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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: Shri George George K, JM & Shri B.R.Baskaran, AM
O R D E R Per George George K, JM These appeals at the instance of the assessee are directed against two orders of the CIT(A), both dated 09.01.2020. The relevant assessment years are 2015-2016 and 2016-2017.
Common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order.
Identical grounds are raised for both the assessment years, except for difference in figures. The ground raised for assessment year 2015-2016 is reproduced below:-
“1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned CIT[A] is not justified in upholding the denial of 2 ITA Nos.276-277/Bang/2020. M/s.Thannirupantha Primary Agri.Cr.Co-op.So.Ltd. deduction claimed u/s.8OP[2][a][i] of the Act amounting to Rs.52,64,317/- in respect of the profits earned by the appellant from the business of providing credit facilities to its members under the facts and in the circumstances of the appellant's case.
3. The learned CIT[A] erred in holding that the business of providing credit facilities to the members carried on by the appellant cannot be regarded as a business carried on by a co-operative society complying with the principles of mutuality since the appellant had admitted nominal and associate members, who could neither vote nor were entitled to a share in the profits as per the bye-laws of the appellant and hence, the appellant was not entitled to deduction u/s. 8OP[2][a][i] of the Act having regard to the rationale behind the judgment of the Hon'ble Supreme Court in the case of Citizens Co-operative Society reported in 397 ITR 1 [SC] under the facts and in the circumstances of the appellant's case.
The learned CIT[A] ought to have appreciated that the appellant co-operative society had no doubt admitted nominal and associate members, which was permissible under the Karnataka Co-operatives Societies Act, 1959 but, there was no violation of any of the provisions of the Karnataka Co-operative Societies Act under which the appellant was constituted and therefore, the judgement of the Hon'ble Supreme Court relied upon in the case of Citizens Co-operative Society reported in 397 ITR 1 was distinguishable and wholly inapplicable to the facts of the appellant's case.
5. Without prejudice to the above, the learned CIT[A] ought to have appreciated the alternate claim made by the appellant for allowance of deduction u/s. 8OP of the Act with reference to the extent of income derived from advances given to members apart from nominal members, which was exempt under the principles of mutuality as held by the Hon'ble Bombay High Court in the case of M/s. QUEP~M URBAN CO- OPERATIVE CREDIT SOCIETY LTD in to 24 of 2015 dated 17104/2015 under the facts and in the circumstances of the appellant's case.
6. The learned CIT[A] ought not to have upheld the assessment of income earned by the appellant of Rs. 55,01,889/- under the head "Other Sources" as against the claim of the appellant that the said interest income formed part of the income from business of providing credit facilities to the members and thus, was entitled to deduction u/s. 8OP [2][a][i] of the Act following the judgment of the Hon'ble Karnataka High Court in the case of TUMKUR MERCHANTS SOUHARDA CREDIT CO-OPERATIVE LTD reported in [2015] 230 Taxman 309 [Kar] under the facts and in the circumstances of the appellant's case.
7. The learned CIT[A] ought to have appreciated that the appellant had earned the interest income from investments statutorily required to be maintained under the Karnataka Co- operative Societies Act from out of the profits besides 25% of the total deposits as SLR with co-operative banks and 3% of the total deposits towards CRR and thus, the income earned therefrom ought to have been assessed as part of the business of the providing credit facilities to its members and not under the head 'Other Sources" under the facts and in the circumstances of the appellant's case.
8. Without prejudice to the above, the learned CIT[A] ought to have appreciated that the cost of funds ought to have been allowed u/s. 57[iii] of the Act by allowing the actual interest paid on member's deposits while assessing the interest income under the head "Other Sources" instead of the arbitrary allowance of 10% of the income as incidental expenses, under the facts and in the circumstances of the appellant's case. 9. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 10. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.” 4. Brief facts of the case are as follow: The assessee is a primary agricultural credit society registered under the Karnataka Co-operative Societies Act, 1959. The assessee is engaged in providing credit facilities to its members. For the assessment years 2015-2016 and 2016- 2017, the returns of income were filed declaring income of Rs.57,64,370 and Rs.74,29,284, respectively, after claiming deduction u/s 80P of the I.T.Act. In the gross total income for the assessment years 2015-2016 and 2016-2017, the assessee had also included interest income and dividend -277/Bang/2020. M/s.Thannirupantha Primary Agri.Cr.Co-op.So.Ltd. income received from District Co-operative Banks. The assessments were taken up for scrutiny for assessment years 2015-2016 and 2016-2017 by issuing notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the A.O. proposed to disallow the claim of deduction u/s 80P of the I.T.Act by quoting the judgment of the Hon’ble Karnataka High Court in the case of Pr.CIT & Anr. v. Totagars Co- operative Sale Society reported in [(2017) 395 ITR 611 (Kar.)].The assessee contended that they are primary agricultural co-operative credit society and the main objective of the assessee was providing credit facilities to its members with a view to promote the agricultural activities undertaken by its members. It was further submitted that the amounts invested in District Central Co-operative Banks are surplus funds of the society, which are not immediately required and interest income / dividend received is part of banking business of the society and entitled for deduction u/s 80P(2)(a)(i) or deduction u/s 80P(2)(d) of the I.T.Act. The Assessing Officer rejected the contentions raised by the assessee and disallowed the claim of deduction u/s 80P(2)(a)(i) as well as 80P(2)(d) of the I.T.Act.
5. Aggrieved by the assessment orders completed for assessment years 2015-2016 and 2016-2017, the assessee preferred appeals to the first appellate authority. The first appellate authority confirmed the view taken by the Assessing Officer in denying the benefit of deduction u/s 80P of the I.T.Act. The first appellate authority held that the assessee has violated the principles of mutuality by having dealing with the nominal members. Further, the first appellate authority -277/Bang/2020. M/s.Thannirupantha Primary Agri.Cr.Co-op.So.Ltd. also rejected the claim of deduction u/s 80P(2)(d) of the I.T.Act by relying the judgment of the Hon’ble Apex Court in the case of Totagars Co-operative Sale Society v. ITO reported in 322 ITR 283 (SC) as well as the judgment of the Hon’ble Karnataka High Court in the case of Pr.CIT & Anr. v. Totagars Co-operative Sale Society (supra).
Aggrieved by the orders of the CIT(A), the assessee has preferred these appeals before the Tribunal. The learned Counsel for the assessee submitted that insofar as the denial of benefit u/s 80P of the I.T.Act is concerned, the issue is squarely covered by the recent judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. and Ors. v. CIT & Anr. reported in [2021] 431 ITR 1 (SC), it was stated by the learned AR that the Bangalore Bench of the Tribunal in the recent order in the case of M/s.Kadaba Sahakari Vyavasayika Bank Ltd. v. ITO in (order dated 23.07.2021) had restored the identical matter to the files of the A.O. to consider the dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. and Ors. v. CIT & Anr. (supra).
As regards ground Nos.6, 7 & 8 with respect to the claim of deduction u/s 80P(2)(d) of the I.T.Act, the learned AR submitted that the Bangalore Bench of the Tribunal in the case of M/s.The Jayanagar Co-operative Society Ltd. v. ITO in (order dated 23.07.2019), on identical facts, had restored the matter to the files of the A.O. for de novo consideration. -277/Bang/2020. M/s.Thannirupantha Primary Agri.Cr.Co-op.So.Ltd.
The learned Departmental Representative, on the other hand, by relying on the judgment of the Hon’ble Apex Court in the case of Citizens Co-operative Society Ltd. v. ACIT reported in 397 ITR 1 (SC), submitted that the assessee violated the principles of mutuality by dealing with nominal members, and hence, was not entitled to the benefit of mutuality. Hence, the claim of deduction u/s 80P has been rightly denied by the A.O. and confirmed by the CIT(A).
We have heard rival submissions and perused the material on record. The Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. and Ors. v. CIT & Anr. (supra), had held that expression “Members” is not defined under the Income-tax Act, hence, it is necessary to construe the expression “Members” in section 80P(2)(a)(i) of the I.T.Act in the light of the definition of that expression as contained in the respective State Co-operative Societies Acts. The Hon’ble Apex Court had settled many issues in the decision rendered by it in the case of Mavilayi Service Co-operative Bank Ltd. and Ors. v. CIT & Anr. (supra). Facts prevailing in the instant case needs to be examined afresh in the light of the principles enunciated by the Hon’ble Apex Court. Therefore, we are of the view that the issue of deduction u/s 80P(2)(a)(i) of the I.T.Act requires de novo consideration by the A.O. Accordingly, we set aside the orders of the CIT(A) for the assessment years 2015-2016 and 2016-2017 and restore them to the files of the A.O. for fresh consideration. A similar view has been held by the Bangalore Bench of the Tribunal in the case of M/s.Kadaba Sahakari Vyavasayika Bank Ltd. 9.1 As regards the claim of deduction u/s 80P(2)(d) of the I.T.Act, the Bangalore Bench of the Tribunal in the case of M/s.The Jayanagar Co-operative Society Ltd. (supra), on identical facts, had restored the issue to the files of the A.O. for de novo consideration. The narration of facts, contentions and the findings of the Tribunal in the case of M/s.The Jayanagar Co-operative Society Ltd. (supra) reads as follow:-
“4. The issues that arise for consideration in this appeal by the assessee are as to whether the Revenue authorities were justified in holding that the assessee was not entitled to the benefit of deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 (in short ‘the Act’) on interest income earned and under section 80P(2)(d) of the Act in respect of interest received from Co-operative institutions. The Assessing Officer (AO) denied the claim of the assessee on the ground that interest income earned by making investment of surplus funds has to be assessed under the head “Income from Other Sources” and not income from business and since interest income is not assessed as business income, the claim for deduction under section 57 of the Act cannot be allowed. In upholding the above conclusions, the CIT(A), inter alia, relied on the decision of the Hon’ble Supreme Court in the case of The Totgar’s Co-operative Sales Society Ltd., Vs. ITO 322 ITR 283 (SC) wherein the Hon’ble Supreme Court held that the benefit of deduction under section 80P(2)(a)(i) of the Act is only on income which is assessable under the head “Income from Business”. Interest earned on investment of surplus funds not immediately required in short term deposits and securities by a Co-operative Society providing credit facilities to members or marketing agricultural produce to members is not business income but income from other sources and the society is not entitled to special deduction.
While learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Tumukur Merchants Souharda Credit Co-operative Ltd., 230 taxman 309 (Karn), the DR relied on a subsequent decision of the Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co- operative Sale Society Ltd., 395 ITR 611 (Karn.). We have carefully gone through the said judgment. The facts of the case before the Hon’ble Karnataka High Court was that the Hon’ble Court was considering a case relating to Assessment Years 2007-08 to 2011-12. In case decided by the Hon’ble Supreme Court in the case of the very same assessee, the Assessment Years involved was Assessment Years 1991-92 to 1999-2000. The nature of interest income for all the Assessment Years was identical. The bone of contention of the Assessee in AY 2007-08 to 2011-12 was that -277/Bang/2020. M/s.Thannirupantha Primary Agri.Cr.Co-op.So.Ltd. the deduction under Section 80P(2) of the Act is claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act which was the claim in AY 1991-92 to 1999- 2000. The reason given by the Assessee was that in AY 2007-08 to 2011-12 investments and deposits after the Supreme Court's decision against the assessee Totgar's Co-operative Sale Society Ltd. (supra), were shifted from Schedule Banks to Cooperative Bank. U/s.80P(2)(d) of the Act, income by way of interest or dividends derived by a Co-operative Society from its investments with any other Co-operative Society is entitled to deduction of the whole of such interest or dividend income. The claim of the Assessee was that Co-operative Bank is essentially a Co-operative Society and therefore deduction has to be allowed under Clause (d) of Sec.80P(2) of the Act. The Hon'ble Karnataka High Court followed the decision of the supreme Court in The Totgars Co-operative Sales Society Ltd. (supra) and held that interest earned from Schedule bank or cooperative bank is assessable under the head income from other sources and therefore the provisions of Sec.80P(2)(d)of the Act was not applicable to such interest income. It is thus clear that the source of funds out of which investments were made remained the same in AY 2007-08 to 2011- 12 and in AY 1991-92 to 1999-2000 decided by the Hon'ble Supreme Court. Therefore whether the source of funds were Assessee's own funds or out of liability was not subject matter of the decision of the Hon'ble Karnataka High Court in the decision cited by the learned DR. To this extent the decision of the Hon'ble Karnataka High Court in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra) still holds good. Hence, on this aspect, the issue should be restored back to the AO for a fresh decision after examining the facts in the light of these judgment of the Hon'ble Apex Court rendered in the case of The Totgars Co-operative Sale Society Ltd. (supra) and of Hon'ble Karnataka high Court rendered in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra).”
9.2 In the light of the above order of the Tribunal, we deem it appropriate on the facts of the instant case, to restore the issue of claim of deduction u/s 80P(2)(d) of the I.T.Act to the files of the A.O. Hence ground Nos.6 and 7 are allowed for statistical purposes.
9.3 As regards ground No.8, we noticed that the issue raised is an alternative contention to the claim of deduction u/s 80P(2)(d). Since we have already restored the issue of claim of deduction u/s 80P(2)(d) of the I.T.Act to the files of the A.O., the issue raised in ground No.8 relating to the allowability of expenditure on income assessed as income from other
In the result, the appeals filed by the assessee are allowed for statistical purposes.