M/S THE TOTGARS CO-OPERATIVE SALE SOCIETY LTD., vs. THE INCOME TAX OFFICER

: 1 : IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 25TH DAY OF MARCH, 2015 PRESENT THE HON’BLE MR.JUSTICE B.S.PATIL AND THE HON’BLE MR.JUSTICE P.S.DINESH KUMAR I.T.A. NO.1568/2005 C/W I.T.A. NOS.1569, 1570, 1571, 1572, 1573, 1574 & 1575 OF 2005 IN I.T.A. NO.1568/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS, S/O SHRIDHAR HEGDE. ... APPELLANT (BY SRI. A SHANKAR, SRI. M.LAVA & SRI. S.S.HEGDE, ADVS.) AND THE INCOME TAX OFFICER WARD –1, SIRSI - 581 402 ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1460/BNG/2003 FOR THE ASSESSMENT YEAR 1991-92 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND

: 2 : SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1460/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1991-92 ETC. IN I.T.A. NO.1569/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD., NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS, S/O SHRIDHAR HEGDE. ... APPELLANT (BY SRI. A SHANKAR & SRI. S.S.HEGDE, ADVS.) AND THE INCOME TAX OFFICER WARD I, SIRSI 581 402. ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1461/BAG/2003 FOR THE ASSESSMENT YEAR 1992-93 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1461/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1992-93 ETC. IN I.T.A. NO.1570/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD., NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS, S/O SHRIDHAR HEGDE. ... APPELLANT

: 3 : (BY SRI. A SHANKAR, ADV.) AND THE INCOME TAX OFFICER WARD-1, SIRSI - 581 402 ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1462/BNG/2003 FOR THE ASSESSMENT YEAR 1993-94 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1462/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1993-94 ETC. IN I.T.A. NO.1571/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD., NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS, S/O SHRIDHAR HEGDE. ... APPELLANT (BY SRI. A SHANKAR & SRI.S.S.HEGDE, ADVS.) AND THE INCOME TAX OFFICER WARD-I SIRSI 581 402 ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1464/BNG/2003 FOR THE ASSESSMENT YEAR 1996-97 PRAYING THAT THIS HON'BLE COURT MAY BE

: 4 : PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1464/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1996-97 ETC. IN I.T.A. NO.1572/2005: BETWEEN M/S THE TOTGARS’ CO-OP SALE SOCIETY LTD NEW MARKET YARD, SIRSI 581 402 REP BY GEN MANAGER PRAKASH HEGDE AGED ABOUT 33 YEARS S/O SRIDHAR HEGDE ... APPELLANT (BY SRI. A SHANKAR & SRI.S.S.HEGDE, ADVS.) AND THE INCOME TAX OFFICER, WARD-1, SIRSI 581 402 ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1463/BNG/2003 FOR THE ASSESSMENT YEAR 1994-95 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1463/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1994-95 ETC. IN I.T.A. NO.1573/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD., NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS,

: 5 : S/O SHRIDHAR HEGDE. ... APPELLANT (BY SRI. A SHANKAR, ADV.) AND THE INCOME TAX OFFICER WARD I, SIRSI 581 402 ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1465/BNG/2003 FOR THE ASSESSMENT YEAR 1997-98 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1465/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1997-98 ETC. IN I.T.A. NO.1574/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD., NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS, S/O SHRIDHAR HEGDE. ... APPELLANT (BY SRI. A SHANKAR, ADV.) AND THE INCOME TAX OFFICER WARD I, SRISI 581 402 ... RESPONDENT (BY SRI. Y V RAVIRAJ, ADV.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1466/BNG/2003 FOR THE ASSESSMENT YEAR

: 6 : 1998-99 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1466/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1998-99 ETC. IN I.T.A. NO.1575/2005: BETWEEN M/S THE TOTGARS’ CO-OPERATIVE SALE SOCIETY LTD., NEW MARKET YARD, SIRSI 581 402, REPRESENTED BY ITS GENERAL MANGAER PRAKASH HEGDE, AGED ABOUT 33 YEARS, S/O SHRIDHAR HEGDE. ... APPELLANT (BY SRI. A SHANKAR, ADV.) AND THE INCOME TAX OFFICER WARD-1, SIRSI - 581 402 ... RESPONDENT (BY SRI. A SHANKAR & SRI.S.S.HEGDE, ADVS.) THIS I.T.A. FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DT. 9.11.2004 PASSED IN ITA NO. 1467/BNG/2003 FOR THE ASSESSMENT YEAR 1999-00 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NO. 1467/BANG/2003 DT. 9.11.2004 FOR THE ASSESSMENT YEAR 1999-2000 ETC. THESE APPEALS COMING ON FOR FINAL HEARING THIS DAY, P.S. DINESH KUMAR J., DELIVERED THE FOLLOWING:

: 7 : JUDGMENT Appellant in all these appeals are challenging order in ITA Nos.1460 to 1467/Bang/2003 dated 09.11.2004 for the assessment years 1991-92 to 1999- 2000 disallowing the claim of the appellant to deduct the cost and expenditure incurred in earning income under the head “income from other sources”. 2. The appellant is a Co-operative Society in the business of marketing agricultural produce and provide credit facilities to its members. For the assessment years 1991-92 to 1999-2000, appellant had claimed deduction under Section 80P(2). No regular assessment was conducted, but a notice under Section 148A of Income Tax Act (‘Act’ for short) was issued by the respondent. Appellant raised an objection that Notice under Section 148 could not have been issued as prior consent of the Additional Commissioner was necessary. The appellant requested the respondent to accept the original returns and also filed one more return as a technical compliance and furnished the information

: 8 : called for. On completion of assessments, order dated 20.01.2003 came to be issued. However, pursuant to certain directions issued by the Additional Commissioner of Income Tax Range-1, Hubli under Section 144A for the assessment years 1991-92 to 1999-2000, the benefit of deduction under Section 80P(2)(a)(i) in respect of the interest earned on deposits kept with Scheduled Banks, Indira Vikas Patra, National Savings Certificates etc., was denied to the appellant. Being aggrieved the appellant filed appeals before the Commissioner of Income Tax (Appeals). By order dated 26.09.2003, the said appeals were allowed and claim of the appellant seeking deduction under Section 80P(2)(a)(i) was upheld. However, objections raised by the appellant with regard to validity of notice under Section 148 of the Act in the matter of sanction was rejected by the Commissioner. 3. Revenue being aggrieved by order of the Commissioner of Income Tax (Appeals) allowing the claim of the appellant under Section 80P(2)(a)(i),

: 9 : preferred appeals before the Income Tax Appellate Tribunal. Appellant also filed cross-objections with regard to dismissal of its appeals with regard to validity of the notice under Section 148 of the Act in the matter of sanction and change in opinion. 4. The Tribunal by a combined order dated 09.11.2004 allowed the appeals preferred by the respondent holding that the interest income was not liable for deduction under Section 80P(2)(a)(i) and also dismissed the cross-objections filed by the appellant. Hence, the appellant has preferred these appeals. 5. We have heard Sri.A.Shankar, learned counsel appearing for the appellant and Sri.Y.V.Raviraj, learned counsel for the Revenue. 6. Learned counsel for the appellant submits that the very issue with regard to the benefit of deduction of interest came up for consideration before the Hon’ble Supreme Court in Civil Appeal Nos.1622/2010 to 1629/2010 filed by the Appellant

: 10 : and by order dated 08.02.2010 the said appeals have been disposed off by recording a finding as follows: “The words “the whole of the amount of profits and gains of business” emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee-Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of “Other Income” which has been rightly taxed by the Department under Section 56 of the Act.” 7. Learned counsel for the appellant further submits that the Hon’ble Supreme Court also held that following question advanced by the appellant before the Authorities had remained unanswered and remitted the said question for consideration by this Court. “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income by way

: 11 : of interest on deposits held with scheduled banks, bonds and other securities was chargeable to tax under section 56 under the head ‘Income from other sources’ without allowing any deduction in respect of cost of funds and proportionate administrative and other expenses under section 57?” 8. Learned counsel for Appellant, adverting to the order passed by the Apex Court submits that the above question which involves interpretation of Sections 56 and 57 of the Income Tax Act, the Hon’ble Supreme Court has indeed been answered by the Apex Court holding that income in respect of which deduction is sought must constitute an operational income and not the other income and further that in the case on hand, the evidence on record indicates that the appellant earns interest on fund which are not required for business purpose and therefore, in the facts and circumstances, the interest income has been held to fall in the category of “other income”.

: 12 : 9. Learned counsel for the appellant further submits that the Assessing Officer has erred in coming to the conclusion that the appellant who is involved in the business of marketing of agricultural produce of its members are not exposed to any element or risk when funds are placed in bank deposits, bond and securities and on this premise, the Assessing Authority has wrongly held that the income so earned is “income from other sources” and therefore, disallowed the exemption under Section 80P(1)(i). He submits that in view of the fact that the issue has been answered by the Hon’ble Supreme Court holding that the appellant earns interest on funds which are not required for business purposes at the given point of time and further that in the facts and circumstances of the case of the appellant such interest income falls in the category of “other income” and has been rightly taxed by the Department under Section 56 of the Income Tax Act, what remains is only to pass a fresh order by the Assessing Authority by giving such permissible deductions under Section 57 of

: 13 : the Act. He submits that under Section 57(iii) the appellants are entitled for deduction of proportionate expenditure or actual expenditure which the appellant may have incurred in mobilizing the funds placed in deposit with the Bank and the same needs to be calculated by the Assessing Authority. 10. Learned counsel for the Revenue does not dispute the facts recorded herein above. 11. Having heard the learned counsel for the parties and perusing the records and in the light of the finding recorded by the Hon’ble Supreme Court that the interest income earned by the appellant falls within the category of “other income” what falls for reconsideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deductions in respect of proportionate costs incurred as permissible under Section 57.

: 14 : 12. 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 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.

: 15 : 13. 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.

: 16 : (v) Ordered accordingly. SD/- JUDGE SD/- JUDGE Rsh