MAHAVEERA CREDIT CO-OPERATIVE SOCIETY LIMITED ,MANGALORE vs. INCOME TAX OFFICER, WARD-1(1) , MANGALORE

5. The learned CIT(A) has grossly erred in overlooking the fact that the entire interest income of the Appellant is attributable to its business of providing credit facilities to its members and has thus erred in not extending the deduction u/s 80P(2)(a)(i).

6. It is submitted that Rule 28 of the Karnataka Co- operative Societies Rules 1960 mandates that every Co- operative Society maintain "Fluid Resource". Such resources cannot be lent to members and are hence re- invested with Co-operative Institutions to earn interest income. Further Section 58 of Karnataka Co-operative Societies Rules 1959 read with Rule 23 of the Karnataka Co-operative Societies Rules 1960, stipulates that co- operative societies must invest their reserve funds only in Government saving banks or co-operative bank or a scheduled bank. In view of the aforementioned statutory requirements, the Appellant made investments and income Page 3 of 80P(2)(a)(i).

8. The Learned CIT (A) has misconstrued the ruling of the Apex Court in Totgars Co-operative Societies Ltd reported in (2010) 3 SCC 223 in passing the impugned order and hence the same is liable to be set aside.

Page 5 of “In view of above mentioned facts, legal provisions and following decisions in above mentioned cases, i hereby, direct the AO that appellant should be granted deduction u/s 80P(2)(d) on the interest received from deposits/savings account kept with other cooperative societies/ banks which are not governed by RBI Banking Regulation Act. However, such deduction will not be available to interest received from scheduled commercial banks. While giving appeal effect; AO will allow these deductions looking into respective amounts/figures from appellant's books of accounts. Accordingly, grounds of appeal are partly allowed.”

6. Aggrieved by the orders of the Ld.CIT(A), assessee is in appeal before this Tribunal. The Assessee has also filed a Memo for citation enclosing therein Order in and 125/Bang/2024 relied upon by the Assessee.

7. Before us The Ld.AR of the Assessee submitted that the Authorities below erred in not allowing deduction amounting to Rs. 13,80,255/- out of the total claimed of Rs. 26,99,014/- claimed U/s 80P(2)(a)(i) of the Act on the ground that the said Interest was not eligible for deduction U/s 80P(2)(a)(i) and the same was taxed by AO U/s 56 as “Income from other sources” whereas the ld CIT(A) by partly allowing the Appeal held that deduction u/s 80P(2)(d) on the interest received from deposits/savings account kept with other cooperative societies/banks which are not governed by the RBI Banking regulation Act will be allowed and no deduction will be available on Interest received from scheduled commercial banks. Without prejudice to this, it was submitted by the ld AR of the Assessee that the assessee is entitled for cost of funds incurred U/s 57 of Page 6 of Act if the income is assessed as “income from other sources” u/s 56 of the Act.

9. Heard both the rival parties, perused the entire material on record and the orders of the Authorities below. The assessee is a credit co-op. society registered with Karnataka Co-op. Societies Act, 1959 and providing credit facilities to its members and accepting deposits from its members. Out of the total deduction claimed u/s 80P(2)(a)(i) amounting to Rs.26,99,014/- the AO has not allowed deduction of Interest on Investment either u/s. 80P(2)(a)(i) or 80P(2)(d) of the Act amounting to Rs. 13,80,255/- & added the same to the total Income. The assessee submits that it is operational income and therefore the AO should have allowed entire deduction 80P(2)(a)(i) of the Act. The Ld CIT(a) however direct the AO to grant deduction U/s 80P(2)(d) of the Act on the interest received from deposits/Savings account kept with other Cooperative Societies/banks which are not governed by the RBI Banking Regulation Act. Further the CIT(A) was of the view that no such deduction will be allowed on interest received from scheduled commercial banks.

10.1 We are also of the opinion that the interest received by the assessee from Investment held cannot be treated as operational

Page 7 of income of the assessee because the interest received was not from the credit facilities provided to its members as envisaged in section 80P(2)(a)(i) of the Income Tax Act. This issue has been settled by the Hon’ble jurisdictional High Court in the case of PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka) wherein it is held that the source of funds are irrelevant. Therefore the contention of the Assessee is not tenable & we agree completely with the view of the ld. CIT(A) that the deduction for Interest on investment can’t be granted U/s 80P(2)(a)(i) of the Income Tax Act.

10.2 Further with regards to the allowable of the claim of deduction u/s 80P(2)(d) of the I.T. Act, we direct the A.O. to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co- operative society, as observed by Hon’ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. in Civil Appeal No.10069 of 2016, order dated 14.09.2023, the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act.

10.3 Without prejudice to the above, we make it clear that if the interest earned by assessee from the banks is considered under the head “Income from other sources”, relief to be granted to the assessee u/s 57 of the Act in accordance with law. Accordingly, the issue is restored to the file of ld. AO for de-novo consideration with the above observations.

In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 08th July, 2024.