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Facts
The assessee, a cooperative society, claimed deduction under Section 80P(2)(a)(i) on its net profit which included interest income from deposits with a cooperative bank and commission from E-Stamps. The AO disallowed the entire deduction due to transactions with non-members and interest from deposits.
Held
The Tribunal held that the E-stamping commission from non-members was a minor fraction of the total income and did not disentitle the assessee from the deduction. It further held that interest income from deposits made to meet statutory requirements was operational income and eligible for deduction.
Key Issues
Whether income from E-stamping commission from non-members and interest from statutory deposits are eligible for deduction under Section 80P despite the principle of mutuality.
Sections Cited
80P, 80P(2)(a)(i), 80P(2)(d)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the Addl/JCIT(A)-2, Noida dated 04/10/2024 in DIN No. ITBA/ NFAC/ S/250/2024-25/106938591(1) for the assessment year 2017-18.
The assessee has raised as many as 5 grounds of appeal, however the issue raised in ground Nos. 1 to 5 are interconnected and pertain to disallowances of deduction claimed under section 80P(2)(a)(i) of the Act.
The facts in brief are that the assessee is a cooperative society registered under the Karnataka Co-operative Societies Act (here after the KCSA) engaged in the business of providing credit facilities to its members. The assessee for the year under consideration has shown the net profit of Rs. 14,98,578/- and the same was claimed as deduction u/s 80P(2)(a)(i) of the Act. The net profit of Rs. 14,98,578/- also includes a sum of Rs. 17,445/- and Rs. 4,94,014/- being receipt of commission on E-Stamps and receipt of interest on deposits with cooperative Bank namely BDCC Bank.
The assessee, during the assessment proceeding submitted it carried business accepting deposit from the member and providing credit facility to the needy members. In the process of carrying out the impugned business, it earned a net profit of 14,98,578/- which as per the provisions of section 80P(2)(a)(i) of the Act is eligible for 100% deduction. The assessee claimed that in the ordinary course of business it made deposits with the cooperative bank to meet the statutory requirement of the KCSA, and the amount deposited in the manner provided under section 58 of the KCSA. The assessee submitted that as per the guidelines of the KCSA, the cooperative societies engaged in banking business with members required to deposit 100% of general reserve and 20% of the Deposit collected in short term deposit. It also submitted that as per the said guidelines, the assessee was required to deposit an amount of Rs. 74,39,101/- however it makes deposit of Rs. 65,25,000/- only on which earned interest of Rs. 4,94,014 during the year. Therefore, the interest earned was treated as part of the business of providing credit facilities and accepting deposits with members. The . assessee in support also placed reliance on the decision of Hon’ble Karnataka High Court in the case of Tumkur Merchant Souharda Credit Cooperative Ltd vs. ITO reported in 55 taxmann.com 447.
The assessee alternatively submitted if the interest received on deposit with cooperative bank is not considered as business receipt and held as investment activity then the deduction under section 80P(2)(d) of the Act shall be provided as the cooperative bank is also a cooperative society registered under KCSA.
The AO on the other hand noted that deduction under section 80P(2)(a) is allowed on the income derived from any of the activity as provided under clause (i) to (vii) of section 80P of the Act. Making a deposit with the bank or cooperative bank is not covered under any of the activity provided therein. Further the AO observed that the assessee has regularly made FD with the bank and also regularly renewed the old deposit without withdrawing which proves the fund deposited was surplus fund not immediately required for business and deposited with the motive to earn interest. Therefore, the claim of the assessee that interest income eligible for deduction under section 80P(2)(a)(i) of the Act is not acceptable. The AO held that a cooperative society is free to make deposits with any bank as per their by-law and as pe the provision of respective Acts (cooperative societies Act). However, the income earned income from such deposits shall be liable to tax under the Income Tax Act.
The AO also found that the provision of section 80P(2)(d) of the Act provides deduction of interest income or dividend income on account . of deposit or investment with any other cooperative society not with cooperative bank. The cooperative bank is different from cooperative society as provided under section 80P(2)(d) of the Act. The cooperative bank may be registered under KCSA but for the purpose of deduction under section 80P of the Act the same has been kept out of purview of cooperative society by inserting subsection 4 to section 80P of the Act. The AO also observed that deduction to the cooperative society under the Act provided on the concept of mutuality. In the case of interest earned from FD with the bank, the condition of mutuality does not satisfy. The AO held even assuming, the interest earned from such deposits is distributed to members as divided, still the principle of mutuality does not get fulfilled as held by the Hon’ble Supreme Court in the case of Kumbakonam Mutual benefit Fund Ltd reported in 53 ITR 241
Accordingly, the AO comes to conclusion that the interest income has not been earned from its business activity and the deduction claim by the assessee for interest income is in violation of provision of section 80P of the Act.
Furthermore, the AO regarding the commission income of Rs. 17,445/- on E-Stamp observed that the assessee in issuing E-stamp dealt with the general public, and this is not denied by the assessee. Therefore, the assessee by dealing with general public violated the principles of mutuality.
The AO relying on various judgments of Hon’ble Supreme Court and High Courts disallowed the entire claim of the assessee under section 80P the Act on account of violation of mutuality.
The aggrieved assessee preferred an appeal before the learned CIT(A).
The assessee before the learned CIT(A) submitted that the interest income on deposits is eligible for deduction u/s 80P(2)(a)(i) as the deposits were made out of surplus fund arising from its regular business income and therefore such deposits are the part of its business operation.
The assessee also submits that the co-operative banks are also recognized as co-operative societies under the KCS Act and therefore interest earned from co-operative bank would also be eligible for deduction u/s 80P(2)(d) of the Act.
The assessee with respect to commission income from E- Stamping activities submits that the amount of income is very less and therefore the same has not affected its core business activities. Accordingly, the eligibility of deduction u/s 80P should not restricted. The assessee, therefore, requested the ld. CIT(A) to allow the deduction under section 80P and grant appropriate relief.
The learned CIT(A) after considering the facts in totality held that the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO reported in 322 ITR 283, clearly clarified that . interest income earned on surplus funds deposited with co-operative banks does not qualify for deduction u/s 80P(2)(a)(i) of the Act as it is not earned from any of the business activity as stipulated under section 80P(2)(a) of the Act. The learned CIT(A) further relying on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd.(supra) and other judicial precedents held that the cooperative bank in not a cooperative society. Therefore, the interest income earned on deposits with cooperative bank is not eligible for deduction under section 80P(2)(d) of the Act and it will be considered as income from other sources. Hence the Ld. CIT(A) upheld the action of the AO treating such income as income from other sources.
Furthermore, the learned CIT(A) regarding the commission on E stamping found that the assessee has dealt with the general public in issuing E-Stamp. Therefore, the assessee has violated the principle of mutuality. The learned CIT(A) rejected the assessee contention that such amount of receipt from person other than member are minimal. As such, the learned CIT(A) held that principle of mutuality is absolute in it application and it does not allow for any exception. Therefore, the quantum of transactions with non-members is irrelevant. The learned CIT(A) in holding so referred to the judgment of the Hon’ble Supreme Court ruling in case of CIT vs. Kumbakonam Mutual Benefit Ltd reported in 53 ITR 241 and various other Hon’ble High Court which are available at page 12 of ld. CIT(A) order. Thus, the learned CIT(A) concluded that the insignificant transactions with non-members also violate the principles of mutuality and accordingly the assessee is not eligible for deduction under section 80P of the Act.
Being aggrieved by the finding of the learned CIT(A) the assessee is in appeal before us.
The learned AR for the assessee before us among other contentions argued that the deposits made with the Co-operative Bank, are out of statutory obligation as per the Karnataka State Co-operative Societies Act, 1959, and not voluntary investments intended to earn income. As per Section 57(2) of the Karnataka State Co-operative Societies Act, 1959, co-operative societies are required to set certain sum, which must be mandatorily invested in manner provided under section 58 of the said Act. The learned AR argued that since these deposits are part of the overall business activity of providing credit facility to member and accepting deposit from the members, hence eligible for deduction under section 80P(2)(a)(i) of the Act. Therefore, taxing such interest income under "Income from Other Sources" is unjust and against the intent of law.
On the contrary, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contention of both the parties and perused the materials available on record. The facts of the case on hand have been elaborately discussed in the preceding paragraph. Therefore, we are not inclined to repeat the same for the sake of brevity. From the preceding discussion, we note that the issue arise for adjudication is as under: (i) Whether the learned CIT(A) and the AO right in denying entire claim of deduction of Rs. 14,98,578/- under section 80P of the .
Act on account of alleged e-stamping commission of Rs. 17,445/- earned from non-members. (ii) Whether the interest income of Rs. 4,95,014/- earned on the FD with Cooperative Bank is eligible for deduction under section 80P(2)(a)(i) of the Act in the given facts.
20.1 Regarding the first question, we note that the assessee, a cooperative society registered under the Karnataka Co-operative Societies Act, 1959, is engaged primarily in providing credit facilities to its members and accepting deposits. The authorities below disallowed the entire deduction under section 80P of the Act solely on the ground that a minor portion of income, Rs. 17,445/-, was earned from e- stamping commission involving transactions with non-members, thereby allegedly violating the principles of mutuality.
20.2 We find that this approach is legally and factually unsustainable. The principle of mutuality applies to assess whether the core activities of the cooperative society qualify for deduction under section 80P of the Act. It is well settled that incidental or minor transactions with non- members, which are negligible compared to the total business activities, do not disentitle the assessee from claiming the benefit of section 80P of the Act on its main activities with members.
20.3 We are of the considered view that that the doctrine of mutuality is not destroyed merely because the club or organization earns income from incidental or minor transactions with non-members. What matters is whether the predominant activity is mutual in nature. We find that Hon’ble Patna High Court in the case of CIT vs. Bankipur Club Ltd which .
Page 9 of 11 was further upheld by the Hon’ble Supreme Court reported in [1997] 92 Taxman 278 (SC) has held as under: that merely because the assessee-company had entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost. The assessee was a mutual concern. The income derived by it from its house property let to its members and their guests and from the sale of liquor, etc., to its members and their guests was not taxable in 20.4 In the present case, the e-stamping commission from non- members constitutes a very small fraction (Rs. 17,445/-) of the total net profit of Rs. 14,98,578/-, which arises primarily from business with members. Disallowing the entire deduction under section 80P(2)(a)(i) merely due to such a minor non-member transaction is disproportionate and contrary to the spirit of the provision. Courts have consistently ruled that the eligibility for deduction under section 80P(2)(a)(i) must be determined with reference to the predominant or main business activity of the society, not incidental or minimal income from non-members. Accordingly, we hold that the AO and ld. CIT(A) were not justified in denying the entire deduction of Rs. 14,98,578/- under section 80P of the Act on account of the minimal e-stamping commission earned from non- members. The assessee is entitled to the deduction under section 80P(2)(a)(i) of the Act for its income from business with members.
Coming to next question, we note that the deposits in question were not voluntarily made by the assessee society for investment purposes but were instead mandated by the Karnataka State Co- operative Societies Act, 1959. As per section 57(2) of the said Act, every co-operative society is required to set aside at least 25% of its net profit each year as a reserve fund. Further, as per section 58 of said Act, such .
Page 10 of 11 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 Registrar of Co-operative Societies.
Given this statutory compulsion, we find that the interest income arising from these deposits cannot be equated with interest income derived from surplus funds voluntarily parked in banks for earning a return. Therefore, we hold that the interest income earned from such statutory deposits should be considered as operational income derived in the course of the assessee’s business and consequently qualifies for deduction under Section 80P(2)(a)(i) of the Act. In holding so, we also draw support and guidance from the Judgment of Hon’ble Supreme court in the case of CIT versus Karnataka State cooperative apex bank reported in 251 ITR 194 wherein it was held as under: 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 purposes of carrying on the banking business, the income derived therefrom 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 Bank 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.
In light of the above reasoning, we hold that the assessee is entitled to deduction under Section 80P(2)(a)(i) on the interest income earned from deposits made in compliance with statutory requirements. We further note that the assessee during the assessment proceeding has provided the working of the amount required to be deposited as per statutory requirement. However, the AO and the ld. learned CIT(A) have not given any finding on the same. Hence, we direct the AO to verify such working and allow the appropriate deduction as per above finding. Hence, the ground of appeal filed by the assessee is hereby allowed.
In the result, the appeal of the assessee is allowed for statistical purposes.