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Facts
The appeals concern the deductibility of interest income earned by the assessee, a cooperative society, on investments made in banks and cooperative banks. The assessee claimed deduction under section 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act. The Assessing Officer (AO) denied the deduction, and the Commissioner (Appeals) upheld this denial, treating the interest income as 'income from other sources'.
Held
The Tribunal noted that the Supreme Court in Mavilayi Service Co-operative Bank Ltd. case held that the interpretation of 'member' should consider the respective State Cooperative Societies Act. The Tribunal also referred to the Bangalore Bench's order in M/s. Ravindra Multipurpose Cooperative Society Ltd. case, remanding the issue for de novo consideration by the AO. For interest income from cooperative banks, the AO is directed to verify if the income is from investments in cooperative societies and if so, is eligible for deduction under section 80P(2)(d). If taxed as 'income from other sources', relief under section 57 is to be considered.
Key Issues
Whether interest income earned by a cooperative society from its investments in banks and cooperative banks is eligible for deduction under Section 80P of the Income Tax Act, and if not, whether cost of funds is deductible under Section 57.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 57(iii), 56
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI KESHAV DUBEY
All these appeals by assessee are emanated from different orders of the NFAC for the assessment years 2011-12, 2012-13, 2013-14, 2017-18 are dated 6.1.2024 and for the AY 2018-19 dated 15.1.2024. The issues in all these appeals is common in nature but only varies in figures. Hence, we consider the grounds raised by the assessee in assessment year 2011-12, which reads as follows:
1. The Order of the learned Commissioner passed under section 250 of the Act is opposed to law, equity, weight of evidence, probabilities and the facts and circumstances in the Appellant's case.
2. The Appellant denies to be assessed to tax on total income as determined by the learned AO of Rs. 81,81,055/- as against the total income reported by the Appellant of Rs. 21,000/- on the facts and circumstances of the case.
3. The learned Commissioner of Income-tax (Appeals) erred in applying the ratio of judgement of Karnataka High Court in the case of M/S Totgars Co- to 333/Bang/2024 Basaveshwaranagara Coopera, Bangalore Page 2 of 6 operative Sales Society reported in 83 Taxmann.com 140 for charging interest income as Income from Other Sources which are distinguishable on facts of the Appellant' case: i. The Appellant is a credit co- operative society and not engaged in marketing of agricultural produce; and ii. The Appellant has earned interest from investment of its operational funds used in business of investing and lending to members and not by investing surplus funds in short term deposits.
4. The learned Commissioner of Income-tax (Appeals) erred in applying the principles laid down by the Supreme Court in case of Totgar's Co-Operative Sale Society Ltd. v. ITO [2010] 322 IT R 283 in so far as the interest income earned from Cooperative Banks are not attributable to business operations, hence not eligible for deduction u/s 80P(2)(a)(i) of the Act in the facts and circumstances of the case.
5. The learned Commissioner of Income-tax (Appeals) erred in not considering that investment made in Co-operative Banks is statutorily required under the Karnataka Co-operative Societies Act, 1959; hence it is attributable to carrying on the business of society eligible for deduction u/s 80P(1) of the Act in the facts and circumstances of the case.
The learned Commissioner of Income-tax (Appeals) erred in not considering Karnataka High Count in the case of Tumkur Merchan Souharda Credit Cooperative Ltd. v. Income tax officer Ward-V, Tumkur reported in 120151 55 taxmann.com447 and M/S Honnalli Credit Co-operative Society Ltd dated 31/01/2018 where interest income earned from investment in co-operative Bank by a primary agricultural credit co-operative society is eligible for deduction u/s 80P(1) of the Act in the facts and circumstances of the case.
The learned Commissioner of Income-tax (Appeals) erred in considering interest income earned by the Appellant from investment into Co-operative Banks of Rs. 81,60,055/- as taxable under the head "Other sources" and not "Business income", thus rendering deduction u/s 80P(2)(d) not applicable in the facts and circumstances of the case.
The learned Commissioner of Income-tax (Appeals) failed to appreciate that SCDCC Bank is a co-operative Society which is registered under Karnataka State Co-operative Societies Act, 1959, then it is no a bank per-se governed by RBI, then interest income earned from deposits with SCDCC Bank is eligible for deduction u/s 80P(2)(d) of the Act in the facts and circumstances of the case. 9. Without prejudice, the Appellant is entitled to cost of funds u/s 57 of the Act if interest income is taxed u/s 56 of the Act as "Income from Other Source" in the facts and circumstances of the case.
The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above.
In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.
First, we will take up the grounds relating to section 80P(2)(a)(i) of the Act in all these assessment years. This is the second round of litigation in assessment year 2011-12. Facts as narrated in assessment year 2011-12 on this issue are as follows. 2.1 The assessee claimed deduction on interest received on investment with banks and co-operative banks under section 80P(2)(a)(i) of the Act. Similar is the position in other assessment years, which is as follows: Sl.No. Assessment Interest year received on investment with banks and co- operative banks 1. 2011-12 81,60,055/- 2. 2012-13 1,24,94,050/- 3. 2013-14 1,68,28,561/- 4. 2017-18 2,34,70,800/- 5. 2018-19 2,67,08,210/- 2.2 The same has been denied. Against this assessee is in appeal before us.
We have heard the rival submissions and perused the materials available on record. The Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (123 taxman.com 161) had held that the co-operative societies providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the Act. The Hon’ble Apex Court after considering the judicial pronouncements on the subject, had stated the term “member” has not been defined under the Income-tax Act. It was, therefore, stated by the Hon’ble Apex Court that the term “member” in the respective to 333/Bang/2024 Basaveshwaranagara Coopera, Bangalore Page 4 of 6 State Co-operative Societies Acts under which the societies are registered have to be taken into consideration. The Hon’ble Apex Court held that if nominal / associate member is not prohibited under the said Act, for being taken as a member, the income earned on account of providing credit facilities to such member also qualify for deduction u/s 80P(2)(a)(i) of the Act. It was further held by the Hon’ble Apex Court that section 80P(4) of the I.T. Act is to be read as a proviso. It was stated by the Hon’ble Apex Court that section 80P(4) of the Act now specifically excludes only co-operative banks which are co-operative societies engaged in the business of banking i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. The Hon’ble Apex Court had enunciated various principles in regard to deduction u/s 80P of the Act. On identical factual situation, the Bangalore Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO in ITA No.1262/Bang/2019 (order dated 31.08.2021) had remanded the issue to the files of the A.O. for de novo consideration. The Tribunal directed the A.O. to follow the dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (supra). The relevant finding of the Co-ordinate Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO (supra), reads as follows:-
“6. Grounds 2-4 & additional Ground No.1:
In respect of associate / nominal members, Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC) has held that the expression “Members” is not defined in the Income-tax Act. Hence, it is necessary to construe the expression “Members” in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. In view of this, the facts are to be examined in the light of principles laid down by the Hon’ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (surpa). to 333/Bang/2024 Basaveshwaranagara Coopera, Bangalore Page 5 of 6 Accordingly, we remit this issue of deduction u/s 80P(2)(a)(i) of the Act to the files of Ld.AO to examine the same de novo in the light of the above judgment. Needless to say that proper opportunity of being heard is to be granted to assess in accordance with law.”