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Facts
The assessee, a co-operative society, claimed deduction under Section 80P(2)(a)(i) of the Income Tax Act for Assessment Years 2017-18, 2018-19, and 2020-21. The Assessing Officer (AO) denied this deduction, stating the society dealt with nominal/associate members and violated the principle of mutuality. The CIT(A) upheld the AO's decision.
Held
The Tribunal held that the AO and CIT(A) did not consider the latest judgment of the Apex Court in Mavilayi Service Co-operative Bank Ltd. The Tribunal restored the matter to the AO to examine dealings with non-members and allow proportionate deduction. For ground No.4 and 5 regarding interest income from co-operative banks, the matter was also restored to the AO for re-examination based on the wording of Section 80P(2)(d) and the Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. case. For ground No.7, concerning cost of funds for interest income assessed under 'other sources', the matter was restored to the AO to calculate and allow deduction under Section 57(3) based on the Totgars Co-operative Sale Society Ltd. judgment.
Key Issues
Whether the assessee co-operative society is eligible for deduction under Section 80P(2)(a)(i) despite dealing with associate members, and whether interest income from co-operative banks and deposits is eligible for deduction under Section 80P(2)(d) or 56/57.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 56, 57(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI WASEEM AHMED
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA Nos.547, 548, 599/Bang/2024 Assessment Years : 2017-18, 2018-19, 2020-21 M/s. Shree Cheerumba Credit Co- Vs. ITO, operative Society Ltd., Ward – 2(1), Shop No.102, 1st Floor, Sahakari Mangaluru. Sadana, Rao and Rao Circle, Mission Street, Mangaluru – 575 001. PAN : AAAAC 1985 B APPELLANT RESPONDENT Assessee by : Shri Sriram V. Rao, CA Revenue by : Shri. Subramanian S, JCIT(DR)(ITAT), Bengaluru. Date of hearing : 16.05.2024 Date of Pronouncement : 17.05.2024 O R D E R Per George George K, Vice President : These appeals at the instance of the assessee are directed against three Orders of CIT(A) (for Assessment Years 2017-18, 2018-19 the CIT(A)’s order are dated 24.01.2024 and for Assessment Year 2020-21, the CIT(A)’s order is dated 31.01.2024) passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Years are 2017-18, 2018-19, 2020-21.
Common issues are raised in these appeals; hence, they were heard together and are disposed off by this consolidated order.
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Brief facts of the case are as follows:
Assessee is a co-operative society registered under the Karnataka Cooperative Societies Act, 1959. For the Assessment Years 2017-18, 2018-19 and 2020-21, assessee filed return of income claiming deduction under section 80P(2)(a)(i) of the Act. Assessments were completed under section 143(3) of the Act for Assessment Years 2017-18, 2018-19 and 2020-21 vide orders dated 26.12.2019, 17.03.2021 and 23.09.2022 respectively. In the said Assessment Orders, the claim of deduction under section 80P(2)(a)(i) of the Act was denied. The reason for the denial of claim of deduction under section 80P of the Act was that assessee had violated the principles of mutuality, since it was dealing with nominal / associate members and not regular members. Further, it was held by the AO that the interest income received from the co-operative banks / scheduled banks cannot be brought to tax under the head “Income from Business / Profession” and it should be treated as “Income from Other Sources”. Therefore, the AO for the aforesaid Assessment Years denied the claim of deduction under section 80P of the Act.
Aggrieved by the Assessment Orders passed for Assessment Years 2017-18, 2018-19 and 2020-21, assessee filed appeals before the CIT(A). The CIT(A) dismissed the appeals of the assessee vide the impugned orders dated 24.01.2024 for the Assessment Years 2017-18, 2018-19 and dated 31.01.2024 for the Assessment Year 2020-21. The CIT(A) held that (i) the assessee society having nominal / associate members and providing credit facilities to such members is not eligible for deduction under section 80P(2)(a)(i) of the Act. (ii) Income from deposits with central co- operative banks is not eligible for deduction under sections 80P(2)(a)(i) or
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80P(2)(d) of the Act. Assessee also was not allowed deduction under section 57(iii) of the Act towards the cost of funds even though the prayer was made in the appeal.
Aggrieved by the Orders of the CIT(A), assessee has filed the present appeals before the Tribunal. Assessee has filed three separate Paper Books for each of the impugned Assessment Years enclosing therein the grounds of appeal before the ITAT and the CIT(A), the impugned orders of the AO and the CIT(A), challan evidencing payment of appeal fees, etc. The assessee has also filed brief written submissions and the case laws relied on.
Assessee has raised identical grounds in all three appeals. The grounds 1, 8 and 9 are general in nature and no specific adjudication is called for; hence, the above grounds are not adjudicated. The surviving grounds viz., grounds 2 to 7 are adjudicated as under:
Grounds 2 and 3
That the learned CIT(A) has erred on facts and in circumstances of the case and in law by confirming the Assessment order passed by the learned Assessing Officer who has held that the Appellant is not eligible for deduction even u/s 80P(2)(a)(i) of the Act as it is not a pure co-operative society due to restricted rights of its members. 3. That the learned CIT(A) has erred on facts and in circumstances of the case and in law in overlooking the Hon'ble Supreme Court judgment in the case of Malavayi Service Co- operative bank Ltd vs CIT, which is squarly applicable to the Applicant's case.
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In the above grounds, assessee has raised the contention that CIT(A) is not justified in not granting deduction under section 80P(2)(a)(i) of the Act. The reason stated by the AO and the CIT(A) for denying the claim under section 80P(2)(a)(i) of the Act is that assessee was dealing with nominal / associate members who are not regular members of assessee society and has violated the principles of mutuality. In this context, the learned AO and the CIT(A) had relied on the judgment of the Hon’ble Apex Court in the case of Citizen Co-operative Society Ltd., Vs. ACIT reported in (2017) 397 ITR 1. The Learned AR, by referring to the latest judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co- operative Bank Ltd., & Ors. Vs. CIT reported in 431 ITR 1 submitted that there is no prohibition under the Karnataka Co-operative Societies Act, 1959, for admission of nominal / associate members. Hence, it was contended that assessee is entitled to deduction under section 80P(2)(a)(i) of the Act, in providing credit facilities to its associate / nominal members.
The learned DR supported the orders of the AO and the CIT(A).
We have heard the rival submissions and perused the material on record. In respect of associate / nominal members, the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra) had held that the expression “members” is not defined under the Income Tax Act, 1961. Hence, it is necessary to construe the expression “members” in section 80P(2)(a)(i) of the Act light of the definition of the expression as contained in the concerned Co-operative Societies Act under which the assessee is constituted. Both the AO and the CIT(A) has not considered the latest judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs.
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CIT (supra) in correct perspective. Even assuming that assessee is dealing with non-members, only to such extent there shall be a denial of deduction under section 80P(2)(a)(i) of the Act. Since AO and CIT(A) have not considered the dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra), we deem it appropriate to restore the matter to the AO. The AO is directed to examine whether assessee has been dealing with non-members, and if so, only to that extent there shall be denial of deduction under section 80P(2)(a)(i) of the Act. In other words, assessee would be entitled to proportionate deduction in respect of its dealing with members. It is ordered accordingly. Hence, ground Nos. 2 and 3 are allowed for statistical purposes.
Ground No.4
That the learned CIT(A) has erred on facts and in circumstances of the case and in law by confirming the Assessment order passed by the learned Assessing Officer who has held that the interest received by the Appellant from co-operative banks is not eligible for deduction u/s 80P(2)(d) of the Act.
By raising the above ground, the learned AR contends that interest received by the assessee from a co-operative society ought to be allowed as a deduction under section 80P(2)(d) of the Act. It was submitted that while filing the return of income, assessee had claimed the entire interest receipts from scheduled bank, central co-operative bank and co-operative societies as “Income from Business / profession” and claimed deduction under section 80P(2)(a)(i) of the Act. It was stated that the AO had aggregated the aforesaid interest receipts and has not granted deduction under section
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80P(2)(d) of the Act even in respect of interest income received from co-operative societies.
The learned DR was duly heard.
We have heard the rival submissions and perused the material on record. The wording of section 80P(2)(d) of the Act is very clear. If the assessee co-operative society is in receipt of interest from investments with another co-operative society, the same is eligible for deduction under section 80P(2)(d) of the Act. It is a claim of the assessee that the entire interest receipts received from scheduled bank, central co-operative bank and co-operative societies has been aggregated by the AO and has denied the benefit the deduction under section 80P of the Act. In light of the clear wording of section 80P(2)(d) of the Act, the issue raised in ground No.4 needs to be re-examined by the AO. The assessee is directed to furnish the bifurcation of the interest receipts and necessary details before the AO. The AO shall examine the claim of the assessee and shall grant deduction under section 80P(2)(d) of the Act in respect of interest income received from co-operative societies. It is ordered accordingly.
Ground No.5
That the learned CIT(A) has erred on facts and in circumstances of the case and in law by confirming the disallowance of deduction u/s 80P(2)(d) of the Act on the interest income earned from other co-operative banks, as the definition co-operative society includes co-operative banks as well.
In the above ground, the learned AR submits that the interest received by the co-operative bank is also to be treated as receipts from
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co-operative society for the benefit of deduction under section 80P(2)(d) of the Act. In this context, the learned AR relied on the latest judgment of the Hon’ble Apex Court in the case of Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. Vs. Assessing Officer reported in (2023) 458 ITR 384 (SC).
The learned DR supported the orders of the AO and the CIT(A).
We have heard the rival submissions and perused the material on record. The Hon’ble Apex Court in the case of Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. Vs. Assessing Officer (supra) had held that although the assessee society in that case is an apex co-operative society within the meaning of State Act, 1985, it is not a co- operative bank within the meaning of section 5(b) r.w.s. 56 of the RBI Act, 1949. It was concluded by the Hon’ble Apex Court that if a co-operative bank does not have a banking licence under the RBI Act, the said co-operative bank would be entitled to deduction under section 80P of the Act. In other words, certain categories of co-operative banks which does not have RBI licence to do a banking business would in essence be a co-operative society. Hence, any interest income received from such co-operative banks should also be entitled to deduction under section 80P(2)(d) of the Act. Therefore, with the aforesaid observation, the matter is restored to the files of the AO.
In the result, ground No.5 is allowed for statistical purposes.
Ground No.6
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Under the facts and circumstances of the case, even in case the deduction u/s 80P(2)(d) of the Act is disallowed, the Appellant must be eligible to claim deduction in respect of interest earned on compulsory deposit with co-operative banks which is a statutory requirement. 17. In the above ground, the assessee has raised a contention that some investments are made with the central co-operative bank as per the compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was submitted that the interest income has to be assessed under the head “Income from Business / Profession” which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. In this context, the learned AR relied on the Orders of the Bangalore Bench of the Tribunal in the case of S. K. Goldmiths Industrial Co-operative Society Ltd., in ITA No.771/Bang/2023 (order dated 12.12.2023) and M/s. Kachur Credit Co-operative Societies Ltd., Vs. ITO in ITA No.478/Bang/2023 (Order dated 26.09.2023).
The learned DR was duly heard.
We have heard the rival submissions and perused the material on record. The contentions of the learned AR are that investments are made with Central Co-operative Bank and is in compulsion with the requirements under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was submitted that such interest income received on investments made under compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, is entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. We find that this issue was considered by the Bangalore Bench of the Tribunal in the case of M/s. Kachur Credit Co-operative Societies Ltd., Vs. ITO (supra). The
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Bangalore Bench of the Tribunal had followed its earlier orders. The relevant finding of the Bangalore Bench of the Tribunal reads as follows:
“8. I have heard the rival submissions and perused the material on record. The solitary issue for adjudication is whether a sum of Rs.5,07,822/- can be allowed as a deduction under sections 80P(2)(a)(i) of the Act. Admittedly, the amount of Rs.5,07,822/- has been received by the assessee from South Canara District Central Co- operative Bank Ltd. It is the claim of the assessee that the amounts are invested in compliance with the relevant Acts and Rules. On identical facts, the Bangalore Bench of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) by following the Co-ordinate Bench’s order in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT in ITA No.453/Bang/2020 (order dated 13.08.2021) had stated that if the investments made with the Central Co-operative Bank is out of compulsions under Karnataka State Co- operative Societies Act, 1959 and Rules, the income received from such investments would be entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) 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 co- operative societies is to be allowed as deduction.” 9. In view of the above order of the Tribunal, I restore the issue to the files of the AO to examine whether interest income received amounting to Rs.5,07,822/- from South Canara District Central Co- operative Bank Ltd., is out of compulsions and in compliance with the Karnataka State Co-operative Societies Act, 1959 and the relevant Rules. If it is so, the same interest income is to be assessed as income from business which would entail the benefit of deduction under
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section 80P(2)(a)(i) of the Act. With the aforesaid observation, I restore the matter to the AO. It is ordered accordingly.”
In light of the above orders of the Tribunal, we direct the AO to examine whether the interest income received on investments with central co-operative banks is out of compulsion compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If so, the same may be considered as “business income” and entitled to deduction under section 80P(2)(a)(i) of the Act. In other words, if the assessee society does not comply with the relevant provisions of the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, it cannot carry its co-operative activities viz., carrying on the business of banking of providing credit facilities to its members. Therefore, if the investments are out of compulsions under the relevant Rules, necessarily it forms part of assessee’s business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. For the aforesaid examination of the matter, the issue raised in ground No.6 is restored to the files of the AO. It is ordered accordingly.
In the result, ground 6 is allowed for statistical purposes.
Ground No.7
Alternatively, even in case the interest earned on deposits with co- operative banks is taxed u/s 56 of the Act under 'income from other sources', the Appellant must be eligible to claim deduction u/s 57(iii) of the Act in respect of cost of funds and proportionate administrative and other expenses.
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In the above ground, assessee contends that it is entitled to cost of funds with respect to interest income that is assessed as “Income from Other Sources”. We find that this contention of the assessee is covered by the Order of the Bangalore Bench of the Tribunal in the case of M/s. Deepa Credit Co-operative Society Ltd., Vs. ITO in ITA No.750/Bang/2023 (order dated 07.12.2023). The Bangalore Bench of the Tribunal had followed the dictum laid down by the Hon’ble jurisdictional High Court in the case of Totgars Co-operative Sale Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka). The relevant finding of the Bangalore Bench of the Tribunal in the case of M/s. Deepa Credit Co- operative Society Ltd., Vs. ITO (supra) reads as follows:
“6. I have heard the rival submissions and perused the material on record. Assessee had earned interest income of Rs.18,48,817/- on account of investments with co-operative banks / scheduled banks. The limited prayer of the assessee before the Tribunal is to allow the interest cost as a deduction under section 57 of the Act for earning interest income which is to be assessed under the head ‘income from other sources’. The Hon’ble Karnataka High Court in the case of Totgars Co-operative Sale Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka) had categorically held that where an assessee, a co-operative society, earns interest on deposits kept with scheduled banks; only the net interest income can be taxed under section 56 of the Act (i.e., the interest income reduced by the administrative expenses and other proportionate expenses to earn the said income). 7. The relevant find of the Hon’ble jurisdictional High Court reads as follows: “11. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as "other income" falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund
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i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from "other sources", the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. 12. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits. In the result, we pass the following: ORDER (i) Appeals are allowed in part. (ii) Order of the Tribunal in disallowing deduction in respect of cost of funds and proportionate administrative and other expenditure in respect of funds placed in deposit is set aside. (iii) All other contentions urged by the parties are kept open. (iv) Matter is remanded to the adjudicating authority for quantification of the cost incurred by the appellant and deduction thereof under Section 57(3) of the Act and to pass orders in accordance with law. (v)Ordered accordingly.” 8. In view of the aforesaid judgment of the Hon’ble High Court, we restore the matter to the AO. The AO is directed to calculate the cost of funds for earning the interest income which has to be assessed under section 56 of the Act and allow the same as deduction under section 57 of the Act. It is ordered accordingly.”
In light of the aforesaid judicial pronouncement cited supra, we restore the matter to the AO. The AO is directed to follow the dictum laid
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down in the judicial pronouncement cited supra and take a decision in accordance with law. The AO is directed to afford a reasonable opportunity of hearing to the assessee before a decision is taken in the matter. It is ordered accordingly.
Therefore, ground No.7 is allowed for statistical purposes.
In the result, appeals filed by the assessee are allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (WASEEM AHMED) (GEORGE GEORGE K) Accountant Member Vice President Bangalore, Dated : 17.05.2024. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.