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Facts
The assessee, a primary agricultural credit co-operative society, filed its return of income declaring 'Nil' income after claiming deductions under sections 80P(2)(a)(i) and 80P(2)(a)(iv). The Assessing Officer disallowed a portion of the deduction claimed for interest income received from the Kodagu District Co-operative Central Bank Ltd., classifying it as not eligible for deduction under Section 80P. The CIT(A) partly allowed the assessee's appeal.
Held
The Tribunal held that if the investments made by the assessee with co-operative banks are out of compulsion as per the Karnataka Co-operative Societies Act and its rules, then the interest income earned from such investments would qualify as business income and be eligible for deduction under Section 80P(2)(a)(i) of the Act. For claims under Section 80P(2)(d), the matter was restored to the AO to differentiate between income from co-operative societies and co-operative banks, considering the Apex Court's ruling.
Key Issues
Whether interest income earned from investments made under compulsion as per the Co-operative Societies Act is eligible for deduction under Section 80P(2)(a)(i)? Whether interest income received from co-operative societies is eligible for deduction under Section 80P(2)(d)?
Sections Cited
80P(2)(a)(i), 80P(2)(a)(iv), 80P, 143(2), 143(3), 80P(2)(d)
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Income Tax Appellate Tribunal, “SMC - C” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI CHANDRA POOJARI
Per George George K, Vice President:
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 15.07.2024, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2021-22.
There is a delay of 11 days in filing this appeal. Assessee has filed an application for condonation of delay along with a supporting affidavit of CEO of assessee society. I have perused the reasons stated in the application for condonation of delay for belated filing of this appeal and I am of the view that there is reasonable cause and no latches can be attributed to the assessee for belated filing of this appeal. Hence, I condone the delay of 11 days in filing this appeal and proceed to dispose off the same on merits.
Brief facts of the case are as follows:
Assessee is a primary agricultural credit co-operative society registered under the Karnataka Co-operative Societies Act, 1959. It is engaged in the business of providing credit facilities to its members. For the Assessment Year 2021-22, the return of income was filed on 14.02.2022 declaring ‘Nil’ income, after claiming deduction under sections 80P(2)(a)(i) and 80P(2)(a)(iv) of the Act, to the tune of Rs.38,15,140/-. The assessment was selected for scrutiny and notice under section 143(2) of the Act was issued on 28.06.2022. During the course of assessment proceedings, it was noticed that assessee had received interest income from Kodagu District Co-operative Central Bank Ltd., (KDCC Bank). The assessment was completed under section 143(3) of the Act vide Order dated 27.10.2022 by disallowing the claim of deduction under section 80P of the Act to the extent of Rs.11,54,058/-.
4. Aggrieved, assessee filed appeal before the First Appellate Authority (FAA). The CIT(A) partly allowed appeal of the assessee.
5. Aggrieved by the Order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed a brief written submission stating that investments with KDCC Bank are out of compulsion under the Karnataka Co- operative Societies Act, 1959, and other relevant Rules. Therefore, it was submitted that interest received from such investment would qualify as business income entitled to deduction under section 80P(2)(a)(i) of the Act. Further, the assessee in the written submission had stated that assessee is entitled to deduction under section 80(2)(d) of the Act. The learned AR, by relying on the judgment of the Hon’ble Supreme Court judgment in the case Kerala State Co-operative Agricultural and Rural Development Bank Vs. ITO reported in 458 ITR 348, submitted that interest income has been received from Co-operative Societies and not from Co-operative Bank. The relevant portion of the written synopsis reads as follows:
“3. The Appellant submits that amounts invested with the Kodagu District Co-operative Central Bank Ltd (KDCC Bank) is out of compulsion under the Karnataka Co-operative Societies Act, 1959 and other relevant rules. Therefore, the appellant relies on this Tribunal decision of Canara bank Staff Credit Co-operative Societies Ltd., in (order dated 03/10/2023) and M/s Primary Agricultural Credit CO-operative Society Ltd vs. ITO, Ward-1, Puttur (ITA 1006/BANG/2023) wherein it held that if the investments are out of compulsion under the act, the interest income received out of the such investment would qualifies as business income and it is incidental to the business and the Appellant is eligible for deduction u/s 80P(2)(a)(i) of the act.
The Appellant submits that Co-operative societies registered under Karnataka Co-operative Society Act, 1959 are not governed by RBI perse. The Appellant relies on Kerala State Cooperative Agricultural and Rural Development Bank Ltd., in Civil Appeal No.10069 of 2016, order dated 14.09.2023 wherein it was held that Central Co-operative Bank is a Cooperative Society which is registered under the Kerala State Co-operative Societies Act, then it is not a bank per se governed by RBI; hence eligible for deduction u/s 80P(2)(d) of the Act. The Appellant relies on this tribunal judgement in the case of Vittal Grameena Sahakari Bank Niyamitha vs ITO, Ward 2(5) (ITA 895/Bang/2023) where interest income earned from Cooperative Bank is eligible for deduction u/s 80P(2)(d) as it not bank governed by RBI per-se.”
6. The learned Standing Counsel submitted that as regards the claim of the assessee that it is entitled to deduction under section 80P(2)(a)(i) of the Act, the CIT(A) has directed the AO to examine the issue and therefore the aforesaid claim of the assessee now presented before the Tribunal does not survive. In this context, the learned Standing Counsel referred to pages 12 to 16 of the CIT(A)’s Order. As regards the claim of deduction under section 80P(2)(d) of the Act, by reference to the judgment of Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Vs. ITO (supra), it was submitted that assessee has not raised this contention before the lower authorities.
I have heard the rival submissions and perused the material on record. Assessee in the synopsis filed before the Tribunal had raised two prayers viz., that investments with KDCC Bank is out of compulsion under the Karnataka Co- operative Societies Act, 1959, and the relevant Rules. Therefore, it was submitted that the interest income received out of such income would qualify as a business income entitled to deduction under section 80P(2)(a)(i) of the Act. We find that the Bangalore Bench of the Tribunal in the case of Primary Agricultural Credit Co-operative Society Ltd., Vs. ITO in (Order dated 06.02.2024) had decided the identical issue and restored the matter to the AO with a specific direction to allow deduction under section 80P(2)(a)(i) of the Act if it is found that interest income is received out of investments which are required to be kept as per the provisions of Karnataka Co-operative Societies Act, 1959, and the relevant Rules. The relevant finding of the Bangalore Bench of the Tribunal in the case of Primary Agricultural Credit Co-operative Society Ltd., Vs. ITO (supra) reads as follows:
“8. As regards the claim of deduction of interest income received from Co-operative Banks, it is the contention of the assessee that investments are in compliance with the requirement under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, the interest income is entitled to deduction under section 80P(2)(a)(i) of the Act. On identical facts, the Bangalore Bench of the Tribunal in the case of Canara Bank Staff Credit Co-operative Societies Ltd., in (order dated
03.10.2023) had restored the matter to the AO to examine whether the amounts invested with the Co-operative Banks are out of compulsion under the Karnataka Co-operative Societies Act and the relevant Rules. It was further held by the Tribunal that if the investments are out of compulsion under the Act and the relevant Rules, the interest income received out of the investment made under such compulsion would be liable to be taxed as ‘income from business’ which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Bangalore Bench of the Tribunal reads as follows:
7. I have heard the rival submissions and perused the material on record. The interest income is received out of investments made with Apex Co-operative Bank. It is the case of the assessee that the investments are made out of compulsions as per the Karnataka Co- operative Societies Act, 1959, and the relevant Rules. The Hon’ble Apex Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank (supra) had held that when amounts are invested by the Co- operative Societies as per the statutory requirements, the same would be entitled to deduction under section 80P(2)(a)(i) of the Act. The Hon’ble Apex Court considered the following question of law: “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961?
8. In considering the above question, the Hon’ble Apex Court rendered the following findings: “4. This judgment was cited before the Bench of two learned Judges which decided the case of the Bangalore District Co- operative Central Bank Ltd. (supra). It was considered as having been rendered on its own facts and not applicable to the case of Bangalore District Co-operative Central Bank Ltd. (supra) in view of the finding of the Tribunal that the income in question was attributable to the business of that assessee. The Court referred to the Banking Regulation Act, the Karnataka Co- operative Societies Act and the Karnataka Co-operative Societies Rules, which showed that the investments that had been made by the assessee were in compliance with the statutory -provisions and in order to carry on the business of banking. They were necessary and consequently, they were part of the business activities of the assessee falling within the scope of section 80P(2)(a)(i).
We do not agree with the finding of the Bench which decided the Bangalore District Co-operative Central Bank Ltd.'s case (supra) that the decision in the case of M.P. Co-operative Bank Ltd. (supra) was rendered on its own facts. The latter decision was clearly a reasoned decision.
The question is whether we agree with the reasoning in M.P. Co-operative Bank Ltd.'s case (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying the banking business, the income derived therefrom would be income from the assessee’s business. We are unable to take the view that found favour with the Bench that decided the case M.P. Co- operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
7. In the premises, we take the view that the decision of this Court in the case of M.P. Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee.”
9. A similar view that has been held by the Hon’ble Andhra Pradesh High Court in the case of CIT-II, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., reported in 336 ITR 516 (AP).
The Bangalore Bench of the Tribunal in the case of M/s. The Bharathi Co-operative Credit Society Vs. ITO in (order dated 28.11.2022) for Assessment Year 2015-16, following its earlier order in the case of M/s. Vasavamba Co- operative Society Ltd., Vs. The PCIT in (Order dated 13.08.2021), had rendered a similar finding which reads as follows: “7.1 In the instant case, it was contended that majority of the interest income is earned out of investments made with Co- operative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co- operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction.”
In light of the aforesaid reasoning and the judicial pronouncements cited supra, we restore this issue to the files of the AO. The AO is directed to examine whether the amounts invested with Apex Co-operative Bank and other banks, are out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is found that the investments are made out of compulsions under the Act and the relevant Rules, the interest income received out of the investments made under such compulsions would be liable to be taxed as “business income” which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, we restore the matter to the AO. It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.”
Further, as regards the claim of deduction under section 80P(2)(d) of the Act is concerned, assessee relied on the judgment of the Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Vs. ITO (supra) wherein the Hon’ble Apex Court had stated that only those co- operative banks which has RBI licence to do the business of banking alone would be considered as a Co-operative Bank and not other Co-operative societies. In light of the Hon’ble Apex Court judgment in the case cited supra, I restore the matter to the AO to examine whether interest is received from Co-operative Society or Co-operative Banks. If it is found that interest income is received from Co-operative Society, the same would be entitled to deduction under section 80P(2)(d) of the Act. The AO shall examine the aforesaid aspect as per the dictum laid down by the Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Vs. ITO (supra). It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.