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Facts
The assessee, a cooperative society, claimed deduction under section 80P(2)(a)(i) and 80P(2)(d) for interest income earned on reserve fund investments. The Assessing Officer and CIT(A) denied this deduction, treating the interest income as 'Income from Other Sources'. The assessee contended that the income was derived from statutory investments mandated by the Karnataka Cooperative Societies Act.
Held
The Tribunal restored the issue of deduction under section 80P(2)(a)(i) to the AO for fresh consideration, following the Apex Court's ruling in Mavilayi Service Co-operative Bank Ltd. regarding 'members'. For deduction under section 80P(2)(d), the AO was directed to verify if interest was earned from investments with Cooperative Societies. If so, deduction is allowable. Otherwise, if income is treated as 'Income from Other Sources', relief under section 57 is to be granted.
Key Issues
Whether the interest income earned by the cooperative society on its investments is eligible for deduction under section 80P, and if not, whether expenses incurred to earn such income are deductible under section 57.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 57, 56, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI KESHAV DUBEY
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of NFAC for the assessment year 2020-21 dated 11.3.2024. The assessee has raised following grounds of appeal:
1. The Ld. CIT(A) has erred in upholding the Assessing Officer's order u/s 143(3) which is opposed to the law and facts of the case.
2. The Ld. CIT(A) erred in disallowing the deduction of Rs. 9,23,130/- claimed u/s 80P(2)(a)(i) ignoring submissions made and various court rulings in support of our appeal.
3. The learned CIT[A] failed to appreciate that the appellant was bound by statutory provisions of Karnataka Co- operative Societies Act, 1959 & rules, hence is business income entitled to deduction u/s. 80P(2)(a](i) of the Act. As held in:
The Jamkhandi Taluk School Teacher Co-op Credit Society, Jamkhandi Page 2 of 7 Supreme Court case of Commissioner of Income Tax Vs Nawnshahar Central Cooperative Bank Ltd (2007) 289 ITR 6 (SC) Canara Bank Staff Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore) 517/Bang/2023 4. The Ld. CIT(A) erred in misconceiving the facts of the case to suit his arguments and placed reliance on the judgement of Hon'ble jurisdictional High Court in the case of PCIT Vs. Totagars Co- operative Sales Society reported in 395 ITR 611 (Karn.) even when the facts and circumstances of this case are different from appellants.
Without prejudice to the above, the learned CIT[A] ought to have appreciated that the entire interest income of Rs. 9,23,130/- was alternatively entitled to deduction under section 80P(2)(d) of the Act since the said interest income was derived from co-operative banks as held by recent High court case of Thorapadi Urban Coop Credit Society Vs Income Tax Officer Madaras High Court (2023)
Facts of the case are that the Assessing Officer has brought to tax the Gross Interest earned on Reserve Fund of Rs 9,23,130/- with Bagalkot District Cooperative Bank Ltd as Income from Other Sources and denied the exemption claimed u/s 80P(2) of the Act. The Assessing Officer has misconceived the facts to suit his arguments and applied principle laid down Court rulings-in parts. The Assessing Officer has made the simple issue complex by raising issues on mutuality which the assessee never raised. The facts of the Hon’ble Supreme Court case relied by the Assessing Officer is totally different. Totagars Coop Sale Society Vs Income Tax Officer, Karnataka (2010) 188 Taxman 282 (SC) case facts relate to marketing society retaining funds of members of sale of produce and treating it as liability and investing the same with banks etc. The interest so earned was held to be income from other sources and was brought to tax as Income from Other Sources. Also the Assessing Officer in applying the case of Pr CIT Vs Totagars Cooperative Sale Society (2017) 83 Taxmann.com 140 (Karnataka) failed to give fully effect to the principle laid down there. It was held that if interest on investments was taxable under section 56 of Income Tax Act under Income from Other Sources then deduction has to be allowed u/s 57 The Jamkhandi Taluk School Teacher Co-op Credit Society, Jamkhandi Page 3 of 7 towards proportionate expenses to earn that income. The Assessing Officer has brought to tax the whole of Rs 9,23,132/- being interest on Reserve Fund from BDCC Bank Ltd without allowing proportionate expenses u/s 57 of the Act much against the Totagars. Court order, Assessing Officer is relying. The assessee would like that under the Karnataka Cooperative Societies Act and Rules it is mandated to set aside 25 percent of the profits as reserve funds year on year basis. As per the Section 57(2), 58 read with rules 22 and 23 of the Karnataka Cooperative Act 1959 -each cooperative society shall out of its net profits in any year transfer an amount not being less than twenty-five percent of the profits to the reserve fund. This amount has to be invested in District Cooperative Bank of that District as per the guidelines of Registrar of Cooperative Societies. The assessee is bound by the Act and guidelines made by the authority. As per the Balance Sheet the society, it has Reserve Funds of Rs 1,15,18,962/- against which they have invested Rs.1,06,96,145/- with Bagalkot District Cooperative Bank. They have earned a sum of Rs 9,23,132 on the investment with Bagalkot District Cooperative Bank. These are statutory provisions to be followed by any Cooperative Society registered in Karnataka. The assessee relied on the well settled Supreme Court Case of Commissioner of Income Tax Vs Nawnshahar Central Cooperative Bank Ltd (2007)289 ITR 6 (SC). Earlier 80P(2)(a) deduction was allowed to Cooperative Banks apart from Co-operative Societies-Prior to 2007 amendment to BOP. It was held that statutory provisions are to be followed by the Cooperative Bank and hence interest arising from such investments is attributable to the business of banking under the head Profits and Gains of Business and is deductible under section 80P(2)(a)(i) of the Act. The Assessing Officer has raised issues of mutuality which is never raised by the assessee. Against this assessee went in appeal before NFAC. NFAC once again The Jamkhandi Taluk School Teacher Co-op Credit Society, Jamkhandi Page 4 of 7 confirmed the order of ld. AO. Once again assessee is in appeal before us by way of above grounds.
The main crux of the aforesaid grounds is with regard to the ground relating to deduction claimed under section 80P(2)(a)(i) of the Act and 80P(2)(d) of the Act, which have 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 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 (order dated 31.08.2021) had remanded the issue to the files of the A.O. for de The Jamkhandi Taluk School Teacher Co-op Credit Society, Jamkhandi Page 5 of 7 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).
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.”