incidental expenses incurred under section 57 of the Act under the facts of the case. The appellant denies itself liable to be levied to interest under sections 234A, 234B and 234C of the Act and further the computation of interest was not provided to the appellant as regard to the rate, period and method of 3. 8,89,637/- calculation of interest under the facts and circumstances of the case. The appellant expressly urges that the period of levy of interest is not in accordance with sections 234A, 234B and 234C of the Act. The appellant craves leave to add, alter, 4. delete or substitute any of the grounds - urged above. In view of the above and other grounds that may be urged at the time of the 5. hearing of the appeal, the appellant - prays that the appeal may be allowed in the interest of justice and equity.
Brief facts of the case are as under: From the assessment records, the Ld.AO observed that assessee in its return of income declared Rs. 1,99,640/- after claiming Rs.79,20,599/- as deduction u/s. 80P of the Act. The Ld.CIT(A) was of the opinion that assessee does not qualify for deduction under the said section. The Ld.AO was of the opinion that the principles of mutuality was violated and disallowed the following:
Page 4 of Interest/dividend income of Rs.1,79,47,663/- earned from Co-operative Banks and nationalised Banks was held to be income from other sources and excluded from the deduction u/s. 80P(2)(a)(i). Further deduction under Section 80P(2)(d) was also denied relying on the Karnataka High Court decision in the case of Totgar's Co-operative Sale Society Ltd. dated 16th June, 2017. b) The principles of mutuality were violated relying upon the decision of Hon'ble Apex Court in the case of M/s. Citizen Co-operative Society Ltd., Hyderabad dated 8th September, 2017. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A). The Ld.CIT(A) relying on the decisions of Hon’ble Karnataka High Court in case of PCIT vs. Totgars Co-operative Sales Society Ltd. reported in 395 ITR 661 dismissed the appeal filed by assessee.
The Ld.CIT(A) was of the opinion that though assessee is a co- operative society and carries on the business of providing credit facility to its members, the interest earned from the institutions cannot be allowed as deduction u/s. 80P(2)(a)(i) of the Act. The Ld.CIT(A) disallowed the provision made for gratuity to compute the correct deduction u/s. 80P(2)(a)(i) of the Act. He also disallowed the claim of assessee u/s. 80P(2)(d) being interest on deposits made in Co- operative Banks. We have perused the submissions advanced by both sides in the light of records placed before us.
We note that prima facie, the issues needs to be revisited by the Ld.AO, in the light of the principles laid down by Hon'ble Supreme Page 5 of Court in the case of Mavilayi Service Cooperative Bank Ltd. Vs.CIT (2021) reported in 123 taxmann.com 161 (SC) considered the issue and has distinguished the decisions of Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. vs. ITO (supra). 6.1 In respect of interest earned, we note that following decisions by Coordinate Bench of this Tribunal has remanded the issues to Ld.AO. Ravindra Multipurpose Co-operative Society Ltd. vs. ITO in by order dated 31.08.2021 Sri Gurudeva Vividodesha Co-op Society Ltd. vs. ITO in ITA Nos. 1425 & 1426/Bang/2019 by order dated 31.08.2021 We refer to the observation in case of Ravindra Multipurpose Co- operative Society Ltd. vs. ITO (supra) which is reproduced as under: “7.1 This issue has been decided by coordinate bench of this Tribunal in case of Potters Cottage Industrial Co- Operative Society Ltd., for assessment years 2015-16 in ITA No 1257 & 1258/Bang/2019 by order dated 30-08- 2019. This Tribunal observed and decided as under: "We note that the Ld.AO denied deduction under section 80P(2)(d) of the Act, as well in respect of interest income received by assessee from deposits kept with banks for the years under consideration. The Ld.AO assessed the interest income received from bank deposits under the head income from other sources. The Ld.Counsel placed reliance on the decision of Hon'ble Karnataka High Court in keep case of Totgars co-operative sale society Ltd. vs ITO reported in (2015) 58 Taxmann.com 35. We have perused plethora of decisions on this issue by Hon'ble Karnataka High Court and the ratio laid down by Hon'ble Supreme Court. Hon'ble Supreme Court in the case of the Totgars Co-operative Sale Society Ltd. Vs. ITO reported in 322 ITR 283 held that, Income from utilisation of surplus funds was taxable under the head income from other sources, and therefore not eligible for deduction u/s 80P. Hon'ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO reported in 230 Taxman 309, dealt with an issue where deduction u/s.80P(2)(a)(i) of the Act was claimed on interest from the deposits made in a nationalized bank Page 6 of which was used for providing credit facilities to its members. The Assessee therein claimed that the said interest amount is attributable to the credit facility provided by the assessee and forms part of profits and gains of business. Hon'ble Karnataka High Court after considering the decision by Hon'ble Supreme Court in case of Totgars(supra) held that, since the word income is qualified by the expression "attributable" to the business of Banking, is used in Sec.80P(2)(a)(i) of the Act, it has to receive a wider meaning and should be interpreted as covering receipts from sources other than the actual conduct of business. Hon'ble Karnataka Court held that a Cooperative Society that is carrying on with 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, cannot be kept 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. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. Hon'ble Karnataka Court distinguished the facts in the decision of the Hon'ble Supreme Court in the case of Totgars (supra) by observing that Hon'ble Supreme Court was dealing with a case where the assessee-cooperative society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee-Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) of the or under Section 80P(2)(a)(iii) of the Act. Therefore, in the facts of Totgars (supra), Hon'ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. The Court also observed that even the Hon'ble Page 7 of Supreme Court made it clear that, they are confining the said judgment to the facts of that case. Similar view taken in case of Guttigedarara Credit Co- operative Society Ltd. vs. ITO reported in [2015] 377 ITR 464 by Hon'ble Karnataka High Court. In a subsequent decision of Pr.CIT And Anrs vs. Totagars Co- Operative Sale Society reported in 392 ITR 74 in the context of deduction u/s.80P(2)(d) of the Act, it was held by Hon'ble Karnataka high Court that deduction in respect of any income by way of interest or dividends derived by the co- operative society from its investments with any other co- operative society, the whole of such income is available under sec.80P(2)(d) of the Act. Hon'ble Karnataka high Court held that decision by Hon'ble Supreme Court in case of Totgars (supra), was not on the deduction claimed u/s.80P(2)(d) of the Act, but was rendered in respect of deduction claimed under Section 80P(2)(a)(i) of the Act. Hon'ble Karnataka High Court in the case of Pr.CIT Anr. vs. Totgars Co- Operative Sale Society reported in 395 ITR 611 took a different view and held that interest income earned on deposits whether with any other bank will be in the nature of income from other sources and not income from business and therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed to the Assessee. The Hon'ble Court followed decision of Hon'ble Gujarat High Court in the case of SBI Vs. CIT reported in 389 ITR 578, wherein Hon'ble Gujarat High Court dissented from the view taken by the Hon'ble Karnataka High Court in the case of Tumkur Merchants case (supra). It can thus be seen that the ratio laid down by the Hon'ble Karnataka High Court in the case of Totagars Cooperative Sales Society in 395 ITR 611 is that, in light of the principles enunciated by Hon'ble Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. Thus interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by assessee with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. This needs to be verified by the Ld.AO. On the basis of above discussions, and in the interest of Justice we remand this issue back to the Ld.AO to verify Page 8 of 80P(2)(d) of the Act." 11.2 Respectfully following the above view, we direct the Ld.AO to verify the interest earned on investment earned from co-operative societies and to consider the claim of assessee in accordance with law under section 80p(2)(d) of the Act.” 6.2 The Ld.AO is therefore directed to consider the claim in accordance with principles laid down by Hon’ble Supreme Court and Coordinate Bench of this Tribunal. The assessee is directed to file all requisite details in support of the claim which would be verified by the Ld.AO in accordance with law and following the principles laid down in above referred decisions. Needless to say that proper opportunity of being heard to be granted to assessee in accordance with law. In the result, the appeal filed by the assessee stands allowed for statistical purposes. Order pronounced in the open court on 14th March, 2022.