M/S. SHIMOGA DAVANGERE CHITRADURGA DIST. CO-OP MILK PRODUCERS SOC UNION LIMITED,SHIVAMOGGA vs. INCOME TAX OFFICE, WARD-1 & TPS, SHIMOGA

The brief facts of the case are that the assessee filed return of income on 18/09/2018 declaring a total income of Rs.2,81,62,780/-. Subsequently, the case was selected for scrutiny and statutory notices were issued to the assessee. The assessee filed details and from the details filed, it was noticed that the assessee claimed deduction of Rs.49,49,178/- u/s 80P(a)(d) of Rs.50,000/- u/s 80P(2)(c)(iii) of the Act. In this regard, the assessee submitted that the assessee is a co-operative society and eligible for deduction u/s 80P of the Act relating to interest and dividends derived from co-operative society from its investments with other co-operative society and the whole of such income is eligible for deduction u/s 80P(2)(d) of the Act. The assessee offered for tax on the income derived from banking company. From the detailed submission, the AO noted that the assessee received interest and dividend as under:-

The AO did not allow the deduction u/s 8P)(2)(d) of the Act following the judgment of Hon’ble Apex Court in the case of Totgars Co-operative Sales Society Vs. ITO reported in 322 ITR 283 (SC) and held that interest received from scheduled bank or government bank is assessable under the head ‘income from other sources’ and he also relied on the judgment of Hon’ble jurisdictional High Court in the case of CIT Vs. Totgars Co-operative Sale Society reported in 395 ITR 611 (Kar) and the entire amount of Rs.49,49,178/- was disallowed. The AO also disallowed u/s 30 of the Act towards service tax refund expenses of Rs.19,47,919/-. Accordingly, the income was assessed at Rs.3,50,59,877/-.

Aggrieved from the above order, the assessee filed appeal before the CIT(A).

From the details submitted by the assessee during the appellate proceedings, the ld. CIT(A) noted that the assessee has received interest from various co-operative bank of Rs.36,32,278/- and relying on the judgment of Hon’ble Apex Court disallowed Rs.36,32,278/-. The other issues raised by the assessee were allowed. Accordingly, the ld. CIT(A) partly allowed the appeal of the assessee.

Being aggrieved from the above order, the assessee filed appeal before us.

The ld. AR reiterated submissions made before the lower authorities and submitted that assessee is eligible for deduction u/s 80P(2)(d). He submitted that interest income received on assessee’s investments to another co- operative society are 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). He further submitted that the ld. CIT(A) has not considered the judgment in the case of Tumkur Grain Merchants Souharda Credit Co-op. Ltd. reported in 55 taxmann.com 447 and the ITAT decision in Totgars Co-operative Sale Society in to 379/Bang/2023 wherein interest income earned from investment in co-operative bank by multipurpose co-operative society is held eligible for deduction u/s. 80P(2)(d) of the Act. He further submitted that the ld. CIT(A) has wrongly applied the judgment of Hon’ble Apex Cout in the case of Totgars Co-operative Sale Society [2010] 322 ITR 283 and not considered that investment in co-operative bank is a statutory requirement under Karnataka Co-operative Societies Act, 1959. Even the assessee has not been granted deduction u/s. 80P(2)(d). 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.

The Ld. DR relied on the order of the Ld.CIT(A) and he submitted that the interest income received by the assessee is to be considered as Income from other source, 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. He further 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.

Considering the rival submissions, we note that the assessee is registered under Karnataka Co-operative Society Act 1959. During the course of assessment proceedings, the AO asked to submit details as per notice u/s 142(1) and the AO noted that the assessee has received interest from Co-operative Bank, therefore the deduction was denied u/s 80P(2)(d). 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 Apex Court (supra). We note from the submissions of the ld. AR that the assessee has invested in District central Co-operative Banks as noted above 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 received. 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. The assessee has 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. The Section 80P(2)(d) describes that if the assessee has received interest/dividend from the co- operative society, then the assessee is eligible for claim of deduction on such interest/dividend, however we note that the assessee has received interest from co-operative bank but 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. In addition, 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. (supra) in which 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 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. If AO finds that the co-operative banks are 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.

We further note that the assessee has received interest from other co-operative 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 banks and no expenses u/s. 57(iii) has been allowed to the assessee for earning of such income. While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. 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. Reliance is also placed on the judgment of Co-ordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souharda 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 entire interest income.

The other grounds are consequential in nature.

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