KARAVALI CRDIT CO-OP SOCIETY LIMITED ,UDUPI vs. INCOME TAX OFFICER WARD-2, UDUPI

Since some common issues are involved in these three appeals, we heard these appeals together and deem it convenient to pass a common order.

The first common issue for consideration in all the three appeals is whether the revenue authorities were justified in rejecting the claim of the Assessee for deduction u/s.80P(2)(a)(i) of the Income Tax Act, 1961 (Act). The quantum of deduction claimed by the each of the Assessee is a sum of Rs.30,89,462/- by the Assessee in Rs.33,58,900/- by the Assessee in and a sum of Rs.47,52,224/- by the Assessee in ITA No.941/Bang/2019.

The second issue for consideration in is as to whether the revenue authorities were justified in denying the benefit of deduction u/s.80P(2)(d) of the Act in respect of interest income of Rs.10,36,996/- which is comprised of the following interest incomes viz., (i) Interest received from SCDCC Bank Rs.9,52,170 (ii) ICIC Bank Rs.57,940 (iii) Vijaya Bank Rs.12,230 (iv) Syndicate Bank Rs.14,564 The order impugned in this appeal arises out of an order dated 22.1.2019 passed u/s.154 of the Act.

As far as the first common issue is concerned, the facts are that all the Assessees in these appeals are Co-operative Society registered under Karnataka State Co-operative Societies Act. The Assessee’s claim for deduction u/s.80P(2)(a)(i) of the Act was denied by the AO on on the basis of the decision of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd., Civil Appeal No.10245 of 2017 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 AO, the principle of mutuality was not satisfied in the case of the assessees and, therefore, the deduction claimed u/s 80P(2)(a)(i) cannot be allowed. According to the AO the Assessee was providing credit facilities to nominal members and such nominal members did not have right to vote and therefore the principle of mutuality viz., identity of the contributors and recipients of the profit being in the hands of the one and same persons was absent. He therefore denied the benefit of deduction u/s.80P(2)(a)(i) of the Act. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Hence, these appeals by the Assessee before the Tribunal.

At the time of hearing the parties agreed that identical issue was considered by a co-ordinate Bench of ITAT Bangalore in the case of M/S.Hemmadi Fishermen’s Primary Co-operative Society Ltd. Vs. The ITO, Ward-2, Udupi in (AY 2016-17) order dated 28.6.2019 and it was held therein that the decision of the Hon’ble Supreme Court in the case of Citizen’s Co-operative Society Ltd., was rendered in the context of Co-operative Societies Act as prevalent in a different state and not the State of Karnataka and the issue needs to be adjudicated having regard to the provisions of the Karnataka State Co-operative Societies Act. The issue was remanded for fresh consideration in the light of the law applicable to Co-operative Societies in the State of Karnataka. Since the facts and circumstances are identical, we deem it fit and proper to restore the issue to the AO for fresh consideration in the light of the observations made in the case of M/S.Hemmadi Fishermen’s Primary Co-operative Society Ltd. (supra).

As far as the second issue is concerned, the AO denied the benefit of deduction u/s.80-P(2)(d) of the Act to the Assessee on the ground 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 assesee cannot be allowed. The CIT(A) also upheld the conclusion of the AO that the income earned on FD’s in the form of interest was assessable under the head ‘income from other sources’ and he upheld action of the AO in applying the decision of the Hon’ble Supreme Court in the case of Totgar’s Co-operative Sales Society Ltd., (Supra).

Aggrieved by the order of the CIT(A), the assessee is in appeal 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 Cred 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 parkiong 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 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 examing 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 Merchnts Souharda Co-operative Ltd. (supra). We also make it clear that the examination of claim for deduction in respect of interest income of Rs.1,49,51,464 received on deposits with Co-operative banks and deduction on interest income of Rs.46,74,662/- being interest on deposits other than co-operative banks, will be made only u/s.80P(2)(a)(i) of the Act and in so far as deduction u/s.80P(2)(d) of the Act is concerned, the same becomes not allowable in view of the decision of Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sale Society Ltd. 395 ITR 611 (Karn.).

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.before deciding the issue.

In the result, the appeals are treated as allowed for statistical purpose.