M/S. SRINAGARA CREDIT CO-OPERATIVE SOCIETY LIMITED,BANGALORE vs. INCOME TAX OFFICER, WARD- 5(2)(5), BANGALORE

The assessee has raised two issues in both the appeals and the issues so raised are common in both the Assessment Years as given below:

a) Denial of exemption u/s 80P(2)(d) of the Act in respect of interest income earned from Co-operative banks. and 163/Bang/2020 Page 2 of 7 b) Denial of deduction u/s 80P of the Act in respect of commission income earned on sale of e-stamps.

We have heard the parties and perused the record. The facts relating to the case are stated in brief. The assessee originally filed its return of income declaring nil total income after claiming deduction u/s 80P of the Act. In assessment year 2013-14 & 2014-15, the A.O. rejected the claim for deduction u/s 80P of the Act. Consequently, the A.O re-opened the assessment of year under consideration by issuing notice u/s 148 of the Act. In the reopened assessment, the A.O. rejected the claim for deduction u/s 80P of the Act by holding that the assessee is dealing with Nominal members and hence, fails in the Principle of mutuality. In support of this proposition, the AO placed his reliance on the decision rendered by Hon'ble Supreme Court in the case of Citizen Cooperative Society Ltd. (250 Taxman 78). Accordingly, the AO held that the assessee is not eligible for deduction u/s 80P of the Act. The assessee had also earned commission income on sale of e-stamps and the A.O. held that the same is not eligible for deduction u/s 80P of the Act. The assessee had also earned interest income of Rs.27.75 lakhs from deposits kept with various co-operative banks. The main contention of the assessee is that the interest income is eligible for deduction u/s 80P(2)(a)(i) of the Act. In the alternative, the assessee claimed that the same is deductible u/s 80P(2)(d) of the Act. The A.O. rejected the alternative claim also by following decision rendered by Hon'ble Karnataka High Court In the case of Principal CIT Vs. Totgars Co-operative Sales Society (2017) 83 Taxmann.com 140. Accordingly, the A.O. brought to tax the entire income of the assessee. and 163/Bang/2020 Page 3 of 7 4. In the appellate proceedings, the Ld. CIT(A) noticed that the assessee has not transacted its business with nominal members and accordingly, held that the facts of the present case is distinguishable from the facts prevailing in the case of Citizen Cooperative Society Ltd. (supra). Accordingly, the Ld. CIT(A) held that the assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act in respect of its business income. However, he confirmed the disallowance u/s 80P(2)(d) of the Act in respect of interest income and also rejection of deduction u/s 80P(2)(c) in respect of commission income earned on sale of e-stamps. Aggrieved, the assessee has filed this appeal before the Tribunal.

Before the Tribunal, the assessee has raised contesting the disallowance of deduction u/s 80P(2)(c) and 80P(2)(d) of the Act.

We first take up the issues urged on merits. With regard to claim for deduction u/s 80P(2)(d) of the Act, the Ld. A.R. submitted that the Hon'ble Karnataka High Court has passed an order in the case of Totgars Co- operative Sales Society Ltd. (58 Taxmann.com 35), consequent to the setting aside of the issue relating to deduction u/s 80P(2)(d) of the Act to its file by Hon'ble Supreme Court. The Hon'ble Karnataka High Court has held in the case reported in 58 taxmann.com 35 that the assessee is eligible for deduction of proportionate cost, administrative and other expenses against the interest income. The Ld. A.R. submitted that the above said decision of Hon'ble High Court of Karnataka has been followed by the Bengaluru Bench of Tribunal in the case of Karkala Co-op. S. Bank Ltd. Vs. ITO (ITA No.1288 8r, 1289/Bang/2019 dated 18.2.2021). Accordingly, he prayed that similar direction may be given in this case also. With regard to commission and 163/Bang/2020 Page 4 of 7 earned on sale of e-stamps, the Ld A.R submitted that the assessee is eligible for deduction u/s 80P(2)(c) of the Act.

The Ld D.R admitted that the decision rendered by the Hon'ble Karnataka High Court in the case of Totgars Co-operative Sales Society Ltd. (58 Taxmann.com 35) may be applied in the instant case. With regard to the deduction claimed u/s 80P(2)(c) in respect of Commission income, the Ld D.R fairly agreed that the assessee is eligible for the said deduction in respect of commission income.

We have heard the parties and perused the record. In the case of Karkala Co-op. S. Bank Ltd. Vs. ITO (supra), the Bangalore bench of Tribunal has considered issue of eligibility of the assessee to claim deduction u/s 80P(2)(d) and it was held that the assessee is eligible for deduction of expenses incurred for earning the interest income. The relevant observations made by the Tribunal are extracted below:-

The next issue relates to the deduction claim u/s 80P(2)(c) of the Act in respect of commission income earned on sale of e- stamps. We notice that the tax authorities have rejected the claim only on the ground that the Commission income has been earned mainly from outsiders and not mainly from members. However, a perusal of provisions of sec.80P(2)(c) would show that there is no such restriction prescribed in it. Section 80P(2)(c) prescribes deduction in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b). It further states that the deduction u/s 80P(2)(c) is allowable to so much of its Profits and gains attributable to such activities as does not exceed the amount prescribed. Thus the quantum of deduction is the amount of "profits and gains attributable to the activities" subject to the maximum amount prescribed therein. Hence, we are of the view that the assessee would be eligible for deduction u/s 80P(2)(c) of the Act in respect of commission income on sale of e-stamps, since it is not one of the activities mentioned in clause (a) or (b). However, we notice that it is necessary to first determine the profits and gains attributable to the "activities of earning commission income on sale of e-stamps" and then compute deduction u/s 80P(2)(c) subject to the limits prescribed in the said provision. Accordingly, this issue requires fresh examination at the end of AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh in the light of discussions made supra. and 163/Bang/2020 Page 7 of 7 10. In the result, both the appeals are treated as allowed for statistical purposes.