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Income Tax Appellate Tribunal, A BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI CHANDRA POOJARI
Common issues are raised in these appeals; hence, they were heard together and are disposed off by this consolidated order. Identical grounds are raised for both the Assessment Years except for variation in figures. The grounds raised for Assessment Year 2017-18 reads as follows:
Was C.I.T. (A) justified in upholding the addition for interest on investments derived from S.C.D.C.C. Bank and P.L.D. Bank (Primary Co-op. Agriculture & Rural Development Bank) as per Para 6.4 of the impugned order to deny the benefit of exemption u/s. 80P of the Act to appellant to the extent of deduction claimed in the ITR being Rs. 14,27,029/-.
2. Whether in law and on facts, the impugned order is sustainable in holding that Interest on Investments derived by the appellant from S.C.D.C.C. Bank and P.L.D. Bank is taxable in view of the judgements rendered by — (a) Hon. High Court of Judicature at Hyderabad in W.P. No. 12727 and 12767/2016 The Vavveru Co-op. Rural Bank Ltd. and Anr. Vs. The Chief C.I.T. & anr. vis-a-vis the judgement in Totgars Co-operative Sale Society Ltd.; (b) Hon. High Court of Kerala dated 01-11-2021 in - Principal Commissioner of Income tax, Thiruvananthapuram vs. Vilappil Service Co-operative Bank Ltd, Peyad.; and (c) Hon. High Court of Bombay dated 07-05-2021 in — The Pr. Commissioner of Income Tax vs. The Quepem Urban Co-operative Credit Society Ltd. & Ors. [2021] 128 taxman.com 41 (Bombay) — all involving identical issue.
3. The case of the appellant is squarely covered by the judgement of this Hon. Tribunal in dated 18-07-2023 in The Totgars' Co-operative Sale Society Ltd. Sirsi Vs. ACIT, Hubli and in ITA No.685/Bang/2023 dated 14-12-2023 in Raythara Sahakari Sangha Ltd. Hiriadka vs. ITO, Ward —1, Udupi.
Brief facts of the case are as follows:
Assessee is a primary agricultural 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 as per its Bye Laws. Assessee for Assessment Years 2017-18 and 2020-21 had earned interest income from its investments with Scheduled Banks and Co-operative Banks. The AO passed the Assessment Orders by denying the claim of deduction under section 80P of the Act for the interest income earned from Scheduled Banks and Co-operative Banks. The AO held that assessee is not entitled to deduction under section 80P(2)(a)(i) of the Act or under section 80P(2)(d) of the Act. In support of the view taken by the AO, reliance was placed on the judgment of the Hon’ble Apex Court in the case of Totgar’s Co-operative Sales Society Ltd., Vs. ITO reported in (2010) 322 ITR 283 and on the judgment of the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars Sales Society reported in 395 ITR 611 (Karnataka).
Aggrieved by the part disallowance of claim of deduction under section 80P of the Act, assessee filed appeals before the First Appellate Authority (FAA) for Assessment Years 2017-18 and 2020-21. Before the FAA, it was contended that assessee as per section 28 of the Karnataka Co-operative Societies Rules, was required mandatorily to keep 28% of deposit in statutory liquidity funds and hence these investments in the Co-operative Banks are integral part of its business activity of providing credit facilities to its members. Therefore, it was contended that assessee is eligible for deduction under section 80P(2)(a)(i) of the Act. Assessee also contended before CIT(A) that it is entitled to deduction under section 80P(2)(d) of the Act. In this context, learned AR relied on the judgment of the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars Sales Society Ltd., reported in 392 ITR 74. The CIT(A), however, followed the dictum laid down by the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars Sales Society reported in 395 ITR 611 (Karnataka). The relevant finding of the CIT(A) for Assessment Year 2017-18 reads as follows:
“6.4 Though it is admitted that this issue has been subject matter of substantial litigation till date and various Tribunals and Courts have given contrary judgments as to whether interest income earned from investments of surplus funds with banks etc. is 'attributable to' the business activity of providing credit facility to members or not and whether co-operative banks are or are not to be treated as co-operative societies for the purpose of section 80P(2)(d), however, the above discussed judgment, being the latest judgment of the Hon'ble jurisdictional High Court on the issue involved sets a binding precedent to be followed in the instant case. In view thereof, other case laws to the contrary relied upon by the appellant are not applicable to the instant case. Thus, respectfully following the aforesaid binding judgement of the Hon'ble jurisdictional High Court on the issue on similar facts & circumstances, I hereby hold that the interest/dividend of Rs. 30,24,844/- earned by the appellant society from scheduled banks and Co-op Bank other than co-op society is to be assessed u/s 56 under the head 'Income from Other Sources' as rightly done by the Assessing Officer in the impugned assessment order. Further, the appellant is also held to be ineligible for deduction u/s 80P(2)(d) of the Act in respect of the interest/dividend income of Rs. 30,24,844/- earned during the year under consideration. Consequently, this ground of appeal is allowed.”
5. Aggrieved by the order of the CIT(A) for Assessment Years 2017-18 and 2020-21, assessee has filed the present appeal before the Tribunal. The learned AR reiterated the submissions made before the Income Tax authorities.
6. The learned Standing Counsel supported the orders of the AO and the CIT(A).
We have heard the rival submissions and perused the material on record. The later decision of the Hon’ble High Court in the case of PCIT Vs. Totgars Sales Society reported in 395 ITR 611 (Karnataka) had categorically held that the interest income received from Co-operative Banks is to be assessed as ‘Income from Other Sources’ under section 56 of the Act. The Hon’ble jurisdictional High Court had held that the interest income is not entitled to deduction under section 80P(2)(d) of the Act. The Hon’ble jurisdictional High Court had considered the judicial precedence of the subject and rendered the above finding. However, it is the contention of the assessee that investments are in compliance with the requirement under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, the interest income is entitled to deduction under section 80P(2)(a)(i) of the Act. On identical facts, the Bangalore Bench of the Tribunal in the case of Canara Bank Staff Credit Co-operative Societies Ltd., in (order dated 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?
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 consequently, they were part of the business activities of the assessee falling within the scope of section 80P(2)(a)(i).
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.
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).
The Bangalore Bench of the Tribunal in the case of M/s. The Bharathi Co-operative Credit Society Vs. ITO in (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: “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.” 8. 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 reported in 458 ITR 384 (SC). It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.