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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI D.S. SUNDER SINGH
Per N.V. Vasudevan, Vice President
The above appeal by the Assessee is against the order dated 11.6.2018 of the CIT(Appeals)-3, Bengaluru, relating to assessment year 2015-16.
The first issue that arises for consideration in this appeal is with regard to the claim for deduction u/s.80P(2)(a)(i) of the Income Tax Act, 1961 (Act) which was denied by the Revenue authorities. The assessee is a credit co-operative society registered under the Karnataka co-operative societies Act, 1959. It is primarily engaged in accepting deposits and providing credit facilities to its members The Assessee claimed deduction u/s 80P(2)(a)(i) of the Act on a sum of Rs.56,79,238/- which was interest income derived from investments out of surplus funds of the Assessee. It was the plea of the Assessee that funds not immediately required were invested to earn interest income and therefore the interest income was very much part of the income derived from the business of providing credit facilities to members.
The deduction claimed by the assessee was not allowed by the Revenue authorities for the reason that the income which was claimed as deduction was interest income which was earned by the assessee on deposits and in view of the decision of the Hon’ble Supreme Court in the case of PCIT Vs. Totgars Co-operative Sale Society Ltd., 83 taxmann.com 140 interest income had to be regarded as ‘income from other sources’. Since interest income was not income derived from the business of co- operative society, the deduction claimed by the assessee cannot be allowed. The revenue authorities also placed reliance on a similar decision rendered by the Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sale Society Ltd. 395 ITR 611 (Karn.). The AO allowed deduction of expenses incurred in earning interest income of Rs.30,17,661/- and added a sum of Rs.26,61,577/- to the total income of the Assessee by denying the deduction u/s.80P(2)(a)(i) of the Act.
Aggrieved by the orders of the CIT(A), the assessee has filed the present appeals before the Tribunal.
We have heard the rival submissions. The learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. Vs. ITO 230 taxman 309 (Karn) wherein the Hon’ble Karnataka High Court considered the decision of the Hon’ble Apex Court in the case of The Totgar’s Co- operative Sales Society (supra) and held that interest income in respect of temporary parking of own surplus funds not immediately required is eligible for deduction u/s.80P(2)(a)(i) of the Act. The learned 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 judgment relied by the learned DR. The facts of the case before the Hon’ble Karnataka High Court in the decision cited by the learned DR was that the Hon’ble Court was considering a case relating to Assessment Years 2007-2008 to 2011- 2012. In case decided by the Hon’ble Supreme Court in the case of the very same Assessee, the Assessment years involved was AY 1991-92 to 1999- 2000. The nature of interest income for all the AYs was identical. The bone of contention of the Assessee in AY 2007-08 to 2011-12 was that 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 in Totgar's Co-operative Sale Society Ltd. (supra), were shifted from Schedule Banks to Co-operative 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 co- operative 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 examiningg 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).
The AO will afford opportunity of being heard to the Assessee and filing appropriate evidence, if desired, by the Assessee to substantiate its case, before deciding the issue.
The second issue that arises for consideration in this appeal is as to whether the CIT(A) in exercise of his powers of enhancement was justified in brining to tax a sum of Rs.1,67,25,066/- which sum represented interest income on investments in the form of Fixed deposits with another co- operative society which was allowed as deduction by the AO u/s.80P(2)(d) of the Act. 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 AO allowed the claim for deduction as made by the Assessee.
The CIT(A) in exercise of his powers of enhancement by order sheet entry dated 7.6.2018 called upon the Assessee to show cause as to why the deduction allowed by the AO u/s.80P(2)(d) of the Act should not be disallowed in view of the judgment of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. Vs. ACIT (2017) 84 taxmann.com 114(SC) wherein it was held that principle of mutuality has to be satisfied before deduction of income derived by a co-operative society from the business of providing credit facilities to its members can be allowed u/s.80P(2)(a)(i) of the Act. According to the CIT(A), the principle of mutuality was not satisfied in the case of the assessees as the Assessee had in the hearing on 7.9.20178 admitted that it had nominal members and the scheduled banks and co-operative societies in which it makes deposits are not its members. The following were the relevant observations of the CIT(A) in this regard:-
“5.1 In response to the same the appellant submitted that fats of its case are identical to that of Citizen Co-operative Society (Supra) as in its case too there are nominal members and it makes deposits with scheduled banks as well as other Cooperative banks/societies, although the same are not members of the appellant society. The AR submitted that in view of above he doesn't have anything to say and the case may be treated as heard as no further submissions are required to be made(order sheet entry dt 07.06.2018). 5.2 The submissions of the appellant have duly been considered. The appellant has admitted that the facts of its case are identical to that of Citizen Co-operative Society (Supra). In view of the same, it can be concluded that the business of the appellant does not involve transactions within' the society with an element of mutuality but the same is akin to a finance business. The surplus funds generated from these activities are deposited by the appellant with various banks/societies to earn interest income. These banks/societies are not members of the appellant society. The appellant submitted that the society placed the unutilized deposit money received from the members in the bank/other societies as fixed deposits or in saving bank accounts and earned interest on the same. From these activities it cannot be said that the appellant co-operative society is only for its members and its business activities are only with its members. Thus the appellant society is not meeting the requirements of the provisions of the Co-operative Societies Act. Thus the appellant society has given a go by to the principle of mutuality. Therefore, the appellant co-operative society cannot be said to be eligible for deduction U/s. 80P of the LT. Act.”
The action of the CIT(A) resulted in the entire interest income of Rs.2,24,04,304/- earned by the Assessee comprising of Rs.1,67,25,066/- earned on fixed deposits with other co-operative societies which was claimed exempt u/s.80P(2)(d) of the Act and the interest income of Rs.56,79,238/- earned on deposits with non-cooperative societies which was claimed as deduction u/s.80P(2)(a)(i) of the Act being denied.
Aggrieved by the action of the CIT(A) in denying deduction u/s.80P(2)(d) of the Act, the Assessee is in appeal before the Tribunal. We have heard the rival submissions. We are of the view that the CIT(A)’s action in making the impugned addition in exercise of powers of enhancement requires reconsideration by the AO. The questions that need to be answered are whether the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd., (supra) would apply to a claim for deduction u/s.80P(2)(d) of the Act and whether the principle of mutuality can be extended to Sec.80P(2)(d). The decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd., (supra) was rendered in the context of Sec.80P(2)(a)(i) of the Act which allows deduction of income earned by a co-operative society from the business of providing credit facilities to its members. The term members were interpreted by the Hon’ble supreme court to mean members who are both contributors and participators of the same income. That analogy cannot be imported into the provisions of Sec.80P(2)(d) of the Act which provides for deduction of interest earned on deposits with other co-operative societies. The purpose behind deduction u/s.80P(2)(d) is not dependant on satisfaction of the principle of mutuality. Nevertheless, we are of the view that since this issue has not been examined by the AO. If the AO comes to a conclusion that the principle of mutuality is applicable to Sec.80P(2)(d) of the Act also then he has to examine with specific reference to the facts of the case and the relevant statutory provisions of law with regard to Co- operative societies as prevalent in the state of Karnataka, whether the principle laid down by the Hon’ble Supreme Court in the case of Citizen’s Co-operative Society Ltd., (supra) can be applied to the case of the Assessee. We accordingly set aside the order of CIT(A) on this issue and restore the issue to the AO to consider it afresh, after affording opportunity of being heard to the Assessee.
In the result, appeal by the assessee is treated as allowed for statistical purpose.
Pronounced in the open court on this 5th day of December, 2019.