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Facts
The assessee, a Primary Agricultural Credit Society, earned interest income from deposits with co-operative banks and other financial institutions. The Assessing Officer (AO) treated this interest as income from other sources and disallowed the deduction under Section 80P. The CIT(A) affirmed the AO's view, disallowing deductions under Section 80P(2)(a)(i) and 80P(2)(d).
Held
The Tribunal held that interest income earned from deposits with co-operative banks and financial institutions, where such deposits were not mandated by statute for maintaining fluid resources, does not fall under 'profits and gains of business' for deduction under Section 80P. However, it directed the AO to verify if interest was earned from investments with other co-operative societies, in which case deduction under Section 80P(2)(d) might be allowable. If the income is treated as 'income from other sources', relief under Section 57 is to be considered.
Key Issues
Whether interest income earned by a co-operative society from its investments in co-operative banks and financial institutions is eligible for deduction under Section 80P of the Income Tax Act, 1961, and if not, whether expenses incurred for such funds are deductible under Section 57.
Sections Cited
250, 139(1), 80P, 80P(2)(a)(i), 80P(2)(d), 56, 57(iii), 143(3), 144B, 2(24)(i)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C’’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 dated 30.05.2024 passed for the Assessment Year (in short “AY”) 2020-21 under section 250 of the Income Tax Act, 1961 (in short “The Act”). Since the outcome of the penalty appeal for the AY 2020-21 in AY 2020-21 filed by the assessee in they are clubbed together, heard together and disposed of by a consolidated order.
The assessee has raised the following grounds of appeal:
3. There is a short delay of four days in filing both the appeals before this Tribunal. Before us, the ld. AR of the assessee submitted that since the date of service of the order was on 03.06.2024, the present appeal ought to have been filed on or before 02.08.2024. The 3rd and 4th of August being weekends therefore, the effective delay are only two days which is due to the fact of remote location of the assessee. Considering the fact that it is a case of short delay of just four days (with 2 days of weekends in between), we hereby condone the short delay and proceed to decide the matter in the interest of justice.
Brief facts of the case are that the Assessee is a Primary Agricultural Credit Society registered under the provisions of Karnataka Co-operative Societies Act, 1959 and is in the business of providing credit facilities to its members for their agriculture related activities, selling of fertilizers, manure and PDS distribution and other allied activities as permitted under its Bye-laws duly approved by the Registrar of Co-operative Societies. The assessee is carrying on its business well within the frame work of law and exclusively with its members and it is not doing any business with non-members.
& 1441/Bang/2024 BelveVyavasaya Seva Sahakari Sangha Ltd Udupi Page 3 of 9 4.1 The Assessee had filed its Return of income u/s. 139(1) of the Act on 04.01.2021 declaring total income of Rs. NIL after claiming deduction u/s. 80P(2)(a)(i) of the Income Tax Act, 1961 (in short “The Act”) amounting to Rs. 1,02,21,126/-. Thereafter the case was selected for complete scrutiny under CASS system. During the course of assessment proceeding, the AO found that out of total interest and dividend income received amounting to Rs. 1,37,24,438/- made with district co-operative bank and other co- operative society an amount of Rs. 1,30,85,803/- has been earned by the assessee from SCDCC bank. Moreover, the assessee has also shown Interest income from other sources amounting to Rs. 23,925/- earned from the Vijaya Bank. The AO after considering the assessee’s reply, concluded that since the funds are deposited as term deposits with co-operative banks and not with the co- operative societies therefore, the interest income earned from term deposits does not fall under the head Profits and Gains but income from other sources as per section 80P(2)(a) of the Act and 80P(2)(d) of the Act. Thus, the interest income of Rs. 1,30,85,803/- earned from deposits with the SCDCC Bank and interest earned of Rs. 23,925/- from Vijaya Bank totaling Rs. 1,31,09,728/- was treated as income from other sources (deduction u/s. 80P was disallowed).
4.2 The AO however, failed to allow the set-off to the resultant Business Loss of Rs.28,88,602/- after the segregation of interest on investments from the Business income of the Assessee. Thus, the total income of the assessee came to be wrongly determined at Rs.1,31,09,728/- (which ought to have been Rs. 1,02,21,126/- as per the proceedings of assessment) against which no deduction was given under Sec. 80P of the Act as per Assessment Order dated 23-09-2022 passed u/s. 143(3) r.w.s. 144B of the Act and levying tax plus interest Rs.60,44,292/- as per Demand notice of even date.
Aggrieved by the assessment completed u/s. 143(3) r.w.s. 144B vide order dated 23.09.2022, the assessee preferred an appeal before the ld. CIT(A)/NFAC.
The Ld. CIT(A) affirmed the view taken by the assessing officer and partly allowed the appeal by holding that interest income earned by the appellant society is not eligible for deduction u/s. 80P(2)(a)(i) of the Act as section 80P(2)(a)(i) allows deduction to a Co-operative society engaged in carrying on the business of banking or providing credit facilities to its members in respect of whole of the amount of profits and gains attributable to such activity. The AO held in the assessment order that that interest income earned from term deposits with co-operative banks does not fall under the head profits and gains of business and profession but income from other sources. The ld. CIT(A) / NFAC also held that the interest income earned from deposits with banks could not qualify for deduction u/s. 80P(2)(d) of the Act for the express reason that deduction can be claimed under this section only in respect of income by way of interest or dividends earned by a co-operative society from its investments with any other co-operative society which was not the case here. Further, during the appellate proceedings no detailed working of the said business loss as claimed in the ground of appeal vis-à-vis the income earned from investments made was furnished by the appellant. The ld. CIT(A) / NFAC was of the opinion that since this is a matter of record, the AO, while giving appeal effect to this order, is directed to verify the correctness of the claim of the appellant with respect to the provisions of the statute to check for any arithmetical error as claimed in determination of the total income for the year has occurred. To such extent, this ground of appeal may therefore be treated as allowed for statistical purpose.
7. Aggrieved by the order of the Ld. CIT(A)/NFAC dated 30.05.2024, the assessee has filed the present appeal before this Tribunal.
8. The solitary issue that is raised whether the Ld. CIT(A)/NFAC is justified in rejecting the claim for deduction u/s. 80P(2)(a)(i) or in the alternative u/s. 80P(2)(d) of the Act amounting to Rs. 1,30,85,803/- earned from deposits with the SCDCC Bank under the facts and circumstances.
Before us, the Ld. AR of the assessee submitted that the assessee is engaged in the business of providing credit facilities to its members only for their agriculture related activities, selling of fertilizers, manure and PDS distribution and other allied activities as permitted under its Bye-laws duly approved by the Registrar of Co-operative Societies. As per the statute, one has to mandatorily maintain the fluid resources as required under its governing statute. If the society is not bound by the requirement of the statute, the society would have invested by lending to members and earn more interest on that and therefore the same is part and parcel of the credit co-operative business.
The Ld. DR on the other hand supported the orders of the income tax authorities below.
We have heard the rival submissions and perused the material on record. The undisputed fact of the case is that the assessee has earned interest on investment with other co-operative banks. Now the contention of the assessee in the grounds of appeal is that this income is to be assessed as either “business income” and the deduction u/s. 80P(2)(a)(i) of the act should be allowed or & 1441/Bang/2024 BelveVyavasaya Seva Sahakari Sangha Ltd Udupi Page 6 of 9 in the alternative the deduction u/s. 80P(2)(d) of the act may be allowed as the assessee has to maintain fluid fund separately as per the statute. Without prejudice to this, it was submitted that the assessee is entitled for cost of funds incurred if the income is assessed as “income from other sources” u/s. 56 of the IT Act, 1961.
11.1 Section 80P(2)(a)(i) allows deduction to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members in respect of whole of the amount of profits and gains attributable to such activity.
11.2 Hon'ble Supreme Court in its judgment dated 12 January 2021 in the case of The Mavilayi Service Coop. Bank Ltd. & Ors. vs. CIT. Civil Appeal Nos. 7343-7350 of 2019 (Supreme Court) categorically stated in para 35 that, - “Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the cooperative movement as a whole”
11.3 In the instant case, the 'interest income' under question was not the interest received from the members of the assessee-society for providing credit facilities to them. What was sought to be taxed u/s. 56 is the interest income arising on the investment in co- operative banks and financial institutions other than the 'co- operative societies'.
11.4 The marginal note to Section 80P which reads "Deduction in respect of income of cooperative societies" is important, in that it & 1441/Bang/2024 BelveVyavasaya Seva Sahakari Sangha Ltd Udupi Page 7 of 9 indicates the general "drift" of the provision as held by Hon'ble Apex Court in K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. (1981) 4 SCC 173 and The Mavilayi Service Coop. Bank Ltd. & Ors. vs. CIT. Civil Appeal Nos. 7343-7350 of 2019 dt. 12.01.2021 (Supreme Court). Secondly, section 80P(1), inter alia, states that where the 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 mentioned in section 80P(2) would be eligible for deduction [The Mavilayi Service Coop. Bank Ltd. &Ors. vs. CIT. Civil Appeal Nos. 7343-7350 of 2019dt. 12.01.2021 (Supreme Court)]. The word 'income' has been defined under section 2(24)(i) of the Act to include profits and gains of business. This sub-section is an inclusive provision. The Parliament has included specifically 'business profits' into the definition of the word 'income'. Therefore, one is required to give a precise meaning to the words 'profits and gains of business' mentioned in section 80P(2). In the instant case, as claimed, the assessee-society invested funds mandated under its governing statute. Interest on such investments, therefore, could not fall within the meaning of the expression' profits and gains of business' as held by Hon'ble Supreme Court in the case of Totgars, Cooperative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC). Such interest income could not be said to be attributable to the activities of the society, viz., carrying on the business of providing credit facilities to its members.
11.5 Further, Hon'ble Supreme Court in the case of Totgars, Co- operative Sale Society Ltd. vs. Income-tax Officer, Karnataka (supra) held in para 11 as under :
& 1441/Bang/2024 BelveVyavasaya Seva Sahakari Sangha Ltd Udupi Page 8 of 9 “To say that the source of income is not relevant for deciding the applicability of section 80P would not be correct because one needs to give weightage to the words 'the whole of the amount of profits and gains of business' attributable to one of the activities specified in section 80P(2)(a). The words 'the whole of the amount of profits and gains of business emphasize that the income, in respect of which deduction is sought, must constitute the operational income and not the other income which accrues to the society. In the instant case, the evidence showed that the assessee-society earned interest on funds which were not required for business purposes at the given point of time. Therefore, on the facts and circumstances of the instant case, such interest income fell in the category of 'other income' which had rightly been taxed by the department under section 56.””
11.6 In view of the above, as regards the claim of deduction u/s. 80P(2) of the IT Act, we direct the AO to verify whether interest / dividend is received by the assessee out of investment made with co-operative society. If the assessee earns interest / dividend income out of the 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 IT Act, 1961.
11.7 Without prejudice to the above, we make it clear that if the interest earned by the assessee from the co-operative banks / commercial bank is considered under the head income from other sources, relief to be granted to the assessee u/s. 57 of the act in & 1441/Bang/2024 BelveVyavasaya Seva Sahakari Sangha Ltd Udupi Page 9 of 9 accordance with law. Accordingly, the issue is restored to the file of Ld.AO for denovo consideration with the above observation.
As the quantum appeal for the AY 2020-21 filed by the assessee in is remitted back to the file of AO accordingly, we also remit back the penalty appeal for the AY 2020-21 in for fresh consideration in accordance with the law. Since in our opinion, if a quantum appeal is remitted back by the ITAT, the penalty proceedings based on the same quantum assessment cannot sustain. We are of the considered opinion that if an order of assessment or reassessment which forms the basis for the penalty is remitted back, then the penalty cannot stand by itself and is liable to be set aside. Accordingly, the penalty proceeding is also remitted back to the file of AO for fresh consideration in accordance with law.