BHASKARA EMPLOYEES CREDIT CO-OPERATIVE SOCIETY LIMITED ,BENGALURU vs. INCOME TAX OFFICER, WARD-4(2)(2), BANGALORE

On the assessment, the assessee was denied deduction u/s 80P (2) (a) (i) of the Act on interest income earned by the assessee on investments made in pursuance of provision of The Karnataka State Cooperative Societies Act, 1959 not treating it as business income attributable to the activities of the assessee. The ld assessing officer passed an assessment order under section 143(3) of the Act on 27/12/2019 denying deduction under section 80P of the Act but determined the total income at Rs 470921/- against the returned income of rupees Nil. Thus the assessee was denied deduction under section 80 P of the Act on the interest income earned by the assessee of ₹ 470,921/–. Main reason for disallowing the above claim is the decision of the Hon’ble Karnataka High Court in case of Totagars’ Sales Cooperative Societies (2017) 83 taxmann.com 140 (Karnataka). When the matter reached before the learned CIT – A, the order of the learned AO was upheld. Therefore, assessee is in appeal before us.

Though the assessee has raised a ground before us in appeal that no show cause notice was issued, but crux of the argument is that the assessee is entitled to deduction under section 80 P of the Act of interest earned by the assessee on statutory investment made by it in compliance of The Karnataka Cooperative Societies Act, 1959, is allowable as business income and therefore the entitlement of deduction under section 80 P (2) (a) (i) of the Act cannot be denied.

Before us the assessee distinguished the decision of the Hon’ble Karnataka High Court and further relied upon the decision of the Hon’ble Supreme Court in case of Kerala State Cooperative Agricultural And Rural Development Bank Ltd (2023) 458 ITR 384 (SC) and as well as the decision of the case of Mavilayi Service Cooperative Bank Ltd (2021) 123 taxmann.com 161 (SC). It submits that the issue is squarely covered in favour of the assessee by the decision of the coordinate bench also (ITA No.1724/Bangalore/2019 dated 22/11/2021 for AY 2014 – 15) wherein it is held that interest income on statutory investment is eligible for deduction under section 80P of the Act.

The learned DR vehemently supported the order of the learned lower authorities and submitted that the Hon’ble Karnataka High Court has categorically held that the interest income could not be granted as deduction under section 80 P of the Act with respect to the interest income earned.

I have carefully considered the rival contention and perused the orders of the learned lower authorities. The simple issue involved in this appeal is that an assessee being an employee’s credit cooperative society of employees officer is eligible for deduction of interest income on statutory reserve fund which are deposited in terms of regulations of the Karnataka Cooperative Societies Act under section 80 P of the Act or not.

Hon’ble Supreme Court had an occasion to consider the issue of interpretation of provision of section 80 P of the Act in Mavilayi Service Co-operative Bank Ltd. vs. Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC)/[2021] 279 Taxman 75 (SC)/[2021] 431 ITR 1 (SC)[12-01-2021] wherein it was held as under:-

Since we are concerned here with sub-clause (i) of clause (a) of sub-section (2), it recognises two kinds of cooperative societies, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members.

Undoubtedly, if one has to go by the aforesaid definition of "cooperative bank", the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative to have a licence from Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a cooperative bank. The appellant, therefore, would not come within the mischief of sub- section (4) of section 80-P.

So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under section 80-P of the Act is not sub-section (4) thereof. What has been noticed by the assessing officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violation of the provisions of MACSA under which it is formed. It is pointed out by the assessing officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of "nominal members". These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in fixed deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that the depositors and borrowers are quite distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as cooperative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the assessing officer that the activity of the appellant is in violation of the Cooperative Societies Act. Moreover, it is a cooperative credit society which is not entitled to deduction under section 80-P(2)(a)(i) of the Act.

It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the assessing officer, our purpose would be served by taking note of the following portion of the discussion: "As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality: (i) that no person can earn from him; (ii) that there a profit motivation; (iii) and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20-12-2010]. [Though the bank formed the third party vis-à-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs.] In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the Society as such the AOP body by the Society is not covered by concept of mutuality at all."

These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a cooperative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80-P of the Act."

An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment: (I) That section 80P of the IT Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; (II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub-section (2) of section 80P must be given by way of deduction; (III) That this Court in Kerala State Cooperative Marketing Federation Ltd. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so - which is not the case with section 80P(2)(a)(i); (V) 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 cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4).

However, considering that the learned Senior Advocate appearing for the Revenue argued that the concurrent findings of fact in that case were that most of the business of the assessee was conducted illegally with nominal members, who could not be members of such society under the Andhra Pradesh Act, and considering also that, as the assessee engaged in granting loans to the general public, it could not be treated as a co-operative society meant only for its members and providing credit facilities to its members, the appeal by the assessee would fail. It is important to note that no argument was made by the counsel for the assessee in Citizen Cooperative Society Ltd. (supra) that the assessing officer and other authorities under the IT Act could not go behind the registration of the co-operative society in order to discover as to whether it was conducting business in accordance with its bye-laws."

The Honourable Supreme court further held that :-

Thus, the verdict of the Hon’ble Supreme Court in this case is very clear and is the law of the land. It is held that object of the provision of section 80 p is the furtherance of cooperative movement. Therefore, it cannot be said that one Act i.e., Karnataka State Cooperative Societies Act 1959, directs the cooperative societies to maintain fund with the institutions for carrying on its activities and the income tax Act denies the deductions holding that it is not business activity of the assessee and interest so earned is not the income attributable to the activities of the assessee.

It is not in dispute before us then the income earned by the assessee from investment in the bank is earned from the statutory investment made by the assessee with the other cooperative banks in terms of the provisions of the governing act of the Karnataka State Cooperative Societies Act, 1959. The issue is not that the idle funds have been invested by the assessee and therefore the deduction is eligible to the assessee or not is a question under section 80P(2)(d) of the Act, therefore such income cannot be taxed under the head income from other sources.

According to the provisions of section 80 P (2) the whole of the amount of profits and gains of business activity to any or more of more of such activities is eligible for deduction. In this case it is not the claim of the revenue that the interest income on by the assessee is not attributable to the activities of the assessee as specified.

The decision of the Hon’ble Karnataka High Court is on the issue of deduction under section 80 P (2) (d) of the Act whereas the issue before us is deduction of interest income which is attributable to the business of the assessee allowable under section 80 P (2) (a) (i) of the Act. Further we have relied upon the decision of the Hon’ble Supreme Court which is held that provisions of section 80P of the Act are beneficial, should be interpreted liberally and in favour of the assessee.

The Coordinate bench in dated 22/11/2021 for assessment year 2014 – 15 has also taken this view.

In view of the above facts we do not find any reason to uphold the orders of the learned lower authorities in denying the deduction under section 80P(2)(a)(i) of the Act of ₹ 470,921/–. Accordingly the appeal of the assessee is allowed and the learned assessing officer is directed to grant deduction of ₹ 470,921/– to the assessee under section 80P(2)(a) (i) of the Act.

In the result appeal of the assessee is allowed.