ITO, SIRSI vs. M/S THE TOTAGAR'S RURAL CO-OPERATIVE AGRICULTURAL CREDIT SOCIETY LTD.,, SIRSI

consolidated order of the CIT(A) pertaining to A.Ys: 2010 – 11 and 2012 – 13.

ITA 213 & 214/Bang/16 Page 2 of 13 2 Since common issues are involved in these appeals I reproduced the grounds of appeal raised in ITA 214/Bang/16, is under:

1 Whether the CIT(A) is right in not appreciating the fact that the assessee was not eligible for deduction u/s. 80P of I.T. Act, 1961 in respect of interest income as the same is not earned by the assessee from investments made by it with co – operative societies.

2 The Learned CIT(A) erred in holding that the assessee was eligible to claim the deduction u/s. 80P(1)(a)(i) in respect of the income earned by way of interest on deposits/savings bank account and dividend income on the ground that the said income is attributable to the business activity of the assessee co – operative society and hence, the assessee is eligible to claim the deduction u/s. 80P(2)(a)(ii) in respect of this income.

3 Whether the CIT(A) erred in law and on facts in not appreciating the facts of the case and also relying upon the decision of the High Court of Karnataka in M/s. Tumkur Merchants Souharda Credit Co– Operative Society in dated: 28.10.2014, and other decisions, ignoring the decision of the Hon’ble Supreme Court in the case of The Totgars Co–Operative Sale Society Ltd., [(322 ITR 283(SC)].

ITA 213 & 214/Bang/16 Page 3 of 13 3 Facts in brief relating to the impugned issues are that the assessee, a Rural Co–Operative Bank and its main activities are lending of money to its members and accepting deposits from them.

It filed its return of Income for the A.Ys: 2010 – 11 & 2012 – 13 and claimed exemption u/s. 80P (2) (d) of the I T Act, 1961 (hereinafter called as an act). The A.O disallowed the same and brought to tax the declared income following the decision of the Supreme Court in the case of Totagar’s Co–Operative Sale Society Ltd., vs. ITO, Sirsi, reported in 322 ITR 283 (SC).

4 Aggrieved assessee has preferred an appeal before the CIT(A) and placed the reliance on various judgments including the judgment of Jurisdictional High Court. The CIT(A) relying upon the judgment of the jurisdictional High Court accept the claim of the assessee having observed that the amount that is eligible for deduction under this section is the amount of profit attributable to the activities mentioned under section 80P (2) (a) and the action of the assessee falls in the sub-clause(1) viz., providing credit facilities to its members.

5 Being aggrieved with the order of the CIT(A), revenue has preferred an appeal before the Tribunal with the submission that while adjudicating the issue CIT(A) has not taken to account in the judgment

ITA 213 & 214/Bang/16 Page 4 of 13 of the Apex Court in the case of M/s. Totagar’s Co–Operative Sales Society Ltd.,. Whereas the learned counsel for the assessee placed the reliance on the order of the CIT(A) with the submission that the CIT(A) has decided the issue following judgment of jurisdictional High Court and other High Courts. While dealing with the issue the CIT(A) also taken in to the account the judgment of the apex court in the case of Totagar’s Co–Operative Sales Society Ltd.,.

6 Having carefully examined the orders of the lower authority in light of rival submissions we find that while dealing with the issues the CIT(A) has taken in to account the judgment of the Apex Court in the case of M/s. Totagar’s Co–Operative Sales Society Ltd., and the judgment of different High Courts. Relevant observation of the CIT(A) are extracted here as under:

On the contrary, the assessee in its written submissions brought to my notice the provision of the Karnataka Co– Operative Societies Act, 1959, especially to Sec. 58 which deals with investment of funds, according to which a co– operative society may invest or deposit its funds:

1 In a Govt. Savings Bank or 2 In any securities specified in Sec. 20 of India Trust Act 1982, 3 In the shares or securities of any other co – operative society or 4 With any co – operative bank or co – operative society, or 5 With any scheduled bank approved by the Registrar.

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Rule 23 of the Act states that the objects of keeping or investing the surplus funds of co – operative societies is intended to meet any unforeseen losses.

The assessee states that the Revenue’s reliance on the Apex court’s decision in the case of Totagar’s Co – operative Sale Society is misconceived and distinguishable on the facts of the case as under.

M/s. Totagar’s Co – Operative Sale Society, apart from providing credit facilities to members, was also in the business of marketing agricultural produce grown by its members. The sale consideration received from marketing agricultural produce from members was retained in many cases. The said retained amount payable to members was invested in short term deposit. Such amount which was retained by the society was a liability and it was shown as such, in the Balance Sheet on the liability side. Therefore to the extent, such interest cannot be said to be attributable either to Section 80P (2)(a)(i) of the Act or under section 80P(2)(a)(iii) of the Act. Therefore on the facts of the case, the Apex Court held that the AO was right in taxing the interest income, indicated above, u/s. 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of the case and can’t be applied in general and it was not laying any law. The assessee has further based its grounds of appeal by taking recourse to the following decided case Laws.

1 Similar view as held by the above Apex court was taken in the case of CIT III Hyderabad vs. A.P Co – Operative Bank Ltd., by A.P High Court (2011) 336 ITR 516 (A.P).

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2 Tumkur Merchants Souharda Credit Co – Operative Ltd., vs. ITO, Tumkur, of 2014. The Karntaka High Court held that the assessee had to invest money in form of deposits in banks to earn interest which is attributable to carrying on the business of banking.

3 In the case of Menasi Seemeya Group Gramagala Seva Sahakari Sangh Niyamita in and 601/Bang/2014 dt. 06/02/2015, wherein it was held that the restrictive interpretataion given to Co – Operative Society under section 80P(2)(a) of the Act was not warranted. After a detailed reasoning the Tribunal came to the conclusion that the interest and dividend earned by the assessee from co – operative banks was eligible for deduction u/s. 80P(2)(d) of the Act.

4 In the latest case decided by the Karnataka High Court in of 2014 (Tumkur Merchants Souharda Credit Co – Operative Society), the Court referred to the following cases where similar view was taken by the Courts. a CIT vs. BilGurubasava Pattina Shakari Sangh Niyamit. b CIT vs. Bangalore Credit Co – Operative Society in ITA No. 598/2013. c CIT vs. Yeshwantpur Credit Co – Operative Society Ltd., in ITA No. 237/2012.

ITA 213 & 214/Bang/16 Page 7 of 13 d CIT vs. Mysore University Employees Co – Operative Society Ltd., in ITA No. 298/2013. e CIT vs. Vasavi Credit Co – Operative Socity Ltd., in ITA No. 118/2012. f CIT vs. Vasavi Multipurpose Souharda Sahakari Sangh Niyamit in ITA No. 505/2013. g CIT vs. General Insurance Employees Co – Operative Society Ltd., in ITA No. 273/2013.

Finally the assessee prayed that the assessee is registered under the Karnataka Co – Operative Societies Act, 1959, and had not applied and obtained permission from the Reserve Bank of India as a bank, and as such, the activity of the assessee cannot be termed to be under the Banking Regulation Act. Therefore the assessee prays that the decision of the Jurisdictional High Court in of 2014, i.e.,Tumkur Merchants Souharda Credit Co – Operative Society Ltd., and also that of Cahndrapabhu Urban Co – Operative Credit Society Ltd., Nippani vs. ITA in ITA No. 100043 and 1000045, dtd. 21/09/2015, be followed and relief be granted.

I have gone through the assessment orders for the assessment years, viz., 2010 – 2011 and 2012 – 2013 of the AO, and also the written submissions of the assessee.

The object of keeping or investing the surplus funds of a Co – Operative Society is intended to meet any unforeseen losses. The amount that is eligible for deduction under this section is the amount

ITA 213 & 214/Bang/16 Page 8 of 13 of profit attributable to the activity mentioned in Sec. 80P(2)(a) and the activity of the assessee falls under sub-clause (i), viz., providing credit facilities to its members. Thus it is the “Activity” that is the condition precedent for claiming deduction u/s. 80P of the Act and once it is proved beyond doubt that a particular income is “attributable” to only the activity/activities mentioned u/s. 80P(2)(a) of the Act, the whole of such income is eligible for deduction u/s. 80P of the Act. The interest income stems from the deposits made by a mandatory requirement for carrying on the activity of providing credit facilities to the members. If such deposits are not made as required as per the stature, then it would be an offence under the law and the assessee will not be in a position to carry on its business. Therefore the interest income earned from depo Industrial Co. Vs. CIT sits are incidental and inextricably linked with the activity of providing credit facilities to its members and consequently the interest thereon cannot be considered as a source of income having distant identity for itself. The word “Attributable to” in sec. 80P(2) makes a distinction between the word “derived from” to “attributable to”. In the case of Cambay Electric Supply {(1978) 113 ITR 84 (SC)} the Supreme Court held that the meaning of the word “attributable” is much wider than the word “derived from” and since the expression of wider import viz., “Attributable to”, has been used the Legislature intended to cover receipts from sources other than the interest earned by the assessee on the deposits made for liquidity purposes and as a measure of fund management which is essential for its activities of providing credit facilities to its members, can only be considered as an income arising out of activity of providing credit facilities, on the facts and circumstances of the case, and consequently to be reckoned for the purpose of deduction u/s. 80P (2) (a) (i) of the Act.

ITA 213 & 214/Bang/16 Page 9 of 13

In the case of CIT Vs. Muzzafarnagar Dist. Co – Operative Bank (2013) 214 Taxman 498 (All) the Allahabad High Court has considered the question of whether interest on deposits on non-statutory liquidity ratio funds would be eligible for deduction u/s. 80P (2) (a) (i) in the case of co – operative banks. The court analysed this issue in the light of various Apex Court decisions which have equated the money held by a bank to its stock-in-trade or circulating capital and finally held “as we have pointed above”, it is a normal mode of carrying on banking business to invest money in a banker that are readily available and that is just as much a part of the mode of conducting bank’s business are receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how circulating capital is employed and that is the normal course of business of a bank. The money laid out in the form of deposits as in the instant case, would not cease to be a part of circulating capital of appellant nor would they cease to form part of its banking business. Thus, I agree that the decision of the Karnataka High Court in dtd. 28/10/2104, in the case of Tumkur Merchants Souharda Credit Co – Operative Society, which has analysed the provisions of sec 80P (2) (a) (ii), with reference to the decision of the Supreme Court, referred to by the AO, i.e., Totagar’s Co – Operative Sale Society and also other decisions and further held that the word “attributable to” is much wider when compared to “derived from” as held by another Apex Court decision (Cambay Electric Supply Industrial Co. Vs. CIT (1978) 113 ITR 84), squarely applies to the facts of the case and hold that the interest and dividend income earned by the assessee will qualify for deduction u/s. 80P (2) (d) of the interest and dividend earned from deposits with other co – operative banks or not. For this purpose it is necessary to go through the provisions of sec. 80P (2) (d).

ITA 213 & 214/Bang/16 Page 10 of 13

Sec. 80P (2) (d): In the case of Co-Op. Society engaged in, 1 Carrying on business of banking or providing credit facilities to its members, or 2 ----------------------------or 3 ----------------------------or 4 ----------------------------or 5 ----------------------------or 6 ----------------------------or 7 ----------------------------or

The whole of the amount of profits and gains attributable to any one or more of such activities……………..”.

The word “Attributable to” used in the said section is of great importance. From the above, it can be analysed that: 1 The object of keeping or investing the surplus funds of co – operative society is intended to meet any unforeseen losses.

2 The amount that is eligible for deduction under the section, is the amount of profit attributable to the activity of the assessee falls under sub-clause (1), viz., providing credit facilities to members.

3 It is the activity that is the condition precedent for claiming deduction u/s. 80P of the Act and once it is proved beyond doubt that a particular income is “Attributable” to only the activities mentioned u/s. 80P (2) (a), the whole of such income is eligible for deduction u/s. 80P of the Act.

4 The interest income stems from the deposits made by a mandatory requirement for carrying on ITA 213 & 214/Bang/16 Page 11 of 13 the activity of providing credit facilities to the members.

5 If such deposits are not made as required as per the statute then it would be an offence under the law and it would not be in a position to carry on its business.

6 The interest and dividend earned are thus incidental to and inextricably linked with the activity of providing credit facilities to members and consequently the interest thereon cannot be considered as a source of income having distinct identify for itself.

Without prejudice to the above findings that the interest income from deposits are eligible for deduction u/s. 80P (2) (a) (i), it is to be noticed that the assessee is also entitled to deduction u/s. 80P (2) (d) also in the interest and dividend from investment with any other co – operative society, the whole of such income is eligible for deduction.

Sec. 2(19) of the Act defines a Co – operative Society to mean a co – operative Society registered under the Co – operative Societies Act, 1912, or under any law for the time being in force in any State for the registration of co – operative societies. The provisions of the I T Act, 1961, either in Sec. 2(19) or u/s. 80P do not make any discrimination between co – operative societies carrying on banking business and other co – operative societies. Co – operative banks are primarily co – operative societies by constitution and “banks” by the nature of business.

In conclusion it is held that the interest income and dividend earned on deposits with other co – operative banks/societies are fully

ITA 213 & 214/Bang/16 Page 12 of 13 deductible u/s. 80P (2)(a)(1) from the income liable to tax though the assessee has claimed the same as exempt u/s. 80P (2)(d) of the Act, as stated above.

In the result the appeals for both the assessment years, viz., 2010 – 11 and 2012 – 13 are allowed in favour of the assessee and the additions and disallowances made in the assessment orders are hereby deleted.

7 Since CIT(A) has decided the issue following the judgment of jurisdictional High Court, I find no infirmity in its order. Therefore, I confirm CIT(A).

8 In the result the appeals of the revenue are dismissed.

Order pronounced in the open court on this 26th August, 2016.