INCOME TAX OFFICER,WARD-1, HOSPET vs. GAYATRI PATTINA SOUHARDA SAHAKARI SANGHA NIYAMITHA, HOSPET, HOSPET

The brief facts of the case are that the assessee is registered under Karnataka Souharda Sahakari Act,1997 and is carrying on the business of providing financial facility to its members. The assessee filed its return of income for the assessment year 2017-18 declaring total income as NIL after claiming the deduction u/s 80P(2) of the Act. The return was then processed & intimation u/s 143(1) was also passed. Thereafter the case was selected for scrutiny under CASS as complete Scrutiny. The AO completed the assessment proceedings vide order dated 27/12/2019 passed u/s 143(3) of the Act with the following observations/ additions/disallowances- Gayatri Pattina SouhardaSahakari Sangha Niyamitha, Hospet Page 3 of 21

Aggrieved by the aforesaid order of the AO dated 27/12/2019 passed u/s 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

The ld. CIT(A)/NFAC partly allowed the appeal of the assessee by observing/holding as follows:- i) The ld. CIT(A)/NFAC by relying on the Judgement of Hon’ble Karnataka High Court in the case of Swabhimani Souharda Credit Co-operative Ltd vs. Govt. of India ( 421 ITR 670) as well as Sri Mata Vividodesha Pathina Souhardi Sahakari Niyamitha vs. Union of India ( 134 taxmann.com 62) held that the assessee is clearly a co-operative Society as per the definition of Section 2(19) of the IT Act. Accordingly the assessee is eligible for the deduction u/s 80P of the Act amounting to Rs. 34,79,909/- and this ground was upheld.

Aggrieved by the order of the ld. CIT(A)/NFAC dated 05/04/2024, the revenue has filed the present appeal before this Tribunal.

Before us, the ld. D.R. vehemently submitted that the ld. CIT(A)/NFAC erred in deleting the disallowance u/s 80P(2)(a)(i) of the Act amounting to Rs. 3,42,99,582/- especially when the society has earned interest income from investments in entities which are not co-operative society nor members of the co-operative Society. The ld. DR also submitted that the ld. CIT(A)/NFAC erred in Gayatri Pattina SouhardaSahakari Sangha Niyamitha, Hospet Page 6 of 21 deleting disallowance u/s 80P(2)(d) of the Act as the interest income has been earned from investment in FDs with Co-operative banks/other banks. Further, the ld. DR relied on the decision of Hon’ble High Court of Karnataka Dharwad Division Bench in the case of Pr. CIT Hubballi Vs. Totgar’s Co-operative Sale Society Ltd, Sirsi in ITA No.1000066 of 2016 dated 16.6.2017, wherein it was held that the income by way of interest earned from deposit and investments of surplus funds does not change its character irrespective of whether such interest is earned from the scheduled banks or the co-operative banks and thus clause (d) of section 80P of the Act would not apply to the facts and circumstances of the case.

The ld. A.R. on the other hand supported the Order of the ld. CIT(A)/NFAC and vehemently submitted that the assessee is entitled for the benefit of deduction amounting to Rs.3,42,99,582/- u/s 80P(2)(a)(i) of the Act as the entire interest is attributable to the business of the assessee. Without prejudice, the assessee claimed that they are entitled for the benefit of deduction to such portion of interest from Co-operative banks/other banks in respect of mandatory maintenance of Statutory deposits/fluid resources as bound under the Karnataka Co-operative Society Act and only the balance of net interest over and above, the mandatory SLR was liable to be charged u/s 56 of the Act after allowing the deduction u/s 57 of the Act.

We have heard the rival submissions & perused the material available on record. It is an undisputed fact that the assessee is registered under Karnataka Souharda Sahakari Act,1997 and is carrying on the business of providing financial/credit facility to its members. It is also well settled by the juri ictional Karnataka High Court in the case of Swabhimani Souharda Credit Co-operative Ltd Vividodesha Pathina Souhardi Sahakari Niyamitha vs. Union of India reported in 134 taxmann.com 62 that entities registered under the Karnataka Souharda Sahakari Act,1997 fit into the definition of “Co-operative” as enacted in Sec. 2(19) of the Income- Tax Act,1961 and therefore subject to all just exceptions, the assessee are entitled to stake their claim for the benefit of section 80P of the Act. We also take a note of the fact that the Revenue has also neither raised any grounds on this issue as well as issue of deletion of an addition made u/s 40(a)(ia) of the Act in the present appeal.

1 The Revenue in the present appeal has raised 3 grounds which all are related to the sole issue of allowing the deduction u/s 80P(2)(a)(i) /80P(2)(d) of the Act on Interest income earned from FDs with Co-operative Bank/ Other Bank amounting to Rs. Rs.3,42,99,582/-. On going through the order of the ld. CIT(A)/NFAC, we also could not understand the workings of the ld. CIT(A)/NFAC in deriving interest income of Rs.2367/- held liable to be taxed & the balance addition of Rs. 3,42,97,215/- ( 3,42,99,582 – 2367) was deleted by holding that the assessee being a co- operative society even though not eligible for deduction u/s 80P(2)(d) of the Act on the investments made in banks/co-operative banks but indirectly becomes eligible for deduction u/s 80P(2)(a)(i) of the Act to the extent of investment of business funds but not surplus funds.

2 First we will consider the argument of the AR of the assessee supporting that the assessee is entitled for the deduction under section 80P(2)(a)(i) of the act as the entire interest earned by the cooperative society from Co-operative Bank/Scheduled Bank/Co- operative society is attributable to the business of the assessee. The Gayatri Pattina SouhardaSahakari Sangha Niyamitha, Hospet Page 8 of 21 Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (123 taxman.com 161) has held that the co-operative societies providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the Act. We are of the considered opinion that if the Idle fund/ surplus money which are neither required to be deposited for maintaining the fluid resources nor statutorily required to be deposited under the Karnataka State Co-operative societies Act are invested/deposited into bank with an intention to earn Interest income only as these funds are not immediately required for the purposes of the business then it can not be said that such interest income earned are attributable to the business of the assessee. Therefore, such interest income earned on the surplus fund can neither be treated as an operational income of the assessee nor can it be said to be attributable to the business of the assessee. Had the intention of the legislature was to treat all the interest income earned by society are attributable to the business of the assessee only, then the provision of section 80P(2)(d) of the Act would be completely redundant. According to Section 14 of the Act, all income shall, for the purposes of charge of income tax and computation of total income, be classified under the five heads of income as specified. Therefore, we do not agree with the contention of the assessee that the entire interest income of Rs.3,42,99,582/- are allowable as deduction u/s 80P(2)(a)(i) of the Act.

3 Further the ld. CIT(A)/NFAC, heavily relied upon the decision of the Apex Court in the case of Totagar Sales Society Vs. ITO (2010) 322 ITR 283 and contended that the interest earned out of surplus funds kept by co-operative societies with banks are not eligible for deduction u/s 80P(2)(d) of the Act and the same are taxable as Income from Other sources u/s 56 of the Act. When we look at the decision of Hon’ble Supreme Court in case of Totgars Co- operative Sale Society's case (Supra), relied by the Ld. DR, Hon’ble Gayatri Pattina SouhardaSahakari Sangha Niyamitha, Hospet Page 9 of 21 Supreme Court was dealing with a case where the assessee therein, 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 payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein 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. On these facts Hon’ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 as income from other sources of the Act. Hon’ble Supreme Court, also clarified that, they are confining the said judgment to the facts of that case alone.

4 Further the adjudication by the Hon’ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. vs. ITO (supra) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction under Sec.80P(2)(d) on the interest income on the investments/deposits parked with a cooperative bank. Therefore, reliance was placed by the Ld. CIT(A)/NFAC on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. vs. ITO (supra) is distinguishable on facts.

5 Now we will consider the second argument raised by the AR of the assessee by contending that the assessee is entitled for the deduction under section 80P(2)(a)(i) of the act to such portion of the interest from co-operative banks in respect of mandatorily maintenance of fluid resources as compared under the assessee’s Gayatri Pattina SouhardaSahakari Sangha Niyamitha, Hospet Page 10 of 21 governing statute and only the balance of interest over and above the mandatory SLR was liable to be charged under section 56 of the Act.

6 We note that the primary issue in dispute pertains to the eligibility of deduction u/s 80P(2)(a)(i) of the Act/80P(2)(d) of the Act in respect of interest income earned from deposit made with co- operative banks and district co-operative banks/Scheduled banks. The crux of the matter is whether such interest income is to be considered as “business income” eligible for deduction u/s 80P(2)(a)(i) of the Act or 80P(2)(d) of the Act or to be classified as “income from other sources” and taxed accordingly.

7 We also take a note of the fact that the certain deposits(FDs) in question as contended by the AR of the assessee was not voluntarily made by the assessee society for investment purposes but were instead statutorily mandated by the Karnataka State Co- operative Society Act, 1959/ Karnataka Souharda Sahakari Act,1997. As per section 57(2) of the Karnataka State Co-operative Society Act, 1959, a co-operative society shall, out of its net profit in any year transfer an amount not being less than twenty-five per cent of the profits to the reserve fund. Further as per Rule 28 of the Karnataka Co-operative Societies Rules, 1960, every Co-operative Society accepting deposits and granting cash credits shall maintain fluid resources in such form and according to such standards as may be fixed by the