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Facts
The assessee, a co-operative society, claimed deduction under Section 80P for interest income earned on deposits with scheduled banks, arguing it was part of their business and derived from compulsory deposits. The AO disallowed this deduction, and the NFAC granted partial relief.
Held
The Tribunal held that if the investments were made compulsorily as per the Karnataka Co-operative Societies Act and Rules, the interest income would be considered business income eligible for deduction under Section 80P(2)(a)(i). If considered 'income from other sources', deductions under Section 57 would be allowable.
Key Issues
Whether interest income from bank deposits made under compulsion as per Co-operative Societies Act is eligible for deduction under Section 80P(2)(a)(i), or if not, whether cost of funds is deductible under Section 57.
Sections Cited
80P(2)(a)(i), 57, 250, 143(2), 142(1), 234-A, 234-B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI SOUNDARARAJAN K.
PER SOUNDARARAJAN K., JUDICIAL MEMBER:
This appeal by assessee is directed against order of NFAC Delhi made u/s 250 of the Income Tax Act, 1961 (in short “The Act”) for the assessment year 2018-19 dated 6.3.2024. The assessee has raised following grounds of appeal: 1. “The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT [A] is not justified in upholding the assessment of interest income to the extent of Rs. 2,00,08,680/- from out of the original addition of Rs. 3,45 90,126/- holding that the interest income earned by the appellant on deposits in banks was not forming part of the business of providing credit facilities to the members of the appellant without appreciating the contentions raised that these deposits were liable for assessment under the head "Business" on account of the fact that the appellant was required to maintained certain statutory reserves and therefore, the said interest income was also entitled to deduction u/s. 80P(2)(a)(i) of the Act under the facts and in the circumstances of the appellant's case.
M/s. Rythara Sevasahakara Sanga N., Bangalore Page 2 of 7
Without prejudice to the above, the learned CIT[A] ought to have appreciated that the appellant was entitled to cost of funds in case the interest income earned on bank deposits was treated as income from other sources under the facts and in the circumstances of the case.
4. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest UIs. 234-A and 234-B of the Act, which under the facts and in the circumstances of the appellant's-case deserves to be cancelled 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
Brief facts of the case are that the assessee is a Co-operative Society registered under the provisions of the Co-operative Societies Act and it lent money to its members for agricultural purposes and also take deposits from its members. In respect of the assessment year 2018-19, the assessee has claimed the income earned by them as eligible for deduction u/s 80P of the Act for the reason that the assessee is a co-operative society registered under the provisions of the Societies Act and therefore, all the incomes earned by the assessee would be eligible for exemption u/s 80P(2)(a)(i) of the Act. The case of the assessee was selected for scrutiny under CASS and after issuing notice u/s 143(2) & 142(1) of the Act, the ld. AO had disallowed the claim of deduction u/s 80P(2)(a)(i) of the Act an income of Rs.3,45,90,126/-. Against the said order of the ld. AO, the assessee filed an appeal before the NFAC. The NFAC also granted partial relief and restricted the disallowance to Rs.2,00,08,680/- after granting a relief of Rs.1,45,81,446/- being the interest income earned from deposits held with Co-operative Banks. Against this, assessee filed appeal before this Tribunal on the ground that interest income earned by the assessee from the deposits made with other scheduled banks are also eligible for exemption since the surplus amounts were deposited in the scheduled banks out of compulsion M/s. Rythara Sevasahakara Sanga N., Bangalore Page 3 of 7 as per the provisions of the Karnataka Co-operative Societies Act and the relevant rules. Therefore, the assessee contended that the compulsory deposits and the consequential interest earned would not be deemed an income from other sources but it is part of the business income of the assessee and eligible for deduction u/s 80P(2)(a)(i) of the Act. 2.1 The ld. A.R. also filed a paper book and a list of citations in which this Tribunal had decided the issue in favour of the assessee and remitted to the file of ld. AO to issue fresh order on the basis of the judgement of Hon’ble Apex Court in the case of Kerala State Co- operative Agricultural Rural Development Vs. AO reported in 458 ITR 384 (SC). The assessee also relied on the following decision of this Tribunal: a) Decision of Bangalore Bench of Tribunal in dated 21.11.2023 in the case of Sri Dodmane Group Gramagala Seva Sahakari Sangha Niyamita Karkimakki Vs. ITO b) Decision of Bangalore Bench of Tribunal in ITA No.1007/Bang/2023 dated 6.2.2024 in the case of M/s. Primary Agricultural Credit Co-operative Society Ltd. Vs. ITO 3. The ld. D.R. relied on the orders of the lower authorities and prayed to dismiss the appeal.
We have heard the rival submissions and perused the materials available on record. The decisions of Bangalore Bench of Tribunal relied on by the assessee in ITA No.751/Bang/2023 dated 21.11.2023 in the case of Sri Dodmane Group Gramagala Seva Sahakari Sangha Niyamita Karkimakki Vs. ITO in which we found that similar issue came up for hearing and the Tribunal decided the issue as follows: 7. I have heard the rival submissions and perused the material on record. The assessee’s claim of deduction under section 80P has been disallowed to the extent of Rs.6,97,062/- for the reason that such interest income is received on investments made with District Co-operative Bank. It is the contention of the assessee that investments in District Co-operative Bank are in compliance with the requirement M/s. Rythara Sevasahakara Sanga N., Bangalore Page 4 of 7 under the Karnataka Co-operative Societies Act and the relevant Rules. Therefore, the interest income is entitled to deduction under section 80P(2)(a)(i) of the Act. On identical factual situation, the Bangalore Bench of the Tribunal in the case of Canara Bank Staff Credit Co-operative Societies Ltd., in (order dated 03.10.2023) had restored the matter to the AO to examine whether the amounts invested with the Co-operative Banks are out of compulsion under the Karnataka Co-operative Societies Act and the relevant Rules. It was further held by the Tribunal that if the investments are out of compulsion under the Act and the relevant Rules, the interest income received out of the investment made under such compulsion would be liable to be taxed as ‘income from business’ which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Bangalore Bench of the Tribunal reads as follows: “7. I have heard the rival submissions and perused the material on record. The interest income is received out of investments made with Apex Co- operative Bank. It is the case of the assessee that the investments are made out of compulsions as per the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. The Hon’ble Apex Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank (supra) had held that when amounts are invested by the Co-operative Societies as per the statutory requirements, the same would be entitled to deduction under section 80P(2)(a)(i) of the Act. The Hon’ble Apex Court considered the following question of law: “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961?”
8. In considering the above question, the Hon’ble Apex Court rendered the following findings:
“4. This judgment was cited before the Bench of two learned Judges which decided the case of the Bangalore District Co-operative Central Bank Ltd. (supra). It was considered as having been rendered on its own facts and not applicable to the case of Bangalore District Co-operative Central Bank Ltd. (supra) in view of the finding of the Tribunal that the income in question was attributable to the business of that assessee. The Court referred to the Banking Regulation Act, the Karnataka Co- operative Societies Act and the Karnataka Co-operative Societies Rules, which showed that the investments that had been made by the assessee were in compliance with the statutory -provisions and in order to carry on the business of banking. They were necessary and consequently, they were part of the business activities of the assessee falling within the scope of section 80P(2)(a)(i).
We do not agree with the finding of the Bench which decided the Bangalore District Co-operative Central Bank Ltd.'s case (supra) that the decision in the case of M.P. Co-operative Bank Ltd. (supra) was rendered on its own facts. The latter decision was clearly a reasoned decision.
M/s. Rythara Sevasahakara Sanga N., Bangalore Page 5 of 7 6. The question is whether we agree with the reasoning in M.P. Cooperative Bank Ltd.'s case (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying the banking business, the income derived therefrom would be income from the assessee’s business. We are unable to take the view that found favour with the Bench that decided the case M.P. Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
In the premises, we take the view that the decision of this Court in the case of M.P. Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee.”
A similar view that has been held by the Hon’ble Andhra Pradesh High Court in the case of CIT-II, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., reported in 336 ITR 516 (AP).
The Bangalore Bench of the Tribunal in the case of M/s. The Bharathi Co- operative Credit Society Vs. ITO in (order dated 28.11.2022) for Assessment Year 2015-16, following its earlier order in the case of M/s. Vasavamba Co-operative Society Ltd., Vs. The PCIT in ITA No.453/Bang/2020 (Order dated 13.08.2021), had rendered a similar finding which reads as follows:
“7.1 In the instant case, it was contended that majority of the interest income is earned out of investments made with Cooperative Banks and is in compliance with the requirement under the Karnataka Co- operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co-operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. Insofar as deduction u/s 80P(2)(d) of the I.T.Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction.”
In light of the aforesaid reasoning and the judicial pronouncements cited supra, we restore this issue to the files of the AO. The AO is directed to examine whether the amounts invested with Apex Co-operative Bank and other banks, are out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is found that the investments are made out of compulsions under M/s. Rythara Sevasahakara Sanga N., Bangalore Page 6 of 7 the Act and the relevant Rules, the interest income received out of the investments made under such compulsions would be liable to be taxed as “business income” which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, we restore the matter to the AO. It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.”
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 (supra). If the assessee is not entitled to benefit of deduction either under section 80P(2)(a)(i) or under section 80P(2)(d) of the Act, the AO shall consider the claim of deduction under section 57 of the Act in respect of the cost of funds for earning such interest income which is assessed as income under the head ‘income from other sources’. For the direction to grant deduction for the cost of funds, I rely on the judgment of the jurisdictional High Court in the case of Totgar’s Co-operative Sales Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka) (judgment dated 25.03.2015).” 4.1 This view has been followed by this Tribunal in dated 6.2.2024 in the case of M/s. Primary Agricultural Credit Co-operative Society Ltd. Vs. ITO. 4.2 In view of the order of the ITAT, which is identical to the facts of the case, we restore the issue of claim of deduction u/s 80P(2)(a)(i) of the Act to the file of the A.O. for de novo consideration. 5. Without prejudice to the above, we make it clear that if the interest earned by assessee from the banks are 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. 6. In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 27th May, 2024