SAPTAGIRI PATTINA SOUHARDA SAHAKARI SANGHA NIYAMITHA SINDHANUR,SINDHANUR vs. INCOME TAX OFFICER, WARD-1, RAICHUR, RAICHUR

The ld. AR has filed written synopsis and financial statements. The written synopsis is as under:-

“4) The expression 'profits and gains of business' in section 80P is wider in scope and encompasses not only the income under the head 'Profits and gains of business or profession’ but also other incomes which have some relationship with the business, though not arising directly from the carrying on of the business. Further, the term 'gain' is of wider importance than the word 'profit'. Thus, the expression 'profits and gains' in section 80P(2) also includes other items of income (as covered by 'gains') which have some relationship with the business of banking, even though they do not fall under the head of business income. 5) In the case of credit co-operative societies, generally, they don't carry out any activity except in providing credit facilities to its members and the funds are operational funds. The only fund available with the pure credit societies is deposits from its members and, thus, there are no surplus funds as such other than accumulated profits which also belong to the members. 6) It is further submitted that to meet any eventuality the societies are required to maintain some liquid funds and it is also a fact that there may not be takers for loan always. Therefore, the credit societies invest in fixed deposits till such time a willing borrower is found from amongst the members. Therefore, it may be construed as entire activity of investing in co-operative banks and income arising therefrom is nothing but attributable to business of banking. Therefore, it is submitted that the Phrase 'attributable to' brings within its fold not only the items of income having direct nexus, but also items of income having some commercial or causal connection with the source. 7) The Jurisdictional Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative Limited (55 taxmann.com 447) has distinguished this aspect from the decision of the Honourable Supreme Court in Totgars Co-operative Sale Society Ltd. (55 taxmann.com 447). The relevant portion of the decision is reproduced below: "In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee- Cooperative Society, apart from providing credit facilities 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/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 that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 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 profits 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 the Andhra Pradesh High Court in the case of Commissioner Of Income-Tax ill, Hyderabad Vs. Andhra Pradesh State Cooperative 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 hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue". In the case of the Appellant, the amount which was invested in Co- operative 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 the members. In fact, this amount which is in the nature of profits and gains, was not immediately required by the Appellant for lending money to the members, as there were no takers. The said interest and dividend income from the bank is therefore attributable to carrying on the business and therefore it is eligible to be deducted in terms of Section 80P(2)(a)(i) of the Act. 8) Without prejudice to the above submissions, Section 80P(2)(d) of the Act provides for hundred percent deduction in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, so long as the same forms part of the Gross Total Income. For the purpose of this clause, it is pertinent to refer to Section 2(b1) of the Karnataka Co-operative Societies Act, 1959 wherein a Co-operative bank has been defined as below; 2(b1) "Co-operative Bank" means a Co-operative Society which is doing the business of banking. Explanation.—For the purpose of this clause "banking" shall have the meaning assigned to it in section 5 of the Banking Regulation Act, 1949 (Central Act 10 of 1949).] From the above, it is clear that a co-operative bank is also a co- operative society and interest earned from a co-operative bank is tantamount to receiving interest from a co-operative society that would qualify for deduction under clause (d) of sec 80(P)(2). Further it is also submitted that the co-operative banks essentially continue to be co-operative societies and while 'cooperative societies' is a genus term, the 'co-operative banks' are species thereto. Therefore, such co- operative banks are essentially cooperative societies notwithstanding their engagement in banking business. Consequently, it is claimed that the investment in cooperative banks are to be treated at par with investment in cooperative societies for the purposes of eligibility of deduction under section 80P(2)(d) of the Act. The Hon'ble Bangalore ITAT in the case of The Totgars Co-operative Sate Society Ltd v ACIT in has held that interest income earned by a cooperative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. The Hon'ble Chennai ITAT in the case of Income Tax Officer v M/s Irula Snake Catchers Industrial Co-operative Society Limited [TS- 5808-ITAT-2022(Chennai)-0] held that co-operative banks are first cooperative society and thereafter they are converted into banks. 9) Without prejudice to the above and assuming without admitting that the interest received from co-operative banks is not eligible for claiming deduction u/s 80P(2)(d), it is submitted that the proportionate expense incurred in connection with the interest received ought to have been allowed as a deductible expenditure u/s 57. An identical claim was made before Hon'ble Supreme Court in the case reported as Totgars Co-operative Sale Society Ltd. Vs. ITO (2010) 188 taxmann.com 282 and the Hon'ble Supreme Court, had restored the question raised by the Assessee to the file of Hon'ble High Court of Karnataka. Consequent thereto, the Hon'ble High Court of Karnataka has passed the order in the case reported in 58 taxmann.com 35 and held that the Tribunal was not right in coming to the conclusion that the interest earned by the Assessee is an income from other sources without allowing deduction in respect of proportionate cost, administrative expenses incurred in respect of such deposits. Accordingly, it is prayed that deduction of proportionate cost, administrative and other expenses be allowed if the interest income earned from bank deposits is assessed as income under the head "other sources". For these and such other grounds that may be adduced or removed in time to time, it is requested that the Hon'ble Income Tax Appellate Tribunal may be pleased to examine the case in the light of justice and allow deduction u/s 80P of the Act.”

The ld. DR relied on the orders of lower authorities and he submitted that the interest income received by the assessee is not to be considered as a business income, 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 which is a later judgement. He also submitted that the status of the payer of interest also should be seen whether it is co-operative bank or co-operative society. He relied on the judgment of Hon’ble Apex Court in case of Kerala State Co- operative Agricultural and Rural Development Bank Ltd. (KSCARDB) vs. The Assessing Officer, Trivandrum & Ors. reported in (2023) 154 taxmann.com 305 (Supreme Court). He further submitted that the interest received from Co-operative bank is also not eligible for deduction u/s 80P(2)(d) of the Act because it was received from the co-operative bank which is carrying banking business .

Considering the rival submissions, we note that here the issue is that whether the assessee is eligible to claim of deduction u/s. 80P(2)(a)(i) or 80P(2)(d) on the interest income earned on its investments amount made with 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 subsequent decision of ITAT Bangalore including in the case of M/s.Vasavamba Co-operative Society Ltd. (ITA No.453/Bang/2020 (order dated 13.08.2021) had held that the assessee is not entitled to deduction u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the I.T. Act with regard to the interest income earned from investments made with cooperative banks. As per written synopsis noted above the ld. AR submitted that in fact, this amount which is in the nature of profits and gains, was not immediately required by the Appellant for lending money to the members, as there were no takers. The said interest and dividend income from the bank is therefore attributable to carrying on the business and therefore it is eligible to be deducted in terms of Section 80P(2)(a)(i) of the Act. Further, the assessee submitted that the investments were made in co-operative banks which are co-operative society. Therefore the interest received on such investments are to be allowed for deduction u/s. 80P(2)(d). The amount was kept idle because there was no takers and amount was invested into the bank for earning interest. Here the assessee’s motive is to earn interest income on such idle fund. Therefore, the interest income received on such investments from co-operative bank is not attributable to main business of the appellant, hence needs to be assessed as ‘income from other sources”. The issue regarding the word “attributable” has been discussed elaborately by the Hon’ble Apex Court in the case of M/s Totgar’s Co-operative Sales Society (2010) reported in [2010] 188 Taxman 282 (SC) where it is held by the Hon’ble Supreme Court that the deduction u/s 80P(2)(a)(i) is available only to the income which is attributable to the business operation. Since the interest income received by the appellant was not attributable to the main business of the appellant the same should not be allowed as deduction u/s 80P(2)(a)(i) of the Act.

We note from the submissions of the ld. AR that the assessee has invested its fund in co-operative banks and earned interest thereon. 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 income. However we note that the assessee has received interest from co- operative bank but it is not clear whether the interest payer 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, 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 cooperative 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 remitted back to the Ld.AO.

We further note that the assessee has received interest from other co-operative bank on its investments. In this regard, the Ld.CIT(A) has not given benefit of deduction u/s. 80P(2)(d) as per the judgment of the Jurisdictional High Court reported in 395 ITR 611. The revenue authorities have considered the entire interest as income from other sources u/s. 56 and no cost of expenses u/s. 57 has been allowed to the assessee. 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 entire interest income. Reliance is also placed 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.

In the result, both the appeals of the assessee are partly allowed for statistical purposes.

A copy of the common order be placed in respective case files.