YADAGERE SOUHARDA CO-OPERATIVE SOCIETY LIMITED., ,CHIKKAMAGALURU vs. INCOME TAX OFFICER, WARD-1, , CHIKKAMAGALURU

The assessee filed appeal before the CIT(Appeals). The case was migrated to NFAC in terms of Notification dated 25.09.2020 by the Board. The CIT(Appeals) fixed the case for hearing on different dates, however the assessee did not respond to any of the notices issued. Therefore the CIT(Appeals) dismissed the appeal of the assessee by relying on some judgments quoted in his order. Aggrieved from the above order, the assessee is in appeal before the ITAT.

As far as the requirements of registration of entity is concerned the Appellant society is registered under the provisions of THE KARNATAKA SOUHARDA SAHAKARI ACT, 1997.

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

In the case of UDAYA SOUHARDA CREDIT CO-OPERATIVE SOCIETY LTD very recently Honorable High court has come with the judgement and Honorable High court has the opinion that 33. The provision of section 80P offers tax deduction in respect of income of co-operative societies which is enacted with a laudable object of promoting co-operating movement. Such benefit cannot be denied to so called co- operative under the Souharda Act merely on hyper technicalities. The interpretation given by the revenue to section 2(19) of the Act is untenable. A harmonious reading of said provisions would indicate that co-operative society registered the Co Operative Society Act 1959 alone is not the Co- Operative society for the purposes of Income Tax Act as the phrase “or” employed with the following words ‘under any other law for the time being in force in state for the registration of Co-operative society’. If properly read, Co-operative Societies registered under the Souharda Act which is a State enactment would certainly be construed as Co-operative Society coming within the ambit of Section 2(19) 34 Thus for the reason aforesaid, we find no jurisdictional error in the order passed by the learned Single Judge in extending the benefit of section 80P to the entities registered under the Souharda Act In view of the decision taken by us as aforesaid, the substantial questions of law raised in the Income Tax Appeal are answered in favour of the assessee and against the revenue

We relied on the latest judgement upon the decision of the Division INCOME TAX APPELLATE TRIBUNAL“SMC – B” BENCH : BANGALORE 6. in the case of Halapur Pattina Souharda Sahakari Niyamitha vs The Income Tax Officer, Ward-2, Raichuru, order dated on 26-07- 2019 the judgement of the same is reproduced for your kind reference The above discussion would show that souharda co-operatives are also one form of co-operative societies registered under a law in force in the State of Karnataka for registration of co-operative societies. Therefore the conclusion of the revenue authorities that co-operative societies and co-operatives are different and that co- operative registered as Souharda Sahakari cannot be regarded as co-operative societies is unsustainable. We therefore hold that the Assessee should be allowed deduction u/s.80P(2)(a)(i) of the Act, as the ground on which the same was denied to the Assessee is held to be incorrect. However, the other conditions for allowing deduction u/s. 80P(2)(a)(i) of the Act needs to be examined by the AO. I, therefore, remand the question of allowing deduction u/s. 80P(2)(a)(i) of the Act to the AO, except the issue already decided above.

In the recent decisions relating to Siddartha Pattina Souharda Sahakari Niyamitha, Manvi (ITA No. 1234/Bang/2019) and also, Halapur Pattina Souharda Sahakari Niyamitha (ITA No 1233/Bang/2019), both of which were passed very recently (26-07-2019), the same Income Tax Appellate Tribunal, Bengaluru, has given the verdict as under.

In the result, appeal by the Assessee is allowed for statistical purposes 8. Very recently, the H’nble High Court of Karnataka has given the judgment in the case of Swabhimani Souharda Co-operative Ltd, Bengaluru V/s the State of Karnataka pronounced on 16-01-2020 where in the judgment all the confusions are put to rest by stating that (b) the object of enacting sec.80P of the 1961 Act may be defeated if a restrictive meaning is assigned to the definition for “Cooperative Society” as given u/s2(19) in as much as the invokability of the provision of sec 80 P is dependent upon the entity seeking the benefit thereunder being a Co-operative society; going by the text and context of these provisions, one can safely conclude that all the entities that are registered under the enactments relating to co-operative societies, regardless of their varying nomenclatures need to be treated as co- operative societies; this view accords with the purposive construction of sec. 80P read with Sec. 2(19) of the Income Tax Act, 1961 In the above circumstances, these writ petitions succeed; . . . the petitioners are entitled to stake their claim for the benefit of Sec 80P of the said Act.

As far as the requirements of deposits in co-operative bank as well as the other bank is concerned, the Appellant society is registered under the provisions of THE KARNATAKA SOUHARDA SAHAKARI ACT, 1997 where in the Act stipulates that certain funds of the society are to be invested outside the business.

In the instant case the amount which was invested in banks to earn interest was not an amount due to any members. It was not on account of any liability that was to be refunded to members. In fact this amount which is in the nature of profit and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. The said interest income is attributable to carrying on the business and therefore it is eligible to be deducted in terms of section 80P of the Act. 16. From the aforesaid facts, it may clearly be established that the sum of 82,90,021 represents the interest earned from the deposits invested in specified investments as permitted under the Act in the ordinary course of business and hence eligible for deduction., This interest is attributable to the business of providing credit facilities to its members. In this context we rely on the decision of H’ble High Court of Karnataka, Bangalore dated 28-10-2014 in the case of M/s Tumkur Merchants Souharda Credit Co operative Ltd Vs The ITO, Ward-1, Tumkur (I.T.A. NO. 307 OF 2014) which has distinguished itself from the Supreme Court decision. The relevant portion of the decision is reproduced below “ In this context when we look at the judgement of the Apex court in the case of M/s Totagars Co-operative sale Society ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee- co operative society, apart from providing credit facility to the members, was also in the business of marketing of agricultural produce grown by its members the sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short term deposit or security. Such an amount which was retained by the assessee- society was a liability and it was shown in the balance sheet on the liability side. Therefore, to the extent, such interest income cannot be said to be attributable to either to the activity mentioned in section 80P(2)(a)(i) of the act or under 80P(2)(a)(iii) of the Act therefor in the facts of the said case, the Apex court held the assessing officer 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 that case. Therefore it is clear: supreme court was not laying down any law. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profit and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest the said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of section 80P(1) of the Act. In fact similar view is taken by Andhra Pradesh High Court in the case of Commissioner of income Tax III, Hyderabad Vs Andhra Pradesh State co-operative bank Ltd., reported in (2011) 200 TAXMAN 220/12. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is here by set aside the substantial question of law is answered in favour of the Assessee and against the Revenue.”

In other words, the investments made and the interest income earned by the Appellant society is given in the table below to explain as to how the claims are made in the computation of income submitted Deposits in Deposits in Co Details of Deposits Total other Banks op Banks Deposits made to meet statutory requirements as explained 4,49,55,080 3,52,76,090 8,02,31,170 earlier Nil Nil Nil Excess deposits made 39,17,751 82,90,021 Interest apportionable to business income and claimed 43,72,270 deduction u/s 80P(2)(a)(i) 18. It is a bonafide business investment done in the ordinary course of the business to meet the statutory requirements and therefore the income earned thereon is business income earned in the ordinary course of business and it is attributable to the business activities of the assessee. And therefore, it is allowable under section 80P(2)(a)(i) of the IT Act of the Act

The learned AO has relied upon on the Judgment of the Karnataka High Court Dharwad Bench dt 16-06-2017 in case of The Totagars Co-Operative Sale Society, Sirsi. We strongly feel that the above case cannot be relied upon for assessing the appellant because the TSS Case relates to Marketing society where as the appellant is not a marketing society. It is a credit society carrying on credit business activities with its members only.

In the case of M/s. Machina Service Co-operative Society Ltd., very recently the Income Tax Appellate Tribunal “A” BENCH : BANGALORE has come with the order and ITAT has the opinion that In the event it is found that assessee is not entitled to get the benefit under section 80P(2)(a)(i) of the Act, the AO shall also examine whether it is entitled to deduction under section 80P(2)(d) of the Act in light of the recent judgment of the Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural Rural Development Vs. AO reported in 458 ITR 384 (SC). It is ordered accordingly 21. In addition to this We would like to quote the case law which is recently ordered by Income tax Appellate Tribunal Banglore -A bench in the case of M/s. Sumantha Pathina Souharda Sahakari Niyamita, has come up with the opinion that The jurisdictional High Court in the case of PCIT Vs. Totgars Sales Society (supra) had categorically held that the interest income received from Scheduled Banks / Co-operative Banks are not entitled to deduction under section 80P(2)(a)(i) or under section 80P(2)(d) of the Act. However, the latest judgment of the Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd., Vs. AO reported in 458 ITR 384 (SC) had categorized various co-operative banks as co-operative societies thereby granting the benefit of deduction under section 80P of the Act to the said co-operative banks. Though the Hon’ble Apex Court was considering the interpretation of section 80P(4) of the Act, when a co- operative bank is deemed to be considered as a co-operative society, the necessary corollary has to follow. Thereby meaning when interest income is received from such co-operative bank which are deemed to be considered as co-operative society, then the assessee would be entitled to deduction under section 80P(2)(d) of the Act. Since AO did not have the benefit of examining the dictum laid down by the Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd., Vs. AO (supra), we deem it appropriate to restore the matter to the AO. The AO is directed to reexamine the issue whether the assessee is entitled to deduction under section 80P(2)(d) of the Act (i.e., the FD interest received from SUCO Co- operative Bank of Rs.3,14,544/-) in light of the judgment of the Hon’ble Apex Court. It is ordered accordingly.

In addition to this We would like to quote the case law which is recently ordered by Income tax Appellate Tribunal Banglore -C bench in the case of NTI Housing Co operative Society has come up with the opinion that The matter relates to claim of deduction under Section 80P(2)(d) of the Act amounting to Rs.1,02,22,331/- i.e. interest income earned by the appellant out of the deposit made in the Cooperative Banks out of the money of the members of the appellant society which has been denied by the Ld. AO and confirmed by the Ld. CIT(A) is liable to be quashed in view of the ratio laid down in the case of PCIT vs. Totagars Co-operative Sales Society Ltd. (supra) as already discussed by Bangalore Bench in case of The Totagars Co- operative Sales Society Ltd. vs. ACIT in to 379/Bang/2023. Thus, with the above observation, we quash the order passed by the authorities below with a direction upon the Ld. AO to grant relief in regard to the claim of deduction made by the appellant under Section 80P(2)(d) of the Act

In addition to this We would like to quote the case law which is recently ordered by Income tax Appellate Tribunal Banglore -A bench in the case of The West Coast Paper Mill Employees Souhardha Credit Co-op. Ltd., has come up with the opinion that Respectfully following the above judgment of the Hon’ble High Court of Karnataka, we hold that the assessee is entitled for cost of funds and only the net interest income is taxable u/s. 56 of the Act. Considering the alternative submissions this issue is remitted to the file of AO for determination of net income after set off of cost of funds/interest expenditure in earning the interest income for the purpose of taxability u/s. 56 of the Act as per law. Needless to say that the assessee may be given reasonable opportunity of being heard and the assessee is directed to produce all the relevant documents to substantiate its claim and avoid seeking unnecessary adjournment for early disposal of the case. This issue is allowed for statistical purposes.

In addition to this We would like to quote the case law which is recently ordered by Income tax Appellate Tribunal Banglore -C bench in the case of Siddhi Vinayaka Souhardha Pattina Sahakari Niyamita Kalaburagi., has come up with the opinion that the assessee is eligible for claim of its cost of funds on the entire interest income The assessee has relied on the judgment of Co-ordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souhardha 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 interest income

As per the CBDT Circular, having Circular No.18/2015 dated 02.11.2015.interest earned from the investments made for the purpose of comply with the Act and relevant Rules are taxable u/s 28 of the Income tax Act and not under 56 of the said act 26. We request your goodselves to allow the expenditure u/s 57 in case your goodselves decide to treat the interest income from investment in the ordinary course of business of the assessee as income from other sources u/s 56. 27. With respect to Interest on income tax refund amounting to Rs 22,997, the appellant haven’t received any Income tax refund in the assessment year 2018- 19 and whatever the income tax refundable amount was adjusted to the outstanding demand moreover the Rectification rights are transferred to jurisdictional assessing officer. Such refund has not been credited to the appellant bank accounts. 28. I have For these and such other submissions that may be adduced in time to time, it is requested that the Honourable ITAT may cancel the addition made by the Assessing Officer and allow deduction under section 80P(2)(a)(i) of the Act.” 8. The ld. DR relied on the order of the lower authorities and submitted that the CIT(Appeals) granted various opportunities which were not responded by the assessee.

Considering the rival submissions, we note that the assessee was not allowed deduction under Chapter VIA of the Act by observing that the assessee is not registered under the the Karnataka Co-operative Societies Act, 1959, it is registered under Karnataka Souharda Sahakari Act, 1997. We further note that the assessee has not represented the case before the CIT(Appeals). In the interest of justice, we remit the appeal to the CIT(Appeals) for fresh consideration and decision as per law after reasonable opportunity of being heard to the assessee. The assessee is directed to update its correct email-id and phone number in the departmental portal and respond to the notices issued by the department. The assessee is directed not to seek unnecessary adjournment for early disposal of the case and in case of further default, the assessee shall not be entitled to any leniency.

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