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Income Tax Appellate Tribunal, B BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
Per Laxmi Prasad Sahu, Accountant Member
This appeal is filed by the assessee against the order dated 20.12.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the AY 2017-18 on the following revised grounds dated 21.5.2024 :-
“ 1. The learned CIT (A) appeal erred in passing the orders in the manner he did. 2. The learned CIT(A) appeal erred restricting the deduction under 80P(2)(a)(i) to the extent of Rs.11,99,658/- as against Rs.48,97,193/- without appreciating the submission of the appellant.
3. The learned CIT(A) erred in restricting the deduction under 57 to the extent of Rs.24,59,246/- as against Rs.66,16,858/- as claimed by the assessee.
4. The learned CIT(A) further ought to have appreciated that any expenditure which is allowed under section 57 for computing interest income and Dividend Income, the profit of the business of the assesee will be increased and accordingly the deduction under section 80(2)(a)(i) will also be increased accordingly.
5. The learned CIT(A) further erred in no deleting the addition made by AO, in respect of provision for NPA, which was once added back in original computation by the Assessee.
Without prejudice, the impugned additions are excessively arbitrary and unreasonable and liable to be deleted in full.
7. For these and such other grounds that may be urged at the time of hearing the appellant prays that the appeal may be allowed.”
Briefly stated the facts of the case are that the assessee is a primary agricultural co-operative society engaged in the business of acceptance of deposits, lending loans to members, earning income on its investments and engaged in trading in food grains, general items and sale of kerosene oil, sale of gunny bags and other trading activities. The assessee filed return of income on 06.11.2017 declaring NIL income after claiming deduction of Rs.48,97,193 u/s. 80P. The case was selected for scrutiny and statutory notices were issued. During the assessment proceedings, the AO noted that assessee has violated principle of mutuality as held by Apex Court in the case of Citizen Co- operative Society Ltd. in Civil Appeal No.10245/2017 reported in (2017) 397 ITR 1 and denied deduction u/s. 80P(2)(a)(i) of the Act. The AO further noted that assessee has received interest/dividend from its investments in scheduled bank and cooperative bank of Rs.65,97,441 (interest 57,18,316 + dividend 8,79,125). The assessee had included this income for the purpose of claiming deduction u/s. 80P. The AO relied on the judgment of jurisdictional High Court in the case of Totgars Cooperative Sale Society Ltd., 395 ITR 611 order dated 16.07.2017 and disallowed deduction u/s. 80P(2)(d) observing that interest and dividend income received by the assessee does not satisfy the condition laid down as per section 80P(2)(d). The income received on investments were treated as income from other sources. The AO also disallowed provision made for NPA of Rs.4,40,660 and accordingly income was assessed at Rs53,37,850 without allowing any deduction u/s. 80P(2)(d) and completed assessment.
Aggrieved from the above order, the assessee filed appeal before the CIT(Appeals). The ld. CIT(A) after considering the detailed written submissions allowed deduction u/s. 80P(2)(a)(i) of the Act to the extent of Rs.11,99,658 and observed that the interest/dividend income received from deposits with cooperative/scheduled banks are not allowable for deduction u/s. 80P(2)(a)(i)/80P(2)(d), only interest and dividend income received from co-operative society is eligible for deduction. He also allowed deduction of Rs.50,000 u/s. 80P(2)(c). The CIT(A) also directed to allow deduction u/s. 57 in respect of cost of funds and proportionate administrative expenses incurred for earning interest from scheduled and cooperative banks. Aggrieved from the above order, the assessee filed appeal before the ITAT.
The ld. AR reiterated submissions made before the lower authorities and submitted that the ld. CIT (A) has wrongly computed the deduction u/s 80P(2)(a)(i) of the ACT. The computation of business income from providing credit facilities to its members have wrongly arrived at Rs. 11,99,658/- whereas it should be Rs. 52,64,438/-. She referred to computation of income placed at page 66 to 72 of PB. She further submitted that interest received from the investments is also eligible for deduction u/s 80(P)(2)(a)(i) of the Act because it was invested as per the direction issued by the Registrar of Cooperative Societies for maintaining liquidity ratio against the deposits received from the members as per Karnataka Cooperative Societies Act/Rules. Therefore it should be considered as business income for providing credit facilities to its members. She further submitted that the assessee is a primary agricultural co-operative society engaged mainly in the business of providing credit facilities to its members and providing financial aids as well as agricultural implements, seeds, fertilizers, pesticides etc. The assessee has earned interest on investments out of its operational fund used in business of lending to its members and not by investing surplus funds in short term deposits. The ld. CIT(A) has wrongly analysed the figures appeared in the financial statements and allowed deduction only Rs. 11,99,658 and not considered the investment in co-operative bank is a statutory requirement under Karnataka Co-operative Societies Act, 1959. Hence it is attributable to carrying on of normal business activity and society is eligible for deduction u/s. 80P(2)(a)(i) of the Act on such interest income..
The ld. AR further submitted that interest income received on assessee’s investments to another co-operative society are also eligible for deduction u/s. 80P(2)(d) because the co-operative banks are primarily co-operative societies as specified in section 80P(2)(d). She further submitted that interest income earned should not be taxed under the head income from other sources and it should be considered as business income. The ld. CIT(A) has also not decided the issue in the light of Hon’ble Supreme Court judgment in the case of Kerala State Cooperative Agricultural and Rural Development Bank Ltd. in Civil Appeal No.10069/2016, order dated 14.09.2023 in which it has been held that co-operative bank is a co-operative society which is registered under Kerala Co-operative Societies Act and it is not a bank per se governed by RBI. She further submitted that while giving OGE in pursuance of the order of the CIT (A) the cost of funds have not been granted to the assessee vide dated 17.01.2024. She relied on coordinate bench decision in for AY 2017-18 order dated 17.08.2022 at para 8.1.
6. She further submitted that disallowance of provision of Rs.4,40,660 is provision made from the profits of business of assessee. If the provision is not allowed, the assessee is eligible for deduction u/s. 80P(2)(a)(i) of the Act and disallowance of provision will lead to increase the profit of assessee society. Therefore assessee will get benefit of CBDT Circular No.37/2016 dated 2.11.2016. She also relied on the judgment of Hon’ble Apex Court decision in the case of Mavilayi Service Co-op. Bank Ltd. [2021] 123 taxmann.com 1 (SC).
The Ld. DR relied on the order of the Ld.CIT(A) 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 also 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. Though the assessee was required to deposit certain amount of its deposits as per the Karnataka co-operative society Act for maintain liquidity ratio and earned interest on such deposits but the interest income is not eligible for deduction u/s 80P(2)(a)(i) because the interest was not received from providing credit facilities to its members and investee bank is not a member in terms of definition of members as per bylaws of the society. The character of interest income received from its investments cannot be treated as business income even if is compulsion for investments. The lower authorities have rightly allowed cost of funds. The Karnataka Co-operative Society Act and Rules cannot override the income tax provisions. 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, 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) 80P(2)(d) on the interest income earned on its investments made with District co-operative banks. The Ld.CIT(A) has not accepted the claim of the assessee.
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, therefore it is eligible for deduction u/s 80P(2)(d). It is submitted by the ld. AR that interest received on such investments are to be allowed for deduction u/s. 80P(2).
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/Rules 28 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. 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 as prescribed in the section. 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. 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), the AO considered it as income u/s 56 of the Act. 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. As 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, the aforesaid contention of the Ld. AR that the same could be considered for deduction u/s. 80P(2)(a)(i) cannot be accepted. 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:-
80P. (1) …. (2) The sums referred to in sub-section (1) shall be the following, namely :—
(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income; We note from the order of the AO that the assessee has invested its funds 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 “derived” under the said provision. 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. However 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. 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. The computation of income filed by the assessee placed at paper book needs to be examined in depth. 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. During the course of hearing it was brought into notice of both the parties regarding the order of ld. CIT (A) at para No. 07, that the ld. CIT(A) has mentioned “ Therefore, the Assessing Officer is directed to delete the addition of Rs. 65,97,441/- and........on the same” but nobody was able to explain how the ld. CIT(A) has deleted.
We further note that the assessee has received interest from other co-operative banks/commercial banks on its investments. The ld. CIT (A) has given direction to the AO for granting cost of funds but while giving OGE the ld. AR submitted that the AO has not given cost of funds. While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. During the assessment proceedings the assessee submitted calculation of cost of funds but the AO has not accepted. Considering the involvement of internal and external funds for investments it requires fresh consideration. 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. Therefore, we are remitting this issue to the file of AO for determination of cost of funds invested for earning interest and dividend income. Accordingly, the assessee is directed to provide the details of cost of funds before the assessing officer.
During the course of assessment proceedings the AO noted that the assessee has made provision for NPA of Rs.4,40,660 and it was observed that it is not ascertained liability and the same is not allowable as expenditure u/s. 37 and accordingly added back into the total income of the assessee. In this regard, the ld. AR submitted that if the assessee is not allowed as expenditure u/s. 37 on the provision for NPA for the aforesaid amount, since the assessee is eligible for deduction u/s 80P(2)(a)(i) as decided the ld. CIT(A) on its business income and provisions were created out of the business income, therefore the assessee is eligible for deduction u/s. 80P(2)(a)(i) in the light of CBDT Circular No.37/2016 dated 02.11.2016. We have gone through the order of the CIT(A( on this issue and grounds of appeal taken before the CIT(A), but before the ld. CIT(A) this issue is not emerging from the order of the CIT(A). We also gone through grounds of appeal taken before us, we do not find any such separate ground on this issue. Therefore we cannot adjudicate at this point of time.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on this 30th day of July, 2024.