INCOME TAX OFFICER vs. MAHARASHTRA BANK EMPLOYEES CO-OP CREDIT SOCIETY LTD,, PUNE

आदेश / ORDER

PER SUSHMA CHOWLA, JM:

Both the appeals filed by Revenue are against separate orders of CIT(A)-8, Pune, both dated 30.11.2016 relating to assessment years 2009-10 and 2012-13 against respective orders passed under section 143(3) r.w.s. 147 and 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).

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Section 70 of the said Act lays down that society shall invest or deposit its funds in one or more of the investments provided in clauses (a) to (e) thereunder. We are concerned here with clause (d) to section 70 of the said Act, which reads as under:- “70… (a)…. (b)…. (c)… (d) in any co-operative bank (other than those referred to in clause (a) of this section) or banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose: (e)…..” 12. Reading the provisions of Maharashtra Co-operative Societies Act, it is incumbent upon the society which is making profits to park one-fourth of its profits in the reserve fund. Further, the said reserve funds as per directions of the State Government by general or special order are to be invested in one of the securities, which are provided under section 70 of the said Act. Clause (d) clearly lays down that the investment or deposit of funds could be in any Co- operative Bank or Banking company approved for this purpose by the Registrar. The assessee society belonging exclusively to the employees of Bank of Maharashtra, had invested its reserve funds in FDs with Bank of Maharashtra. Accordingly, the assessee society applied for requisite permission from the Registrar of Co-operative Societies under section 70 to do so. The Registrar vide its letter dated 18.10.1995 in respect of investment of reserve funds consequent to Society‟s Resolution dated 25.08.1994 and Management Committee‟s Resolution dated 29.07.1991 and further the assessee‟s letter dated 11.07.1995, granted permission under section 70 of the Maharashtra Co-operative Societies Act, 1960 and Rule 54 of the Rules 1961 to transfer reserve funds amount with Pune District Central Co-operative Bank to the Bank of Maharashtra with condition of investment and also that the amount invested in the Bank of Maharashtra could not be given as security for borrowing or used for any other purpose without written permission from the Registrar. The copy of said permission is placed at page 6 with English translation at page 7 of the Paper Book. The claim of assessee was that in line with the said permission received from the Registrar as under the provisions of section 66 and 70 of the Maharashtra Co-operative Societies Act, it was required to transfer the funds i.e. one-fourth of profits of assessee‟s society to the reserve fund and thereafter, the funds in the reserve fund were invested as FDRs with the Bank of Maharashtra. The assessee points out that the said parking of funds in FDRs with the Bank of Maharashtra was one of the conditions for carrying on the business activities of the assessee society, hence interest earned therefrom was business income in the hands of assessee. It was time and again reiterated by the learned Authorized Representative for the assessee that the amounts which were parked in FDRs with Bank of Maharashtra were not out of surplus and idle funds but were out of funds transferred to reserve fund. The assessee thus, claimed that once the interest income has been earned during the course of carrying on of its business activities, then the same is eligible for grant of deduction under section 80P(2)(a)(i) of the Act . 13. The Apex Court in CIT Vs. Karnataka State Co-operative Apex Bank (supra) while deciding the case of Co-operative Societies and scope of special deduction had held as under:- “Interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund

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by a co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. The placement of such funds being imperative for the purpose of carrying on banking business the income therefrom would be income from the assessee‟s business. There is nothing in the phraseology of section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital.” 14. We further find that similar issue was considered by the Pune Bench of Tribunal in ITO Vs. M/s. Kundalika Nagari Sah. Patsanstha Maryadit (supra), wherein the issue was with regard to investments with other Co-operative Society as per the mandate of Maharashtra Co-operative Societies Act and whether the interest income earned by the assessee on such investments was liable for deduction under section 80P(2)(a)(i) of the Act. The Assessing Officer had denied the claim relying on the ratio laid down by the Hon'ble Supreme Court in Totgar‟s Co-operative Sale Society Ltd. Vs. ITO (supra), the Tribunal after considering the factual and legal aspects held as under:- “17. In order to adjudicate the issue, first reference is made to the decision of Hon‟ble Supreme Court in Totgar Co-operative Sale Society Ltd. Vs. ITO (supra). In the facts of the said case, the assessee before the Hon‟ble Apex Court was a co-operative society providing credit facilities to the members or marketing agricultural produce of its members. The assessee had parked its funds in short term bank deposits and securities and the interest earned on the same was claimed as deductible under section 80P(2)(a)(i) of the Act. The Revenue authorities held that the same was taxable under the head „income from other sources‟. The claim of the assessee was that it had invested the funds on short term basis as these were not required immediately for business purposes and consequently, interest received by the assessee was eligible for deduction under section 80P(2)(a)(i) of the Act. Further, the contention of the assessee before the Court was that under regulations 23 and 28 r.w.s. 57 and 58 of the Karnataka Co- operative Societies Act, 1959, a statutory obligation was imposed on co- operative credit societies to invest its surplus funds in specified securities and in view of the aforesaid statutory obligations, the above mentioned investment was made by the assessee and the same was in the nature of its business activity. The said interest income was claimed to be eligible for deduction under section 80P(2)(a)(i) of the Act, irrespective of the source or head under which such income would fall. The Hon‟ble Apex Court noted that the interest income arising on surplus investment in short term deposits and securities, which surplus was not required for business purpose, was to be taxed under section 56 of the Act. The Hon‟ble Apex Court further noted that the assessee markets the produce of its members whose sale proceeds at times were retained by it and the tax treatment of such amount was the issue before them. The Hon‟ble Apex Court held that where the interest on deposits / securities, where the funds were not immediately required for business purposes, was invested in specified securities, would be taxable as income under section 56 of the Act. It further held that where the assessee society regularly invests its funds not immediately required for business purposes, interest on such investment could not fall within the expression of profits and gains of business and the same could not be held to be attributable to the activities of the society i.e. carrying on of business of providing credit facilities to its members or marketing the agricultural produce of its members. The Hon‟ble Apex

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Court further reiterated that where the assessee markets the agricultural produce of its members and it retains the sale proceeds in many cases and where the retained amount which was payable to its members, from whom the produce was bought, was invested in short term deposits / securities, the said amount was liability of the assessee and it was shown in the balance sheet on the liabilities side, therefore, to that extent, the Hon‟ble Supreme Court held that such interest income could not be said to be attributable either to the activity mentioned in 80P(2)(a)(i) or 80P(3) of the Act. In view thereof, the Hon‟ble Supreme Court upheld the order of Assessing Officer in taxing the said amount under section 56 of the Act. The alternate plea of the assessee that even if the said interest income was held to be covered under section 56 of the Act, was eligible for deduction under section 80P(2)(a)(i) of the Act, was rejected. 18. In the facts of the case before Hon‟ble High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (supra), the assessee co-operative society was engaged in the activity of carrying on of business of providing credit facilities to its members and it had earned interest income on its deposits. Another fact noted by the Hon‟ble High Court of Karnataka was that the amount which was invested in banks to earn interest was not the amount due to any members and it was not the liability of the assessee. In fact, the said amount was in the nature of profits and gains, which was not immediately required by the assessee for lending money to the members as there were no takers and the assessee in such circumstances, deposited the money in bank so as to earn interest. The Hon‟ble High Court of Karnataka in such circumstances held that the interest income was attributable to carrying on of business of banking and therefore, it was liable to be deducted in terms of section 80P(1) of the Act, they took note of insertion of section 80P(4) of the Act, which was applied by the Assessing Officer to deny the deduction under section 80P(2)(a)(i) of the Act. The Hon‟ble High Court of Karnataka referred to the judgment of Hon‟ble Apex Court in Totgar Co-operative Sale Society Ltd. Vs. ITO (supra) and pointed out that in the facts of the said case, the amount which was retained by the assessee was a liability and it was shown in the balance sheet on liabilities side. Where the interest income was earned on such funds, then the same was held by the Hon‟ble Apex Court to be treated under section 56 of the Act. However, the distinction was drawn by the Hon‟ble High Court of Karnataka in para 10 and it was pointed out that in the case before them, the amount which was invested in banks to earn the interest was not an amount due to any member, it was not the liability and it was not shown as liability in their accounts. In fact, the amount was in the nature of profits and gains which was not immediately required by the assessee for lending money to the members as there were no takers and hence, was deposited in the banks so as to earn interest, such interest income earned by the assessee was held to be attributable to carrying on the business and therefore, same was liable to be deducted in terms of section 80P(1) of the Act. 19. Another decision referred to by the learned Authorized Representative for the assessee is Guttigedarara Credit Co-operative Society Ltd. Vs. ITO (supra), wherein the assessee was a co-operative society engaged in the activity of carrying on the business of providing credit facilities to its members. The Assessing Officer in view of insertion of section 80P(4) of the Act, had declined to extend the benefit

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of deduction under section 80P(2)(a)(i) of the Act. The interest income earned on short term deposits and from saving banks account was held liable to income tax. The Hon‟ble High Court held that where the assessee society was providing credit facilities to its members and was not carrying on any other business, then the surplus funds which it had earned as profits of its business when temporarily not required were invested in banks to earn interest was attributable to carrying on the business of banking and therefore, liable to be deducted under section 80P(1) of the Act. 20. Further, the Pune Bench of Tribunal in ITO Vs. Niphad Nagari Sahakari Patsanstha Ltd. (supra) had laid down the similar proposition as by the Hon‟ble High Court of Karnataka. 21. ……… The claim of the assessee before us is that it was engaged in the business of providing credit facilities to its members, out of loan received from its members itself. The surplus amount which was on account of amount received from its members only, which had not been advanced to any of the members was invested in the banks, against which the said investment was made out of surplus funds available with the assessee, which in turn, were amounts advanced by the members itself. The said parking of funds with the co-operative banks was claimed by the assessee to be in the nature of its business activity as it was the requirement of Maharashtra Co-operative Societies Act, 1960, that 20 to 30% of total deposits are to be parked in the investments with co-operative banks. It is not the case of the Department that the amount invested by the assessee was out of any liabilities due by the assessee. In the absence of the same and following the same parity of reasoning laid down by the Hon‟ble High Court of Karnataka in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (supra) and the facts of the present case being at variance to the facts before the Hon‟ble Supreme Court in Totgar‟s Co-operative Sale Society Ltd. Vs. ITO (supra), we hold that the assessee is entitled to the claim of deduction under section 80P(2)(a)(i) of the Act. In the alternate, we find merit in the plea of the assessee that at best the income which can be assessed in the hands of assessee is the net income and not the gross income as proportionate expenditure incurred is to be allowed in the hands of the assessee. However, we are not adjudicating this issue since we have already held the assessee to be eligible for claim of deduction under section 80P(2)(a)(i) of the Act. In view thereof, we also do not adjudicate the second alternate plea raised by the assessee that it is entitled to the claim of deduction under section 80P(2)(d) of the Act. However, the assessee is not entitled to the deduction under section 80P(2)(a)(i) of the Act relating to dividend received from UTI Mutual Funds and Sundaram Finance of Rs.87,087/- and Rs.88,519/-, which are to be included as income from other sources, on which the assessee is entitled to proportionate expenditure. Similarly, the profit of Rs.25,786/- from other activities and services is not entitled to the claim of deduction under section 80P(2)(a)(i) of the Act. Accordingly, we partly uphold the order of CIT(A). In view thereof, the grounds of appeal raised by the Revenue are partly allowed.” 15. The Hon‟ble Punjab & Haryana High Court in CIT Vs. Nawanshahar Central Co-operative Bank Ltd., (2003) 263 ITR 320 (P&H) held that where investment in PSEB bonds was made in accordance with mandatory provisions of section 44 of Punjab Co-operative Societies Act, it was clearly a statutory investment and the interest on this investment was eligible for deduction under

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section 80P(2)(a)(i) of the Act. The Hon‟ble Punjab & Haryana High Court held that whether investment was made in statutory reserves had come out of working or circulating capital or out of surplus funds was of no consequence. The said decision of the Hon‟ble Punjab & Haryana High Court has been confirmed by the Hon'ble Supreme Court in CIT Vs. Nawanshahar Central Co- operative Bank Ltd. (2007) 289 ITR 6 (SC), wherein it has been held that where a Co-operative bank carrying on the business of banking, statutorily required to place part of its funds in approved security, then the income attributable thereto is deductible under section 80P(2)(a)(i) of the Act. The Hon'ble Supreme Court relied on earlier decisions of the Apex Court in this regard. 16. The Hon‟ble Punjab & Haryana High Court in CIT Vs. Punjab State Co- operative Agricultural Development Bank Ltd. (2016) 389 ITR 607 (P&H) has remanded the issue back to the Tribunal to decide whether the assessee was carrying on business of banking and thereafter, decide the issue of eligibility of deduction under section 80P(2)(a)(i) of the Act on the interest income attributable to the business of banking. 17. However, we find that the Hon‟ble High Court of Gujarat in State Bank of Income Vs. CIT (supra) while deciding similar issue of eligibility of deduction under section 80P(2)(a)(i) of the Act on interest income from deposits of surplus funds in banks held that neither it was business income nor income from investment in any other Co-operative societies. It may be pointed out that the Hon‟ble High Court in para 16 has clearly noted that in the said case, there was no obligation upon the assessee to invest its surplus funds with the State Bank of India. It was further observed that investing surplus funds in a bank is no part of the business of the appellant of providing credit to its members and hence, it cannot be said that the interest income derived from depositing surplus funds with the State Bank of India being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a)(i) of the Act. The Hon‟ble High Court further referred to section 71 of the Gujarat Co-operative Societies Act, 1961 permitting society to invest or deposit its funds in the State Bank of India. The Hon‟ble High Court held that while investment in State Bank of India was permissible under section 71 of that Act, there was no statutory obligation upon the assessee to deposit the funds as part of its business. The said provision also permitted investment of funds in any Co-operative Bank or any banking company approved for this purpose by the Registrar. The Hon‟ble High Court further held that the assessee could not avail the deduction under section 80P(2)(d) of the Act in this regard. Even in the case of Mantola Co-operative Thrift & Credit Society Ltd. Vs. CIT (supra) the issue before the Hon‟ble High Court was in respect of interest income earned from FDRs out of surplus funds and applying the principle laid down in Totgar‟s Co-operative Sale Society Ltd. Vs. ITO (supra), the Hon‟ble High Court held the assessee not to be entitled to claim the deduction. 18. We find that the facts of the present case are at variance to the facts before the Hon‟ble High Court of Gujarat (supra). Even in the facts before the Hon'ble Supreme Court in Totgar‟s Co-operative Sale Society Ltd. Vs. ITO (supra), the issue was deposit of surplus funds as in the case before the Hon‟ble High Court of Gujarat. Though reference is being made to the reserve funds but the ratio laid down is against investing of surplus funds. Where any society deposits its surplus funds in fixed deposits with Scheduled Bank, then the Courts have held that such interest income is not eligible for claim of deduction under section 80P(2)(a)(i) of the Act. However, the facts of the present case before us are at variance, it is not surplus funds which has been deposited by the assessee. On the other hand, the assessee is statutorily required to deposit 25% of its profits in reserve funds, which in turn, have to be

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parked in FDRs with Co-operative Bank or Scheduled Banking company. The assessee before us, in line with statutory obligation of maintaining its status of Co-operative society and as per the regulations of Maharashtra State Co- operative Societies Act, was duty bound to transfer 25% of its profits to reserve funds, which it has done. There is no dispute to the same. The second aspect is the utilization of funds in reserve funds by way of making FDRs with Scheduled bank under section 70 of the said Act. The assessee has received permission of the Registrar of Maharashtra Co-operative Societies Act to make such investment with Bank of Maharashtra and also in order to carry on the business activities of providing credit facilities to its employees, it is mandatory upon the assessee to invest 25% of its profits in the reserve funds, which in turn, are parked in FDRs with Bank of Maharashtra, then interest income earned by the assessee is from carrying on its business activities. Once it is so, then the said income is assessable as „Income from business‟ and the assessee is entitled to claim deduction under section 80P(2)(a)(i) of the Act. Accordingly, we hold so. However, the assessee is not entitled to claim the said deduction on Saving Account interest. 19. Before parting, we may also refer to the order of Tribunal in assessee‟s own case in ITA No.490/PN/1999, relating to assessment year 1996-97, order dated 25.08.2005, wherein similar issue was decided by the Tribunal in turn, referring to the mandatory requirements as per sections 66 and 70 of the Maharashtra Co-operative Societies Act, 1960. The said decision of the Tribunal has been accepted by the Revenue and it has not been brought to our notice that the said decision has been reversed. Accordingly, we find no merit in the stand of Revenue in this regard and dismissing the grounds of appeal raised by the Revenue, we uphold the order of CIT(A) in directing the Assessing Officer to allow eligible deduction under section 80P(2)(a)(i) of the Act on the interest income earned on FDRs of Bank of Maharashtra.”

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mentioned similar disallowance in para 6 at page 2 of the assessment order and accordingly, we hold that the assessee is entitled to claim the aforesaid deduction on interest income on fixed deposit with Bank of Maharashtra amounting to Rs.2,02,33,008/-; however, the interest on saving account with Bank of Maharashtra amounting to Rs.2,27,008/- is not entitled to the aforesaid deduction. The grounds of appeal raised by the Revenue are thus, partly allowed.

Order pronounced on this 18th day of December, 2018.

Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 18th December, 2018. RK आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; 3. आयकर आयुक्त(अऩीऱ) / The CIT(A)-8, Pune; 4. The Pr.CIT-3, Pune; ववबागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “फी” / DR 5. ‘B’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// तनजी सधिव / Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune