M/S CO-OPERATIVE CANE DEVELOPMENT UNION LTD.,LAKHIMPUR-KHERI vs. INCOME TAX OFFICER-I, LAKHIMPUR -KHERI

A.Y. 2017-18, 2018-19 & 2016-17 M/s Cooperative Cane Development vs. Income Tax Officer, Union Ltd., Gola Gokaran Nath, Range-3(4), Lakhimpur Lakhimpur Kheri, U.P. Kheri, U.P. PAN:AAAAC1960A (Appellant) (Respondent) Assessee by: Sh. Shubham Rastogi, C.A. Revenue by: Sh. Sanjeev Krishna Sharma, Addl CIT DR Date of hearing: 20.03.2025 Date of pronouncement: 30.04.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: These three appeals filed by the assessee against the orders of the ld. CIT(A), Bareilly and ld. CIT, NFAC in which the disallowances made by the ld. AO in respect of claim of deduction under section 80P for interest earned by the assessee were upheld and the appeals of the assessee were dismissed. The grounds of appeal are as under:-

A.Y. 2017-18 1. That the Authorities below erred on facts and in law in not allowing deduction u/s 80P of I.T. Act on Interest received on Investments held with Banks in form of FDR's Rs. 2,68,63,010/-.

2. That the Authorities below erred in relying on the decision of Hon'ble Supreme Court in the case of Totgars Co-Operative Sale Society Ltd. vs. ITO without appreciating that the decision of Hon'ble Supreme Court is distinguishable in facts from the case of the Appellant Assessee.

3. That the Ld. C.I.T. (A) erred on facts and in law in considering that the A. O. has failed to demonstrate in the Assessment Order that the Interest Income on FDR's and Saving Bank Accounts was on account of surplus funds of the Society & M/s Cooperative Cane Development Union Ltd. and in absence of such finding the decision of Hon'ble Supreme Court cannot be relied upon in Appellant's Case.

4. That the Ld. C.I.T. (A) erred on facts and in law in not considering that the Law has used the word "attributable" and not the word "derived" in section 80P so as to include income from sources other than the actual conduct of the Business of the Society and thus Interest Income on FDR's & S. B. A/c is attributable to the business of providing credit facilities and marketing the agriculture produce of members. WITHOUT PREJUDICE TO ABOVE 5. The Ld. C.I.T.(A) erred on facts and in law in not considering that the funds of the Society in form of Share Capital from members and the society being co- operative society is statutorily required to maintain a Reserve Fund of a minimum 25% of its profit and thus the investments in form of deposits with Banks to the extent of the Share Capital and Reserve Funds cannot be said to be made out of surplus funds.

6. That Ld. C.I.T. (A) erred on facts and in law in not considering that the P. F. Balance of seasonal employees of society which is held in the form of deposits are not the investments of the society and accordingly interest accruing on the said amount cannot be said to be the Income of the Society.

WITHOUT PREJUDICE TO ABOVE 7. That the Authorities below erred on facts and in law in not allowing proportionate deduction for 'Management Expenses of Rs. 5,66,43,874/- and 'Interest paid Rs. 74,15,032/-/- debited in the Profit and Loss Account from the gross interest of Rs. 2,68,63,010/-.

8. That the Authorities erred on facts and in law in not considering that only the real income/ profit can be Taxed and accordingly, the expenses incurred in earning the said income has to be determined and deducted from the Gross Income.

9. That the addition made is highly excessive, contrary to the facts, law and principle of natural justice and without providing sufficient time and opportunity to have its say on the reasons relied upon by CIT (A).”

A.Y. 2018-19 1. That the Authorities below erred on facts and in law in not allowing deduction u/s 80P of I. T. Act on Interest received on Investments held with Banks in form of FDR's Rs. 3,45,29,714/-.

3. That the Ld. C.I.T. (A) erred on facts and in law in considering that the A. O. has failed to demonstrate in the Assessment Order that the Interest Income on FDR's and Saving Bank Accounts was on account of surplus funds of the Society and in absence of such finding the decision of Hon'ble Supreme Court cannot be relied upon in Appellant's Case.

4. That the Ld. C.I.T. (A) erred on facts and in law in not considering that the Law has used the word "attributable" and not the word "derived" in section 80P so as to include income from sources other than the actual conduct of the Business of the Society and thus Interest Income on FDR's & S. B. A/c is attributable to the business of providing credit facilities and marketing the agriculture produce of members. WITHOUT PREJUDICE TO ABOVE 5. The Ld. C.I.T.(A) erred on facts and in law in not considering that the funds of the Society in form of Share Capital from members and the society being co- operative society is statutorily required to maintain a Reserve Fund of a minimum 25% of its profit and thus the investments in form of deposits with Banks to the extent of the Share Capital and Reserve Funds cannot be said to be made out of surplus funds.

6. That Ld. C.I.T. (A) erred on facts and in law in not considering that the P. F. Balance of seasonal employees of society which is held in the form of deposits are not the investments of the society and accordingly interest accruing on the said amount cannot be said to be the Income of the Society. WITHOUT PREJUDICE TO ABOVE 7. That the Authorities below erred on facts and in law in not allowing proportionate deduction for 'Management Expenses' and 'Interest paid' debited in the Profit and Loss Account from the gross interest of Rs. 3,45,29,714/-.

8. That the Authorities erred on facts and in law in not considering that only the real income/ profit can be Taxed and accordingly, the expenses incurred in earning the said income has to be determined and deducted from the Gross Income.

9. That the addition made is highly excessive, contrary to the facts, law and principle of natural justice and without providing sufficient time and opportunity to have its say on the reasons relied upon by CIT (A).” & M/s Cooperative Cane Development Union Ltd. A.Y. 2016-17 “1. The Ld. C.L.T. (A) erred on facts and in law in not allowing deduction u/s 80P of I.T. Act, 1961 on Interest received from Bank on F.D.R's and Saving Bank Accounts Rs. 2,61,79,220/-.

2. That in not allowing the deduction u/s 80P of 1. T. Act, 1961, Ld. CIT(A) and the authorities below relied upon the decision of Hon'ble Supreme Court in the case of Totgar's Co-operative Sale Society Limited Vs. LT.O. without appreciating that the decision of Hon'ble Supreme Court is distinguishable in facts from the case of the appellant assessee. 2.1 That the Ld. C.I.T. (A) erred in not considering that the Assessing Officer has failed to demonstrate in the assessment order that the Interest income from F.D.R's and Saving Bank Accounts was on account of surplus funds of society and in absence of such finding the decision of Hon'ble Supreme Court cannot be relied upon in the present sets of facts and circumstances.

3. The Ld. C.LT. (A) erred on facts and in law in not considering that the appellant assessee is a 'Welfare Society' for cane growers and not a 'Sale Society' as in the case of Totgar's Co-operative Sale Society Limited and it was not marketing/selling the product of its members.

4. That the Ld. C.I.T. (A) erred in facts and in law in not considering that the funds of the Society are in form of Share Capital from members being farmers and the funds are invested as per byelaws of the society and the same are under the direct control and Management of Cane Commissioner.

5. That the Ld. C.I.T. (A) erred on facts and in law in not considering that the law has used the word 'attributable' and not the word 'derived' in Sect. 80P of L. T. Act so as to include income from sources other than the actual conduct of the business of the Society and thus Interest Income from F.D.R.'s and Saving Bank Accounts is attributable to the business of providing credit facilities and marketing the agriculture produce of members.

Additional grounds of appeal

1. That the Authorities below erred on facts and in law in not allowing proportionate deduction for 'Management Expenses of Rs. 5,43,58,995/- and 'Interest paid Rs. 51,91,972/- debited in the Profit and Loss Account from the gross interest of Rs. 2,61,79,220/-.

2. That the Authorities erred on facts and in law in not considering that only the real income/ profit can be Taxed and accordingly, the expenses incurred in & M/s Cooperative Cane Development Union Ltd. earning the said income has to be determined and deducted from the Gross Income.

2. At the very outset, it is observed that the appeals in these cases are delayed by 80 days (in 394/Lkw/2019), 65 days (in 37/Lkw/2022) and 357 days in (15/Lkw/2023). Condonation petitions have been submitted by the assessee in respect of these three appeals. It has been submitted that for the assessment year 2016-17, the ld. CIT(A) passed the order on 25.01.2019 and the same was received by the Society on 30.01.2019. The Society deposited the requisite appeal filing fee of Rs.10,000/- on 14.02.2019 for filing the appeal before the Hon’ble ITAT. However, due to non-appointment of secretary of the Society, the appeal could not be signed for the purposes of filing it. Since, in that period, the Society did not have a full time Secretary, the appeal papers could not be put up for filing before the Secretary. It was only after the appointment of a new Secretary and on receipt of notice of attachment from the Department, that the new incumbent became aware of the need to file the appeal and accordingly immediately filed the same. It was submitted that the deposit of fees on time indicated the bona fides of the assessee’s in deciding to go in appeal and the delay was caused due unavoidable circumstances i.e. the unavailability of any authorized person to sign the appeal. Accordingly, it was prayed that the delay may & M/s Cooperative Cane Development Union Ltd. kindly be condoned. After considering the facts of the case, the delay of 80 days (in 394/Lkw/2019) is condoned. With regard to appeal in it is observed that the entire delay of 65 days is covered in the period that was excluded for the purposes of limitation due to the Covid -19 pandemic by the Hon’ble Supreme Court in its decision in Suo Moto Writ Petition No. 03/2020. Hence, the delay is condoned and the appeal is admitted for adjudication. In respect of appeal in where the delay is of 357 days, it is observed that 128 days of said delay are covered in the Covid period as per the decision of Hon’ble Supreme Court in Suo Moto Writ Petition No. 03/2020. For the remaining 229 days, it has been submitted that the order was served on the email ID asif9415168684@gmail.com, which belonged to the counsel of the assessee and the Society did not receive any intimation from the local counsel about the service of the appellate order. It was only upon the receipt of outstanding demand intimation from the jurisdictional AO that the assessee society enquired from its counsel about the pendency of the first appeal and was informed by the counsel that the order of the Hon’ble CIT(A), NFAC had been passed on 24.11.2021 and received on his email ID. Thereafter, the Secretary of the Society immediately contacted the counsels at Lucknow. However, due to last date of filing of return and tax audit report, the counsels were busy and could not file the appeal. Once the same was over, the assessee was asked to deposit the appeal fee which it did on 22.11.2022 and thereafter it filed the appeal. It was submitted that the delay was unintentional and caused by the failure of the local counsel to inform the assessee about the passing of the appeal order and the pre-occupation by the counsels at Lucknow with the tax audit and return filing. It was, therefore, prayed that in the interest of justice, the appeal may be admitted. After considering the facts as narrated above, we deem it appropriate in the interest of justice to condone the delay and admit the appeal for hearing.

3. The facts of the case in all the three assessment orders are similar. The assessee had claimed deduction under section 80P with respect to the interest 6 & M/s Cooperative Cane Development Union Ltd. earned on deposits made by it with the banks. The ld. AO after detailed discussions in each case held that the assessee was not eligible for deduction under section 80P(2)(a)(i) or section 80P(2)(d) on the interest that had been earned by it on deposits with the bank as the same could not be said to be attributable to the activities of the society and would come in the category of, “income from other sources” and should therefore, be taxed accordingly under section 56 of the Act, in view of the decision of the Hon’ble Supreme Court in the case of Totgars Cooperative Sale Society Limited vs. ITO, (2010) 322 ITR 263 (SC) and the decision of Hon’ble Allahabad High Court in its order in which had held that such interest i.e. the like of which was erred by a Cooperative Society for investment in a cooperative bank cannot be said to be the activities of the society. Accordingly, the ld. AO disallowed the deduction claimed by the assessee in respect of interest on deposit held in various banks. In pursuance of the same, a disallowance of Rs.2,61,79,223/- was made in the assessment year 2016-17, a sum of Rs.2,68,63,013/- was disallowed in the assessment year 2017-18 and a sum of Rs.3,45,29,714/- was disallowed in the assessment year 2018-19.

4. Aggrieved with the decisions of the various ld. AOs in the orders, the assessee preferred appeals before the ld. CIT(A), Bareilly and the ld. CIT(A), NFAC. In all three appeals, the ld. CIT(A) in these three cases rejected the plea of the assessee for distinguishing its case from that of the case of M/s Totgars Cooperative Sale Society Limited and pointed out that the Hon’ble Allahabad High Court in a later decision in of 2008 dated 11.09.2012 in the case of Cooperative Cane Development Union Limited had held that in M/s Totgars Cooperative Sale Society Limited, the Hon’ble Supreme Court had explained the eligibility of deduction under section 80P and held that where the investment in securities was not a primary object of the Cooperative Credit Society, the interest therefrom could not be regarded as income attributable to business but would in fact be regarded as income from other sources. He noted that the Hon’ble Allahabad High Court in the said case had 7 & M/s Cooperative Cane Development Union Ltd. pointed out that the assessee was a Cooperative Cane Development Union and the objects of the society did not provide for investment of money in the post office or bank and to earn interest on the same and therefore, in its case also, the interest earned out of the investments made in the bank would be an interest which would be income from other sources and chargeable to tax under section 56 of the Act. Therefore, relying upon the case of the Hon’ble Supreme Court in the case of M/s Totgars Cooperative Sale Society Limited vs. ITO (supra) and the Hon’ble Allahabd High Court in of 2008 in the case of Cooperative Cane Development Union, Lakhimpur Kheri (supra). The ld. CIT(A) in all three assessment years dismissed the appeals of the assessee and upheld the disallowances made by the assessee.

5. Aggrieved by these disallowances, the assessee is before us in appeal. Sh. Shubham Rastogi, C.A. (hereinafter referred to as the ld. ‘AR’), arguing the case on behalf of the appellant submitted that the assessee was a cooperative society registered under the U.P. Sahkari Samiti Adhiniyam, 1965 by the Registrar, Ganna Sahkari Smitiyan. The assessee was a welfare society for cane growers and the main object of the society, as set out in the byelaws was to provide assistance to the cane growers for the better development of cane crops, to make available and provide assistance in obtaining better quality of seeds, fertilizers, agricultural equipment etc., and also provide credit facilities to the Members for purchase of equipments, seeds, fertilizers etc,. It was submitted that the ld. AO had treated the interest received from the banks as not eligible for deduction under section 80P of the Act and thus had brought it to tax under section 56 as income for other sources. It was submitted that as per section 58 of the U.P. Cooperative Societies Act, 1965, under which the society was registered, the society was required to keep an amount of out of its profits in a, “statutory reserve fund”. The said amount which was required to be kept in that fund was to be not less than 25% of total profits. The ld. AR took us through section 58 of the U.P. Cooperative Societies Act, 1965 and pointed out that such investments which 8 & M/s Cooperative Cane Development Union Ltd. were placed in the bank could not be held to be a surplus of the society which could bring the case within the ambit of the judgment of the Hon’ble Supreme Court in the case of M/s Totgars Cooperative Sale Society Limited – where the society was a sale society and was retaining the sale proceeds of its Members which was invested in short term deposits and it was in respect of such matters that the Hon’ble Supreme Court had held that the said investment could not be held to be attributable to business and therefore, not deductible under section 80P of the Act. Since in the present case, the assessee statutory obliged to maintain reserve to the extent of 25% of its profits in the form of deposits in bank, these could not be held to be made out of the surplus funds of the society and the interest accruing on the said deposits could not be brought to tax under section 56 of the Income Tax Act, 1961 by relying on the decision of the Hon’ble Apex Court in the case of Totgars Cooperative Sale Society Limited. It was submitted that the Hon’ble Madras High Court in the case of K. 2058, Saravanampatti Primary Agricultural Co-Operative Credit Society Ltd. v. ITO 426 ITR 251 (Mad) had held after considering that the society was required to maintain statutory reserve of 25% under the Tamilnadu Cooperative Societies Act, that the same cannot be the surplus fund of the society as decided in the case of Totgars Cooperative Sale Society Limited and after placing reliance on the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax V. Nawanshahar Central Cooperative Bank Limited reported in 289 ITR 6, it had set aside the assessment for de novo and fresh examination. It was, therefore, prayed that in the light of the above facts which had not been examined by the lower authorities, the issue may be set aside for fresh examination by the ld. AO in the interest of justice. The ld. AR also invited our attention to the decision of the ITAT Lucknow ‘B’ Bench in the case of Cooperative Cane Development Union Limited, Maholi vs. ACIT, Sitapur in 166 and 168/Lkw/2023 wherein that Bench, of which one of us was a party, had held that the investment in FDs and other securities on account of the provisions of section 58 and 59 of the U.P. Cooperative Societies Act, 1965 and & M/s Cooperative Cane Development Union Ltd. section 173 of the U.P. Cooperative Society Rules, 1968 were investments attributable to the main activity of the assessee co-operative society and therefore, the interest earned from such investments ought not to be regarded as a surplus within the meaning of the Totgar’s case and therefore, the said interest was deductible under section 80P. It was submitted that in that particular case, as the ld. AO had not examined the breakup of the investments and the interest earned on them, with reference to the byelaws of sections 58 and 59 of the U.P. Cooperative Societies Act and section 173 of the U.P. Cooperative Society Rules, the matter had been restored to his file for the limited purpose of re-computing the admissible deduction under section 80P with reference to the interest earned on investments made in accordance with the aforesaid statutory provisions. Accordingly, it was prayed that since the facts in the present case were identical, these cases may also be referred back to the ld. AO for fresh consideration in the light of the statutory provisions as laid out in that decision.

6. On the issue of the additional ground of appeal no.4 that the interest of the PF balance of interest received on provident fund balance of seasonal employees which was held in the form of deposits with the society and invested with the banks, was not the interest of the assessee as it was only a custodian of the said amounts which was liable to be paid back to the respective employees at the time of the completion of their contract with the society, it was pointed out that in the aforesaid decision in 167 and 168/Lkw/2023, the Hon’ble Tribunal had held that these investments could not be considered to be the investments of the society and accordingly the interest accruing on the said amount could not be said to be the income of the society. The ld. AR, therefore, prayed that directions may kindly be given that interest earned on such deposits was not liable to be considered for the purposes of computation of the assessee’s income. With regard to the other grounds preferred by him, the ld. AR submitted that if his prayer of restoring the matter back to the file of the ld. AO for reconsideration of his order in the light of the statutory 10 & M/s Cooperative Cane Development Union Ltd. provisions as contained in section 58 and 59 of the U.P. Cooperative Societies Act, 1965 and Rule 173 of the U.P. Cooperative Society Rules, 1968, were accepted and the orders of the Tribunal given earlier on the issue of investment of provident fund of employees was reiterated, he would not press the remaining grounds for a decision at this stage.

7. Responding to these arguments, Sh. Sanjeev Krishna Sharma, ld. Sr. DR (hereinafter referred to as the ‘ld. Sr. DR’) pointed out that the relevant issue had already been decided in favour of Revenue by the Hon’ble Supreme Court in the case of PCIT, Hubli vs. M/s Totgars Cooperative Sale Society (2017) 83 taxman.com 140 which re-emphasized the fact 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. He further submitted that the above verdict of the Hon’ble Supreme Court had been further followed by the Hon’ble Allahabad High Court in similar cases wherein the Hon’ble Allahabad High Court had held in the case of PCIT, Bareilly vs. Cooperative Cane Development Council, Lakhimpur Kheri in of 2016 that investment in securities was not a primary object of the cooperative credit society and the objects of the society did not provide for investments of money in post office or bank to earn interest. Therefore, any such interest earned from such deposits would necessarily be chargeable to tax under section 56 of the Act. It had also been held in of 2008 in CIT vs. Cooperative Cane Development Union Limited that where the investment in securities was not a primary object of the Cooperative Cane Society and the objects of the society did not provide for investment of money in post office and bank and for earning of interest, the interest earned out of investments made in the bank would be an interest which would be income from other sources and it would be chargeable to tax under section 56 of the Act. The ld. Sr. DR submitted that since the issue was covered in favour of the Revenue by the verdicts of the Hon’ble Supreme Court and the Hon’ble jurisdictional High Courts, the & M/s Cooperative Cane Development Union Ltd. assessee’s appeal in the three cases on the similar issue deserve to be dismissed and the orders of the ld. CIT(A) deserve to be upheld.

8. Following the aforementioned ratio laid down by the Division Bench which we consider binding on us, we too answer the question referred to us in the affirmative in favour of the assessee cooperative Society and against the Revenue." 7.3 Further we find that the assessee has relied on a judgment of Raipur Tribunal in the case of Gramin Sewa Sahakari Samiti Maryadit vs. Income Tax Officer [2022] 138 taxmann.com 476 (Raipur-Trib.) wherein the Tribunal has held that the interest earned by the assessee from deposit with co-operative bank and nationalized bank was eligible for deduction u/s 80P(2)(a) of the Act. 7.4 The above two judgments respectively by Hon'ble High Court and Tribunal hold that the interest earned by a Co-operative Society on deposits, which are statutorily required to be kept in the form of bank deposits or Government securities, are attributable to the business of an assessee. 7.4 Here in the present cases, we do not find the figures regarding the interest which the assessees may have earned on fixed deposits attributable to the making of statutory reserves. We further find that bye laws of the assessee has to be gone through which, though are available in the paper book, but require examination by the Assessing Officer as these were filed before Hon'ble Supreme Court as additional evidences. Therefore, we deem it appropriate to remit the issue of deduction u/s 80P for readjudication by the Assessing Officer, who, in the light of judgment of 14 & M/s Cooperative Cane Development Union Ltd. Hon'ble Supreme Court and keeping in view the judgments relied on by the assessee and keeping in view the additional documents, as filed before Hon'ble Supreme Court, will adjudicate the issue afresh. Needless to say that the assessees will be provided sufficient opportunity of being heard.”

14. Subsequent on the said remand, the matter was examined by the Revenue and after consideration of the decision of the Hon’ble Supreme Court and the other judgments relied upon by the Hon’ble ITAT while remanding the matter back to him, the ld. Assessing Officer held as under:- "3.3 Reason for inference drawn that no variation is required on this issue: The submissions made by the Assessee have been examined thoroughly particularly the bylaws of the Assessee Society and the U. P. Co-operative Societies Act. On going through the by-laws of the Assessee Society, it has been noticed that its Part 14 i.e. "Disposal of Net Profit and Societies" Assets and funds and appropriation thereof deals with the appropriation of Net Profits and Funds of the Assessee Society. Further, it has also been noticed that the aforementioned Part-14 of the bylaws of the Societies are in accordance with section 58 and 59 of the U. P. Co-operative Societies Act. Further, it has also been noticed that the secured reserve as well as other reserves are created in Annual General Meeting of the Society as per its bylaws and get accumulated over the year. These reserves are kept in co-operative and nationalized banks from where the Assessee earns the interest income under question. In view of the aforementioned facts, it is inferred that the reserve funds kept by the Assessee with Co-operative and nationalized banks are as per the by-laws of the Society and accordingly interest income arising from these funds can be held to be attributable to its main activities and therefore, the assessee is eligible for deduction in respect of this interest income under section 80P(2)(a) of the Act as per the case laws referred to and relied upon by the Hon'ble L.T.A.T. i.e. Judgments of Hon'ble Allahabad High Court in the case of CIT Vs. Krishak Sahkari Ganna Samiti Limited [2002] 258ITR594 (Allahabad) and ITAT, Raipur in the case of Gramin Sewa Sahakari Samiti Maryadit Vs. Income Tax Officer 92022), 138 Taxmann.com 476 (Raipur Tribunal).”