SUMANGALA CREDIT CO-OPERATIVE SOCIETY ,BANTWAL vs. INCOME TAX OFFICER, WARD-2(3), MANGALURU

This appeal is filed by the assessee against the order u/s. 263 of the Act dated 03.11.2023 of the Principal Commissioner of Income Tax, Panaji [Pr.CIT] for the AY 2018-19.

Briefly stated the facts are the assessee filed return of income on 12.9.2018 declaring Nil income after claiming deduction of Rs.90,75,459 u/s. 80P of the Act. The case was selected for scrutiny and statutory notices issued to the assessee. The assessee is registered under the Karnataka Cooperative Societies Act, 1959 and the primary object is to provide credit facilities to its members. The AO accepted the returned Nil income and passed order on 15.04.2021. Later, the Pr.CIT exercised his jurisdiction u/s. 263 of the Act and noted that the assessee has received interest from SCDCC Bank and other banks and has claimed deduction u/s. 80P(2)(a)(i) of the Act which was allowed by the AO. The ld. Pr.CIT after considering the submissions of the assessee held that interest income received from SCDCC Bank and other Banks amounting to Rs.39,07,351 is not eligible for deduction u/s. 80P(2)(a)(i) and u/s. 80P(2)(d) of the Act relying jurisdictional High Court reported in 395 ITR 611 and directed the AO to pass fresh order. Aggrieved, the assessee is in appeal before the ITAT.

The ld. AR vehemently argued that the assessee was required to deposit certain amount for maintaining liquidity as SLR as per the statutory requirement of Karnataka Cooperative Societies Act and direction issued by the Registrar of Cooperative Societies. Therefore interest received on such interest income should be treated as operational income and assessee is eligible for deduction u/s. 80P(2)(a)(i) of the Act on such deposits. He also submitted that the assessee is also eligible for deduction u/s 80P(2)(d) on interest received from Banks. Primarily the SCDCC Bank is a cooperative bank, therefore it is covered u/s. 80P(2)(d). The assessee has also provided details of interest received on FD of Rs.48,87,879 and interest on SB Account of Rs.5,74,299, dividend of Rs.11,970 and interest received from members for pre-mature deposits of Rs.10,139. Resultantly the total interest received is Rs.54,84,287. He further submitted that as per Rule 28 of the Karnataka Cooperative Societies Rules, 1960 fluid resources cannot be lent to the members for interest and such funds are required to be invested in cooperative institutions instead of keeping the same as cash in hand. Therefore the investment and interest and dividend thereon are primarily attributable to assessee’s business of providing credit facilities to its members. In support of his argument, he relied on the judgments in the case of Totagars Co-operative Sale Society [2010] 322 ITR 272 (Kar) and [2010] 322 ITR 283 (SC). The ld. AR also referred to the Circular which is placed at page 28-29 of PB.

The Ld. DR relied on the order of the ld.Pr.CIT and he submitted that the interest income received by the assessee is not to be considered as a business income since the Hon’ble Jurisdictional High Court of Karnataka has settled this issue in the case of Totgars’ Co- operative Sales Society Ltd. reported in (2017) 395 ITR 611 (Karnataka) dated 16.06.2017. The ld. DR further submitted that in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs. Assessing Officer, (2023) 154 taxmann.com 305 the Hon’ble Supreme Court has clearly held that if the payer bank holds licence from RBI for carrying out banking business, then the interest received from such bank is not eligible for deduction u/s. 80P(2)(d), though the co-operative bank may be primarily formed as co-operative society and that the activity of the entity should be seen. He submitted that the interest received from co- operative bank is governed by Banking Regulation Act, 1949. The case law relied by the ld. AR is not applicable in the present facts of the case. The character of interest income received from its investments cannot be treated as business income even if is compulsion for investments. The Karnataka Co-operative Society Act and Rules cannot override the income tax provisions. The ld. DR further submitted that the Act should be read with literal interpretation. Section 80{P)(2)(a)(i) is very clear that income earned from carrying on the business of banking or providing credit facilities to its members is eligible for deduction and there is no ambiguity in the section.

Considering the rival submissions, the ld. Pr. CIT has exercised his jurisdiction u/s 263 and directed to AO for passing consequential order denying deduction u/s 80P(2)(a)(i)/80P(2)(d) on interest received from its investments of Rs. 39,07,351/-. We note that the assessee is registered under Karnataka Co-operative Society Act 1959. We note that here the issue is that whether the assessee is eligible to claim of deduction u/s. 80P(2)(a)(i) and/or 80P(2)(d) on the interest income earned on its investments amount made with District co-operative banks. The Ld. Pr.CIT has not accepted the claim of the assessee by relying on the judgment of Hon’ble Karnataka High Court in case of Totgars’ Co-operative Sales Society Ltd. (supra).

During the course of hearing, the Ld.AR of the assessee relied on the Circular No. 18/2015 dated 02.11.2015 and submitted that as per the provisions of the Karnataka Co-operative Societies Act, the assessee is required to maintain SLR from the deposits received from the members and has to invest 100% from the general reserve and 25% from the deposits collected from members as per rule 28 of the Karnataka Cooperative Society Rules 1960. Accordingly, assessee has invested in the fixed deposits. As per the circular, the income received from the investments should be treated as business income u/s. 28 and assessee is eligible to make a claim of deduction u/s. 80P(2)(a)(i) as business income. Further, the assessee also submitted that the investments were made in co-operative banks which are co-operative society. It is submitted by the ld. AR that interest received on such investments are to be allowed for deduction u/s. 80P(2). In support of his argument, the assessee relied on the following decisions:

Admittedly, it is a matter of fact borne from the record that the legislature in all its wisdom had inserted the provisions of Section 80P(2)(a)(i) of the Act as a part of deductions from carrying on the business of banking or providing credit facilities to its members by a Co-operative Society. Although the contention of the Ld. AR that interest received from deposit under compulsion is to be considered u/s 80P(2)(a)(i), as per our considered opinion, going by the rule of literal interpretation that has to be adopted, while construing the scope and gamut of a statutory provision, the same does not merit acceptance. Section 80P(2)(a)(i) does not carve out any exception as regards the applicability of the same in a case where the investments are made under compulsion or as per any direction from Registrar of co-operative society This view of ours that statutory provision has to be construed as per the rule of literal interpretation is supported by the judgment of the Hon'ble Supreme Court in the case of New Noble Educational Society v. Chief CIT [2022] 143 taxmann.com 276/[2023] 290 Taxman 206/[2023] 448 ITR 594/[CA No. 3793 to 3795 of 2014 dated 19-10-2022]. The Hon'ble Apex Court observed that if the language is unambiguous and capable of only one meaning, that alone should be applied and not any other, based on the surmise that the legislature intended it to be so. In other words, it is only in case of ambiguity that the court can use other aids to discern the true meaning, but where the statute is clear and the words are plain, the legislation has to be given effect in its own terms. Since, in the case of the assessee interest income received is from investments from Banks which cannot be attributed to the main business of providing credit facilities to its members, same cannot be held to be allowable as deduction u/s 80P(2)(a)(i) of the Act.

The assessee has also raised issue that the deduction should be allowed to the assessee u/s 80P(2)(d) on such interest income received from its investments. For the sake of convenience we are reproducing the section 80P(2)(d) as under:-

We further note that the assessee has received interest from other co-operative banks/commercial banks on its investments. The ld. Pr.CIT has held that the interest amount of Rs.39,07,350 is not eligible for deduction u/s. 80P(2)(a)(i) or 80P(2)(d) and during the course of assessment proceedings the AO has not examined the issue in the light of the judgment of Hon’ble jurisdictional High Court as relied by the ld. Pr.CIT. Accordingly we hold that the ld. Pr.CIT has rightly exercised his jurisdiction u/s. 263 of the Act and held the order of AO is erroneous and prejudicial to the interest of revenue. However, we direct the AO to pass consequential order considering our findings noted above.

During the course of argument the ld. AR also raised alternative plea that if the assessee is not allowed deduction u/s. 80P(2)(a)(i) / 80P2(d) on the interest income received from co-operative bank, then the cost of funds should be allowed to the assessee. Relying on the judgment of Hon’ble Jurisdictional High Court in case of Totgars’ Co- operative Sales Society Ltd. vs ITO Sirsi, reported in (2015) 58 taxmann.com 35 (Karnataka), the assessee is eligible for claim of its cost of funds on the interest income received from banks. Therefore we direct the AO to grant of cost of funds towards earning of interest income from cooperative banks which are not part of qualifying amount of deduction u/s. 80P(2)(a)(i) or 80P(2)(d).

In the result, the appeal is partly allowed for statistical purposes.