INCOME TAX OFFICER WARD-5(2)(3), BANGALORE vs. M/S THE KARNATAKA STATE CO-OPERATIVE HOUSING FEDERATION LIMITED , BANGALORE

O R D E R

Per George George K, JM:

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. section (4) to section 80P of the Act with effect from 001.04.2007, the assessee is not entitled to the benefit of deduction u/s 80P(2)(a)(i) of the Act. The A.O. also placed reliance on the judgment of the Hon’ble Apex Court in the case of The Citizen Co-operative Society Ltd. v. ACIT reported in 397 ITR 1 (SC) had held that the assessee has violated the principle of mutuality. Further, the A.O. held that the amount of Rs.64,90,752 being interest received from deposits with Scheduled Banks and Co-operative Banks was wrongly disclosed under the head `income from business’ in the return of income. The A.O. by placing reliance on the judgment of the Hon’ble jurisdictional High Court in the case of Pr.CIT & Anr. v. Totagars Co-operative Sale Society reported in (2017) 395 ITR 611 (Kar.), held that the surplus funds invested with Scheduled Banks and Co-operative Banks are not entitled to deduction u/s 80P(2)(a)(i) nor u/s 80P(2)(d) of the Act.

3. Aggrieved by the order of the assessment, the assessee preferred an appeal to the first appellate authority. The CIT(A) held that the decision relied on by the Assessing Officer in The Citizen Co-operative Society Ltd. v. ACIT (supra) is not applicable since the assessee has been entirely dealing with its members by providing credit facilities for acquisition of residential sites / flats. The CIT(A) by placing reliance on the judgment of the Hon’ble Apex Court in the case of CIT v. Karnataka State Co-operative Apex Bank reported in (2001) 251 ITR 194 (SC), held that interest arising from investments made in compliance with the statutory provision is exempt u/s 80P(2)(a)(i) of the Act. Accordingly,

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. the claim of deduction u/s 80P(2)(a)(i) of the Act was allowed by the CIT(A).

4. The Department being aggrieved by the order of the CIT(A), has preferred this appeal before the Tribunal. The grounds raised by the Department read as follows:

“1. The order of the Learned CIT(A) is opposed to law and facts of the case.

2. Whether on facts and circumstances of the case, the Learned CIT(A) was right in holding that the assessee was having only one category of members who are entitled for all the privileges without any kind of discrimination or distinction despite the fact that as per Para 25 of the bye law amended on 29.09.1999, the Society consists of membership of 4 categories viz 'A' class members, 'B' class members (nominal), 'C' class members(Associates) and 'D' class members (PSU & Government) having different powers and privileges.

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. 5. The learned Departmental Representative relied on the grounds raised.

6. The learned AR, on the other hand, has filed a paper book comprising of 244 pages, enclosing therein the written submissions, the statement of total income and financial statements for the year ending 31.03.2015, details of the interest income received during the relevant assessment year, case laws relied, etc. The learned AR strongly supported the order of the CIT(A). Further, it was alternatively submitted that if the portion of the interest income is assessed as income from other sources, necessarily, the cost incurred for earning such income ought to be allowed as a deduction u/s 57 of the Act. In this context, the learned AR relied on the judgment of the Hon’ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO reported in [2015] 58 Taxmann.com 35 (Karnataka) (judgment dated 25.03.2015). The learned AR also relied on the judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. Reported in (2021) 431 ITR 1 (SC), for the proposition that the assessee is entitled to deduction u/s 80P(2)(a)(i) of the Act.

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. earned out of investments made from surplus funds would be taxable under the head `income from other sources’ and would not be eligible for deduction u/s 80P(2)(a)(i) of the Act. It was further held by the Tribunal insofar as the deduction u/s 80P(2)(d) of the Act is concerned, only those interest received from investment with co-operative societies alone would be entitled to deduction. The relevant funding of the Tribunal reads as follows:-

“9. The Hon’ble Supreme Court in the case of the The Totgars Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283 (SC) 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. The Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO (230 Taxman 309), was dealing with a case where deduction u/s.80P(2)(a)(i) of the Act was claimed on interest from the deposits made in a nationalized bank out of the amounts which was used by the assessee for providing credit facilities to its members. The Assessee claimed that the said interest amount is attributable to the business of providing credit facilities by the assessee and forms part of profits and gains of business. The Hon’ble Karnataka High Court after considering SC judgment 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. The Court held a Cooperative Society which is carrying on 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, they cannot keep the said amount 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. The Hon’ble Court also distinguished the decision of the Hon’ble Supreme Court in the case of Totgars (supra) by observing that the Supreme Court was dealing with a case where the assessee- Cooperative Society, apart from providing credit facilities to the M/s.The Karnataka State Co-op.Ho.Fed.Ltd. 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 Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex 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 Supreme made it clear that they are confining the said judgment to the facts of that case. The Court therefore concluded that Hon’ble Supreme Court was not laying down any law. Similar view taken in Guttigedarara Credit Co- operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 392 ITR 0074 (Karn) in the context of deduction u/s.80P(2)(d) of the Act, it was held that Sec.80P(2)(d) of the Act allows 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. The Hon’ble Court held that that the aforesaid Supreme Court's decision in the case of Totgars (supra), was not applicable to deduction u/s.80P(2)(d) of the Act, because the said decision was rendered with regard to deduction under Section 80P(2)(a)(i) of the Act and not under Section 80P(2)(d) of the Act.

1.

2. The banking business, even though run by a Co- operative bank is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act. The purpose of bringing on the statute book sub- section (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any co- operative bank and to exclude the normal banking business income from such exemption/deduction category. The words

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. used in Section 80P(4) are significant. They are: "The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society …..". The words "in relation to" can include within its ambit and scope even the interest income earned by the respondent-assessee, a co-operative Society from a Co-operative Bank. 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 80P(2)(d) of the Act. The only exception is that of a primary agricultural credit society. (Paragraph-14 of the judgment) 3. The amendment of Section 194A(3)(v) of the Act 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 of the Act also makes the legislative intent clear that the Co- operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act. (Paragarph 15 of the Judgment) 4. If the legislative intent is so clear, then it cannot contended that the omission to amend Clause (d) of Section 80P(2) of the Act at the same time is fatal to the contention raised by the Revenue before this Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon'ble Supreme Court's decision in the case of Respondent assessee itself is otherwise.(Paragraph 16 of the Judgment) 5. On the decision of the earlier decision of the Hon’ble Karnataka High Court referred to in the earlier part of this order, the Court held that it did not find any detailed discussion of the facts and law pronounced by the Hon'ble Supreme Court in the case of the respondent assessee (Totagars Sales Co-operative society) and hence unable to follow the same in the face of the binding precedent laid by the Hon'ble Supreme Court. The Hon’ble Court observed that in paragraph 8 of the said order passed by a co- ordinate bench that the learned Judges have observed that "the issue whether a co-operative bank is considered to be a co- operative society is no longer res integra, for the said issue has been decided by the Income Tax Appellate Tribunal itself in different cases…………..". No other binding precedent was discussed in the said judgment. Of course, the Bench has observed that a Co- operative Bank is a specie of the genus co- operative Society, with which we agree, but as far as applicability of Section 80P(2) of the Act is concerned, the applicability of M/s.The Karnataka State Co-op.Ho.Fed.Ltd. the Supreme Court's decision cannot be restricted only if the income was to fall under Section 80P(2)(a) of the Act and not under Section 80P(2)(d) of the Act.(Paragraph-18 of the Judgment) 6. The Court finally concluded that it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Co- operative Bank. Therefore, the said decision of the Co- ordinate Bench is distinguishable and cannot be applied in the present appeals, in view of the binding precedent from the Hon'ble Supreme Court.” (Paragraph 19 of the Judgment) 12. The Hon’ble Karantaka High Court in the aforesaid decision also placed reliance on a decision of the Hon’ble Gujarat High Court in the case of STATE BANK OF INDIA (SBI) vs. COMMISSIONER OF INCOME TAX 389 ITR 0578 (Guj) did not agree with the view taken by the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. The Hon’ble Gujarat High Court held that in the case of Totgars Co-operative Sale Society (supra) decided by Hon’ble Supreme Court, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. The Hon’ble Gujarat High Court in this regard referred to the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. The Hon’ble Gujarat High Court therefore held that decision in the case of Totagar Co-operative Sales Society rendered by the Hon’ble Supreme Court is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression "profits and gains of business" and that such interest income cannot be said to be attributable to the activities of the M/s.The Karnataka State Co-op.Ho.Fed.Ltd. society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as "investment" are ineligible for deduction under section 80P(2)(a)(i) of the Act. (Paragraph-13 of the Judgment) 13. It can thus be seen that the ratio laid down by the Hon’ble Karnataka High Court in the case of Totalgars Cooperative Sales Society in 395 ITR 611 (Karn) is that in the light of the principles enunciated by the 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. 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 it 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. However, 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.

6. Without prejudice to the above, the learned Principal Commissioner ought to have taken note of the submissions made by the appellant that interest received by it amounting to Rs. 1,32,726 from deposits with Mysore &Chamarajanagar District Central Co-operative Bank made in compliance with section 58 of the Karnataka Co-operative Societies Act, 1959 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961 in respect thereof was rightly allowed by the Income Tax Officer.

7. Without prejudice to the above, the learned Principal Commissioner ought to have considered the submissions of the appellant to the effect that the interest received by it amounting to Rs. 1,32,726 from deposits with Mysore & Chamarajanagar District Central Co-operative Bank made in compliance with rule 28 of the Karnataka Co-operative Societies Rules, 1960 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the appellant was eligible for deduction thereof under section 80-P(2)(a)(i) of the Income Tax Act, 1961.”

18. The issue raised by the Assessee in the aforesaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised in ground No.5 to 7 alone

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. to the AO for examination afresh. In other respects we confirm the order of the CIT.” 7.1 In the instant case, it was contended that majority of the interest income is earned out of investments with central co- operative banks and it is in compliance with the requirements under the Karnataka Co-operative Societies Acts and Rules. If the amounts are invested in compliance with the Karnataka State Co-operative Societies Act, necessarily, the same is to be assessed as `income from business’ which entails the benefit of deduction u/s 80P(2)(a)(i) of the Act. The CIT(A) had allowed the deduction u/s 80P(2)(a)(i) of the Act by holding that interest arising from investments made in compliance with the statutory provisions is exempt u/s 80P(2)(a)(i) of the Act. From the records, we noticed that the assessee has received interest income even from other Scheduled Banks, such as, IDBI Bank, Yes Bank etc. Therefore, the reasoning of the CIT(A) that the investments are made in compliance with the statutory provision of the Karnataka State Co-operative Societies Act, 1959, may not be fully correct. Therefore, we are of the view that the matter has to be examined by the Assessing Officer.

7.2 Insofar as the deduction u/s 80P(2)(d) of the Act is concerned, we make it clear that the interest income received out of investments with co-operative societies alone is to be allowed as deduction. As regards the alternate contention of the assessee that if interest income is to be assessed as income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction M/s.The Karnataka State Co-op.Ho.Fed.Ltd. u/s 57 of the Act, we find an identical issue was considered by the Hon’ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO reported in [2015] 58 Taxmann.com 35 (Karnataka) (judgment dated 25.03.2015). The relevant findings of the Hon’ble High Court, read as follows:- “11. Having heard the learned counsel for the parties and perusing the records and in the light of the finding recorded by the Hon’ble Supreme Court that the interest income earned by the appellant falls within the category of “other income” what falls for consideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deduction in respect of proportionate costs incurred as permissible under Section 57.

M/s.The Karnataka State Co-op.Ho.Fed.Ltd. net income has to be taxed (i.e., gross receipt minus allowable expenditure), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of the Hon’ble jurisdictional High Court in the case of Totagars Sale Co-operative Society Limited v. ITO [2015] 58 taxmann.com 35 (Karnataka). Accordingly, the issue of deduction u/s 57 of the I.T.Act is restored to the files of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources’. If so, the same shall be allowed as deduction u/s 57 of the I.T.Act.

7.4 Moreover, the recent judgment of the Hon’ble Apex Court in the case of The Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT (supra) had held that the expression “members” is not defined under the Income-tax Act. Hence, it is necessary to construe the term “members” in section 80P(2)(a)(i) of the I.T.Act as it is contained in the respective State Co-operative Act. The Hon’ble Apex Court had held that providing credit facilities to associate or nominal members would be entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act unless they are not considered as “members” of the co-operative societies under the respective State Act. The Hon’ble Apex Court has also considered the judgment in case of Citizen Co-operative Society Ltd. (supra). The Hon’ble Apex Court has settled many issues. The gist of the judgment of the Hon’ble Apex Court, are as follows: (i) Section 80P is a benevolent provision enacted by the Parliament to encourage and promote the credit of M/s.The Karnataka State Co-op.Ho.Fed.Ltd. the co-operative sector in general must be read liberally and reasonably, if there is ambiguity, in favour of the assessee (para 45 of the judgment).

(ii) The co-operative societies extending credit facilities are entitled to deduction u/s 80P(2)(a)(i) and if there are loans to non-members, only profits attributable to the transactions with the non-members alone is liable to be excluded from the deduction. That is to say that the transactions with non-members per se would not disentitle a co-operative society from claiming the deduction under the section. If the state Act (the Co- operative Law) provides for enrollment of 'nominal members', the loans given to such nominal members would qualify for the purpose of deduction u/s 80P(2)(a)(i). (Para 30 to 46 of the Judgment)

(iii) Under clause (d) of section 80P(2), the interest or dividend income derived by a co-operative society from investments with other co-operative society is also eligible for the deduction whole of such income. (Para 35 of the Judgment)

(iv) The restrictive clause in sub-section (4) of section 80P applies only a co-operative bank and not to co- operative societies or to co-operative societies extending credit facilities to its members. Further, only a bank having obtained the license under the Banking Regulation Act, 1949, shall be covered under the said restrictive clause u/s 80P(4). The Hon'ble Court has also M/s.The Karnataka State Co-op.Ho.Fed.Ltd. elaborately explained the correct meaning & scope of the Proviso under the said sub-section (4) of section 80P declaring that the proviso carves out an exception to the exclusion in sub-section (4).

7.5 Taking into consideration the above factual issues, we are of the view that the matter needs to be considered afresh by the Assessing Officer. Accordingly, we set aside the order of the CIT(A) and direct the A.O. to verify the claim made by the assessee u/s 80P(2)(a)(i) and 80P(2)(d) of the Act, keeping in view the dictum laid down in the judicial pronouncements referred supra. It is ordered accordingly.