THE JYOTI CO-OPERATIVE NON AGRICULTURAL THRIFT & CREDIT SOCIETY LTD.,SIRMOUR vs. ITO, WARD, NAHAN

Thereafter, in the set aside proceedings, notice under section 142(1) was issued by the AO to the assessee on 15/10/2019 calling for the necessary explanation / information from the assessee. In response, the assessee submitted that it has received deposit from various members as well as non members in accordance with its bye laws which are deposited in the bank account of the assessee. It was submitted that as there is always a time lag between the receipt of funds and its disbursement as loan to its members, the amount is parked in the saving bank accounts and FDRs and it was therefore the integral part of the business activity and providing loans / credit facilities to its members. It was submitted that on the FDRs the assessee has raised limits for disbursing loans to its members. It was further submitted that in the bye laws of 3 the assessee society, there is no requirement to park its surplus funds in FDRs. It was further submitted that the decision of Hon’ble Supreme Court in case of Totgars Co-operative Society Ltd. Vs. ITO reported in 322 ITR 272 is not applicable as in that case, the society was engaged in the business of providing credit to its members apart from its marketing activities and under its bye laws, the profit from marketing activities had to be invested / parked in the FDRs and in view of the facts of that case, the Hon’ble Supreme Court held the same to be not attributable to the business income of the society and it was submitted that in the instant case, no such rider exists in the bye laws. Further reliance was placed on the decision of Hon’ble Karnataka High Court in case of Guttigedarara Credit Cooperative Society Ltd. vs. ITO reported in 377 ITR 464, Hon’ble Andhra Pradesh High Court decision in case of CIT Vs. Andhra Pradesh State Co-operative Bank Ltd. reported in 336 ITR 516, Hon’ble Gujarat High Court in case of CIT Vs. Baroda Peoples Co-operative Bank Ltd. reported in 280 ITR 282 and Hon’ble Karnataka High Court in case of Tumkur Merchants Southarda Credit Cooperative Ltd. Vs. ITO (2015) 55 Taxman.com 447.

The submissions so filed by the assessee were considered but not found acceptable to the AO. As per AO, the assessee is not eligible for deduction either u/s 80P(2)(a)(i) of the Act or u/s 80P(2)(d) of the Act in respect of interest income earned from funds parked with Bank. Also the bye laws of the assessee society are silent on this issue and no specific instructions/directions has been incorporated in the bye laws on the issue of parking of surplus funds with scheduled banks in the form of FDRs. Vide point No. xxi on page No. 16 of bye laws of the society, it is stated that "to invest the surplus funds of the society in accordance with co-operative societies act or rules framed hereunder..": 6.1 The AO further held that the provisions of sections 11 to 13 of the Act have no application in determining exemption under section 80P of the Act or in determining whether interest income was taxable under the head 'income from business' or 'income from other sources. Such differentiation between corpus or non- corpus funds is not mandated and stipulated in section 80P and for 4 determining the head of income; 'income from business or profession' or 'income from other sources'. There is a clear finding that the interest was earned by way of parking of surplus funds in FDRs with banks. The submission made by the assessee itself indicates and predicates that interest was earned by parking surplus funds in fixed deposits. 6.2 It was further held by the AO that the term or expression, 'income' has been defined in section 2(24). By way of Finance Act, 2006, sub-section (viia) was inserted to stipulate that profits and gains of business of banking, including credit facilities, carried on by a co-operative society with its members, is taxable and is included in the term, 'Income'. The aforesaid definition of term 'income' is inclusive and a broad one. Thus, the income of the assessee would be taxable under section 2(24), including the income earned by way of interest on the FDRs with banks. Section 80P provides partial exemption, restricted to the specified 'earning' or 'incomes' in sub-section (2) and not the entire income. 6.3 The AO further held that no doubt, the term 'attributable' is much wider than the term 'derived from', but the question still remains, whether the interest income earned from the FDRs placed out of Surplus funds which were not to be made available and given as credit to the members, can be treated as income attributable to providing credit facilities to members. One need not dilate on the said question as the issue was considered and stands answered by the Supreme Court in the case of Totgars' Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282. The Supreme Court examined the issue whether the interest income from the said surplus funds were eligible for exemption under section 80P(2)(a)(i) as income attributable to profit and gains of business. It was observed that interest received from members for providing credit facilities to them was exempt. Further, anything attributable to the said income would also be covered under section 80P. It was highlighted that exemption is partial and not complete, i.e, the whole income of the co-operative society does not get exemption. It was held that the deduction being in respect of certain incomes, 5 the interest income earned out of surplus funds, would not qualify for deduction as it was assessable under the head 'income from other sources'. 6.4 It was further held by the AO that the present case is of surplus of funds, which were not used for carrying on business of providing credit facilities to members. The interest earned from the aforesaid funds as held by the Supreme Court in Totgars' Co-operative Sale Society Ltd. (supra), would fall under section 56 and would be taxable under the head "income from other sources'. 6.5 It was further held by the AO that as far as principle of mutuality is concerned, this would not have any application in view of sub-section (viia) to section 2 of the Act. Thus if one accepts that the assessee was cooperative society and providing credit facilities to its members, clause (viia) to sub-section (24) to section 2 would have application, Even otherwise, on the principle of mutuality, the Hon’ble Supreme Court in Bangalore Club v. CIT [2013] 350 ITR 509/29 taxmann.com 29 has held that the interest earned on FDRs with banks would not be covered by the principle of mutuality as the transactions were not between the contributors and the beneficiary, but were between the assessee and a third person. The AO accordingly held that in view of aforesaid discussion, the assessee is not entitled for deduction u/s 80P(2)(a)(i) of the Act in respect of interest income earned from the funds parked with co-operative bank.

Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who has since sustained the findings of the AO. Against the said findings and the order of the ld CIT(A), the assessee is in appeal before us.

During the course of hearing, the Ld. AR submitted that the assessee is a cooperative society engaged in providing thrift and credit facilities to its members. For that purposes, the assessee co-operative society accepts deposits from its members as well as non-members in accordance with the bye- laws, the same was received in the shape of recurring deposits, fixed deposits, saving bank accounts etc. all the aforesaid deposits are interest bearing and 6 apart from the said activity, no other activity is being undertaken by the assessee. It was submitted that as there is always time lag between the receipt of funds and its disbursement as loan to its members, the same is parked in the saving bank accounts and FDR's etc, so was integral part of business activity of providing loans/ credit facilities to its members. It was submitted that during the year, the assessee has earned income in the shape of interest on loans granted to its members, and has also earned interest on deposits with cooperative banks as well as scheduled banks. It was submitted that the assessee invested funds in FDR's and earn interest of Rs. 30,42,784/- from the scheduled banks which are not cooperative societies and these funds were always available to assessee for utilisation for providing credit facilities to its members. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members - it was not a liability nor shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. It was submitted that the surplus fund which was pledged with the bank and Cash credit limit is obtained against the same, on which interest have been paid by the assessee society. The CC limits were used for providing credit facilities to its members. The A.O. has failed to notice that income on FDR, on which interest income has accrued, have all been pledged with same bank and CC limit, facilities obtained and on CC Limit, an interest of Rs. 5,30,940/- was paid which is evident from the expenditure account of the society. The CC Limit against Fixed deposit was utilized by the assessee for the purpose of its business or running thrift and credit society for payment to its members. It was submitted that the said issue is no longer res-interga as the said issue has been decided in favour of assessee by various Courts across the country and reliance was placed on the decision of Hon’ble Karnataka High Court in case of Tumur Merchants Souharda Credit Cooperative Ltd. and in case of M/s Guttigedarara Credit Cooperative Society Ltd. as well as the decision of Coordinate Ahmedabad in case of Jafari 7 Momin Vikas Co-operative Credit Society Ltd. Vs. ITO, Coordinate Bengaluru Bench in case of Honnali Credit Co-operative Ltd. vs. ITO, Coordinate Cochin Bench in case of M/s Chirayinkeezhu Service Cooperative Bank Ltd. Vs. ITO and Coordinate Delhi Bench in case of Jwala Cooperative Urban Thrift and Credit Society Vs. ACIT.

The assessee also earned interest income of about Rs.5.84 crores from call deposits made with various banks. This income was also earned by the assessee placing its surplus funds as deposit with banks for short terms with a view to ensure that the funds did not remain idle. The AO declined this claim also on the ground that interest was not earned from the business of providing credit facilities to the assessee's members. The CIT(A), however, allowed the claim. The Tribunal upheld the decision holding that such interest was attributable to the business of providing credit facilities to the assessee's members.

Ms. Dhugga submitted that after the decision of the Tribunal dated 25.03.2009, the Supreme Court delivered the judgment in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 3 SCC 223. She submitted that the judgment covers the case in favour of the Revenue. In that case, the assessee was also a Cooperative Credit Society which provided credit facilities to its members and also marketed the agricultural produce of its members. The society had surplus funds which it invested in short term deposits with banks and in Government securities on interest. The question before the Supreme Court was whether such interest income would qualify for deduction as business income under section 80P(2)(a)(i) of the Act. The Court was only concerned with interest income on short term bank deposits and securities. Paragraphs 15, 16, 17, 18, 20 and 21 of the judgment read as under:— “At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80-P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. The assessee(s) markets the produce of its members and wholesale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question before us is— whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under Section 28 of the Act? In our view, 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, as rightly held by the assessing officer. In this connection, we may analyse Section 80-P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The headnote to Section 80-P indicates that the said section deals with deductions in respect of income of cooperative societies. Section 80-P(1), inter alia, states that where the gross total income of a cooperative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee Society. An income, which is attributable to any of the specified 12 activities in Section 80-P(2) of the Act, would be eligible for deduction. The word "income" has been defined under Section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in Section 80-P(2) of the Act. In the present case, as stated above, the assessee Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the Society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under Section 80-P(2)(a) (i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, the assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. 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 80-P(2)(a)(i) of the Act or in Section 80-P(2) (a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the assessing officer was right in taxing the interest income, indicated above, under Section 56 of the Act. A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80-P of the Act. We find no merit because all the judgments cited were cases relating to cooperative banks and the assessee Society is not carrying on banking business. We are confining this judgment to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of Section 80-P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in Section 80-P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. In this particular case, the evidence shows that the assessee Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "Other income" which has been rightly taxed by the Department under Section 56 of the Act.' 26. The judgment cannot be restricted to cases where the amount invested was the sale proceeds of the produce of an assessee's members marketed by the assessee. The judgment applies to funds not immediately required for business purposes. Funds not immediately required for business purpose include the amounts received towards the sale price of the produce. However, it is not such 13 funds alone that can be said to be not immediately required for business purposes. An assessee such as the respondent may have funds from other sources which are not immediately required for business purpose as well. They would include advances from other entities for the purpose of the assessee in turn using the same for its business of providing credit facilities to its members. If such funds instead of being advanced to the assessee's members are invested with banks the income from such investments equally cannot be said to be attributable to the assessee's business of providing credit facilities to its members. Thus, the income in the present case is not from providing credit facilities to the assessee's members but from the investment with non-members including commercial banks.

The judgment of a Division Bench of this Court dated 10.05.2011 in CIT v. Punjab State Co-operative Federation of Housing Building Societies Ltd., (ITA-643-2010) supports this view. In that case also, the assessee was a Cooperative Federation and claimed a deduction under the same section. The Tribunal held that the interest income was incidental to the business of the assessee of providing credit facilities to its members. In that appeal, the following question of law were raised and the Division Bench answered the same as follows:— "Whether on the facts and in the circumstances of the case and in law the order of the Hon'ble Tribunal is perverse in holding that interest income from commercial banks being attributable to the business activity of the assessee, qualifies for deduction u/s 80P(2) (a)(i) of the Act, ignoring the facts that direct source of income is not the loans advanced to the members of the society and it is only the interest income from commercial banks in the form of fixed deposits and saving banks accounts?" "4. Plea on behalf of the revenue is that interest received by the assessee from commercial banks was not covered by Section 80P(2) (a)(i). It has nothing to do with the interest income on the loan advanced to the members. Reliance has been placed on the judgment of the Hon'ble Supreme Court in The Totgars Cooperative Sale Society Ltd. v. I.T.O., 2010 (35) DTR 25 holding that interest on bank deposits or Government securities derived by a Cooperative Society could not be attributed to the activities of the Society of providing various facilities to its members and was taxable under Section 56 being income from other sources. It appears that since the judgment of the Tribunal is prior to the judgment of the Hon'ble Supreme Court relied upon on behalf of the revenue, the Tribunal did not have advantage of the law laid down therein. The matter is, thus, covered in favour of revenue by the judgment of Hon'ble Supreme Court. Contrary view of the Tribunal cannot be sustained.

By an order dated 03.09.2012, the Supreme Court granted leave to appeal against this judgment in Petition(s) for Special Leave to Appeal (Civil) No(s). 22745/2011 but declined to grant any stay. We are bound by this judgment. It is not open to us to refuse to follow it on the ground that it has not considered the judgment of the Supreme Court in its correct perspective. We are, in any event, in respectful agreement with the interpretation of the Division Bench of Totgar's case.

Mr. Bansal relied upon the judgment of the Andhra Pradesh High Court in CIT v. Andhra Pradesh State Cooperative Bank Ltd. [2011] 336 ITR 516/200 Taxman 220/[2011] 12 taxmann.com 66 (AP). The judgment is distinguishable. In that case, the respondent-assessee was a Cooperative Society engaged in the business of banking and it was held that the assessees were subject to the regulations of the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. The Division Bench distinguished the judgment of the Supreme Court in Totgar's case (supra) on the ground that the Supreme Court was not dealing with the case relating to cooperative banks. The present appeal is not being considered on the basis that banking is the assessee's business either.

Mr. Bansal relied upon the judgment of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO [2015] 55 taxmann.com 447/230 Taxman 309 (Karnataka) . In that case, the assessee-Cooperative Society provided credit facilities to its members and earned interest from short term deposits with banks and from savings bank accounts. The interest income earned by the assessee by providing credit facilities to its members was deposited in banks for a short duration which earned interest. The question was whether this interest was attributable to the business of providing credit facilities to the members. The Division Bench held as follows:— '8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. 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 17 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.

In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Cooperative Sale Society Ltd., on which reliance is placed, 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 members from whom produce was brought, 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. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.

In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State Cooperative Bank Ltd.,[2011] 12 taxmann.com 66/200 Taxman 220. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order. Appeal is allowed.' (The reproduction is from the original website of the Karnataka High Court). There is an important distinction. The Division Bench expressly held in paragraph 10 that interest income was attributable to the business of banking and, therefore, liable to be deducted under Section 80P(2)(a)(i) of the Act. At the cost of repetition, we have not considered whether the assessee carries on the business of banking. If it is established upon remand that the assessee carries on the business of banking the result may be different. In any event assuming that the judgment is not distinguishable on this ground, we would with respect disagree with the same in view of the judgments that we have already referred to and on the basis of our interpretation of Totgar's case. In any event, we are with respect unable to agree with the observations that the Supreme Court in Totgar's case (supra) did not lay down any law.

In these circumstances, questions No.3 and 4 are answered in favour of the Revenue and against the assessee. The judgment of the Tribunal in that regard is set aside.”(Emphasis supplied) 12. In the aforesaid decision, the Hon’ble Punjab and Haryana High Court, referring to the decision of the Hon’ble Supreme Court in case Totgar's Co- operative Sale Society Ltd.(Supra), has held that the said judgment cannot be restricted to cases where the amount invested was the sale proceeds of the produce of an assessee's members marketed by the assessee. It was held that the judgment equally applies to funds not immediately required for business purposes. Funds not immediately required for business purpose include the amounts received towards the sale price of the produce. However, it is not such funds alone that can be said to be not immediately required for business purposes. An assessee such as the respondent may have funds from other sources which are not immediately required for business purpose as well. They would include advances from other entities for the purpose of the assessee in turn using the same for its business of providing credit facilities to its members. If such funds instead of being advanced to the assessee's members are invested with banks, the income from such investments equally cannot be said to be attributable to the assessee's business of providing credit facilities to its members. It was accordingly held by the Hon’ble High Court that the income in the said case is not from providing credit facilities to the assessee's members but from the investment with non-members including commercial banks.

In the instant case, there is no dispute that the assessee cooperative society is providing thrift and credit facilities to its members. It accepts deposits from its members and disburses loans to its members. Given that there are number of members and each of them having their respective requirement whereby they place funds with the society and/or avail loans from the society at different point in time during the financial year, at any given point in time, the assessee society has funds at its disposal which are not immediately required for 19 disbursal to its members. As part of its fund management, the assessee has placed these funds by way of fixed deposits with scheduled commercial banks. The interest income has been earned on such fixed deposits placed with scheduled commercial banks and which has been claimed as eligible for deduction under section 80(P)(2)(a)(i) of the Act. As per decision of the Hon’ble Punjab and Haryana referred supra, where the funds instead of being advanced to the members are invested with banks, the income from such investments cannot be said to be attributable to the assessee's business of providing credit facilities to its members and the said decision supports the case of the Revenue.

Here, it is relevant to note that in the said decision, the Hon’ble Punjab and Haryana High Court has referred to the decision of Hon’ble Karnataka High Court in case of Tumkur Merchants Southarda Credit as well as that of Guttigedara credit cooperative and has held that it doesn’t agree with the view taken by the Hon’ble Karnataka High Court and thus, these decisions equally doesn’t support the case of the assessee.

As far as the contention of the ld AR that such FDRs are placed with the same scheduled banks to obtain the cash credit limit and such cash credit limit is used for providing credit facilities to its members and for the purposes, the assessee has also incurred an interest expenditure, I find that such a contention doesn’t support the case of the assessee. There is a difference between the placement of funds by way of FDRs with the scheduled banks and subsequent pledging of FDRs with the scheduled banks for the purposes of seeking a cash credit limit. As part of providing cash credit facility to its customers, the banks generally seek collateral security from the borrowers and in the instant case, the assessee has placed its liquid funds by way of pledge of FDRs with the bank, however, both are independent transactions even though the same can be claimed to be connected in the sense of same transacting entities. In the instant case, what is of relevance is the act of placement of funds by the assessee society – whether with its members or with the scheduled banks.