DEEPALAXMI NAGARI PATSANSTHA MARYADIT,SANGAMNAGAR vs. ITO WARD 2, AURANGABAD

The Assessing Officer also disallowed the deduction claimed u/s 80P(2)(c) of the Act amounting to Rs.42,609/- being ADCC dividend of Rs.450/-, other income of Rs.4,060/-, small savings commission of Rs.21,640/-, bank commission of Rs.11,659/- and form fee of Rs.4,800/-. However, the assessee is not in appeal on this issue, therefore, we are not concerned with the same.

In appeal the Ld. CIT(A) / NFAC upheld the disallowance of Rs.61,83,470/- made by the Assessing Officer rejecting the claim of deduction u/s 80P(1)(a)(i).

Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee at the outset relying on a series of decisions submitted that the issue stands decided in favour of the assessee by the decisions of the Co-ordinate Benches of the Tribunal according to which interest income received from the cooperative banks is allowed as deduction u/s 80P(2)(a)(i) of the Act. For the above proposition, he relied on the following decisions: Cases wherein deduction u/s 80P(2)(i) allowed a. Mavilayi Service Co-operative Bank Ltd Vs. CIT [2021] 123 taxmann.com 161 (SC)

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case, relying on the decision of Hon’ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd. Vs. ITO and various other decisions, rejected the claim of deduction u/s 80P(2)(a)(i) of the Act in respect of interest income of Rs.61,83,470/- received by the assessee from various cooperative banks. We find the Ld. CIT(A) / NFAC sustained the disallowance made by the Assessing Officer. It is the submission of the Ld. Counsel for the assessee that in view of various decisions filed in the paper book, the interest income received by the assessee from various cooperative banks is allowable as deduction u/s 80P(2)(a)(i) of the Act.

We find some force in the above arguments of the Ld. Counsel for the assessee. We find the issue of allowability of deduction u/s 80P(2)(a)(i) in respect of income from cooperative banks and cooperative societies stands decided in favour of the assessee by various decisions.

We find the Hon’ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. Vs. CIT reported in (2021) 431 ITR 1 (SC) has held that where the assessee was registered as primary agricultural credit society, it was entitled to benefit of deduction under section 80P(2)(a)(i) notwithstanding that it was also giving loans to its members which were not related to agriculture. The relevant observations of Hon’ble Supreme Court read as under: “45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co- operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.

It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 referred to section 80P of the IT Act and then held: “8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under: “2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;”” Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).

Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows: “59. Restrictions on loans.- (1) A society shall not make a loan to any person or a society other than a member: Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society. (2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit. (3) Granting of loans to members or to non-members under sub-section (2) and recovery thereof shall be in the manner as may be specified by the Registrar.” Thus, the giving of loans by a primary agricultural credit society to non-members is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra).

Resultantly, the impugned Full Bench judgment is set aside. The appeals and all pending applications are disposed of accordingly.”

We find the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. reported in (2015) 230 Taxman 309 (Karnataka) has held that where co-operative society was engaged in business of providing credit facilities to its members, deposited excess amount for short term in bank, interest earned was entitled to be deducted under section 80P. The relevant observations of Hon’ble High Court read as under:

We find an identical issue had come up before the Co-ordinate Bench of the Tribunal in the case of ITO vs. M/s. Shri Bhairavnath Multistate Cooperative Credit Society Ltd. vide order dated 27.06.2024 for assessment year 2014-15. The Tribunal has allowed the claim of exemption u/s 80P(2)(a)(i) of the Act on the interest earned on investments made out of surplus funds with the cooperative banks, cooperative banks and nationalized banks. The relevant observations of the Tribunal from para 5 onwards read as under:

In the result, both the appeals filed by the assessee are allowed.