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Facts
The assessee, a co-operative society, filed its return of income for AY 2018-19 claiming deductions under sections 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act. The Assessing Officer completed the assessment accepting the returned income. The PCIT initiated revision proceedings under section 263, holding that interest income from banks was not eligible for deduction under 80P(2)(d) as per the decision in Totagars Co-operative Sale Society. The PCIT directed the AO to deny these deductions.
Held
The Tribunal noted that the PCIT's direction to disallow the entire deduction under 80P(2)(a)(i) and 80P(2)(d) needed modification. It held that if the investments made with SCDCC Bank were out of statutory compulsions under the Karnataka Co-operative Societies Act and relevant Rules, the interest income would be considered 'income from business' and eligible for deduction under 80P(2)(a)(i). The matter was restored to the AO for examination.
Key Issues
Whether interest income earned by a co-operative society from investments made with banks, purportedly due to statutory requirements, is eligible for deduction under Section 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 263, 143(3), 57
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI WASEEM AHMED
Per George George K, Vice President :
This appeal at the instance of the assessee is directed against the Principal Commissioner of Income Tax (PCIT) order dated 07.11.2023, passed under section 263 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.
There is a delay of 38 days in filing this appeal. Assessee has filed a petition for condonation of delay accompanied by an affidavit stating therein the reasons for late filing of this appeal. We have perused the reasons stated in the affidavit for belated filing of this appeal. We are of the view that there is reasonable cause and no latches can be attributed to the assessee for belated filing of this appeal.
ITA No.255/Bang/2024 Page 2 of 10
Hence, we condone the delay of 38 days in filing this appeal and proceed to dispose off the same on merits.
The grounds raised read as follows:
The order of the learned P.C.I.T in so far as it is against the appellant is opposed to law, equity, weight of evidence, probabilities. facts and circumstances of the case. 2. The learned P.C.I.T failed to appreciate that there was no error much less an error prejudicial to the interest of the revenue in the order passed by the learned Assessing Officer warranting revision u/s.263 of the Act and consequently, the order passed by the P.C.I.T. requires to be cancelled. 3. The learned P.C.I.T. is not justified in holding that the order of assessment passed u/s. 143[3] rws 143[3A] & 143[3B] of the Act dated 09/04/2021 was erroneous and prejudicial to the interest of revenue on the ground that the same was not passed in accordance with the decision of the Hon'ble Supreme Court and Jurisdictional High Court of Karnataka prejudicial to the interests of the assessee under the facts and in the circumstances of the appellant's case. 4. The learned P.C.I.T is not justified in law in directing the learned A.O. to deny the deduction u/s 80P[2][a][i] of the Act by holding that the interest income received was not operational income having regard to the decision of the Hon'ble Supreme Court in the case of Totagars Co-operative Sale Society [322 ITR 283] and the decision of the Hon'ble Karnataka High Court in the case of Totagars Co- operative Sale Society [395 ITR 611] under the facts and in the circumstances of the appellant's case. 5. The learned P.C.I.T is not justified in law in directing the learned A.O to deny the claim for deduction u/s 80P[2][d] of the Act to the extent of income earned from co-operative banks which are nothing but co-operative societies in possession of a license from the RBI under the facts and in the circumstances of the appellant's case.
ITA No.255/Bang/2024 Page 3 of 10
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.
Brief facts of the case are as follows:
Assessee is a co-operative society registered under the Karnataka Co- operative Societies Act, 1959. It is engaged in the business of providing credit facilities to its members. For the Assessment Year 2018-19, the return of income was filed on 02.10.2018 declaring total income of Rs.31,800/- after claiming deduction under section 80P(2)(a)(i) of the Act amounting to Rs.26,60,429/- and deduction under section 80P(2)(d) of the Act of Rs.3,55,412/- in respect of dividend income earned from other co-operative societies. The assessment was selected for scrutiny by issuance of notice under section 143(2) of the Act on 22.09.2019. Assessment was completed vide order dated 09.04.2021 under section 143(3) r.w.s. 143(3A) and 143(3B) of the Act accepting the returned income filed by the assessee. Subsequently, notice under section 263 of the Act was issued on 17.10.2023 by the PCIT fixing the hearing on 17.10.2023. The reasons stated for initiating the revisionary proceedings under section 263 of the Act reads as follows:
"On a perusal of the assessment records, it is seen that you have received interest income from various banks including co-operative banks to the tune of Rs.34.69,068/-. As per the provisions of section 80P[2][d] of the Act, deduction u/s.80P is not allowable on income received from banks including co-operative banks. The Hon'ble Karnataka High Court in the case of Totgar's Co-operative Sales Society (ITA No.10066/2016 dated 16.06.2016) has held that the interest earned on deposits with co-operative banks are not eligible for deduction u/s.80P(2)(d) of the Act. The A. O. in his assessment order has not applied the above legal provisions which was binding on him. The AO ought to have disallowed the deduction u/s.80P(2)(d) in respect of interest income arising from banks including co- operative banks".
ITA No.255/Bang/2024 Page 4 of 10
In view of the above facts, the assessment order is erroneous in so far as it is prejudicial to the interests of the revenue. Therefore, it is proposed to pass an appropriate order u/s.263 of the IT Act, 1961 for the Asst. Year 2018-19 in your case".
Assessee, vide its letter dated 06.11.2023, filed objections to the proposed revision under section 263 of the Act. It was submitted that assessee was statutorily required to maintain deposits with SCDCC Bank and thus the interest income earned from these deposits were part of the operational income of the assessee. Therefore, it was contended that assessee society is entitled to deduction under section 80P(2)(a)(i) of the Act. Assessee also placed reliance on several decisions in support of the said proposition that such interest income earned was liable to be assessed under the head “Income from Business”. Assessee also submitted that it is entitled to deduction under section 80P(2)(d) of the Act, in respect of dividend income earned from other co-operative societies. However, the objections raised by the assessee was rejected by the PCIT and the impugned order dated 07.11.2023 was passed. In the said order, it was held that the Assessment Order is erroneous and prejudicial to the interest of the Revenue. The PCIT directed the AO to deny the benefit of deduction under sections 80P(2)(a)(i) and 80P(2)(d) of the Act. The relevant finding of the PCIT reads as follows:
“6. As seen from para 10 of the order of the Karnataka High Court in the case of Totagars Co-operative Society (395 ITR 611), the said assessee was also accepting deposits from its members and provides credit facility to its members in addition to the other activities of marketing of agricultural produce. Even under such circumstances, Hon’ble Supreme Court has held such income as not part of operational income in the decision reported in 322 ITR 283. When the interest so received from co- operative banks is not operational income as held by the Apex Court, deduction u/s.80P(2)(a)(i) cannot be granted on such income. Further, such income from co-operative bank is not eligible for deduction u/s.80P(2(d) in view of the binding decision of the Karnataka High Court in the case of Totagars Co-operative Sales Society reported in 395 1TR 611. Although Authorised Representative of the assessee quoted another
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decision of Karnataka High Court in this issue, the same was rendered in January 2017 i.e., prior to the decision reported in 395 ITR 611. As per the ratio laid down in Govinda Nayak v/s Western Patent Press Company Limited AIR 1980 KAR 92 (FB) the later decision will have more binding force than the earlier one. Considering the above, it is held that the assessee is not eligible for deduction of such income u/s.80P(2)(d) also. Assessing Officer may pass consequential order".
Aggrieved by the Order of the PCIT passed under section 263 of the Act, assessee has filed the present appeal before the Tribunal. Assessee has filed a Paper Book enclosing therein copy of the return filed, copy of the notice issued during the course of scrutiny proceedings, copy of certificate of registration, the extract of bye-laws, reply submitted by the assessee during the course of scrutiny assessment proceedings as well as the revisionary proceedings, case laws relied on, etc. The learned AR submitted that the PCIT is not justified in directing the AO not to grant deduction under section 80P(2)(a)(i) of the Act, as well as deduction under section 80P(2)(d) of the Act. The learned AR submitted that interest income received from SCDCC Bank is part of the operational income of the assessee society and hence it is eligible for deduction under section 80P(2)(a)(i) of the Act. It was submitted that if the amounts are invested in compliance with Karnataka Co-operative Societies Act, the same necessarily needs to be assessed as ‘income from business’ which entails the benefit of deduction under section 80P(2)(a)(i) of the Act. The learned AR further relying on the judgment of Hon’ble Apex Court in the case of Kerala State Co-operative Agricultural Rural Development Vs. AO reported in 458 ITR 384 (SC) stated that assessee is entitled to benefit of deduction under section 80P(2)(d) of the Act. It was further contended that if the interest income is assessed as ‘income from other sources’ and is not granted the benefit of deduction under section 80P(2)(d) of the Act, the assessee ought to be granted deduction of the cost of funds for earning such interest income.
ITA No.255/Bang/2024 Page 6 of 10
The learned DR supported the order of PCIT.
We have heard the rival submissions and perused the material on record. The contention of the assessee before the PCIT during the course of revisionary proceedings was that the interest received from investments with SCDCC Bank is part of the operational income of the assessee and it is eligible for deduction under section 80P(2)(a)(i) of the Act. It was submitted that the said investments were made as per the statutory obligation to maintain the SLR. We find that the AO, during the course of assessment proceedings, had made enquiry about the interest receipt from SCDCC Bank, however, there was no conclusive finding to the effect that the investments with SCDCC Bank are out of statutory compliances under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules to maintain SLR. Since AO has not come to a factual finding that interest received from SCDCC Bank is part of the operational income of the assessee and hence it is eligible for deduction under section 80P(2)(a)(i) of the Act, we are of the view that Assessment Order dated 09.04.2021 is erroneous and prejudicial to the interest of the Revenue.
However, we find that the PCIT in the impugned order passed under section 263 of the Act, had given a categoric direction to the AO not to grant deduction under section 80P(2)(a)(i) of the Act with respect to the aforesaid interest income. The PCIT has also directed the AO not to grant assessee deduction under section 80P(2)(d) of the Act. This direction of the PCIT needs to be modified. If assessee is able to prove that investments with SCDCC Bank are in compliance with the requirement under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, the interest income earned out of such investments would be 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 ITA No.517/Bang/2023 (order dated
ITA No.255/Bang/2024 Page 7 of 10
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
ITA No.255/Bang/2024 Page 8 of 10
consequently, they were part of the business activities of the assessee falling within the scope of section 80P(2)(a)(i). 5. 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. 6. The question is whether we agree with the reasoning in M.P. Co- operative 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. 7. 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.” 9. 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). 10. The Bangalore Bench of the Tribunal in the case of M/s. The Bharathi Co-operative Credit Society Vs. ITO in ITA No.793/Bang/2022 (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:
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“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.” 11. 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 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. 12. In the result, appeal filed by the assessee is allowed for statistical purposes.” 10. In light of the aforesaid order of the Tribunal, the AO is directed to examine whether investment with SCDCC Bank is out of statutory compulsions to maintain the SLR, and if so, to grant deduction under section 80P(2)(a)(i) of the Act. 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
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the head “Income from Other Sources”. For the direction to grant deduction for the cost of funds, we 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).
In the result, appeal filed by the assessee is allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- Sd/- (WASEEM AHMED) (GEORGE GEORGE K) Accountant Member Vice President Bangalore. Dated: 10.05.2024. /NS/*
Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order
Assistant Registrar, ITAT, Bangalore.