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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’
Before: SHRI N.V VASUDEVAN & SHRI JASON P BOAZ
PER SHRI N.V VASUDEVAN, VICE PRESIDENT :
This is an appeal by the revenue against the order dated 21.2.2017 of CIT(A)-7, Bengaluru, relating to AY 2013-14.
2. The only issue that arises for consideration in this appeal by the Revenue is as to whether the revenue authorities were justified in allowing the benefit of deduction u/s/80P(2)((a)(i) of the Income Tax Act, 1961 (Act) to the Assessee on interest income of Rs.1,44,84,605 which interest income was received by the Assessee on investment of their surplus funds. The Assessing Officer denied the claim of the Assessee on the ground that interest income earned by making investment of surplus funds has to be assessed under the head “Income from other Sources” and not income from business and since interest income is not assessed as business income, the claim for deduction cannot be allowed. In coming to the above conclusion, the AO relied on the decision of the Hon’ble Supreme Court in the case of The Togar’s Co-operative Sales Society Ltd. Vs. ITO 322 ITR 283(SC) wherein the Hon’ble Supreme Court held that the benefit of deduction u/s.80P(2)(a)(i) of the Act is only on income which is assessable under the head income from business. Interest earned on Investment of surplus funds not immediately required in short term deposits and securities by a co-operative society providing credit facilities to members or marketing agricultural produce to members is not business income but income from other sources and the society is not entitled to special deduction. On appeal by the Assessee, the CIT(A) allowed the deduction claimed by the Assessee by following the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative 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 grounds raised by the Revenue in this appeal reads thus:
“1. The order of the learned CIT(A) is opposed to law and facts of the case.
Whether on the facts and circumstances of the case, the CIT(A) was justified in law in allowing deduction u/s.80P(2)(a)(i) of the Act to the co-operative society carrying on the business of baking, inspite of the fact that clause no.(4) of section 80P inserted with effect from 01. 04.2007 clearly bars the co-operative society from the above deduction, other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank".
3. Whether on the facts and circumstances of the case, the CIT(A) was justified in law in holding that the assessee is entitled to deduction under section 80P(2) in respect of interest earned from investments by not taking into consideration the judgement of the Hon'ble High Court of Karnataka in the case of M/s. The Totagar Co-operative Sale Society Ltd (2010) 188 taxmann 282 "? 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
5. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.”
As far as ground No.2 is concerned, it is not the case of the AO that the deduction u/s.80P(2)(a)(i) of the Act has to be denied to the Assessee because of the provisions of Sec.80P(4) of the Act which lays down that deduction u/s.80P(2) of the Act will not be available to a co-operative Bank. Therefore the ground of appeal does not arise out of the orders of the revenue authorities and hence dismissed.
As far as Gr.No.3 is concerned, the learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Tumukur Merchants Souharda Credit Co-operative Ltd. (supra), the 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 said judgment. The facts of the case before the Hon’ble Karnataka High Court 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).
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.
In the result, appeal by the revenue is treated as allowed for statistical purpose.
Order pronounced in the open court on 7th December, 2018.