ALANKAR PRIMARY AGRICULTURAL CREDIT CO OPERATIVE SOCIETY ,ALANKAR vs. INCOME TAX OFFICER, WARD-1, PUTTUR

Interest received from certain co-operative banks is on account of compliance with Rule 2S of the Karnataka Co- operative Societies Rules, 1960. Therefore, it constitutes income from business of providing credit facilities to its members and hence the same is eligible for deduction under section SOP(2)(a)(i) of the Act. This identical contention of the assessee has also been dealt with by the Bangalore Bench of the Tribunal in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT (supra). The Bangalore Bench of the Tribunal, in the aforesaid case, had restored to the AO for fresh examination. The relevant finding of the Bangalore Bench of the Tribunal reads as follows: "18. The issue raised by the Assessee in the aforesaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AD as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised in ground NO.5 to 7 alone to the AD for examination afresh. In other respects we confirm the order of the CIT." 9.1.5 In light of the aforesaid order of the Bangalore Bench of the Tribunal, we direct the AO to examine whether interest income is earned out of investments which are in compliance under the relevant Karnataka Co- operative Societies Rules and Act. If the same is found to be out of compulsions, the interest income derived would be entitled to deduction under section 80P(2)(a)(i) of the Act. The same is held in case of Savanoor Primary Agricultural Cooperative Society (ITA No.919/Bang/2023) and we also invested funds as compulsion under state cooperative act and hence we are eligible for deduction u/s SOP 2(a)(i) of Income Tax Act.

Honorable Supreme court in case of Kerala State Cooperative Agricultural and Rural Development Bank Ltd., in civil appeal No.10069 of 2016, order dated 14.09.2023 has held that Central Cooperative Bank is a Cooperative Society which is registered under the Kerala State Cooperative Societies Act, then it is not a bank per se governed by RBI.

Briefly stated the facts of the case are that the assessee filed return of income on 10.2.2021 assessing income at Nil after claiming deduction u/s. 80(P)(2)(a)(i) of the Act of Rs.2,22,13,125. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings the assessee filed reply to the notices. From the documents the AO noticed that the assessee society has invested surplus finds with the co-operative bank/nationalised bank/shares and received interest/dividend on the said investment amounting to Rs.1,81,72,951. The AO noted that the amount invested by the assessee in cooperative bank is not a co- operative society. Therefore deduction u/s. u/s. 80P(2)(d) of the Act cannot be allowed on the said interest income. The AO also held that the deduction u/s. 80(P)(2)(a)(i) is also not allowable on such interest income relying on various judgments quoted in the assessment order. During the assessment proceedings the assessee filed cost of funds for earning such interest/dividend income. Out of total investments of Rs.1,18,47,106 the AO allowed cost of Rs.57,20,948 and other expenses attributable to income from investments (administrative expenses) of Rs.29,58,434. Resultantly there was taxable income of Rs.31,67,724 (118,47,106 – 86,79,382).

During the appellate proceedings, the assessee filed written submissions and the CIT(Appeals) confirmed the order of the AO. Aggrieved, the assessee is in appeal before the ITAT.

During the course of hearing, the ld. AR reiterated submissions made before the lower authorities and relied on judgment of coordinate Bench of the Tribunal in 548 & 599/Bang/2024 for AYs 2017-18, 2018-19 & 2020-21, order dated 17.5.2024 and submitted that deduction should be allowed to the assessee u/s. 80P(2)(a)(i) because it was compulsion to make investment in Central Co-operative Bank under the Karnataka Co-operative Societies Act, 1959 and relevant rules.

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. The lower authorities have rightly allowed cost of funds. The case law relied by the ld. AR is not applicable in the present facts of the case. The character of interest income received from its investments cannot be treated as business income even if is compulsion for investments. The Karnataka Co-operative Society Act and Rules cannot override the income tax provisions. The ld. DR further submitted that the case law relied by the assessee in 548, 599/Bang/2024 order dated 17.5.2024 is not applicable since the Act should be read with literal interpretation. 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) 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

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. 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:

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(1)(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:-

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 expenses u/s. 57(iii) has been allowed to the assessee for earning of such income to the extent of Rs. 86,79,382/-. While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. Before us, the ld. AR of the assessee has produced a computation sheet in which he has calculated cost of funds showing loss from investments of Rs. 14,67,949/- but this has not been examined. 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. Since in the case on hand the assessee has been allowed cost of funds to the extent of Rs.86,79,382 and taxable income under the head income from other sources is Rs.31,67,724, but the assessee has computed taxable income from investments of (-) 14.67,949. Therefore, we are remitting this issue to the file of AO for fresh computation of cost of funds. Accordingly, the assessee is directed to provide the details of cost of funds before the assessing officer.

In the result, the appeal of the assessee is partly allowed for statistical purposes.