DHANLAXMI CREDIT CO. OP. SOCIETY LTD.,MEHSANA vs. THE ITO, WARD-2, PATAN

We are of the considered view that this controversy has now been settled by the Gujarat High Court in the case of Principal Commissioner of Income-tax vs. Ashwinkumar Arban Co Operative Society Ltd. [2024] 168 taxmann.com 314 (Gujarat)[24-09-2024], wherein the Gujarat High Court held that deduction under section 80P(2)(d) of the Act is available to cooperative societies on income earned as interest on investment made with Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 3– cooperative bank which in turn, is a cooperative society itself. In this case, Principal Commissioner invoked revisional powers under section 263 on ground that Assessing Officer had allowed deduction on interest earned by assessee, a cooperative society, from investment made with a cooperative bank under section 80P(2)(d) which was erroneous and prejudicial to interest of Revenue. The Tribunal reversed Principal Commissioner’s order holding that cooperative bank was a cooperative society registered under Gujarat State Cooperative Societies Act and, therefore, interest earned by assessee from said bank was eligible for deduction under section 80P(2)(d). The High Court held that deduction under section 80P(2)(d) is available to cooperative societies on income earned as interest on investment made with cooperative bank which in turn, is a cooperative society itself. The High Court further held that exclusion of applicability of section 80P to cooperative banks by section 80P (4) would not disentitle assessee from claiming deduction under section 80P(2)(d) of the Act in absence of any amendment in said section. While passing the order, High Court made the following observations:

It was therefore submitted that when the respondent-assessee has earned interest on the investment made with the cooperative society which was carrying out the banking business, the deduction under section 80P 2(d) of the Act cannot be denied.

Having heard learned advocates for the respective parties and considering the controversy arising in these tax appeals, we are of the opinion that the controversy sought to be canvassed with regard to deduction under section 80P(2)(d) of the Act is no more res integra in view of the decision of this Court in case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. (supra) as well as in case of State Bank of India (supra) wherein it was held that the deduction of under section 80P(2)(d) of the Act is available to the cooperative societies on the income earned as interest on the investment made with the cooperative bank which in turn, is a cooperative society itself. 29. Reliance placed by the learned advocate for the revenue on decisions of the Hon'ble Karnataka High Court and Hon'ble Supreme Court in case of Totgars' Cooperative Sale Society Ltd. (supra), the Hon'ble Karnataka High Court appears to Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 4– have taken into consideration the amendment in section 194A(3)(v) of the Act wherein the cooperative bank is excluded from the applicability of tax to be deducted at source. However, it appears that the interpretation made by the Hon'ble Karnataka High Court to the effect that the cooperative banks have been excluded from the definition of the cooperative societies by Finance Act,2015 by amending section 194A(3)(v) of the Act is concerned, on perusal of section 194A (3) of the Act, it appears that it provides for exemption from deducting Tax Deducted at Source ['TDS' for short] from the income on interest other than interest on securities as the cooperative societies other than cooperative banks meaning thereby that the cooperative banks are liable to deduct TDS from the interest other than interest on securities. Therefore it cannot be said that cooperative banks are excluded from the definition of cooperative societies by such an amendment.

Moreover, as reliance placed on the aforesaid decision for applicability of section 80P(4) of the Act in the facts of the case is also not possible to accept as section 80P(4) of the Act would be applicable to the cooperative bank when the cooperative bank is liable to pay tax under the provisions of the Act and in such eventuality, the provision of section 80P would not be applicable as per the amendment of sub-section (4) of section 80P of the Act. Therefore, the exclusion of applicability of section 80P to cooperative banks by section 80P (4) of the Act would not disentitle the respondent-assessee from claiming deduction under section 80P(2)(d) of the Act in absence of any amendment in the said section and that would not be sufficient to deny the claim of the respondent-assessee for deduction of interest earned from investment made in a cooperative bank which is also a cooperative society from the total income.

The Hon'ble Apex Court in case of Kerala State Co-operative Agricultural & Rural Development Bank Ltd. (supra) while considering various provisions of the Banking Regulation Act read with provisions of the Income Tax Act has held that the provision of section 80P(4) of the Act would not be applicable to a cooperative bank which is not a bank as per the provisions of the BR Act,1949, as under: "5. Interpretation.— In this Act, unless there is anything repugnant in the subject or context, X X X (b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise; (c) "banking company" means any company which transacts the business of banking in India. Explanation.—Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;"

After considering the above interpretation of various provisions and the Case laws, the Hon'ble Apex Court has analyzed the provisions as under: Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 5– "14.1. In Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd., it was categorically held that under Section 56 of the BR Act, 1949 only three co-operative banks have been defined, namely, state cooperative bank, central co-operative bank and primary co-operative bank which are covered under Section 56 (cci) read with (ccvii) read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence under the BR Act, 1949 to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, 1981, it would not be a co-operative bank within the meaning of Section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act. It was further stated that if a bank has to be a state co- operative bank, there has to be a declaration made by the State Government in terms of Section 2(u) of NABARD Act, 1981. Hence, it is necessary to go into the question as to, whether, the appellant herein has been so declared as a state cooperative bank. This question would need not detain us for long as the Kerala High Court in A.P. Varghese had categorically stated that the "Kerala State Co-operative Bank" is a "state co- operative bank" as defined under the NABARD Act, 1981. Therefore, the appellant bank has not been declared as a state co- operative bank under the provisions of NABARD Act, 1981. Further, in the case of Mavilayi Service Co-operative Bank, this Court observed that a co-operative bank would engage in banking business on obtaining a licence under Section 22(1b) of the BR Act, 1949. In the instant case, the appellant herein is not a co-operative bank having regard to the aforesaid conspectus of the provisions so as to require a licence under the aforesaid provision for carrying on banking business. In the circumstances, the question could still arise as to whether the appellant herein is entitled to benefit of deduction under Section 80P of the Act. 14.2. In Mavilayi Service Co-operative Bank, it has been observed that Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee. That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub- section (2) of Section 80P must be given by way of deduction vide Citizen Cooperative Society. This is because sub-section (4) of Section 80P is in the nature of a proviso to the main provision contained in sub- sections (1) and (2) of Section 80P. The proviso excludes co-operative banks, which are co-operative societies which must possess a licence from the Reserve Bank of India to do banking business. In other words, if an entity does not require a licence to do banking business within the definition of banking under Section5(b) of the BR Act, 1949, then it would not fall within the scope of sub- section (4) of Section 80P. 14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court: (i) Firstly, the marginal note to Section 80P which reads "Deduction in respect of income of co-operative societies" is significant as it indicates the general "drift" of the provision. Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 6– (ii) Secondly, for purposes of eligibility for deduction, the assessee must be a "co- operative society". (iii) Thirdly, the gross total income must include income that is referred to in sub- section (2). (iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being "engaged in", inter alia, carrying on the business of banking or providing credit facilities to its members. (v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. (vi) Sixthly, the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non- members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. (vii) Seventhly, under Section 80P(1) (c), the co-operative societies must be registered either under Cooperative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub- clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). (viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other cooperative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole. 14.4. In paragraph 42 of Mavilayi Service Co-operative Bank, this Court observed that the object and purpose of sub-section (4) of Section 80P is to exclude only co-operative banks that function on par with other commercial banks i.e. which lend money to members of the public. That on a reading of Section 3 read with Section 56 of the BR Act, 1949, the primary co-operative bank cannot be a primary agricultural credit society. As such co-operative bank must be engaged in the business of banking as defined by Section 5(b) of the BR Act, 1949, which means accepting, for the purpose of lending or investment, of deposits of money from the public. Also under Section 22(1)(b) of the BR Act, 1949, no co- operative society can carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by Reserve Bank of India. It was pointed out that as opposed to the above, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. 14.5. It was further observed in the said case that some primary agricultural credit societies had sought for banking licence from Reserve Bank of India but the same was turned down by observing that such a society was not carrying on the business of banking and that it did not come under the purview of Reserve Bank of India requiring a licence for its business. Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 7– 14.6. Thereafter in paragraph 48 of the judgment, it was observed that a deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. That subsection (4) of Section 80P which is in the nature of a proviso specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from Reserve Bank of India."

In view of the above dictum of law as well as the provisions of the Act which are considered we are of the opinion that the provisions of section 80P(2)(d) would be applicable in the facts of the case and the PCIT was not justified in invoking revisional powers under section 263 of the Act which is rightly reversed by the Tribunal holding that the cooperative bank is a cooperative society registered under the Gujarat State Cooperative Societies Act and in view of the various decisions of the Court, the Tribunal after following the same has come to the conclusion that the assessment was not erroneous allowing deduction of section 80P(2)(d) of the Act which is in consonance with the various decisions of the Court as a twin condition invoking section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled.

In view of the foregoing reasons we answer the question in favour of the assessee and against the Revenue. Tax Appeals are being devoid of any merit accordingly dismissed. No order as to costs.

In view of the above, since now the controversy has been settled by the jurisdictional Gujarat High Court, we are of the considered view that the assessee is eligible for claim of deduction under section 80P(2)(d) of the Act on interest earned from co-operative banks.

In the result, ground number 1 of the assessee’s appeal is allowed.

Before us, during the course of hearing, the counsel for the assessee submitted/admitted that the assessee is not eligible for claim of deduction under section 80P(2)(d) of the Act with respect to interest earned from scheduled commercial banks, however, once this amount has been subject to Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 8– tax as income of the assessee, the assessee is eligible for claim of proportionate interest expenditure incurred for earning such interest income.

Accordingly, in interest of justice, the matter is restored to the file of assessing officer for carrying out the necessary verification on the precise amount of interest expenses incurred by the assessee for the purpose of earning such interest income from scheduled commercial banks and to allow proportionate deduction, in accordance with law.

In the result, ground number 2 of the assessee’s appeal is allowed for statistical purposes.

Before us, the counsel for the assessee submitted that the assessee had filed return of income for the impugned assessment year declaring “nil” income, wherein interest income earned by the assessee from deposits in co- operative banks and scheduled commercial banks were claimed as exempt under section 80P(2)(d) of the Act. However, since the ground 2 has been disallowed against the assessee on merits, by way of an alternate claim, the assessee is eligible for claim of basic deduction of ₹ 50,000/- under section 80P(2)(c) of the Act.

A reading of section 80(P)(c) of the Act states that when the society is engaged in “activities” other than those specified in clause (b), so much of its profits and gains are attributable to such activities as does not exceed ₹50,000 is eligible for deduction u/s 80(P)(c) of the Act In the case of Venus Dhanlaxmi Credit Co. Op. Society Ltd. vs. ITO Asst.Year –2017-18 - 9– Parkland Co-Op. Housing Service Society Ltd. vs. Income-tax Officer [2024] 166 taxmann.com 673 (Ahmedabad - Trib.)/[2024] 209 ITD 229 (Ahmedabad - Trib.)[07-08-2024], the Tribunal held that where assessee, a housing co-operative society, showed surplus in its Profit and Loss account after netting out all maintenance expenses, assessee was eligible for deduction under section 80P(2)(c)(ii) of the Act. In the case of Baroda Citizen Community Co-op. Credit Society Ltd. vs. Income-tax Officer [2022] 134 taxmann.com 290 (Ahmedabad - Trib.)/[2022] 193 ITD 113 (Ahmedabad - Trib.)[01-12-2021], the Tribunal held that in case of co- operative credit society, income to which benefit of section 80P(2)(a)(i) is not allowed, basic exemption of Rs. 50,000/- as provided in section 80P(2)(c)(ii) must be granted. Accordingly, looking into the instant facts, we are of the view that the assessee is eligible for grant of deduction under section 80P(2)(c) of the Act, subject to the condition that the non-eligible income exceeds this amount.

In the result, Ground Number 3 of the appeal of the assessee is allowed.