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Facts
A credit co-operative society claimed deduction under Section 80P(2)(a)(i) for Rs. 96,40,390/- (for AY 2020-21, and similar for AY 2018-19) on interest income earned from deposits with co-operative banks and district co-operative banks. The AO and CIT(A) disallowed the deduction, treating the interest as 'income from other sources' and not eligible under Section 80P, relying on Supreme Court judgments in Mavilayi Service Co-operative Bank Ltd. and Totgars Co-operative Sale Society.
Held
The Tribunal held that interest income from deposits mandated by the Karnataka State Co-operative Society Act, 1959, (Sections 57(2) and 58) for reserve funds is attributable to the business and thus eligible for deduction under Section 80P(2)(a)(i). The case is remanded to the AO to compute the statutory quantum of deposits and allow the deduction accordingly. Alternatively, for investments exceeding statutory limits, the AO may consider deduction under Section 80P(2)(d) for income from other co-operative societies, and if treated as 'income from other sources', relief under Section 57 should be granted.
Key Issues
Whether interest income earned by a co-operative society from deposits made with co-operative/scheduled banks, particularly those mandated by state co-operative laws, is eligible for deduction under Section 80P(2)(a)(i) or 80P(2)(d) of the Income Tax Act, 1961.
Sections Cited
250, 80P(2)(a)(i), 80P(2)(d), 143(2), 142(1), 143(3), 144B, 57
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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER KESHAV DUBEY, JUDICIAL MEMBER:
These appeals at the instance of the assessee are directed against the orders of ld. CIT(A)/NFAC both orders dated 23.3.2024 vide DIN & Order Nos. ITBA/NFAC/S/250/2023- 24/1063284867(1) and ITBA/NFAC/S/250/ 2023- 24/1063285037(1) for the assessment years 2018-19 & 2020-21 respectively passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). for the AY 2020-21 as the lead case. The grounds of appeal as raised by the assessee in this appeal are as follows:
& 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 2 of 9
Brief facts of the case are that the assessee is a credit co- operative society filed its return of income for the assessment year 2020-21 on 24.12.2020 declaring total income of Rs.Nil after claiming deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.96,40,390/-. The assessee case was selected for scrutiny under CASS. Accordingly, notices u/s 143(2) as well as 142(1) of the Act were issued calling for information from time to time for which the assessee filed reply. During the course of assessment proceedings, the AO found that the assessee has claimed deduction u/s 80P(2)(a)(i) of the Act amounting to Rs.96,40,390/-. Thereafter, a show cause letter dated 7.9.2022 was issued to the assessee for which the assessee filed its reply on 8.9.2022 and 13.9.2022.
3.1 The assessee submitted that main business of the society is lending to its members and hence earning interest is the main source of business. Further, assessee submitted that whenever there is an idle fund due to no advance in the month, the society used to keep them in the short-term deposit with banks. Further, the assessee submitted that even as per the rules, the society have to keep the RFD with VDCC Bank as per the Karnataka Government Society Act and therefore, interest earned on the deposit with bank are its business income. The AO after considering the reply of the assessee held that the basic condition for claiming deduction u/s 80P(2)(a)(i) of the Act being a cooperative society is to provide credit facilities to its members only. However, & 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 3 of 9 the assessee society deposited amounts in the co-operative banks and district co-operative banks and interest earned on which cannot be treated as business income but it is income from other sources. In view of the above, an amount of Rs.96,40,390/- claimed by the assessee society as deduction u/s 80P(2)(a)(i) of the Act was disallowed by the AO and added to the total income of the assessee society.
3.2 Aggrieved by the assessment completed u/s 143(3) r.w.s. 144B of the Act dated 20.9.2022, the assessee preferred an appeal before the ld. CIT(A)/NFAC.
3.3 During the course of appellate proceedings, the assessee furnished the details of registered members of the society and bank statements along with the breakup of interest earned from members and interest earned from co-operative banks but could not submit the breakup of investment or the exigencies by which it was required statutorily to put the surplus money as investment with co-operative banks. The Ld. CIT(A)/NFAC following the judgement of the Hon’ble Apex court in the case Mavilayi Service Co-operative Bank Ltd. (431 ITR 1) (SC) as well as Hon’ble High Court of Karnataka in the case of Principal CIT Vs. Totgars Co-operative Sale Society (2017) (395 ITR 611) held that the assessee is not entitled to deduction either u/s 80P(2)(a)(i) of the Act or u/s 80P(2)(d) of the Act in respect of interest income from Co-operative Banks/scheduled banks and directed the AO to consider the interest earned as “income from other sources” and not to allow the deduction u/s 80P(2)(d) as well as u/s 80P(2)(a)(i) of the Act on such interest income and accordingly partly allowed the appeal of the assessee.
& 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 4 of 9 3.4. Aggrieved by the order of ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal. The assessee has also filed paper book comprising 130 pages enclosing therein the written submission as well as various case laws relied upon by them.
Before us, the ld. A.R. of the assessee submitted that the deposits made with co-operative banks and district co-operative banks are out of the statutory obligations and the assessee society have to keep the RFD with VDCC bank as per the Karnataka Government Society Act and it is not a voluntary investment intended to earn interest income and accordingly interest on deposit with banks are the business income of the assessee society. Further, AR of the assessee submitted that as per section 57(2) of the Karnataka State Co-operative Act, 1959, Co-operative societies are required to set aside 25% of their net profit every year as a reserve which must be mandatorily invested as per section 58 of the same Act. The ld. A.R. argued that since these deposits are not freely available for the daily business of the society, and cannot be withdrawn without prior approval from the Registrar of Co-operative Society, the interest earned on such deposits constitutes operational business income rather than income from other sources. Therefore, taxing such interest income under income from other sources is unjust and against the intent of the law. Without prejudice, the ld. A.R. submitted that if interest income from impugned deposit are treated as income from other sources, then corresponding cost shall be provided against the impugned income.
On the contrary, ld. D.R. vehemently supported the orders of the authorities below.
& 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 5 of 9 6. We have heard the rival contentions of both the parties and perused the materials available on record. 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/other 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. 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 mandated by the Karnataka State Co-operative Society 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 the said act, such reserve funds must be mandatorily invested in specified institutions including district 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. 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.
6.1 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 judgement of Hon’ble Supreme Court reported in 113 ITR 84 in the & 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 6 of 9 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"
6.2 Further, we also draw support and guidance from the judgement 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:
“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.”
& 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 7 of 9 6.3 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.
6.4 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.
6.5 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, as observed by Hon’ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. in Civil Appeal No.10069 of 2016, order dated 14.09.2023, the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act.
6.6 Without prejudice to the above, we make it clear that if the interest earned by assessee from the banks is considered under the head “Income from other sources”, relief to be granted to the & 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 8 of 9 assessee u/s 57 of the Act in accordance with law. Accordingly, the this issue is also restored to the file of ld. AO for de-novo consideration with the above observations.
6.7 Accordingly, the issue in dispute in this appeal is remitted to the file of ld. AO for fresh consideration.
In the result, appeal of the assessee is allowed for statistical purposes.
At the outset, we note that the issues raised by the assessee in the captioned appeal for the AY 2018-19 are identical to the issue raised by the assessee in for the AY 2020-21. Therefore, the findings given in shall also be applicable for the AY 2018-19. The appeal of the assessee for the AY 2020-21 has been decided by us vide para 7 of this order in favour of the assessee for statistical purposes. The ld. A.R. and ld. D.R. also agreed that whatever will be the findings for AY 2020-21 shall also be applied for the AY 2018-19. Hence, the ground of appeal filed by the assessee are hereby allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
& 869/Bang/2024 Basavan Bagewadi Taluka Primary Teachers Co-operative Society Ltd., Bijapur Page 9 of 9 10. In the combined result, both the appeals of the assessee are allowed for statistical purposes.