SRI UMA KAMANDALESWARA CO - OPERATIVE RURAL BANK LTD.,ATHREYAPURAM vs. THE ADDL. CIT,, KAKINADA

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM “SMC” BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER ITA No. 199/VIZ/2017 (Asst. Year : 2008-09) Sri Uma Kamandaleswara vs. Addl.CIT, Kakinada Co-op Rural Bank Ltd., Ryali, Range, Kakinada. Athreyapuram Mandalm, East Godavari District. PAN No. AADAS 4663 B (Appellant) (Respondent)

Assessee by : Shri G.V.N. Hari – Advocate. Department By : Shri P.S. Murthy – Sr.DR

Date of hearing : 27/12/2019. Date of pronouncement : 13/02/2019. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-2, Guntur, dated 27/01/2017 for the Assessment Year 2008-09. 2. Facts of the case, in brief, are that assessee initially named as „Sri Uma Kamandaleswara Co-operative Rural Bank Ltd.‟. Subsequently name has been changed as „Sri Uma Kamandaleswara Primary Agricultural Credit Co-operative‟ Society Ltd. The assessee is extending credit facilities to its members and

2 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

also claiming deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter referred to as 'Act'), the same is allowed by the Assessing Officer. In the assessment order, the Assessing Officer has noted that the assessee has received interest income of Rs.13,49,073/- from the fixed deposits with the DCCB and called the explain as to how interest income is eligible for deduction under section 80P(2)(a)(i) of the Act. It was submitted by the assessee before the Assessing Officer that as per rules issued by the Government, from the fixed deposits collected from the members of the society, an amount equivalent to 25% of the total deposits collected should invariable be deposited in the form of fixed deposits with DCCB since DCCB is also a guarantor for repayment. The assessee further explained that the society had surplus funds during the year in the form of deposits collected from people and such surplus funds were deposited with the DCCB over and above the statutory requirement. The Assessing Officer after considering the explanation of the assessee, he has noted that it was seen from the books produced, society has collected Rs. 1.79 crores of deposits in total from the members and though the 25% requirement translates to 44.88 lakhs, the society had actually invested an amount of Rs. 1.44 crores with the DDCB. Therefore, a part of the total interest received of Rs. 9.74 lakhs

3 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

from DCCB comprised of interest received on the surplus funds deposited with the DDCB. So, the interest received was bifurcated on pro-rata basis according to which the interest received on surplus funds deposited with the DCCB was arrived at Rs. 11,29,453/-. The Assessing Officer by following the decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Credit Society Ltd. Vs. ITO (188 Taxmann 282 (SC)] has held that interest received on surplus funds from DCCB & KCTB has considered as „income from other sources and accordingly same is brought to tax. 3. On appeal, ld. CIT(A) confirmed the order of the Assessing Officer. 4. On being aggrieved, assessee carried the matter in appeal before this Tribunal. 5. Ld. counsel for the assessee has submitted that the assessee is a co-operative credit society extending credit facility to its members. Collect the deposits, which is immediately not required to the extent of credit facility to its members, the same is kept in the bank and therefore, the interest received by the assessee is attributable to the business of the assessee and eligible for section 80P(2)(a)(i) of the Act. For the above proposition, he relied on the decision of the Hon'ble Andhra Pradesh High Court in the case

4 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

of Vavveru Co-op Rural Bank Ltd. Vs. LD.CCIT & Another [(2017) 396 ITR 371 (AP)]. Insofar as case law relied on by the Assessing Officer is concerned, it is submitted that the facts are entirely different, no application to the present case and submitted that interest received from the bank deposits on account of surplus funds is eligible for 80P(2)(a)(i) of the Act. 6. On the other hand, ld. Departmental Representative strongly supported the orders passed by the authorities below and also placed reliance on the decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Credit Society Ltd., (supra). 7. We have heard both the sides, perused the material available on record and orders of the authorities below. 8. The only issue involved in this appeal is whether assessee is entitled for deduction under section 80P(2)(a)(i) in respect of surplus funds deposits with the bank. The assessee is a primary agricultural Co-op Credit Society extending credit facility to its members. The assessee is also entitled to claim for deduction under section 80P(2)(a)(i) of the Act. So far as this fact is concerned, there is no dispute. The assessee has received an amount of Rs.11,29,453/- on account of surplus funds deposited with the DCCB bank and claimed deduction under section 80P(2)(a)(i) of the Act. The Assessing Officer by following the

5 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

judgment of the Hon'ble Supreme Court in the case of Totgars Co-operative Credit Society Ltd., (supra) disallowed the interest received on account of surplus funds deposited with the bank is not eligible for deduction under section 80P(2)(a)(i) for the reason that such interest income could not be said to be attributable to the activities of the society i.e. carrying the business of providing credit facilities to its members. The very same issue has been considered by the coordinate bench of the tribunal in the case of M/s. Kakinada Co-op Building Society Ltd., Vs. Addl. CIT in ITA Nos. 348 & 349/VIZ/2013, dated 22/01/2016 wherein by following the decision of the Hon'ble Karnataka High Court in the case of Guttigedarara Credit Co-op Society Ltd. Vs. ITO [(2015) 66 (I) ITCL 343 (Kar. HC)] and also by following the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Andhra Pradesh State Co-op Bank Ltd., (2011) 336 ITR 516 (AP) has held that interest earned on deposits by the assessee–cooperative society providing credit facilities to its members would qualify for deduction under section 80P(2)(a)(i) of the Act. For the sake of convenience, the relevant portion of the order is extracted as under:- “9. We have heard both the parties, perused the records and gone through the orders of the authorities below. The assessee is Kakinada Co-operative Building Society engaged in the business

6 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

of collecting the deposits, lending loans to its members for purchase of sites, buildings and construction of houses. When the assessee society receives the deposits from the members in the course of its business, if the deposits received is not necessary for immediate use of its business i.e. lend it to the members the same is deposited with the bank and interest income is earned. According to the A.O., the interest income earned by the assessee is an income from other sources and the same view has been confirmed by the CIT(A). After careful consideration of the orders of the authorities below and also considering the section 80P(2)(a)(i) of the Act, we find that the assessee has deposited some funds in the KCTB and DCCB and other banks when those funds are not necessary for the immediate business purpose. Therefore, they had deposited the money in a bank to earn the interest. The said interest income was attributable to the carrying of business of banking and therefore it was liable to be deducted in terms of section 80P(2)(a)(i) of the Act. The Hon’ble Karnataka High Court in case of Guttigedarara Credit Co-operative Society Ltd. Vs. ITO (supra) by following the decision of A.P. High Court in the case of CIT Vs. Andhra Pradesh State Co-operative Bank Ltd. (supra) has held that “interest earned on the deposits in the bank by the assessee cooperative society providing credit facility to its members would be quantified for deduction u/s 80P of the Act”. We therefore respectfully following the jurisdictional High Court as well as the judgement of the Karnataka High Court, allow this ground of appeal raised by the assessee.” 9. A similar issue has been considered by the Hon'ble Andhra Pradesh High Court in the case of Vavveru Co-op Rural Bank Ltd. (supra) wherein by considering the judgment of the Hon'ble Supreme Court in the case of Totgars Co-operative Credit Society Ltd., (supra) has held as under:- “7. It appears that the petitioners are engaged in the sale of fertilisers to its members. A portion of the income derived therefrom is deposited by the petitioners in Nationalised Banks. The income derived by way of interest on the fixed deposits made by the petitioners with the banks, was treated by the petitioners as an income attributable to the profits and gains of business, eligible for deduction under section 80P(2)(a). But the Assessing Officer treated the interest income as income from other sources not eligible for deduction.

7 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

8 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

9 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

Court did not answer the question in view of the fact that the memorandum of association, the articles of association and the returns of income filed by the assessee had not been examined by the Tribunal on facts. 18. In Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 182/Taxman 287/315 ITR 21 (SC), the issue that arose for consideration actually revolved around section 80P(2)(a)(i)(2)(e) and not around section 80P(2)(a)(i). The assessee in that case was running a consumer co-operative store and was also involved in the distribution of controlled commodities such as wheat, sugar, rice and cloth on behalf of the Government under the Public Distribution Scheme for which it received commission. Whether the commission so received could be treated as an income under section 80P(2)(e) eligible for deduction was the question before the court. The Supreme Court ruled that since the assessee was storing the commodities in question in its godowns as part of its own trading stock, it was not entitled to claim deduction from such margin under section 80P(2)(e). While holding so, the Supreme Court distinguished its earlier decision in CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 43 Taxman 328/176 ITR 117 wherein the commission taken by the society in question for storing the stock on behalf of the State Government and returning the same every month was held to be an allowable deduction. The distinction pointed out by the Supreme Court was that in South Arcot District Co-operative Marketing Society Ltd.'s case (supra), there were two sales, first between the Government and the society and the second between the society and the fair price shop. 19. In Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 272 (Kar.), a Division Bench of the Karnataka High Court held that when a society not carrying on any banking business had invested its surplus funds in security term deposits, the interest accrued from such securities and deposits should be taken as relatable to profits and gains of the society. 20. The above decision of the Karnataka High Court was taken on appeal to the Supreme Court. In a decision reported in Totgar's Co-operative Sale Society Ltd.'s case (supra), the Supreme Court held that the interest income arising out of the investment of surplus funds cannot be attributed to the activities of the society. The relevant portion of the judgment of the Supreme Court reads as follows (page 289) : "The head note to section 80P indicates that the said section deals with deductions in respect of income of co-operative societies. Section 80P(2), inter alia, states that where the

10 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities in section 80P(2) of the Act, would be eligible for deduction. The word 'income' has been defined under section 2(24)(i) of the Act to include profits and gains. This sub- section is an inclusive provision. Parliament has included specifically 'business profits' into the definition of the word 'income'. Therefore, we are required to give a precise meaning to the words 'profits and gains of business' mentioned in section 80P(2) of the Act. In the present case, as stated above, the assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression 'profits and gains of business'. Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as 'investment'. Further, as stated above, the assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this 'retained amount' which was payable to its members, from whom produce was brought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-society, 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 in section 80P(2)(a)(iii)) of the Act." 21. In CIT v. Punjab State Co-operative Federation of Housing Building Societies Ltd. [2011] 11 taxmann.com 448 (Punj. & Har.) a Division Bench of the Punjab and Haryana High Court followed the decision of the Supreme Court in Totgar's and held that the interest income received by the cooperative society from commercial banks cannot be attributed to the activities of the society.

11 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

12 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

long-term deposits and the interest earned thereon was disallowed by the Assessing Officer for deduction under section 80P(2)(a)(i). The Commissioner partly allowed the appeal holding that the interest income relatable to non-SLR investments would not qualify for exemption. The Tribunal allowed the appeal of the assessee holding that in respect of interest income arising both from SLR securities and from non-SLR securities, deduction was allowable. In an appeal under section 260A to this court, heavy reliance was placed by the Revenue upon the decision of the Supreme Court in Totgar's. But the Division Bench distinguished Totgars on the ground that the said decision was confined to the facts of the said case and that the Supreme Court was not dealing with the cases relating to co-operative banks. Referring to the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, this court pointed out that the expression "attributable to" is wider in scope than the expression "derived from" and that a co-operative society may earn profits by way of interest by parking their funds in high- yielding deposits or may earn income by circulating its capital among its members in the course of their banking business. Adverting to the fact that the phrase "business of banking" is not defined in the Income-tax Act, this court referred to the definition of the expression "banking" appearing in section 5(b) of the Banking Regulation Act to come to the conclusion that the income received by a co-operative bank from deposits, whether or not they are made in the discharge of statutory obligation would be eligible for exemption, since it would tantamount to income from banking business. 27. Taking clue from the aforesaid decision of this court in Andhra Pradesh State Co-operative Bank Ltd.'s case (supra), yet another distinction was sought to be made by Mr. A. B. Krishna Koundinya, learned senior counsel appearing for the writ petitioners, to the decision of the Supreme Court in Totgar's Co- operative Sale Society Ltd.'s case (supra). In paragraph-10 of its decision in Totgar's Co-operative Sale Society Ltd.'s case (supra), the Supreme Court pointed out that what was invested by Totgar's was the sale proceeds payable to the members, but which was retained and invested by the society, on account of which the amount was shown as liability in the balance-sheet. Therefore, the learned senior counsel contended that the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) may perhaps be relied upon in cases where the amount payable to the members was retained for a short duration and invested by the society, as a consequence of which the amount so retained would be a liability for the society. But in the case on hand, what was invested by the writ petitioners in fixed

13 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

deposits was not something that formed part of its liability. Therefore, the learned senior counsel maintained that the decision of this court in Andhra Pradesh State Co-operative Bank Ltd.'s case (supra) would hold the field. 28. We have carefully considered the above submissions. Before considering the effect of the various decisions cited on both sides, we think it would be ideal to look at the statutory prescription in pure and simple form. As we have indicated earlier, section 80P(2) is actually divided into six parts, categorised under clauses (a), (b), (c), (d), (e) and (f). Each one of these clauses deal with different types of co-operative societies engaged in different types of activities. The benefit made available to each one of them is also different from the other. Therefore, it may be useful to present a tabular form, the six categories of co-operative societies covered by clauses (a) to (f) and the nature and extent of the benefit available to each one of them, as follows : Category of co-op. societies covered by Nature and extent of

The whole of the amount of profits and gains of (a) (1) Co-operative society carrying on the business of banking or providing credit business attributable to any one or more of such facilities to its members ; activities. (2) Co-op. society engaged in cottage industry ; (3) Co-operative society engaged in marketing of agricultural produce grown by its members. (4) Co-operative society engaged in purchase of agricultural implements, seeds etc., for the purpose of supplying to its members ; (5) Co-operative society engaged in processing of agricultural produce of its members without the aid of power. (6) Co-operative society engaged in collective disposal of the labour of its members. (7) Co-operative society engaged in fishing or allied activities. (b) Primary co-operative society engaged in The whole of the amount of profits and gains on supplying milk, oil seeds, fruits or such business. vegetables grown by its members to— (1) a federal co-operative society, engaged in the same business ;

14 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

(2) the Government or a local authority ; (3) the Government company or Corporation engaged in the same business ; (c) (1) A consumer co-operative society So much of the profits and gains attributable to engaged in activities other than those specified such activities not exceeding Rs. 100,000 (one in clause (a) or clause (b) either independently hundred thousand rupees). of, or in addition to, all or any of the activities so specified. (2) Co-operative society other than a consumer So much to these profits and gains attributable co-operative society engaged in activities other to such activities not exceeding Rs. 50,000 (fifty than those specified in clauses (a) and (b). thousand rupees).

The whole of such income. (d) Interest or dividends derived by the co- operative society from its investments with any other co-operative society ; The whole of such income. (e) Any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities ; (f) A co-operative society other than (1) A The income by way of interest on securities and housing society ; (2) An urban consumer society the income from house property chargeable ; (3) A society carrying on transport business ; under section 22. (4) A society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed Rs. 20,000 (twenty thousand rupees).

15 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

(a) and (b) subject to the further condition that such profits and gains should not exceed a particular limit, (D) to be eligible for deduction under clause (d), the income should be derived from investments with another co-operative society, (E) to be eligible for deduction under clause (e), the income should be derived from letting of godowns or warehouses, etc. 30. Therefore, what follows is that when a co-operative society engaged in any one of the activities stipulated in sub-clauses (i) to (vii) of clause (a) makes profits and gains out of business attributable to anyone of those activities, the case would fall under clause (a). The moment the income derived from one of those activities is invested in another co-operative society and an interest or dividend is derived therefrom, the case would be covered by clause (e). In case the profits and gains of business arising out of the activities listed in sub-clauses (i) to (vii) of clause (a) is invested in immovable properties, such as, godowns or warehouses and an income is derived therefrom, the case would be covered by clause (e) of section 80P(2). 31. The only area of distinction between clause (a) on the one hand and clauses (d) and (e) on the other hand is that the benefit under clause (a) is restricted only to those activities of a co- operative society enlisted in sub-clauses (i) to (vii) of clause (a). On the other hand, the benefit under clauses (d) and (e) are available to all co-operative societies, without any restriction as to the nature of the activities carried on by them. 32. In simple terms, the position can be summarised like this. If there is a co-operative society, which is carrying on several activities including those activities listed in sub-clauses (i) to (vii) of clause (a), the benefit under clause (a) will be limited only to the profits and gains of business attributable to any one or more of such activities. But, in case the same co operative society has an income not attributable to any one or more of the activities listed in sub-clauses (i) to (vii) of clause (a), the same may go out of the purview of clause (a), but still, the co-operative society may claim the benefit of clause (d) or (e) either by investing the income in another co operative society or investing the income in the construction of a godown or warehouse and letting out the same. 33. In other words, the benefit conferred by clause (d) upon all types of co-operative societies is restricted only to the investments made in other co-operative societies. Such a restriction cannot be read into clause (a), as the temporary

16 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

parking of the profits and gains of business in nationalised banks and the earning of interest income therefrom is only one of the methods of multiplying the same income. To accept the stand of the Department would mean that co-operative societies carrying on the activities listed in clauses (i) to (vii), which invest their profits and gains of business either in other co-operative societies or in the construction of godowns and warehouses, may benefit in terms of clause (d) or (e), but the very same societies will not be entitled to any benefit, if they invest the very same funds in banks. Such an understanding of section 80P(2) is impermissible for one simple reason. The benefits under clauses (d) and (e) are available in general to all co-operative societies, including societies engaged in the activities listed in clause (a). Section 80P (2) is not intended to place all types of co-operative societies on the same pedestal. The section confers different types of benefits to different types of societies. Special types of societies are conferred a special benefit. 34. The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note. 35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.

17 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

18 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

Hon'ble Andhra Pradesh High Court is squarely applies to the facts of the present case. Therefore respectfully following the decision of the Hon'ble Andhra Pradesh High Court in the case of Andhra Pradesh State Co-op Bank Ltd. (supra) and also by following the decision of the coordinate bench of the tribunal in the case of M/s. Kakinada Co-op Building Society Ltd. (supra), we hold that the interest income received by the assessee by depositing the surplus funds collected from the members is eligible for deduction under section 80P(2)(a)(i) of the Act. 12. Insofar as the judgment of the Hon'ble Supreme Court in the case of Totgars Co-operative Credit Society Ltd. (supra) is concerned, the Hon'ble Andhra Pradesh High Court has considered and discussed elaborately. In view of the above, the order passed by the ld. CIT(A) is to be reversed, accordingly we reverse the order passed by the ld. CIT(A). Thus, this appeal filed by the assessee is allowed. 13. In the result, appeal filed by the assessee is allowed. Order Pronounced in open Court on this 13th day of Feb., 2019.

(V. DURGA RAO) Judicial Member Dated: 13th Feb., 2019.

19 ITA No.199 /VIZ/2017 (Sri Uma Kamandaleswara Co-op Rural Bank Ltd.)

vr/- Copy to: 1. The Assessee - Sri Uma Kamandaleswara Co-op Rural Bank Ltd., Ryali, Athreyapuram Mandalm, E.G. District. 2. The Revenue – Addl. CIT, Kakinada Range, Kakinada. 3. The Pr.CIT, Rajahmundry. 4. The CIT(A)-2, Guntur. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.