INCOME TAX OFFICER, WARD 1, UDUPI, UUPI vs. KAMBADAKONE RYTARA SEVA SAHAKARI SANGHA LTD, UDUPI

PER KESHAV DUBEY, JUDICIAL MEMBER:

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 3 of 32

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 4 of 32

4.1 Thereafter, the case of the assessee was selected for limited scrutiny through CASS for the reasons-(a) deduction under Chapter VIA, (b) Investments/advances/loans and accordingly notices u/s 143(2) as well as 142(1) of the Act were issued requiring to furnish details such as list of member as on 31.3.2017 with bifurcation of members such as A class/B Class/C Class, bye laws of the societies & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 5 of 32 along with other details/information. In response to notices, the assessee society filed the details such as copy of registration certificate, list of members, list of depositors, and copy of the bye laws of the society. The AO after verifying the details furnished by the assessee, concluded the assessment with the following observations as under:

• The AO held that interest from its investments in scheduled banks and co-operative banks other than co-operative societies amounting to Rs.2,81,04,247/- should be treated as income from other sources and in such a situation the Gross Total Income becomes a negative figure and thus the assessee is not eligible to get any deduction u/s 80P(2)(a)(i) of the Act. Further, the AO is of the view that the interest income is also ineligible for deduction u/s 80P(2)(d) of the Act as claimed by the assessee.

• The total income of the assessee was also held to be ineligible for deduction u/s 80P of the Act on the ground that the non members are almost double to those regular members. Further, the nominal members are more than 15% of the regular members which is in violation of not only the provisions of Karnataka Co-operative Societies Act, 1959 but also the principles of mutuality.

• Moreover, as verified in the audit report, the assessee society is following mercantile system of accounting. However on going through the P & L A/c, the AO found that the assessee in case of interest is following a hybrid system of accounting i.e. interest income are accounted for on cash basis however the interest payables are accounted for on an accrual basis. Therefore, the AO is of the view that interest debited must & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 6 of 32 also be made as per the cash basis and accordingly net difference of interest amounting to Rs. 3,46,09,292/- (14,68,58,216/- (-) 11,22,48,924/-) was disallowed from Interest payable Account.

• The AO had also disallowed the provisions for Non-performing Asset amounting to Rs. 44,09,451/- debited to P & L A/c as these provisions are neither expenditure nor an ascertained liability.

4.2 The AO accordingly computed the income of the assessee as under: Computation of Income

Gross total income as per P&L Rs.2,79,94,566 account Add: Provision of interest made Rs.3,46,09,292 for the current year disallowed as discussed in Para 6 Add: Provisions disallowed as Rs.44,09,451 discussed in Para 7 Revised gross total income Rs.6,70,13,309 Less: Deduction u/s 80P NIL Total income Rs.6,70,13,310

1. With regard to the disallowance of Rs.44,09,451/- towards the provision for non-performing assets, the ld. CIT(A)/NFAC & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 7 of 32 accepted the logic of the assessee that such disallowance will be a nil tax effect as the enhanced total income, if assessed as business of lending, the said profit is 100% deductible u/s 80P(2)(a)(i) of the Act but the fact remains that in the computation of total income, the assessee ought to have added back the provision for NPA as it is an un-crystalized liability. The assessee since is eligible for deduction u/s 80P(2)(a)(i) of the Act, it is not permissible for the assessee to get any deduction u/s 36(1)(viia) of the Act. Therefore, the ld. CIT(A)/NFAC held that the action of the AO is correct although the fact may have the nil tax effect.

3. With regard to interest received by the assessee on its deposit with Cooperative Bank and other bank for a sum of Rs.2,81,04,247/- treated by AO as income from other sources, the ld. CIT(A)/NFAC found that the investment made in Co- operative banks are to safeguard the interest of deposits mobilized by the assessee from the members which is sanctioned by the Karnataka Co-operative Society Act, 1959 in section 58 of such Act. Further, the ld. CIT(A)/NFAC is of the opinion that such investments are made in regular course of & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 8 of 32 business and it is also not established that such investments are made by retaining the amounts payable to the members. It further held that the original source of investment made by the assessee society is admittedly the income that the society derived from the activity listed as providing credit facilities to its members, the character of such income cannot be lost when the statute uses the expression “attributable to” in section 80P(2)(a)(i) of the Act and there is no mention of expression “derived from” or directly “attributable to”. The ld. CIT(A)/NFAC accordingly held that interest income of Rs.2,81,04,247/- is nothing but income from business of the assessee and not income from other sources. Once such income is treated as income from business, the amount in question qualifies for deduction u/s 80P(2)(a)(i) of the Act.

4. Further, with regard to non-eligibility to claim the deduction u/s 80P(2)(a)(i) of the Act, due to the fact that the non- members are almost double to those regular members. Further, In the opinion of the AO, the nominal members are more than 15% of the regular members which is in violation of not only the provisions of Karnataka Co-operative Societies Act, 1959 but also the principles of mutuality. The ld. CIT(A)/NFAC on the other hand, relying on the decision of Hon’ble Supreme Court in the case of Mavilayi Service Co- operative Bank, held that in the case of the assessee society, the governing act of Karnataka Co-operative Society Act, 1959 in section 60 allows the assessee to make loans to a depositor on the security of his deposit. Therefore, the action of the assessee cannot be held to be beyond the scope of law and therefore, respectfully following the decision of Hon’ble Supreme Court, the ld. CIT(A)/NFAC held that the assessee cannot be penalized for allowing loan to associate or nominal & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 9 of 32 members by denying the deduction u/s 80P(2)(a)(i) of the Act and accordingly, directed the AO to recomputed the gross total income of the assessee and such gross total income is to be allowed 100% deduction u/s 80P(2)(a)(i) of the Act.

i. Interest received from Co-operative banks and Urban banks are to be assessed u/s 56 of the Act and not u/s 80P(2)(a)(i) of the Act. ii. The interest receivable from scheduled/commercial banks are to be taxable under the head income from other sources. iii. The NPA provision of Rs.44,09,451/- debited to the profit & loss account of the assessee are not allowable as the same is not an ascertained liability. iv. The provision for interest made for the current year amounting to Rs.3,46,09,292/- is not allowable as per the hybrid system of accounting followed by the assessee.

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 11 of 32 The Revenue has not raised any grounds relating to the ld. CIT(A)/NFAC holding that the assessee cannot be penalized for allowing loans to associate or nominal members by denying the deduction u/s 80P(2)(a)(i) of the Act.

10.1 However, the assessee in his cross objection raised that the assessee is entitled for the benefit of deduction u/s 80P(2)(a)(i) of the Act to such portion of interest from Co-operative banks in respect of mandatory maintenance of fluid resources as compelled under the Karnataka Co-operative Society Act and only the balance of interest over and above, the mandatory SLR was liable to be charged u/s 56 of the Act.

10.2 Further, the differential provision for interest payable on deposits amounting to Rs.3,46,09,292/- disallowed on the ground that the assessee was following hybrid system of accounting and debits found in audited P&L account of the assessee viz. NPA provision of Rs.44,09,451/- are opposed to the CBDT circular no.37/2016 dated 2.11.2016 as well as the decision of Hon’ble Bombay High Court in the case of CIT Vs. M/s. Gem Plus Jewellery India Ltd. and also the decision of the coordinate bench of this Tribunal in in Sri Rama Credit Co- operative Society Ltd., Kundapura vs. ACIT Circle-1 Udupi.

Now we take up the above issues raised before us in seriatim:-

A. DISALLOWANCE OF NPA PROVISION DEBITED TO P & L ACCOUNT AMOUNTING RS. 44,09,451/- 10.3 Before the AO, the Assessee society in its submission had submitted that these provisions are made by the assessee as per the audit guidelines which take care of bad & doubtful debts.

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 12 of 32 Further before us as well as before the lower authorities, the ld. AR of the assessee submitted that even if the said provisions are added back, the resultant increase in its business profits will again qualify for deduction u/s 80P of the Act as per the circular No. 37/2016 dated 02/11/2016.

10.3.1 The AO held that as the assessee had not given any details/explanation saying that the provision so made is in relation to an ascertained liability or against a quantified liability and hence the provision amounting to Rs.44,09,451/- had been treated as not an ascertained liability or expenditure and added to the income of the assessee.

10.3.2 The ld. CIT(A)/NFAC although held that the assessee ought to have added back the provision for NPA as it a uncrystallized liability but also accepted the assessee’s contention that such disallowance will be a nil tax effect. Before us, the Revenue has raised the ground that ld. CIT(A) erred in allowing the NPA Provision of Rs. 44,09,451/- deb ited to profit & loss account as the same is not an ascertained liability or expenditure.

10.3.3 We are of the considered opinion that the ld. CIT(A)/NFAC did not allow the NPA Provision debited to P & L A/c. The ld. CIT(A)/NFAC in fact held that the assessee ought to have added back the provision for NPA as it an uncrystallized liability. However, the ld. CIT(A)/NFAC accepted the contention of the assessee that even if the said provisions are added back, the resultant increase in its business profits will again qualify for deduction u/s 80P of the Act as per the circular No. 37/2016 dated 02/11/2016. We are also of the same opinion as that of ld. CIT(A)/NFAC that as per the circular no. 37/2016 dated & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 13 of 32 02/11/2016, any disallowance related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A will be admissible on the profits so enhanced by the disallowance.

10.3.4 Accordingly, we remit this issue to the file of AO to compute the correct business profit & Gross Total Income as well as the correct value of the deduction u/s 80P of the Act with the above observation.

10.3.5 In the result this ground of appeal of the Revenue is dismissed & the ground raised in the cross objection is allowed.

B. DISALLOWANCE OF EXCESS PROVISION OF INTEREST DEBITED TO PROFIT & LOSS A/C RS. 3,46,09,292/- 10.4 The AO as verified in the audit report, found that the assessee society is following a mercantile system of accounting. However, on going through the P & L A/c the assessee, in case of interest A/c is following a hybrid system of accounting i.e. interest income is accounted for on cash basis however the interest payables are accounted for on an accrual basis. Therefore, the AO is of the view that the interest debited must also be made as per the cash basis and accordingly net difference of Provision for interest for the F.Y. 2016-17 & 2015-16 amounting to Rs. 3,46,09,292/- (14,68,58,216/- (-) 11,22,48,924/-) was disallowed.

10.4.1 The ld. CIT(A)/NFAC on the other hand is of the opinion that the assessee is within its legitimate right to credit interest on cash basis as per section 43D of the Act. However, in case of payable interest, there is no compulsion in the Income Tax Act to & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 14 of 32 account for such liability on cash system only and therefore the logic of the AO that if credit of interest is accounted for on cash basis, the debit of interest payable is also to be accounted for cash basis is not found correct and accordingly, deleted the disallowance of Rs.3,46,09,292/-.

10.4.2 Before the AO, the assessee contended that it has followed accounting policies as per Karnataka State co-op. societies Act and provided for interest payment as per rule 22 of the Karnataka State co-op. societies rule. The AR of the assessee also submitted that as the assessee is following the mercantile system of accounting, the accrued interest to members are also to be allowed as business expenditure of the assessee. Further before us as well as before the lower authorities, the ld. AR of the assessee submitted that even if the said provisions are added back, the resultant increase in its business profits will again qualify for deduction u/s 80P of the Act as per circular No. 37/2016 dated 02/11/2016.

10.4.3 Before us, the ld. DR submitted that the ld. CIT(A)/NFAC grossly erred in allowing the provisions for interest made for the current year amounting to Rs.3,46,09,292/- as per the hybrid system of accounting followed by the assessee which is not allowable under the Income Tax Act.

10.4.4 It is an undisputed fact that for the purposes of computing the taxable income under the income tax act, the provisions of the Income Tax Act has to be followed & not the Karnataka State Co-operative societies act. We are of the considered opinion that as rightly contended by the ld. DR, as per section 145(1) of the Act income chargeable under the head “ Profits and gains of business or profession” or “income from other sources” shall subject to the provisions of sub-section (2), be computed in & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 15 of 32 accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) of section 145 provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. Accordingly, the Central Government notified 10 ICDS vide Notification No.S.O.892(E) dated 31st March, 2015 with effect from assessment year 2016-17. It is to be noted that ICDS is not meant for maintenance of books of account or preparing financial statements. Persons are required to maintain books of account and prepare financial statements as per accounting policies applicable to them. The accounting policies mentioned in ICDS-I being fundamental in nature shall be applicable for computing income under the heads "Profits and gains of business or profession" or "Income from other sources".

10.4.5 Further, the matching concept in accounting, also known as the matching principle, is a core principle in accrual accounting. It dictates that expenses should be recognized and recorded in the same accounting period as the revenues they helped generate. This principle ensures that financial statements accurately reflect a organization's financial performance by aligning costs with the revenues they produce. In view of the above, we do not agree with the method of accounting followed by the assessee for computing the income under the heads "Profits and gains of business or profession"

10.4.6. Further, we also do not agree with the ld. CIT(A)/NFAC in holding that the assessee was within its legitimate right to credit interest on cash basis as per section 43D of the Act. It is an undisputed fact that the assessee is a primary agricultural credit society registered under the provisions of Karnataka Co-operative Societies Act, 1959 & therefore the special provision of section 43D & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 16 of 32 of the Act is not applicable to the assessee co-operative society. Therefore, we are of the considered opinion that in computing income under the heads "Profits and gains of business or profession" the assessee should either follow the mercantile system of accounting or cash system of accounting. The hybrid system of accounting cannot be followed for computing income under the heads "Profits and gains of business or profession" & therefore the assessee has to declare the Interest receipts also on mercantile basis of accounting.

10.4.7 Now coming to assessee’s contention by way of cross objection that such addition of Gross Interest income following the mercantile system of accounting will be a nil tax effect, we are of the considered opinion that as per the circular no. 37/2016 dated 02/11/2016, any disallowance related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A will be admissible on the profits so enhanced by the disallowance. Therefore, we allow this ground of cross objection of the assessee.

10.4.8 Accordingly, we set-aside the order of ld. CIT(A)/NFAC on this issue and remit this issue to the file of AO to recompute the correct business profit & Gross Total Income after taking into consideration the interest Income accrued to the assessee & thereafter determine the correct value of the deduction u/s 80P of the Act with the above observation.

C. (i) INTEREST EARNED FROM CO-OPERATIVE BANK & SCHEDULED/ COMMERCIAL BANK ON INVESTMENTS :-

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 17 of 32 10.5 The AO on verification of details furnished, found that the assessee had earned interest from its investments in scheduled banks and co-operative banks other than co-operative societies at Rs.2,81,04,247/-.The AO held that such interest from its investments in scheduled banks and co-operative banks should be treated as income from other sources and in such a situation the Gross Total Income becomes a negative figure and thus the assessee is not eligible to get any deduction u/s 80P(2)(a)(i) of the Act. Further, the AO is of the view that the interest income is also ineligible for deduction u/s 80P(2)(d) of the Act as claimed by the assessee. 10.5.1 The main contention of the AO is that the assessee society has invested its idle/surplus funds which are immediately not required for lending to its members in Co-operative Banks and Scheduled Banks and earned interest out of such investment which as per legislature the assessee is not supposed to do to get deduction u/s 80P(2)(d) of the Act.

10.5.2 The ld. CIT(A)/NFAC however held that such investments are made in regular course of business of the assessee and it is not established that such investments are made by retaining the amounts payable to the members. Further ld. CIT(A)/NFAC held that the original source of investments made by the assessee society is admittedly the income that the society derived from the activity listed as providing credit facilities to its members, the character of such income cannot be lost when the statute uses the expression “attributable to” and accordingly held that the interest income of Rs. 2,81,04,247/- is nothing but income from business of the assessee and not the income from other sources. Once such income is treated as income from business, the amount in question qualifies for deduction under section 80P(2)(a)(i) of the act.

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 18 of 32 10.5.3 Before us, the learned DR vehemently submitted that the ld. CIT(A)/NFAC grossly erred in relying upon decision of Hon’ble Andhra Pradesh High Court reported in 396 ITR 371 and has allowed the appeal of the assessee, whereas the second decision of Hon’ble jurisdictional High Court in the case of Totgars Co- operative Sales Society in dated 16.6.2017 held that “interest received from co-operative banks and urban banks are to be assessed u/s 56 of the Act.

10.5.4 By way of cross objection, the assessee contended that 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 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. 10.5.5 Surprisingly, in the grounds of cross objection filed by the assessee, the assessee asserted that the order passed by the learned CIT(A) /NFAC allowing deduction under section 80P(2)(d) of the act in respect of interest on investments derived from co- operative banks (SCDCC Bank, Bhatkal Urban Co-operative Bank & Bharath Co-operative Bank) is in order and does not call for any interference whereas on going through the order of learned CIT (appeal), we find that the entire interest on investment where held to be attributable to the business of the assessee and qualifies for the deduction under section 80P(2)(a)(i) of the act.

10.6 First we will consider the grounds of cross objection raised by 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 & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 19 of 32 mandatorily maintenance of fluid resources as compared under the assessee’s 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.

10.6.1 We note that primary issue in dispute pertain 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.

10.6.2 We also take a note of the fact that the deposit in question 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. As per section 57(2) of the said Act, 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 the 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 Registrar, from time to time, by general or special order. As per section 58 of the Karnataka State Co-operative Society Act, 1959, such reserve funds must be mandatorily invested in specified institutions including co-operative banks. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 20 of 32 Registrar of Co-operative Societies. We also take a note of the fact that if the Statutory funds are not invested in the prescribed fund, the business of the assessee may get hampered/affected due to the violation of these statutory provisions.

10.7 Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the banks are entitled for deductions u/s 80P(2)(a)(i) of the Act. In holding so, we also draw our support and guidance from the judgment of the Hon’ble Supreme Court reported in 113 ITR 84 in the case of Cambay Electrical Supply Industrial Co. Ltd. Vs. CIT which has considered the term “attributable” and held as follows:

"As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business" of the specific industry (here generation and distribution of society) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from" been used, it could have with some force been contented that a balance charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression "derived from", as for instance, in Section 80J. In our view, since the expression of wider import, namely "attributable to" has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity"

10.8 Further, we also draw support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank reported in 251 ITR 194 wherein it was held as under:

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 21 of 32 “There is no doubt, and it is not disputed, that the assessee co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income tax thereon. The placement of such funds being imperative for the purpose of carrying on the banking business, the income derived there from would be income from the assessee’s business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co-operative Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.”

10.9 Further, the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. v. Income-tax Officer Reported in (SC) :(2001) 251 ITR 522 had again reiterated by relying on its own judgment delivered in the case of Karnataka State Co-operative Apex Bank’s case (supra) as under-

“Insofar as the interest income upon statutory reserves is concerned, the question must be answered in favour of the assessee, in the light of the judgment delivered by us in Karnataka State Co-operative Apex Bank’s case (supra).”

In view of the above principles laid down by Hon’ble Supreme Court if the income is attributable to the profits & gains of business of the society, then the assessee society is entitled for deduction u/s 80P(2)(a)(i) of the Act.

10.10 Further, In the case of ClT Vs Nawanshahar Central Cooperative Bank Ltd. [2007] 160TAXMAN 48(SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and Gains of Business and Profession". Even & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 22 of 32 though the abovementioned decision was in the context of co- operative societies /Banks claiming deduction under section 80P (2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 as per the CBDT Circular No. 18/2015 dated 02/11/2015.

10.11 Further, the Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax officer Ward-V, Tumkur reported in [2015] 230 Taxman 309 had also held as under- “7. The word 'attributable' used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word 'attributable' as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v.CIT [1978] 113 ITR 84 (SC) as under:

'As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature, has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor- General, it has used the expression ''derived from", as, for instance, in section-80J. In our view, since the expression of wider import, namely, "attributable to'', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.' 8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. 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 & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 23 of 32 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.”

10.12 However, we are also conscious to the fact that the details of quantum of amount necessary to be deposited to comply with the Karnataka Co-operative Society Act is not provided by the assessee. Therefore, we, in the interest of justice and fair play are inclined to set aside this issue to the file of AO with a direction to compute the required quantum of amounts needs to be deposited as per the statutory requirement and allow the claim of the deduction u/s 80P(2)(a)(i) of the Act of the corresponding interest income irrespective of the fact that the investment were made by the co-operative society or scheduled banks.

10.13 Furthermore, without prejudice to the above findings, we are also inclined to consider the alternative plea raised by the assessee. In the event that the AO found that any amount of investment over and above the required statutory limits, the AO may consider the claim of deduction u/s 80P(2)(d) of the I.T. Act and accordingly, we direct the A.O. to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act.

10.14 The Revenue in the grounds of appeal profoundly relied upon the decision of Hon'ble High Court of Karnataka in the case of Totgars Cooperative Sale Society [2017] 83 taxmann.com & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 24 of 32 140/395 ITR 611 (Karnataka) which held that the intention of legislature is clear that Co-operative banks are not specie of genus cooperative society, which would entitle to exemption or deduction under the Special Provisions of chapter VIA in the form of section 80P of the Act.

10.15 We are of the considered opinion that the Hon’ble Supreme Court in the case of Kerala State co-operative agricultural and rural development bank Ltd. KSCARDB v. the Assessing Officer, Trivandrum and Ors. Reported in (2023) 458 ITR 384 analyzed, whether the assessee therein could be treated as a “co-operative Bank” within the meaning of sec. 80P(4) of the Act. The Hon’ble Supreme Court considered the above issue in case of an assessee who is a state level Agricultural and Rural Development Bank, governed as a cooperative society, under the relevant state cooperative societies Act, and was engaged in providing credit facilities to its members who were cooperative societies only. On facts, the assessee therein claimed deduction under Section 80P (2)(a)(i) of the Act. The Ld.AO disallowed the deduction under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Ld.AO therein held that the appellant/assessee is a "co-operative bank" and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. This was upheld by the Ld.CIT(A) and the Tribunal. The decision of the Tribunal was confirmed by Hon’ble Kerala High Court.

10.15.1 The Apex Court analyzed the legal framework, relevant provisions under the co-operative societies Act, NABARD Act, provisions of sec. 80P under the Income Tax Act, 1961, RBI Act, the Banking Regulation Act and the various judicial precedents on & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 25 of 32 similar issues. The observations of Hon’ble Supreme Court in Paras 14.3 and 15.8 are of relevant that reads as under:-

“14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court: i) Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” is significant as it indicates the general “drift” of the provision. ii) Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”. iii) Thirdly, the gross total income must include income that is referred to in sub-section (2). iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being “engaged in”, inter alia, carrying on the business of banking or providing credit facilities to its members. v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. vi) Sixthly, the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. vii) Seventhly, under Section 80P(1)(c), the co-operative societies must be registered either under Co-operative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other co- operative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole.

----------- & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 26 of 32 15.8. Since the words ‘bank’ and ‘banking company’ are not defined in the NABARD Act, 1981, the definition in sub-clause (i) of clause (a) of Section 56 of the BR Act, 1949 has to be relied upon. It states that a cooperative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co- operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of Section 5 of the BR Act, 1949 is seen, it means any company which transacts the business of banking in India and as already noted banking business is defined in clause (b) of Section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank and in such a case, Section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co- operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci). Whereas a co- operative bank is in the nature of a banking company which transacts the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949. But if a cooperative society does not transact the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a cooperative bank. Then the definitions under the NABARD Act, 1981 would not apply. If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act.”

10.15.2 In any event Hon’ble Supreme Court in the decision has elaborately analyzed the requirement of a cooperative bank that could fall within the exception of section 80P(4) of the Act. Based on such principle analyzed by Hon’ble Supreme Court and respectfully following the view taken by the Hon'ble Karnataka High Court in the case of PCIT & Anr. Vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and the Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, we are of the considered opinion that interest earned on any amount of investment over and above the required statutory limits from such commercial/cooperative banks that fall within the definition of “banking company’ as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 27 of 32 interest are to be considered under the head ‘income from other sources’ as held by the jurisdictional High Court of Karnataka in the case of Pr. CIT v. Totagars Co-operative Sale Society reported in (2017) 395 ITR 611.

10.16 Insofar as AR of the assessee’s claim that if interest income is to be assessed as income from other sources, necessarily, the cost of fund and related administrative expenses in respect of earning such interest income should be allowed as deduction u/s 57 of the I.T. Act, 1961.We find an identical issue was considered by the Hon’ble jurisdictional High Court in the case of Totagars Co- operative Sales 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.

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 28 of 32 10.17 The assessee has not raised the plea before the Income tax Authorities that it has to be given deduction u/s 57 of the Act, in respect of expenditure for earning the interest income. However, in spite of such plea not being raised before the lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only 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 (supra). Accordingly, the issue of deduction u/s 57 of the I.T. Act is restored to the file 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 Act. The assessee is directed to co-operate with the revenue and furnish all the necessary details/records/evidence.

10.18 In view of the above discussions/observations, we are inclined to remit the issue back to the file of AO for determining/computing the Business Income, Income from other sources, eligible deduction u/s 80P of the Act with the following Observations- i) The Interest received exclusively from the credit facilities provided to its members will be treated as operating Profit of the Co-operative society & eligible for deduction u/s 80P(2)(a)(i) of the Act. ii) Further, the Interest income earned out of the Statutory deposits/maintain fluid resources are attributable to the business activity of the co-operative society & hence also & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 29 of 32 eligible for deduction u/s 80P(2)(a)(i) of the Act irrespective of the fact that the interest is earned from the co-operative bank and/or scheduled bank. iii) For an amount of interest earned on investment over and above the required statutory limits from such commercial/cooperative banks that fall within the definition of “banking company’ as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head ‘income from other sources’ & the deduction under section 80P(2)(d) is not available on such Interest on investment. However the cost of fund and related administrative expenses in respect of earning such interest income should also be allowed as deduction u/s 57 of the Act. iv) 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 eligible for deduction u/s 80P(2)(d) of the Act.

Needless to say a reasonable opportunity of being heard must be granted to the assessee. The assessee is also directed to submit all the relevant details as well as the breakups as per our observation above.

& 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 30 of 32 & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 31 of 32 13. The assessee has raised the following grounds of cross objection for the AY 2018-19:

ITA Nos.1929 & 1930/Bang/2024 KambadakoneRytaraSevaSahakariSangha Ltd., Uppunda Page 32 of 32 14. The issues in this appeal of the revenue as well as in cross objection of the assessee are similar to that of the appeal of the revenue in and CO of the assessee in CO No.40/Bang/2024 as above and hence, the decision/observation given in the appeal of the revenue in & and CO of the assessee in CO No.40/Bang/2025 will mutatis mutandis apply to the appeal of revenue in CO No.41/Bang/2025 and hence these are also partly allowed for statistical purposes.