SRI VASAVAMBA CO-OPERATIVE SOCIETY LIMITED,HUNSUR vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, MYSORE

2. The assessee is a 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. The assessee also derives income by distributing food grains on behalf of the Karnataka State Food and Civil Supplies Corporation Ltd. In the return of income filed for Assessment Year 2015-16, the asssessee claimed deduction under section 80P(2)(a)(i) of the Act, 1961 of a sum of Rs.10,61,494/- as income from the business of providing credit facilities to its members. The AO

The PCTI, Mysuru, in exercise of its powers under section 263 of the Act, was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the Revenue for the reason that interest income amounting to Rs.1,32,726/- was received by the assessee on deposits with nationalized banks and co-operative banks and therefore deduction on the aforesaid sum ought to not have been allowed to the assessee by the AO either under section 80P(2)(a)(i) or 80P(2)(d) of the Act. Accordingly, the Pr.CIT, Mysore issued show cause notice dated 06.03.2020 to the assessee. The Pr.CIT had in a show cause notice referred to the decision of the Hon’ble Karnataka High Court in the case of Pr.CIT Vs. Totagars Co- operative Sale Society, 395 ITR 611 for the proposition that the assessee was not entitled to deduction under section 80P(2)(d) of the Act on the interest earned from deposits with nationalized banks and co-operative banks.

The assessee, in reply to the aforesaid show cause notice of the Pr.CIT, the Assessee firstly submitted that the entire interest income of Rs.1,32,726/- was earned by way of interest on deposits with Mysore and Chamarajnagar District Central Co-operative Bank and not from any nationalized bank. The assessee secondly pointed out that the claim for deduction on the aforesaid sum was made under section 80P(2)(a)(i) and not under 80P(2)(d) of the Act and therefore the reliance placed by the Pr.CIT in the show cause notice on the decision of the Hon’ble Karnataka High Court in the case of Totagars Co-operative Sale Society 395 ITR 611(Karn) (supra) will not be applicable. The assessee reiterated its stand that the aforesaid interest income was from the business of providing credit

The Pr.CIT however did not agree with the aforesaid submissions of the assessee. He referred to the decision of the Hon’ble Karnataka High Court rendered in the case of Tumkur Merchants Souharda Credit Co- operative Ltd., Vs. ITO 230 taxman 309 wherein it was held that interset earned from short term deposits with banks by a society providing credit facilities to its members from capital not immediately required to be lent to the members and which cannot be kept idle, such interest is attributable to the profits and gains of business of providing credit facilities to its members. The Pr.CIT observed that in a subsequent decision rendered by the Hon’ble Karnataka High Court in the case of Totagars Co-operative Sale Society 295 ITR 611(Karn)(supra), the Karnataka High Court held that the said decision was distinguishable and was contrary to the law laid down by the Hon’ble Supreme Court in the case of Totagars Co-operative Sale Society 322 ITR 283 (SC) and therefore 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 Pr.CIT accordingly directed the AO to revise the Order of Assessment by bringing to tax the interest income in question. Aggrieved by the aforesaid order of the Pr.CIT, the assessee has preferred the present appeal before the Tribunal.

We have heard the submissions of the learned Counsel for the assessee and the learned DR. The learned counsel for the Assessee submitted that the issue dealt with by the Hon’ble Supreme Court in the case of Totgars (supra) was regarding taxability of the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purposes. The deposits were made out sale proceeds of the members of the assessee whose produce was Page 4 of 15 marketed by the Assessee and the money did not belong to the Assessee. He pointed out that interest on such deposits/securities, which strictly speaking accrues to the members’ account, could not be taxed as business income under section 28 of the Act and it was held by the Hon’ble Supreme Court that such interest income would come in the category of ‘income from other sources’, hence, such interest income would be taxable under section 56 of the Act and hence not attributable to the business of providing credit facility to its members. It was submitted the ratio of the decision in case of Totgars Co-op. Sale Society (supra), as observed by Supreme Court itself, was confined only to the facts of the case before it & accordingly cannot be applied in general to all kinds of co-op. societies. It was submitted that in the case of Totgars, the Hon’ble Supreme Court had not spelt out anything with regard to operational funds in the hands of pure Co- operative Credit Societies and the ratio was applicable to co-operative sale societies only. It was submitted that the Assessee in Totgars case had admitted that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits. The surplus funds arose out of the amount retained from marketing the agricultural produce of the members. The Assessee in Totgars case carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii) marketing the agricultural produce; and (d) that the surplus had arisen emphatically from marketing of agricultural produces. Whereas, in the case of co-op. credit societies, generally, it doesn’t carry out any activity except in providing credit facilities to its members and that the funds are operational funds. The only fund available with the pure credit societies is deposits from its members and, thus, there are no surplus funds as such.

It was further submitted that the decision relied upon by the Pr.CIT in the impugned order in the case of Totagars Co-operative Sale Society 395

We have carefully considered the rival submissions. An order passed contrary to a decision of the Hon’ble Jurisdiction High Court would be in the nature of an order prejudicial to the interest of the revenue being an order passed on an incorrect application of law. In the case of Malabar Industrial Co. Ltd. vs. CIT[2000] 243 ITR 83(SC), the Supreme Court held that there must be two conditions namely that the order of assessment is erroneous and that the order is prejudicial to the interests of the Revenue which must be satisfied before the Commissioner may invoke his powers under Section 263 of the Act. The Court held that every loss of tax cannot be said to be prejudicial to the interests of the Revenue. If two views are possible, and the AO has adopted one of those views, the order of assessment cannot be prejudicial to the interests of the Revenue. However, when the Assessing Officer does not apply his mind to the issue at hand or violates any of the principles of natural justice, the order shall be prejudicial to the interests of the Revenue. Also, an incorrect assumption of facts or incorrect application of law by the AO would make the order of aasessment erroneous and prejudicial to the interests of the Revenue.

The Hon’ble Supreme Court in the case of the The Totgars Co- operative Sale Society Ltd. Vs. ITO 322 ITR 283 (SC) held that Income from utilisation of surplus funds was taxable under the head income from other sources, and therefore not eligible for deduction u/s 80P. The Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO (230 Taxman 309), was dealing with a Page 6 of 15 case where deduction u/s.80P(2)(a)(i) of the Act was claimed on interest from the deposits made in a nationalized bank out of the amounts which was used by the assessee for providing credit facilities to its members. The Assessee claimed that the said interest amount is attributable to the business of providing credit facilities by the assessee and forms part of profits and gains of business. The Hon’ble Karnataka High Court after considering SC judgment in case of Totgars(supra) held that since the word income is qualified by the expression “attributable” to the business of Banking is used in Sec.80P(2)(a)(i) of the Act, it has to receive a wider meaning and should be interpreted as covering receipts from sources other than the actual conduct of business. The Court held a Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. The Hon’ble Court also distinguished the decision of the Hon’ble Supreme Court in the case of Totgars (supra) by observing that the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its Page 7 of 15 members from whom produce was bought, was invested in a short-term deposit/security. 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 under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. The Court also observed that even the Hon’ble Supreme made it clear that they are confining the said judgment to the facts of that case. The Court therefore concluded that Hon’ble Supreme Court was not laying down any law. Similar view taken in Guttigedarara Credit Co-operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 392 ITR 0074 (Karn) in the context of deduction u/s.80P(2)(d) of the Act, it was held that Sec.80P(2)(d) of the Act allows deduction in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co- operative society, the whole of such income. The Hon’ble Court held that that the aforesaid Supreme Court's decision in the case of Totgars (supra), was not applicable to deduction u/s.80P(2)(d) of the Act, because the said decision was rendered with regard to deduction under Section 80P(2)(a)(i) of the Act and not under Section 80P(2)(d) of the Act.

However, 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 different 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 Page 8 of 15 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.) in which the Hon’ble Gujarat High Court dissented from the view taken by the Hon’ble Karnataka High Court in the case of Tumkur Merchants case (supra) The Hon’ble Court had to deal with the following substantial question of law:

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:

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

It can thus be seen that the ratio laid down by the Hon’ble Karnataka High Court in the case of Totalgars Cooperative Sales Society in 395 ITR 611 (Karn) is 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) 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 CIT was therefore justified in exercising his powers of revision u/s.263 of the Act and directing the AO to tax interest income in question as it is neither of the nature specified in Sec.80P(2)(a)(i) or 80P(2)(d) of the Act.

The argument of the learned counsel for the Assessee has been that the AO has applied his mind and allowed the deduction and therefore the jurisdiction u/s.263 of the Act cannot be exercised. On this argument, the learned DR pointed out that the jurisdiction u/s.263 of the Act was exercised by the CIT not for the reason that the AO failed to make proper

The argument that co-operative Banks are also co-operative societies is again without any basis in the light of the law explained in the case of Totagar co-opeartive sales society 395 ITR 611 (Karn.). The reliance placed by the learned counsel for the Assessee on the earlier decisions of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision in Totgars Co-operative Sale Society (supra) stands explained by the later decision in the case of Totagar co-opeartive sales society 395 ITR 611 (Karn.).

We however find that the Assessee has raised the following grounds of appeal in its appeal, viz.,

The issue raised by the Assessee in the aforesaid grounds require examination because 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 have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised in ground No.5 to 7 alone to the AO for examination afresh. In other respects we confirm the order of the CIT.