MAHATMA GANDHI NAGRI SAHAKARI PAT SANSTHA MYDT UDGIR,LATUR vs. INCOME TAX OFFICER- WARD 1 -LATUR, LATUR

Briefly stated the facts are that the assessee is Co-operative Credit Society registered under the Maharashtra Co-operative Societies Act, 1960 and engaged in the activity of providing credit facility to its members. For AY 2018-19, the assessee filed its return of income declaring total income at Rs. Nil after claiming deduction u/s 80P(2)(a)(i) of Rs.3,00,30,803/-. The case of the assessee was selected for complete scrutiny assessment under the E-assessment Scheme, 2019 on the following issues : (i) Bonus or Commission to Employee; (ii) Investment/Advances/Loans and (iii) Deduction from total income under Chapter VI-A. Accordingly, statutory notice(s) u/s 142(1) of the Act were issued and served upon the assessee seeking information regarding the deduction claimed by the assessee, in response to which the assessee filed its part reply stating that it does not have any other business activity apart from the business of accepting deposits from the members and lending loans to members and that these activities are performed strictly as per the approved Bye-laws of the society. The Ld. Assessing Officer (“AO”) noted that during the relevant AY the assessee has earned interest of Rs.3,04,88,392 from investments in Co- operative and a show cause notice was issued as to why the said interest income claimed as deduction under section 80P(2)(a)(i)/80(P(2)(d) of the Act be not disallowed and added back as income from other sources. The show cause notice issued by the Ld. AO remained uncomplied with.

1 Before the Ld. AO, taking support from the catena of decisions pronounced by various judicial forums on the impugned issue favorable the assessee, the assessee contended that the interest income earned during the relevant AY from deposits with Co-operative Banks tantamount to business income of the assessee and is an allowable deduction u/s 80P(2)(a)(i) of the Act. Alternatively, the said income is also an allowable deduction u/s 80P(2)(d) of the Act.

2 The above submissions of the assessee were however found to be not acceptable by the Ld. AO. Relying on the decision(s) of the Hon'ble Karnataka High Court in the case of Pr. CIT Vs. The Totagars Co-operative Sale Society in ITA No. 100066/2016, dated 16.06.2017 (Kar.) and in the No. 100011/2016, dated 30.10.2017 (Kar.), the Ld AO disallowed the deduction claimed by the assessee u/s 80P(2)(a)(i)/80P(2)(d) of the Act amounting to Rs.3,04,88,392/- treating the same as other income'. Accordingly, the Ld. AO completed the assessment on 28.09.2021 u/s 143(3) r.w.s.144B of the Act by making an addition of Rs.3,04,88,392/- as income from other sources being not eligible for deduction u/s 80P(2)(a)(i)/80P(2)(d) of the Act

Aggrieved, the assessee carried the matter before the Ld. CIT(A)/NFAC challenging the above action of the Ld. AO. Before the Ld. CIT(A)/NFAC, the assessee filed detailed submissions which are incorporated by the Ld. CIT(A)/NFAC in para 3 and 4 of the his appellate order. The assessee contended that the interest income received from Co- operative Banks is a part of its business income and therefore its claim for deduction u/s 80P(2)(a)(i) of the Act ought to have been allowed. It was also submitted that in case of denial of deduction u/s 80P(2)(a)(i) of the Act, an alternate claim u/s 80P(2)(d) of the Act should be allowed to the assessee in view of catena of decisions on the impugned issue rendered in favour of the assessee by various judicial forums including the Pune Tribunal. The Ld. CIT(A)/NFAC rejected the above submissions of the assessee and upheld the action of the Ld. AO. The relevant findings and observations of the Ld. CIT(A) are reproduced below : "Decision:-

I have considered the facts of the case, assessment order, submissions made by the appellant and the case laws relied upon. The appellant has raised 7 effective grounds of appeal relating to the addition made by the AO of Rs.3,04,88,392/- treating it as 'Income from Other Sources' invoking provisions of section 80P of the IT Act. The appellant in its submission has sought to withdraw ground of appeal no.6 stating it to be an inadvertently claimed. The ground of appeal no.6 is allowed to be withdrawn. In the remaining grounds of appeal, appellant challenges the action of AO disallowing the deduction claimed by the appellant u/s.80P(2)(a)(i) of Rs. 3,04,88,392/-. Since all are related grounds of appeal same are adjudicated combinedly as under:- (i) The appellant is a Co-operative credit society. The funds of the appellant were deposited in different Co-operative banks and earned interest income of Rs.3,04,88,392/-. The appellant has claimed deduction u/s 80P on the interest income of Rs.3,04,88,392/- on account of being income in the ordinary course of business. (ii) Prima facie, the contentions of the assessee are misplaced. There is a subtle difference between the income earned from mutual operations, and, the parking of such income with a bank. In this case, the AO has not disputed the generation of surplus funds, rather, the only dispute is the interest income from that surplus fund, when such surplus fund is deposited with a non-member, or utilized for general public (who are obviously not a member of such Co-operative society). Such fund, as and when it returns to co-operative society, again assumes the character of fund generated out of mutuality. A co- operative bank i.e. an original cooperative society engaged in banking business, but which has been granted license from RBI, does not remain the species of genus Co- operative society. It transcends into a different genus of Commercial banks. (iii) The specific section which governs the deduction of such interest income if Sec. BO (PX2)(d). lt exempts interest income accrued from funds deposited in any Co-operative society. However, when Two High Courts, viz, Hon HC of Karnataka, and Hon HC of Gujarat have held that after receipt of RBI license, the Co-operative Bank moves out of the basket of Co-operative society, and impliedly into the basket of Commercial bank, the interest income shall become outside the purview of S 80(P)(2)(d) benefits and shall be taxable as per the legislative intent. To this extent, all the decisions quoted by the assessee are silent, including juri ictional ITAT, Raipur and are hence distinguished as being sub-silentio. The decision of Hon HC has a persuasive value and stands at a higher pedestal of jurisprudence. The following discussion will further clarify the reason for my decision. (iv) Kind attention is invited to the decision of Hon Gujarat High Court in Katlary Kariyana, (2022) 215 DTR 0125 (Guj), (2022) 327 CTR 0138 (Guj), especially para 2.4 wherein the primary question was formulated by Hon'ble Gujarat High Court. The para 2-4, reads as follows: Para 2.4

4 The principal ground which was taken into consideration vyas as regards the deduction claimed by fhe assessee society in terms of provisions of Section 80P(2)(d) of the Income Tax Act, as not admissible being interest received on FDR's from the cooperative banks and nationalized banks. (v) lt is hence seen that this question of law is almost the same question of law, which is to be answered in impugned appeal. To be more specific and precise, here the issue is only of deposit of surplus funds Cooperative Bank. The most common fact seen in the case of this assessee is that the surplus funds with the Co-operative Societies are deposited with Co-operative Banks and interest earned from such Cooperative Banks are claimed as permissible deduction (impliedly u/s 80(P)(2)(d) and specifically under S 80(P)(2)(a) (i) of the IT Act. That Sec 80P(2)(a)(i) of the Act is not applicable for the simple reason that the surplus funds have not been utilized in the ordinary course of business of assessee. It is not the business of the assessee to deposit surplus funds in banks and earn interest thereon. The ordinary course of business is the assessee is to act as primary Agriculture Credit society for its members. When surplus funds are deposited in a NON-MEMBER, like Bank, the privity of mutuality is extinguished. It is akin to earning by transactions with Non-Member. (vi) For a context on the status of a Co-operative Bank (where funds have been deposited), the decision of ld. SC in the Mavilayi Service Co-op Bank case, in para 22 and 23 should be seen (CA No. 7343- 7350 of 2019). Hon. SC has given a mechanism to test as to when a Co-op Society can be called a Cooperative Bank. The relevant extracts are as follows: (Mavilayi Service Co-Op) '

With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a cooperative bank. However, if it is a primary agricultural credit society or a primary cooperative agricultural and rural development bank, the deduction would still be provided. Thus, cooperative banks are now specifically excluded from the ambit of Section B0- Р.

If one has to go by the aforesaid definition of "cooperative bank", the appellant does not get covered thereby. /t ls a/so a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative to have a license from Reserve Bank of India, (para 20) The Hon. SC in Mavilayi, supra, has defined a test that once the RBI license is received, a Cooperative Society shall become a Co- operative Bank. This issue is important in this case also in order to test whether the excess funds of the appellant were deposited with Cooperative bank or not. Though Hon. SC has given a test to identify Co-operative bank, it has not answered a possible question whether Co-operative Bank loses its basic characteristics of a Cooperative society or not. (vii) This issue has been addressed in KatlaryKariyana, supra by Hon Gujarat HC: Para 6: KatlaryKariyana

Learned senior advocate Mr. Bhatt has further taken this Court to the order passed by the Assistant Commissioner of Income Tax Circle, Himmatnagar, while disposing of the objections filed by the assessee against the reassessment proceedings under Section 147 and has strenuously submitted that the Assessing Officer has rightly observed that the interest derived from the credit provided to its member is deductible under Section 80P(2)(a)(i) of the Act, however, on verification of the case record at the stage of scrutiny assessment, it was noticed that the assessee had received interest on FDR's from the Cooperative banks and Nationalized banks amounting to Rs.18,08,444/-. The Assessing Officer was therefore, right in holding that the interest derived by depositing surplus fund with the bank was not attributable to the business carrying on by assessee which could be considered for deduction under Section 80P(2)(a)(i) of the Act. In fact, such interest derived from the FDRs from the Cooperative Bank and Nationalized Bank are not admissible for deduction in view of Section 80P(2)(d) of the Act. (emphasis supplied) Para 9-10 (part):Katlary Kariyana

We have extensively heard both the learned Counsels appearing for the respective parties and have perused the record, examined relevant provisions as well as a/so carefully gone through the judgments relied upon.

Before this Court dwells into the issue on hand, it would be apt to reproduce section 80P of the Income Tax act, 1961, which reads as under: " Section 80P : Deduction in respect of income of co-operative societies 80P.(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub- section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:- (a) in the case of a co-operative society engaged in (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of the agricultural produce of its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities; (b) .. (c) ..... (d) in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other co- operative society, the whole of such incoте; (viii) At this juncture, attention is again invited to the relevant parts of the provision of S. 80 (P)(2)(d) emphasizing that till now, the question whether the Cooperative Banks lose the character of Co-operative society still remains to be answered in unequivocal terms. For this the para 13 of the decision of Katlary Kariyana is relevant where Hon. Gujarat HC has discussed the issues and decision in the case of Totagars (2017) and Totagars (2010): Paras 13: KatlaryKariyana

Similar issue arose for consideration before the Hon'ble High court of Karnataka (Dharwad Bench) in the case of Principal Commissioner of Income Tax and ors. Vs. Totagars co-operative Sale Society, reported in (2017) 395 ITR 611(KAR). The substantial questions of law which arose for consideration as recorded in Para 1 are reproduced as under: " (l) Whether the assessee, Totagar Co-operative Sale Society, Sirsi, is entitled to 100% deduction under Section 80P(2)(d) of the Income Tax Act, 1961 (for short 'the Act') in respect of whole of its income by way of interest earned by it during the relevant Assessment Years from 2007-2008 to 2011-2012 on the deposits or investments made by it during these years with a Co-operative Bank, M/s.Kanara District Central Co-operative Bank Limited? (ll) Whether the Supreme Court decision in the case of the present respondent assessee, Totgar's Co-operative Sa/e Society Limited itself rendered on )Bth February 2010, in Totgar's Co-operative Sale Society Limited v. ITO, reported in MANU/SC/0095/2010: (2010) 322 ITR 283 SC: (2010) 3 SCC 223 for the preceding years, namely

In case where the co-operative society is a bank, one of its objects would be to carry on the general business of banking. Like other banks, money would be ifs stock-in-trade or circulating capital and its normal business is to deal in money and credit. The business of such a bank does not consist only of receiving deposits and lending money to its members or such other societies as are mentioned in the objects. When such a society lends out its monies so that they may be readily available to meet the demands of its depositors if and when they arise, it is a legitimate mode of carrying on ifs banking business. In case of a credit society like the present one, the business of the society is limited to providing credit to its members and the income that is earned from providing such credit facilities to its members is deductible under section B)P(2)(a)(i) of the Act. However, investing ifs surplus funds with the State Bank of India is no part of the business of the appellant of providing credit to its members and hence, it cannot be said that the interest income derived from depositing surplus funds with the State Bank of India is profits and gains of business attributable to the activities of the appellant society. The character of the interest is different from the income attributable to the business of the society of providing credit facilities to its members. The interest income derived from investing surplus funds with the State Bank of India must be closely linked with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. Therefore, the profits and gains can be said to be directly attributable to the business of providing credit facilities to its members if there is a direct and proximate connection between the profits gains and the business of the appellant. In the present case there is no obligation upon the appellant to invest ifs surplus funds with the State Bank of India. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India not being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a)(i) of the Act. If the appellant wants to avail of the benefit of deduction of such interest income, it is always open for it to deposit the surplus funds with a co-operative bank and avail of deduction under section 80P(2)(d) of the Act.

Section 71 of the Gujarat Co-operative Societies Act, 1961 permits a society to invest or deposit its fund in the State Bank of India. Therefore, while investment in the State Bank of India is permissible under section 71 of that Act, there is no statutory obligation cast upon the appellant to deposit funds as a part of its business. The said provision also permits investment of funds in any co- operative bank or any banking company approved for this purpose by the