K1104 ELAYAMUTHUR PROMARY AGRICULTURAL CO-OPERATIVE CREDIT SOCIETY,TIRUPPUR vs. ITO, WARD 2(4), TIRUPPUR

3. Without prejudice, the Learned Commissioner (Appeals) erred in deciding that the Appellant Society is not entitled for deduction under Section 80P(2)(d) on the investments made with the Cooperative Banks, on a mistaken application of Section 80P(4), which is not applicable for deduction claimed by a Co- operative Society under Section 80P(2)(d). 4. Without prejudice, the Learned Commissioner (Appeals) erred in not following the decision of the jurisdictional High Court in TCA No. 5 of 2015 dated 10/08/2016 and the decision reported in [2023] 156 taxmann.com 419 (Madras), the copies of which were also submitted by the Appellant Society in its reply dated 25/12/2023 vide Ack No. 571808591251223. And, for other reasons that may be adduced at the time of hearing, the Appellant would humbly pray that the appeal be admitted, considered and justice be rendered. & 1041/Chny/2024

Subsequently, the cases were selected for scrutiny under CASS with limited scope to examine the following issues: i. Deduction u/s VIA ii. Investment/advances/loans

5. The statutory notices were issued to the assessee and was requested to produce or cause to produce any evidence on which it may like to rely in support of the said return of income. The assessee submitted all the relevant details and the same was verified by the AO and framed an assessment u/s.143(3) of the Act, by passing an order dated 25.12.2018 for the AY 2016-17 & on 28.12.2019 for the AY 2017-18 by disallowing entire deduction claimed u/s.80P of the Act holding as under:

7. It is pertinent to note that the assessee is running shops under the public distribution scheme, wherein we cannot distinguish the member and non- members as the benefits are enjoyed by the general public. Hence, the principal of mutuality is defeated in this context also & 1041/Chny/2024

8. Even if the existence of two sets of members is permitted by Tamil Nadu Cooperatives Registration Act and also that the assessee is not taking deposits from outsiders/giving any loans to outsiders, the fact remains that in the case of the assessee society, the contributors to the profit are different from the participators of that profit, as is in the case of Citizens Co-operative Society.

9. It may be noted that Hon'ble Supreme Court has delivered its judgment dated: 08.08.2017 in the case of Citizen Co-operative Society subsequent to the judgment of Hon'ble High Court of Chennai in the case of Commissioner of Income- tax, Chennai Vs Tamil Nadu Co-operative Housing Federation Ltd, Chennai (Tax case Appeal No. 685 of 2014) pronounced on 23.11.2016. Hon'ble Supreme Court has clearly stated that an assessee cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members, if it has carved out a category of distinct members. When there is provision for unequal rights between different sets of members, the concept of Principle of Mutuality is misplaced.

10. On the test of mutuality, Honorable Supreme Court in its judgment in the case of CIT vs Bankipur Club Ltd (1997) 226 ITR 97 (SC) held as below:

".....for this doctrine to apply, it is essential that all the contributories to the common fund are entitled to participate in the surplus and that all its participants in the surplus are contributors, so that there is complete identity between contributors and participators.."

11. As detailed in the preceding paras, in assessee's case the principle of mutuality is defeated. As such, as guided by the two judgments of Honourable Supreme Court cited in this order, assessee's claim of deduction under section 80P(2)(i)(a) is disallowed and the entire business profit of Rs. 28,48,881, is taxed under the head, "Business Income"

12. After examining the materials available on record, assessment is completed by disallowing the entire claim of deduction under Chapter VIA as under: For AY 2016-17 Returned Income Nil Add: Business Income Rs. 33,86,248 Assessed Income Rs. 33,86,248 For AY 2017-18 Returned Income Nil Add: Business Income Rs. 28,48,881 Assessed Income Rs. 28,48,881

6. Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld.CIT(A)/NFAC. The Ld.CIT(A) considering the order of the AO and the written submissions made by the assessee allowed the deductions claimed u/s.80P(2)(a)(i), u/s.80P(2)(a)(iv) & u/s.80P(2)(c) and confirmed the disallowance u/s.80P(2)(a) or (b) in respect of income earned from the activity of running shops under PDS and interest/dividend earned from investments with co-operative banks u/s.80P(2)(a) or u/s.80P(2)(d) by holding as under:

6. The Assessing Officer observed that there are two different types of members in the assessee Society i.e 'Members' who are regular members having voting rights and entitled to receive dividend, 'Associate Members members who can & 1041/Chny/2024

take loans and can deposit with Society but do not have voting rights and not entitled to receive dividend. Therefore the Assessing Officer opined that the fundamental principle of mutuality requiring a nexus with the contributors and participators is solely missing. Thereafter, the Assessing Officer held that the facts involved in the assessee's case are similar to the case of Citizen Co-operative Society Ltd [Civil Appeal No. 10245 of 2017 reported in (2017) 397 ITR 1] and applying the ratio of the Hon'ble Apex Court disallowed the deduction claimed u/s 80P.

6.1 The Hon'ble Supreme Court in the case of Mavilayi Service Co-Operative Bank Ltd Vs Commissioner Of Income Tax (2021) 431 ITR 1 (SC) dated 12.01.2021 while confirming its own judgment in the case of Citizen Co-operative Society Limited Vs Assistant Commissioner of Income Tax ((2017) 397 ITR 1 (SC)) has clarified that the expression "members" is not defined in the Income Tax Act, 1961. Since a cooperative society has to be established under the relevant Act, the expression "members" in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law, under which the cooperative society claiming exemption, has been formed. It is, therefore, necessary to construe the expression "members" in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in the Cooperative Societies Act under which the Cooperative Society has been constituted. The Appellant- Assessee is a co-operative society registered under the Tamil Nadu Co-operative Societies Act 1983. The definition of member under the said act is reproduced here under:

2(16). 'member' means a person joining in the application for the registration of a society and a person admitted to membership after registration in accordance with the provisions of this Act, the rules and the by-laws and includes an associate member;"

6.2 In view of the above definition of the member as per the Tamil Nadu Co- operative Societies Act 1983, the Assessing Officer's conclusion that the appellant had violated the principle of mutuality does not hold true. Further, it is not essential for the appellant to satisfy the principle of mutuality to claim deduction under section 80P. Even if the appellant advances loans to non members, the appellant would still be eligible for deduction under section 80P, however, such deduction would be restricted to only such profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members. In the instant case, as per the Tamil Nadu Co- operative Societies Act 1983, since the definition of 'Member' includes an 'Associate Member', the appellant would be entitled for deduction under section 80P (2) (a) (i) for such profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members.

7. In view of the position of as enumerated above, it is now examined, which of its income earned from the following business activities is eligible for deduction u/s.80P:

a. providing credit facilities to its members; b. running shops under the public distribution scheme (PDS); c. selling agricultural raw materials, Agro-seeds, Fertilizers to the members of the society. d. Interest and dividend from Co-operative Banks.

7.1 As held at para 6.2 supra the appellant would be entitled for 100% deduction under section 80P (2) (a) (i) on profits and gains of business activity of providing credit facilities to its members (including Associate Members).

7.2 With respect to the income earned from the activity of selling agricultural raw materials, Agro-seeds, Fertilizers to the members of the society the appellant is eligible for 100% deduction u/s 80P(2)(a)(iv) in view of the position of law as enumerated at para 4.6 supra. & 1041/Chny/2024

7.3 With respect to the income earned from the activity of running shops under the public distribution scheme (PDS) the appellant is not eligible for deduction u/s 80P (2) (a) or (b) in view of the position of law as enumerated at para 4.6 supra.

7.4 With respect to the income by way of Interest and dividend earned from investments with Co-operative Banks the appellant is not eligible for deduction u/s 80P(2)(a) or 80P (2) (d) in view of the position of law as enumerated at para 4.6, 4.9 and 4.10 supra.

7.5 However, in view of the position of law as enumerated at para 4.6 (b) and 4.10 supra, the appellant is eligible for deduction u/s 80P(2)(c) of Rs.50,000/- only on the balance income (i.e., income earned from the activity of running shops under the public distribution scheme (PDS) and income by way of Interest and dividend earned from investments with Co-operative Bank).

7.6 Accordingly, the Assessing Officer is directed to compute the deduction u/s 80P on eligible income in terms of the finding given at para 7.1, 7.2, 7.3, 7.4 and 7.5 supra. The Appeal on Ground 7 is partly allowed in terms of the direction given to the Assessing Officer herein above.

7. Aggrieved by the order of the Ld.CIT(A), the assessee is before us for both the assessment years. The ld.Counsel for the assessee argued that the assessee has made investments in Coimbatore District Central Co-operative Bank Ltd., and has earned an interest income of Rs.11,66,448/- apart from share dividend received from Co-operative Society of Rs.54,720/- during the AY 2017-18 and which is eligible deduction u/s.80P(2)(d) of the Act and hence, the Ld.CIT(A) has erred in confirming the disallowance made by the AO and prayed for setting aside the order of the Ld.CIT(A) on this issue. & 1041/Chny/2024

8. Per contra, the ld.Sr.DR relied on the orders of the AO and that of Ld.CIT(A) and argued that since the investments are made in the Coimbatore District Central Co-operative Bank Ltd., which is carrying on the banking activities and hence, the interest is not eligible for deduction u/s.80P(2)(d) of the Act and prayed for confirming the order of the Ld.CIT(A) on this issue.

Admittedly, the society is carrying on the business of providing credit facilities to its members apart from other trading activities in agricultural goods and supplements. The assessee has earned interest income on the investments made in Coimbatore District Central Co-operative Bank Ltd., and claimed as deduction u/s.80P(2)(d) of the Act. In support of assessee’s claim for deduction of interest earned on investments made in Coimbatore District Central Co-operative Bank Ltd., relied on the decision of the Hon’ble Madras High Court in the case of CIT v. The Salem Agricultural Producers Co-operative Marketing Society Ltd., in TCA No.5 of 2015 dated 10.08.2016, wherein, their Lordships has held that the society is eligible for deduction u/s.80P(2)(d) of the Act.

The relevant portion of the decision is extracted below: & 1041/Chny/2024

4. Though the assessee had contended that the income by way of interest and dividend covered by the assessee/Society from the investment made in Salem District Central Co-operative Bank, which is also a Co-operative Society and therefore, the assessee is entitled for reduction under Section 80 P (2) (d) of the Income Tax Act, the assessing Officer has disallowed the same. CIT (Appeals) has confirmed before the Tribunal.

The case of the assessee is that the income by way of interest and dividend earned by the assessee Society are from investments made in Salem District Central Co-operative Bank, which is also admittedly, a co- operative society and are allowable deduction. The Assessing Officer has held that the assessee has made only with Salem District Central Co- operative Bank and therefore, the income from investment with the Bank is not entitled for deduction under Section 80 P (2) (d) of the Act. On appeal, the Id.CIT (Appeals confirmed the order passed by the Id.CIT (Appeals). We find that in the case of CIT Vs. Kangra Co-operative Bank Ltd. [2009] 309 ITR 106 (HP), the Hon'ble Himachal Pradesh High Court has considered Section 80 P (2) (d) of the Act. The interest earned by the assessee co-operative bank on fixed deposits with Himachal Pradesh State Co-operative Bank in compliance with the provisions of Section 57 of the Himachal Pradesh Co-operative Societies Act, 1968, the income derived from banking business is eligible for deduction under Section 80 P (2) (a) (i) of the Act. Exemption is also available under Section 80 P (2) (d) of the Act. In the present case, the assessee is an Agricultural Producers Co- operative Marketing Society Ltd., registered under Tamil Nadu Co- operative Societies Act and established for the benefit of the Agricultural producers and the interest or dividend earned by the assessee will be beneficial to the members alone. Therefore, keeping in view of the decision, in the case of CIT Vs. Kangra Co-operative Bank Ltd., (supra), we hold that the assessee is eligible for benefit under Section 80 P (2) (d) of the Act and also this being a beneficial section to the co-operative Societies.

Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the interest income earned by the assessee on deposits made with H.P.State Co-operative Bank in the shape of F.D.Rs. is income derived from banking business and therefore, eligible for deduction under Section 80 P (2) (a) (i) of the Income Tax Act?

8. After considering the decisions in CIT Vs. Karnataka State Co-operative Apex Bank reported in [2001] 251 ITR 194, CIT Vs. Ramanathapuram District Co- operative Central Bank Ltd reported in [2002] 255 ITR 423 (SC), a Division Bench of the Himachal Pradesh High Court, at paragraph Nos.10 and 11 held thus:-

The Karnataka High Court in CIT Vs. Sri Ram Sahakari Bank Ltd., [2004] 266 ITR 632, held that the interest on investments and short-term fixed deposits in banks was entitled to be deducted under Section 80 P (2) (a) (i) of the Act. In fact, in CIT Vs. Nawanshahar Central Co-operative Bank Ltd., [2007] 289 ITR 6, the Apex Court has held that where under the provisions of the Co-operative Societies Act, the co-operative bank is & 1041/Chny/2024 statutorily required to place part of its funds in approved securities, the income attributable thereto is not taxable under Section 80 P (2) (a) (i) of the Income-tax Act, 1961.

In the present case, we have noted above that under Section 57, every co-operative Society including the assessee is required by law to keep a percentage of its profits in reserve funds. These reserve funds can only be invested or deposited in a certain manner. Applying the ration of the judgment in Nawanshahar Central Co-operative Bank Ltd's case [2007] 289 ITR 6, it is apparent that any interest on such investments is required � to be deducted under Section 80 P (2) (a) (i) of the Act. At para 12 of � the judgment, further reiterated that .... Furthermore, the investments have been made in the H.P.State Co-operative Bank which is also a co- operative Society and, therefore, even under Section 80 P (2) (d) of the Act, interest income from investments made in any co-operative Society would also be entitled for deduction.

9. Though Mr.J.Narayanasamy, learned Senior Standing Counsel for Income Tax Department submitted that the Tribunal was not right in holding that the interest earned from the Salem Agricultural Producers Co-operative Marketing Society Ltd., for reduction under Section 80 P (2(a) (i) of the Income Tax Act, we are not inclined to accept the said contentions. For the reason that a District Central Co- operative Bank, is also a Society, in which event, the income by way of interest and dividend earned by the assessee/respondent Society from the investments made in Salem District Central Co-operative Bank, which is also a Co-operative Society is entitled for deduction under Section 80 P (2) (a) (i) of the Income Tax Act. Decision relied on by the assessee and considered by the Tribunal squarely applies to the facts on hand. Question of law, figuring as 4, is negatived as against the appellant.

10. The assessee also relied on the following decision in the case of ACIT v. Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd., reported in [2023] 156 taxmann.com 419 (Pune- Tribunal), wherein, the identical issue has been decided in favour of the assessee. The relevant extract is given below:

4. The solitary issue in this appeal hinges around allowability of deduction u/s 80P(2)(d) of the Act in relation ot interest income earned by the assessee co- operative society from its investment held with Co-op bank. This issue is no longer res integra in view of the Co-ordinate Bench decision in favour of the assessee in 'Konkan Education Society Sevak Sahakari Patpedhi Ltd' [ITA No. 46/Pun/2024 dt. 02/02/2024]' Respectfully following Co-ordinate Bench's decision (supra) and judicial precedents relied by the first appellate authority, we see no reason to deviate from the impugned adjudication by Ld. NFAC which overturned the denial of deduction to the assessee. The relevant paragraphs of the said order of Co-ordinate Bench of the Tribunal (supra) is reproduced as;

'7. In the present case, the reasoning given by the lower tax authorities in denying the claim for deduction u/s 80P(2)(d) of the Act is that interest and dividend was received from RDCC a cooperative bank, however this reasoning has no legs to ACIT Vs Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd stand as a cooperative bank is principally a cooperative society & 1041/Chny/2024 and holds a banking license to operate on a larger scale under the guidelines of RBI. This issue was came to consider by Hon'ble Karnataka High Court in 'CIT Vs Totagars Cooperative Sale Society', finds reported in 392 ITR 74 wherein their lordships referring to the decision of Hon'ble Apex Court in the case of Totgar's Co-operative Sales Society Ltd. (supra) held that the ratio of decision of the Hon'ble Supreme Court in the aforesaid case (supra) not to be applied in respect of interest income on investment as same falls u/s 80P(2)(d) and not u/s 80P(2)(a)(i) of the Act. We further note that, the co-ordinate bench in 'Sant Motiram Maharaj Sahakari Pat Sanstha Ltd. vs. ITO', reported in 120 taxmann.com 10, after making reference to the decisions of the Hon'ble Supreme Court in the case of Totgar's Cooperative Sales Society Ltd. (supra) and having noticed the divergent views of the Hon'ble Karnataka High Court in the case of 'Tumkur Merchants Souharda Credit Co-op. Ltd. Vs ITO', 55 taxmann.com 447 and decision of Hon'ble Delhi High Court in 'Mantola Cooperative Thrift Credit Society Ltd. Vs CIT', reported at 50 taxmann.com 278, the decision rendered in 'Mantola Cooperative Thrift Credit Society Ltd. (supra) had not been preferred to ratio laid in 'Tumkur Merchants Souharda Credit Co-op. Ltd. (supra), the relevant observation of the co-ordinate bench are placed as under; "9. The Pune Benches of the Tribunal in Sureshdada Jain Nagari Sahakari Patsanstha Maryadit Vs. The Pr.CIT (ITA No.713/PUN/2016, dated 9-4-2019) decided the question of availability of deduction u/s 80P on interest income by noticing that the Pune Bench in an earlier case of Shri Laxmi Narayan Nagari Sahakari Pat Sanstha Maryadit Vs. ITO (ITA No.604/PN/2014, dated 19- 8-2015) has allowed similar deduction. In the said case, the Tribunal discussed the contrary views expressed by the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO (2015) 230 Taxman 309 (Kar.) allowing deduction u/s. 80P on interest income and that of the Hon'ble Delhi High Court in Mantola Cooperative Thrift Credit Society Ltd. Vs. CIT (2014) 110 DTR 89 (Delhi) not allowing deduction u/s.80P on interest income earned from banks. Both the Hon'ble High Courts took into consideration the ratio laid down in the case of Totgar's Cooperative Sale Society Ltd. (2010) 322 ITR 283 (SC). There being no direct judgment from the Hon'ble jurisdictional High Court on the point, the Tribunal in Shri Laxmi Narayan Nagari Sahakari Pat Sanstha Maryadit (supra) preferred to go with the view in favour of the assessee by the Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra).

10. Insofar as the reliance of the ld. DR on the case of Pr. CIT ACIT Vs Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd and Another Vs. Totagars Cooperative Sales Society (2017) 395 ITR 611 (Kar.) is concerned, we find that the issue in that case was the eligibility of deduction u/s.80P(2)(d) of the Act on interest earned by the assessee cooperative society on investments made in co-operative banks. In that case, the assessee was engaged in the activity of marketing agricultural produce by its members; accepting deposits from its members and providing credit facility to its members; running stores, rice mills, live stocks, van section, medical shops, lodging, plying and hiring of goods and carriage etc. It was in that background of the facts that the Hon'ble High Court held that the assessee could not claim deduction u/s.80P(2)(d) of the Act. When we consider the impact of this decision, it turns out that the same is not germane to case under consideration in view of the position that the claim of the instant assessee is directly about the eligibility of deduction u/s.80P(2)(a)(i) of the Act and not u/s.80P(2)(d). Moreover, so many decisions relied on by the ld. AR amply go to prove that the view taken by the AO, cannot by any standard, be construed as & 1041/Chny/2024

not a possible view. We, therefore, hold that the ld. Pr. CIT was not justified in exercising the revisional power anent to interest income of Rs.22,34,270/- earned on investments made with co- operative banks." (Emphasis supplied) 8. Without multiplying judicial precedents on the aforestated issue, maintaining same parity we adopt equi reasoning and hold that, the interest and dividend earned by the appellant society from its investment held with co-operative banks namely RDCC, being a registered co- operative society under respective state laws, qualifies for deductions u/s 80P(2)(d) of the Act. Consequently the views adopted by the tax authorities below are not in conformity with legal position and binding judicial precedents, hence deserves to be vacated. Resultantly, we set- aside the impugned order and reverse the denial of deduction.' (Emphasis supplied) 5. The appeal of the Revenue in result is stands DISMISSED. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Monday, 10th day of June, 2024

The assessee is directed to file evidences in support of its claim.

Thus, grounds raised by the assessee are allowed.

Order pronounced in the court on 18th September, 2024 at Chennai.