THE IKKARAIBOLUVAMPATTI PACCS 33,COIMBATORE vs. ITO,NCW 4(2), COIMBATORE

(i) Though, the investments were made out of deposits received from its members, the deposits are made out of surplus funds. The interest on such investments, therefore, cannot fall within the meaning of the expression "Profits and gains of Business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members, only the interest received/accrued out of the above deposits made on surplus funds needs to be taxed. The Honorable Supreme Court in the case cited above in para 10 has held that the assessee- society regularly invest funds not immediately required for business purposes and such investments, therefore cannot, fall within the meaning of the expression "profit and gains of business". It was held by the Honorable Supreme Court that such interest income cannot be said to be attributable to the activities of the society and therefore the assessing officer was right in taxing the interest income under section 56 of the Income Tax Act 1961. The facts of the case mentioned in the decision of the Honorable Supreme Court squarely applies to the facts of this assessee society also, viz., M/s.K.758 IKKARAI BOLUVAMPATTI PACCS

(ii) Further in the above decision of the Supreme Court it is held that the income in respect of which deduction u/s 80P is sought must constitute the M/s.Ikkaraiboluvampatti PACCS :: 3 :: operational income and not the other income which accrues to the society. In the instant case of M/s.K.758 IKKARAI BOLUVAMPATTI PACCS, the income earned by them are not operational income, but income accrued to the society.

4. In view of the above objections of the assessee are overruled. The entire interest receipts are assessed to tax under section 56 of the Income Tax Act under "Other sources" in view of the discussions in para 3.1 above and also the deduction u/s 80P is disallowed in view of the discussions in para 3.2 above. Also, technically the question of allowing deduction u/s 80P does not arise since the assessee has included the above interest receipts of Rs.30,12,185/- in the Profit and Loss account. This interest receipts is now reduced from the Profit and Loss account and separately assessed u/s.56 under "Other Sources" and therefore the resultant income from business will be loss.

3. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed written submissions on the issue along with certain judicial precedents which has been reproduced at Para No.3.1 at Page Nos.3-9 of the order of the Ld.CIT(A). The sum and substance of arguments of the assessee before the Ld.CIT(A) are that interest earned by the assessee on fixed deposits with CDCCB, is eligible for deduction u/s.80P(2)(d) of the Act, and thus, the AO is erred in assessing interest income under the head ‘income from other sources’. The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of certain judicial precedents, rejected the arguments of the assessee and upheld the additions made by the AO towards interest income under the head ‘income from other sources’. The relevant findings of the Ld.CIT(A) are as under:

5.0 The facts of the. case, the order under section 143(3) and the submissions made by the Appellant have been carefully considered. Briefly stated, the facts of the case are that the Appellant is a Primary Agricultural Cooperative Credit society. For Assessment Year 2017-18, it filed its return of income on 26/03/2018 with a total income of Rs.Nil. The Appellant had claimed a deduction under section 80P(2)(a)(i) amounting to Rs.19,56,365/-. As discussed at preceding para 2.0, the AO has treated the interest income received by Appellant from Coimbatore District Central Co-. operative Bank, from various types of deposits kept by the Appellant with the said Co- operative Bank, as "income from other sources" instead of "income from business" as claimed by the Appellant. Thus, the AO, placing reliance upon the· decision of the Hon'ble Supreme Court in civil appeal no.1662 of 2010 in the case of M/s The Totgars

:: 4 ::

Cooperative Sales Society Limited, has disallowed the Appellant's claim of deduction under section 80P(2)(a).

5.1 Vide the above referred decision, the Hon'ble Supreme Court, has held that the deduction under section 80P(2)(a) is available to only the 'operational income' from business, and not the 'other income' which accrues to a Co-operative society. Relying on the said decision of the Hon'ble Apex Court, the claim of deduction under section 80P(2)(a)(i) was rejected in the following cases as well: • In case of a society engaged in providing credit facilities to its members income from investments made in banks is not deductible under section 80P [State Bank of India (SBI) (2016) 72 taxmann.com 64 (Gujarat)]. • Deduction under section 80P will be allowed only when there is direct or proximate connection with or nexus to the income and the business carried on by the society. Interest income on deposits made with the banks is not attributable to the income of the co-operative society and outside realm of section 80P- [Sri Basaveshwara Credit Co-operative Society Ltd. v. CIT (2014) 47 taxmann.com 189 (Bangalore Trib.)] • In view of the decision of the Hon’ble Supreme Court (supra) interest income on Fixed Deposit, Interest on Reserve Fund, Interest on Bad Debt Fund and interest on SBF Loan is treated as ‘Income from other sources’ without allowing deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. [National Coal Development Corporation Staff Co-Operative Credit Soc. Ltd. vs. DCIT, ITA No.1564/Kol/2011]

5.2 The Appellant has argued that it is required by law to keep certain funds in the co- operative banks and other financial institutions. The Appellant has further submitted that such statutory deposits are done during the course of normal business operations and hence, the interest income derived from such statutory deposits forms part of the profits and gains of business. The Appellant has contended that such interest income earned during the normal business operations is eligible for deduction under section 80P(2)(a) of the Act. In this connection, it is to be stated that the fact that the Appellant is obliged to keep a part of its funds in banks as per guidelines/instructions, has nothing to do with the determination of the taxability of interest income derived from such statutory deposits. Hon'ble Supreme Court in the case of Southern Technologies Ltd. vs. Joint Commissioner of Income-tax, Coimbatore [2010] 187 TAXMAN 346 (SC) has held that the RBI directions have no overriding effect on the provisions of Income tax. The relevant part of the order vide para 21 is as under:

"It needs to be emphasized that the said 1998 Directions are only Disclosure Norms. They have nothing to do with computation of Total Taxable Income under the Income-tax Act or with the accounting treatment."

5.2.1 Such interest income (derived from statutory deposits, if any) does not constitute the 'operational income' but simply, accrues to an assessee. As already discussed, Hon'ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC) has held that "the income which simply accrues to the assessee falls outside the ambit of section 80P of the Act'. The source of said interest income is the deposits in banks, and it cannot be held to be earned in the normal business operations. Therefore, such an interest is in the nature of “other income” taxable under section 56.

5.3 From the above judicial pronouncements and facts of the case, it is clear that the deduction under section 80P(2)(a) is available only to the income which is attributable to the business operation of the Appellant, i.e., providing credit facilities to tis members. Depositing / investing funds in a co-operative bank / commercial bank is not a part of the business of providing credit facilities to its members. Such an interest income is not the ‘operational income’ of assessee society from providing credit facilities

:: 5 :: to its members. Consequently, the interest income has to be treated as 'income from other sources', not eligible for deduction under section 80P. Respectfully following all of the aforesaid legal precedents, it is held that such interest income earned by the Appellant is not eligible for deduction under section 80P(2)(a)(i).

5.4 The Appellant has also, taken an argument that the interest earned by it from Coimbatore District Central Co-operative Bank is exempt under section 80P(2)(d). In this regard, we have to first examine whether a 'co-operative bank' is akin to the 'co- operative society' mentioned in section 2(19) or section 80P(2)(d).

5.4.1 Hon'ble High Court of Karnataka has answered this issue against the assessee and in favour of revenue, at para 13 of its order in the case of Principal Commissioner of Income Tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka)as under:

"What Section 80P(2)(d) of the Act, which was though not specifically argued and canvassed before the Hon'ble Supreme Court, envisages is that such interest or dividend earned by an assessee co-operative society should be out of the investments with any other co-operative society. The words' Co-operative Banks' are missing in clause (d) of subsection (2) of Section 80P of the Act. Even though a co- operative bank may have the corporate body or skeleton of a co-operative society but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation Act, 1949. Only the Primary Agricultural Credit Societies with their limited work of providing credit facility to its members continued to be governed by the ambit and scope of deduction under Section 80P of the Act."

5.4.2 Thus, the Hon'ble High Court has held that though a co-operative bank may have the corporate body or skeleton of a co-operative society, its business is entirely different and that is the banking business. In effect, Hon'ble Karnataka High Court ruled that a co-operative bank was an entirely different species than that of a co-operative society. Hon'ble High Court strengthened this argument by pointing out that "the words' Co- operative Banks' are missing in clause(d) of subsection (2) of Section 80P of the Act". The co-operative bank in which the appellant has deposited / invested funds is, thus, not co-operative “society” but “bank” doing the banking business. Respectfully; following 'the aforesaid decision of Hon'ble Karnataka High Court, it is held that the Co- operative banks from which assessee has derived interest income during the relevant previous year are not co-operative societies.

5.4.3 Once it is held that the co-operative banks are entirely different species than those of co-operative societies, the next question is whether, the interest earned from such co-operative banks is eligible for deduction under section 80P(2)(d). From the plain reading of section 80P(2)(d), it is apparent that to claim deduction under this section, the income must have been earned by way of interest or dividends and the income must be derived from investment with any other co-operative society only. Hon'ble Karnataka High Court in the case of Principal Commissioner of Income Tax, Hubballi vs. Totagars Co-operative Sale Society(supra) held at para 23 of its decision as under:

"The character of income depends upon the nature of activity for earning the income and though on the face of it, the same may appear to · He falling in any of the specified clauses of section 80P(2) of tie Act, but on a deeper analysis of the facts, it may become ineligible for deduction under section BOP(2) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a scheduled bank or a co- operative bank and, thus, clause (d) of section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate

:: 6 :: from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under section BOP of the Act."

5.4.4 Thus, as can be seen from the above decision, Hon'ble High Court held that the person or body corporate (in this case, co-operative bank) from which such interest income is derived will not change the character of income, viz., the income from other sources, which is ineligible for deduction under section 80P(2)(d). Further, the definition of co-operative society as contained in Section 2(19) speaks only of "Cooperative Society" and not “co-operative bank". Similarly, the words' Co-operative Banks' are missing in clause (d) of subsection (2) of Section 80P. It is well settled rule of the interpretation that the legislative mandate should be read in such a way that no word used by the Parliament should be rendered inoperative. If the word “Co-operative Society” is to be read as “Co-operative Bank”, the same would render the entire provision redundant, the outcome of which the Parliament could sure not have intended. The Hon’ble Supreme Court in the case of Oswal Argo Mills (66 ELT 37) S.C. has clarified that where the words of the Statue are plain and clear there is no room for applying any of the principles of interpretation.

5.4.5 With the insertion of sub-section 80P(4) which is in the nature of a proviso, as held by the Hon’ble Supreme Court in its decision in the case of the Mavilayi Service Coop. Bank Ltd. & Ors. vs. CIT (Civil Appeal Nos. 7343-7350 of 2019 dtd. 12.01.2021), the co-operative banks are excluded from the ambit of section 80P. The relevant extract at par'a21 is as under:

"That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are co-operative societies who must possess a license from the RBI to do banking business." '

5.4.6 Hon'ble Karnataka High Court in the case of Principal Commissioner of Income Tax, Hubballi vs. Totagars Co-operative ·sale Society (supra) further held at para 14 as under:

"The purpose of bringing on the statute book sub-section (4) in Section BOP of the Act was to exclude the applicability of Section BOP of the Act altogether to any co-operative bank and to exclude the normal banking business income from such exemption/deduction category. . . . . . . . . . . . . . . . . . .... This exclusion by Section 80P( 4) of the Act even though without any amendment in Section 80P(2)(d) of the Act, is sufficient to deny the claim of the respondent assessee for deduction under Section BOP(2)(d) of the Act."

5.4.7 Thus, the intention of Legislature is to keep the co-operative banks out of the scope of section 80P. Once the provisions of section 80P are not applicable to Co- operative Banks, for all purposes they have to be kept out of the scope of the section. Wherever the word 'co-operative society' is used in section 80P, it will not be applicable for co-operative banks. This means that the interest income derived from deposits/investments in co-operative banks are not eligible for deduction under section 80(P)(2)(d).

5.4.8 As held by Hon’ble Karnataka High Court in Principal Commissioner of Income Tax, Hubballi v. Totagars CO-operative Sale Society (supra), the amendment of Section 194A(3)(v) excluding the Co-operative Banks from the definition of “Co-operative Society” by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A also makes the legislative intent clear that the Co-operative Banks are not that species of genus co-operative society which would be entitle to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P.

M/s.Ikkaraiboluvampatti PACCS :: 7 ::

5.4.9 In the light of above legal position, it is amply clear that interest earned by Appellant on deposit/ investment made in a co-operative bank is not eligible for claim of deduction under section 80P(2)(d). Thus, as discussed at preceding para 5.3 and herein above, the Appellant is not eligible for deduction under section 80P(2)(a) as well as 80P(2)(d).'

5.5 The provisions relating to exemption and deduction need to be strictly construed and no liberal interpretation or intendment can be inferred in such provisions. The. Constitution Bench of Hon'ble Supreme Court in Civil Appeal No.3327 of 2007, in the matter of Commissioner of Customs (Import), Mumbai Vs Dilip Kumar & Company & Others delivered on July 30, 2018, has categorically held that the exemption statutes have to be interpreted strictly and in case · of ambiguity, it must be interpreted in favour of the Revenue. Therefore, in view of the facts of the case as discussed at the preceding paragraphs and respectfully following the judicial decisions as discussed, the action of the AO in treating the interest income of the Appellant as "income from other sources" under section 56 and disallowing the deduction under section 80P(2)(a) / 80P(2)(d) is confirmed. Thus, all grounds of Appeal stand dismissed.

ITO reported in [2010] 188 Taxman 282 (SC), held that interest earned by a Co-operative Society from fixed deposits with CDCCB, is deductible u/s.80P(2)(d) of the Act.

taxed interest income under the head ‘income from other sources’ and their orders should be upheld.

Veerakeralam Primary Agricultural Co-operative Credit Society, reported in [2016] 388 ITR 492 (Mad.), held that interest income earned from fixed deposits with other Co-operative Societies or Banks, is eligible for deduction u/s.80P(2)(d) of the Act, because, District Central Co-operative Banks are primarily a Co-operative Society registered under Tamil Nadu Co-operative Societies Act, 1983. The relevant findings of the Tribunal are as under:

8. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below along with various case laws cited by both the parties. There is no dispute with regard to the fact that the assessee is a credit co- operative society registered under the TamilNadu Cooperative Societies Act, 1983. It is also not in dispute that the assessee is engaged in the business of providing credit facilities to its members. The AO has disallowed deduction claimed u/s.80P(2)(a)(i) of the Act primarily on two grounds. The first objection of the AO is with regard to claim of deduction in the light of provisions of Section 80A(5) of the Act which restricts the :: 9 ::

deduction unless such deduction is claimed in the return of income. We have gone through the provisions of Section 80P read with Section 80A(5) of the Act and found that nowhere in Section 80P or in Section 80A(5) of the Act it is mentioned that the assessee is required to file its return of income within the prescribed time provided u/s.139(1) or 139(4) of the Act. But, what is required to be seen is whether the assessee has made a claim in the return of income filed for the relevant year or not, even though such return is not filed within due date. In this case, the assessee although not filed its return of income for the impugned assessment year u/s.139 of the Act but such return of income has been filed in response to the notice issued u/s.148 of the Act and in the said return of income the assessee has made a claim for deduction u/s.80P(2)(a)(i) of the Act. Therefore, we are of the considered view there is no merit in the arguments taken by the ld.DR that the assessee is not entitled for deduction u/s.80P unless such deduction is claimed by filing return of income within the prescribed time allowed u/s.139(1) or 139(4) of the Act. This view is fortified by the decision of the Hon’ble Kerala High Court in the case of Chirakkal Service Co-operative Bank Ltd., vs. CIT (2016) 384 ITR 490 (Ker), where the Hon’ble Kerala High Court held that “a return filed by the assessee beyond the period stipulated u/s.139(1) or 139(4) or 142(1) or 148 of the Act can also be accepted and acted upon provided further proceedings in relation to such assessments are pending in the statutory hierarchy of adjudication in terms of the provisions of the IT Act. In all such situations, it cannot be treated that a return filed at any stage of such proceedings could be treated as non est in law and invalid for the purpose of deciding exemption under Section 80P of the Act”.

M/s.Ikkaraiboluvampatti PACCS :: 10 ::

Order pronounced on the 02nd day of November, 2022, in Chennai.