VIPRA VIVIDHODDESHA SOUHARDA SAHAKARI SANGHA NIYAMITHA,SHIVAMOGGA vs. INCOME TAX OFFICER, WARD-1 & TPS,, SHIVMOGA

The learned Commissioner of Income-tax [Appeals] failed to appreciate that the learned Assessing Officer was not justified in passing the order of assessment under the status of Artificial Judicial Person, when the appellant was registered as a co- operative Society and the learned assessing officer ought not to have changed the status of the appellant and consequently the order of assessment passed under section 143 [3] r.w.s. 144B of the Act is bad in law, on the facts and circumstances of the case.

The learned Commissioner of Income-tax [Appeals] and the learned assessing officer failed to appreciate that the interest income earned from investment in Banks and Co-operative banks were attributable to the business of the appellant, since the funds belonged to the members of the appellant and eligible to claim deduction under section 80P[2][a][i] of the Act, on the facts and circumstances of the case.

The learned Commissioner of Income-tax [Appeals] and the learned assessing officer were not justified in not allowing the deduction on account of interest earned by the appellant from deposits in ShimogaDistrict Co-Operative Credit Banks, Karnataka State Cooperative Et Rural Development Bank, Shree Ganapathi Urban Cooperative Bank, Punjab &Maharastra Coopt Bank, SucoSouhardaSahakari Bank Ltd., which are co-operative society of Rs. 34,00,134/- under the provisions of section 80P[2][d] of the Act and erroneously treated such interest income as income from other sources and brought the entire amount to tax, which is not in accordance with law, on the facts and circumstances of the case.

Without prejudice, the learned Commissioner of Income- tax [Appeals] and the learned assessing officer were not justified in not allowing the cost of funds under section 57 [iii] of the Act, on the deposits which were maintained to earn interest, while treating the interest earned as income from other sources, on the facts and circumstances of the case. The learned AO ought to have allowed cost of funds of Rs.33,13,204/- as per computation attached.

Without prejudice, to the right to seek waiver as per the parity of reasoning of the decision of the Hon'ble Apex Court in the case of Karanvir Singh 349 ITR 692, the Appellant denies itself liable to be charged to interest under section 234 A,234 B & 234 C of the Income Tax Act on the facts and circumstances of the case. The appellant contends that the levy of interest under section 234 A, 234 B & 234 C of the Act is also bad in law as the period, rate, quantum and method of calculation adopted by the learned assessing officer on which interest is levied are not discernible and are wrong on the facts of the case.

The appellant craves leave to add, alter, amend, substitute or delete any or all of the grounds of appeal

The ld. FAA after considering the submissions of the assessee and relying on the judgment of Hon’ble Apex Court in the case of Mavilayi Service Cooperative Bank (2021) 123 taxmann.com 161 (SC) observed as under:-

The ld. AR reiterated the submissions made before the lower authorities and strongly contested that the AO has wrongly held the assessee as AOP, whereas as per the judgment of jurisdictional High Court in the case of Government of India Ministry of Finance vs Karnataka State Souhadra Dedral Co-operative Ltd reported in [2022] 134 taxmann.com 170 ( Karnataka) [2022] in which it has been held that society registered under Karnataka Souharda Sahakari Act, 1997 is also eligible for deduction u/s. 80P of the Act.

Considering the rival submissions, both the parties relied on the decision of the coordinate Bench of Tribunal Primary Agricultural Credit Co-operative Society Ltd in dated 03.07.2024 in which it has been held as under:-

Further in respect of deduction u/s 80P(2)(d), considering the rival submissions, 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.CIT(A) 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) and Hon’ble Apex Court in the case of Citizens Co-operative Society Ltd. noted 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. 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 of the Income Tax Act 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:

We note from plain reading of Circular No. 18/2015 dated 02.11.2015 it is applicable to those co-operative societies / co- operative banks in which the Banking Regulation Act, 1949 applies. During the course of hearing the assessee was asked to submit the requirement of SLR as per Karnataka Cooperative Societies Act and the quantum and period for calculating SLR, the assessee was unable to give reply. Rule 23 of the Karnataka Co-operative Societies Rules states that reserve fund belongs to the society and is intended to meet the unforeseen losses. Further if the cooperative society wants to invest reserve fund or any portion thereof for any other purpose as prescribed under section 58 (a) to (d) of the Karnataka Co-operative Societies Act permission is to be taken from the Registrar of Co-operative Societies. Therefore the argument of the assessee that interest income on such investment is operational income is rejected. Even if the maintainability of SLR requirement is out of internal fund/external funds then no deduction shall be allowed u/s. 80P(2)(a)(i), since the interest income received on such investments from co-operative banks is not attributable to main business of the appellant. The issue regarding the word “attributable” has been discussed elaborately by the Hon’ble Apex Court in the case of M/s Totgar’s Co-operative Sales Society (2010) reported in [2010] 188 Taxman 282 (SC) where it is held by the Hon’ble Supreme Court that the deduction u/s 80P is available only to the income which is attributable to the business operation.

We note from the submissions of the ld. AR that the assessee has invested its fund in commercial bank as well as in co-operative banks and earned interest thereon. Section 80P(2)(d) describes that if the assessee has received interest from the co-operative society, then the assessee is eligible for claim of deduction on such interest received. In the judgment of Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. (KSCARDB) vs. The Assessing Officer, Trivandrum & Ors. (2023) 154 taxmann.com 305 (Supreme Court) it has been discussed in detail the definition of co-operative banks and co-operative society. If the payer bank falls under the definition of co-operative bank/ bank in the light of the judgment of Hon’ble Apex Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income received from co-operative banks. We note that the assessee has also received interest from co-operative banks which is governed by the Banking Regulation Act of 1949 and this argument of the ld. DR has not been denied by the ld. AR of the assessee. The Section 80P(2)(d) describes that if the assessee has received interest/dividend from the co-operative society, then the assessee is eligible for claim of deduction on such interest/dividend, however we note that the assessee has received interest from co- operative bank but it is not clear whether the interest payer (co- operative bank) is a bank and registered with Reserve Bank of India and holding licence from RBI for carrying out banking business as per RBI Act. In addition, the judgment of Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs. The Assessing Officer, Trivandrum & Ors. (supra) in which it has been discussed in detail the definition of co-operative banks and co- operative society. If the payer bank falls under the definition of co-operative bank in the light of the judgment of Hon’ble Apex Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income received from co-operative banks, therefore this issue is also remitted back to the AO for verification of interest received from co-operative bank in above terms. If AO finds that the co-operative bank is carrying its banking business activities in the light of the above judgment, the deduction u/s. 80P(2)(d) on such interest income should not be granted.

We further note that the assessee has received interest from other co-operative banks/commercial banks on its investments. The revenue authorities have considered the entire interest as income from other sources u/s. 56 including the interest received from co-operative bank and no expenses u/s. 57(iii) has been allowed to the assessee for earning of such income. While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. Therefore 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. Reliance is also placed on the judgment of Co- ordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souharda Credit Co-op. Ltd. Accordingly, the assessee is directed to provide the details of cost of funds before the assessing officer. Therefore for allowing cost of funds, we are remitting this issue to the assessing officer for determining the cost of funds for earning entire interest income from bank (co-operative bank and scheduled bank).”

Respectfully following the above decision, we send back the issue to the AO for decision in the light of above judgment.

In the result, all the appeals of the assessee are allowed for statistical purposes.