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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
O R D E R
Per N.V. Vasudevan, Vice President This is an appeal by the assessee against the order of CIT(A), Mangaluru, dated 06.01.2020, in relation to AY 2016-17.
The assessee is a primary Agricultural Credit Co-operative Society registered under the Karnataka State Co-operative Societies Act, 1959. It accepts deposits from its members and provides credit facilities to its members. In the return of income filed for Assessment Year 2015-16, the assessee claimed deduction under section 80P of the Income Tax Act, 1961(Act) of a sum of Rs.68,85,589/-. Out of the aforesaid sum that was claimed as deduction u/s.80P of the Act, a sum of Rs.43,49,141 was interest on deposits made with South Canara District Co-operative Bank(SCDCC Bank) and a sum of Rs.5,72,959 was dividend on investments made in SCDCC Bank. The deduction on the aforesaid two
Page 2 of 14 sums were claimed by the assessee u/s.80P(2)(a)(d) of the Act. The remaining sum was claimed as deduction u/s.80P(2)(a) (i) of the Act, being income earned from providing credit facility to its members.
We will deal with the first issue of deduction u/s.80P(2)(d) of the Act. On this issue, the AO was of the view that the interest income and dividend income claimed as deduction u/s.80P(2)(d) by the assessee on deposits and investments with co-operative banks and therefore deduction on the aforesaid sum cannot be allowed to the assessee either under section 80P(2)(a)(i) or 80P(2)(d) of the Act. The AO held that as per the decision rendered by the Hon’ble Karnataka High Court in the case of Totagars Co- operative Sale Society 395 ITR 611(Karn)(supra), following the decision rendered by the Hon’ble Supreme Court in the case of Totagars Co- operative Sale Society 322 ITR 283 (SC) held that interest income is taxable under the head income from other sources and will not be entitled to deduction under section 80P(2)(a)(i) of the Act. The ratio laid down by the Hon’ble Karnataka High Court in the case of Totagars Cooperative Sales Society in 395 ITR 611 (Karn) was that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a)(i) of the Act. Section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co- operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, dividend/interest earned from investments or deposits made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. The AO
Page 3 of 14 therefore denied the benefit of deduction to the assessee u/s.80P(2)(d) of the Act.
On appeal by the assessee, the CIT(A) confirmed the order of the AO on this issue. The assessee is in appeal before the Tribunal against the order of the CIT(A).
We have heard the rival submissions. The learned counsel for the assessee submitted the Hon’ble Supreme Court in Totagar’s Co-operative Sales Society (supra) held that interest on security and deposits not relatable to the business of the assessee is not eligible for deduction u/s.80P(2)(d) or 80P(2)(a)(i) of the Act whereas in the case of the assessee, interest was received on deposits relatable to the business of the assessee and was therefore eligible for deduction u/s.80P of the Act. The learned DR relied on the order of the CIT(A).
We have carefully considered the rival submissions. The Hon’ble Karnataka High Court in the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 395 ITR 0611 (Karn) took a view and held that interest income earned on deposits whether with any other bank will be in the nature of income from other sources and not income from business and therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed to the assessee. The Hon’ble Court followed decision of Hon’ble Gujarat High Court in the case of SBI Vs. CIT 389 ITR 578(Guj.). The Hon’ble Court had to deal with the following substantial question of law:
"(I)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 Page 4 of 14 deposits or investments made by it during these years with a Co- operative Bank, M/s. Kanara District Central Co-operative Bank Limited? (II) Whether the Supreme Court decision in the case of the present respondent assessee, Totgar Co-operative Sale Society Limited itself rendered on 08th February 2010, in Totgar's Co- operative Sale Society Limited v. Income Tax Officer, reported in (2010) 322 ITR 283 SC : (2010) 3 SCC 223 for the preceding years, namely Assessment Years 1991-1992 to 1999-2000 (except Assessment Year 1995-1996) holding that such interest income earned by the assessee was taxable under the head 'Income from Other Sources' under Section 56 of the Act and was not 100% deductible from the Gross Total Income under Section 80P(2)(a)(i) of the Act, is not applicable to the present Assessment Years 2007-2008 to 2011-2012 involved in the present appeals and therefore, whether the Income Tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100% deductible under Section 80P(2)(d) of the Act?"
The Hon’ble Court held that such interest income is not income from business but was income chargeable to tax under the head income from other sources and therefore there was no question of allowing deduction u/s.80P(2)(d) of the Act. The following points can be culled out from the aforesaid decision:
What Section 80P(2)(d) of the Act, which was though not specifically argued and canvassed before the Hon'ble Supreme Court, envisages is that such interest or dividend earned by an assessee co-operative society should be out of the investments with any other co-operative society. The words 'Co-operative Banks' are missing in clause (d) of subsection (2) of Section 80P of the Act. Even though a co- operative bank may have the corporate body or skeleton of a co- operative society but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation Act, 1949. Only the Primary Agricultural Credit Societies with their limited work of providing credit facility to its members continued to be governed by the ambit and scope of deduction under Section 80P of the Act. (Paragraph 13 of the Judgment).
Page 5 of 14 2. The banking business, even though run by a Co-operative bank is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act. The purpose of bringing on the statute book sub-section (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any co-operative bank and to exclude the normal banking business income from such exemption/deduction category. The words used in Section 80P(4) are significant. They are: "The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society …..". The words "in relation to" can include within its ambit and scope even the interest income earned by the respondent-assessee, a co- operative Society from a Co-operative Bank. This exclusion by Section 80P(4) of the Act even though without any amendment in Section 80P(2)(d) of the Act is sufficient to deny the claim of the respondent assessee for deduction under Section 80P(2)(d) of the Act. The only exception is that of a primary agricultural credit society. (Paragraph-14 of the judgment) 3. The amendment of Section 194A(3)(v) of the Act excluding the Co- operative Banks from the definition of "Co- operative Society" by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A of the Act also makes the legislative intent clear that the Co-operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act. (Paragarph 15 of the Judgment) 4. If the legislative intent is so clear, then it cannot contended that the omission to amend Clause (d) of Section 80P(2) of the Act at the same time is fatal to the contention raised by the Revenue before this Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon'ble Supreme Court's decision in the case of Respondent assessee itself is otherwise.(Paragraph 16 of the Judgment) 5. On the decision of the earlier decision of the Hon’ble Karnataka High Court referred to in the earlier part of this order, the Court held that it did not find any detailed discussion of the facts and law pronounced by the Hon'ble Supreme Court in the case of the respondent assessee (Totagars Sales Co-operative society) and hence unable to follow the same in the face of the binding precedent laid by the Hon'ble Supreme Court. The Hon’ble Court observed that in paragraph 8 of the said order passed by a co- ordinate bench that the learned Judges have observed that Page 6 of 14 "the issue whether a co-operative bank is considered to be a co- operative society is no longer res integra, for the said issue has been decided by the Income Tax Appellate Tribunal itself in different cases…………..". No other binding precedent was discussed in the said judgment. Of course, the Bench has observed that a Co-operative Bank is a specie of the genus co- operative Society, with which we agree, but as far as applicability of Section 80P(2) of the Act is concerned, the applicability of the Supreme Court's decision cannot be restricted only if the income was to fall under Section 80P(2)(a) of the Act and not under Section 80P(2)(d) of the Act.(Paragraph-18 of the Judgment) 6. The Court finally concluded that it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Co-operative Bank. Therefore, the said decision of the Co-ordinate Bench is distinguishable and cannot be applied in the present appeals, in view of the binding precedent from the Hon'ble Supreme Court.” (Paragraph 19 of the Judgment) 8. The Hon’ble Karantaka High Court in the aforesaid decision also placed reliance on a decision of the Hon’ble Gujarat High Court in the case of STATE BANK OF INDIA (SBI) vs. COMMISSIONER OF INCOME TAX 389 ITR 0578 (Guj) did not agree with the view taken by the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. The Hon’ble Gujarat High Court held that in the case of Totgars Co- operative Sale Society (supra) decided by Hon’ble Supreme Court, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term
Page 7 of 14 deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. The Hon’ble Gujarat High Court in this regard referred to the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. The Hon’ble Gujarat High Court therefore held that decision in the case of Totagar Co-operative Sales Society rendered by the Hon’ble Supreme Court is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression "profits and gains of business" and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as "investment" are ineligible for deduction under section 80P(2)(a)(i) of the Act. (Paragraph-13 of the Judgment)
It can thus be seen that the ratio laid down by the Hon’ble Karnataka High Court in the case of Totagars Cooperative Sales Society in 395 ITR 611 (Karn) is that in the light of the principles enunciated by the Supreme
Page 8 of 14 Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co- operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act.
The learned counsel for the assessee made alternate submission that interest received by it were on deposits made in compliance with section 58 of the Karnataka Co-operative Societies Act, 1959 and therefore constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961 in respect thereof was rightly allowed by the Income Tax Officer. It was submitted that the interest received by it on deposits was in compliance with rule 28 of the Karnataka Co-operative Societies Rules, 1960 constituted its income from the business of providing credit facilities to the members and accordingly, ought to be held that the assessee was eligible for deduction thereof under section 80- P(2)(a)(i) of the Income Tax Act, 1961. It was submitted that the total deposit collected by the assessee during the previous year was as under.
Interest earned Deposit Member Interest Loans given category received paid A - Regular 19,26,49,834 1,37,74,793 8,77,39,637 74,57,869 C- Nominal 5,65,360 43,49,141 3,12,95,190 54,84,033
Total 19,32,15,184 1,79,23,934 11,90,34,827 1,29,41,902 Following the direction of the circular dated 10.07.2006 issued under the Co-operative Society Act, 1959, the assessee had maintained statutory liquidity ratio in SCDCC Bank, as below.
DEPOSITS IN SCDCC BANKS BANKS AMOUNT GUTHIGAR 9,50,607/- SAMPAJE 18,48,122/- KUMBRA 11,17,613/- JALSOOR 21,43,647/- BANK MG LEDGER 21,47,858/- SULLIA 2,96,63,314/- BELLARE 9,07,638/- TOTAL (A) 3,87,78,799/-
Page 10 of 14 11. The above deposits were maintained with South Canara District Central Co-operative Bank at its branches, mentioned above, as a statutory requirement to maintain 28% of the deposits, as indicated in the circular. At the end of the year the deposit amount came to be Rs. 3,87,78,799/- with interest.
These arguments are raised for the first time by the Assessee before the Tribunal. The issue raised by the Assessee therefore requires examination. If there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments whether can be said to have business nexus and therefore should be considered as income derived from the business of providing credit facility to the members, requires examination. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT(A) by remanding the issue examination afresh.
Another aspect with regard to the deduction u/s.80P(2)(d) of the Act, is with regard to what is the quantum of interest income that should be brought to tax by the AO, in case the deduction is denied to the Assessee u/s.80P(2)(d) of the Act. On this aspect, the Hon’ble ITAT, Bengaluru Bench in the case of Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., Vs. ITO in order dated 14.06.2021 for Assessment Year 2016-17, the tribunal held that the Assessee should be allowed expenses and the entire gross interest cannot be taxed. The following were the relevant observations of the Tribunal: 6. The next issue relates to the deduction claimed by the assessee u/s 80P(2)(d) of the Act in respect of interest income. Identical issue has been considered by the co-ordinate bench in the case of Karkala Co-op S Bank Ltd (supra). For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench:-
Page 11 of 14 "7. The next common issue relates to rejection of deduction claimed u/s 80P(2)(d) of the Act in respect of interest income earned from fixed deposits kept with bank. We noticed earlier that the A.O. has observed in Assessment Year 2015-16 that the interest income received by the assessee from deposits kept with banks is not eligible for deduction u/s 80P(2)(c) & 80P(2)(d) of the Act since the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act. In AY 2016-17, the AO assessed the interest income received on bank deposits under the head "Income from other sources" and denied deduction claimed u/s 80P(2)(d) of the Act. The Ld CIT(A) confirmed the action of the AO on this issue.
The Ld. A.R. submitted that the assessee is entitled to claim deduction allowable u/s 57 of the Act in respect of cost of funds and proportionate administrative and other expenses. In support of this submission, the Ld. A.R. placed reliance on the decision rendered by Hon'ble High Court of Karnataka in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO (2015) 58 taxmann.com 35 (Karn). The Ld. A.R. submitted that the assessee in the above said case had put forth identical claim claim before Hon'ble Supreme Court in the case reported as Totgars Co-operative Sale Society Ltd. Vs. ITO (2010) 188 taxmann.com 282 and the Hon'ble Supreme Court, vide 14 of its order, had restored the question raised by the assessee to the file of Hon'ble High Court of Karnataka. Consequent thereto, the Hon'ble High Court of Karnataka has passed the order in the case reported in 58 taxmann.com 35 and held that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of proportionate cost, administrative expenses incurred in respect of such deposits. Accordingly, the Ld. A.R. prayed that the A.O. may be directed to allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head "other sources".
9. We heard Ld. D.R. on this issue. We find merit in the prayer of the assessee, since it is supported by the decision rendered by Hon'ble High Court of Karnataka in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO (2015) 58 taxmann.com 35 (Karn). Accordingly, we direct the A.O. to Page 12 of 14 allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head "other sources"."
7. In the instant case, the assessee has earned both interest income and dividend income. In view of the decision rendered by the jurisdictional Hon'ble High Court of Karnataka, the assessee is entitled for deduction of proportionate cost, administrative and other expenses. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with similar directions.
The AO will afford opportunity of being heard to the assessee and filing appropriate evidence, if desired, by the assessee to substantiate its case, before deciding the issue in the set aside proceedings.
The next issue raised in this appeal is with regard to the remaining sum that was claimed as deduction u/s.80P(2)(a)(i) of the Act, the AO was of the view that as per the bye-laws of the society nominal members and associated members were also eligible for becoming members of the assessee, besides regular members. The AO was of the view that nominal and associate members of the assessee did not have voting rights and were not entitled to participate in the profits of the society. In the aforesaid circumstances, the AO was of the view that income in question did not satisfy the requirements of principles of mutuality laid down by the Hon’ble Supreme Court in the case of Citizen C-operative Society Ltd. v. ACIT [2017] 86 taxmann.com 114 (SC). The AO therefore denied the deduction u/s. 80P(2)(a)(i) of the Act. The order of the AO was confirmed by the CIT(A).
On the issue of deduction u/s.80P(2)(a)(i) of the Act, the Hon’ble ITAT, Bengaluru Bench in the case of Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., Vs. ITO in order dated 14.06.2021 for Assessment Year 2016-17. The Tribunal has Page 13 of 14 decided identical issue that arises for consideration in this appeal and has remanded the issue for consideration with the following observation:
“4. We heard Ld D.R and perused the record. The first issue relates to the claim of deduction u/s 80P(2)(a)(i) of the Act. We notice that an identical issue has been considered by the co-ordinate bench in the case of Karkala Co-op S Bank Ltd (supra), wherein an identical issue has been restored to the file of AO for examining it afresh. For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench:- "4. The Ld. A.R. submitted that the law on deduction of 80P(2)(a)(i) of the Act available to credit co-operative societies has since been settled by Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. Vs.CIT (2021) 123 taxmann.com 161 (SC). He submitted that the Hon'ble Supreme Court has held that the expression "Members" is not defined in the Income-tax Act. Hence, it is necessary to construe the expression "Members" in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. The Ld. A.R. submitted that the Hon'ble Supreme Court has considered the decision rendered by it in the case of Citizen Co-operative Society Ltd. (supra) and observed that the ratio decidendi of Citizen Co- operative Society Ltd. must be given effect to. Accordingly, he submitted that the assessee should be allowed deduction u/s 80P(2)(a)(i) of the Act.
5. The Ld. D.R., on the contrary, submitted that the issue of deduction needs to be examined afresh in the light of decision rendered by Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. (supra). Accordingly, he submitted that this issue may be restored to the file of the A.O.
6. We heard the parties on this issue and perused the record. We find merit in the submission made by Ld. D.R. Since the Hon'ble Supreme Court has settled many issues in the decision rendered by it in the case of Mavilayi Service Co-operative Bank Ltd. (supra) and since the facts prevailing in the instant case needs to be examined afresh in the light of the principles enunciated by Hon'ble Supreme Court in the above said case, we are of the view that the issue of deduction u/s 80P(2)(a)(i) of the Act requires fresh examination at the end of the A.O.
Page 14 of 14 Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and restore them to the file of the A.O. in both the years for examining it afresh as discussed above."
5. Since the facts are identical, following the decision rendered by the co-ordinate bench, we restore this issue to the file of the AO with similar directions.”
We have considered the rival submissions. As the issues involved in the present appeal are identical to the issues decided by the Tribunal, we restore the issue to the AO to examine the claim of the assessee afresh as directed by the Tribunal in the aforesaid order.
In the result, the appeal of the assessee is treated as partly allowed for statistical purpose.
Pronounced in the open court on the date mentioned on the caption page.