THE W.B STATE CO-OP AGRI AND RURAL DEVELOPMENT BANK LIMITED. ,KOLKATA vs. DCIT, CIR-54,KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH KOLKATA BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND SHRI RAKESH MISHRA, ACCOUNTANT MEMBER ITA No.1320 /KOL/2023 Assessment Years: 2013-14 The W.B. State Co-op. Agri And Assistant Commissioner of Rural Development Bank Ltd. Income-tax, Circle-32, Vs 25D, Shakespeare Sarani, Kolkata. Kolkata-700017. (PAN: AAAJT0468K) (Appellant) (Respondent)

Present for: Appellant by : Shri Palas Chattopadhya, AR Respondent by : Shri Rakesh Kumar Das, Addl. CIT, DR Date of Hearing : 05.06.2024 Date of Pronouncement : 03.09.2024 O R D E R PER RAKESH MISHRA, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2013-14, dated 01.11.2023, which is against the assessment order u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 30.03.2016.

“1. That on the facts and in the circumstances of the case the Ld. CIT(A), NFAC is wrong, unjust and has erred in law in confirming the action of Ld Assessing Officer in holding that interest income of Rs.2,83,02,934/- earned by the appellant co- operative society on FDR(s) with the Schedule banks and interest on Personal

2 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 Loan to members of Rs. 21,98,448/- and interest on HBL to staff of Rs. 1,76,490/- are not an income derived by it from its business activities and is in the nature of receipts from other sources and thereby upholding working of Income from business by the Ld AO. 1.1. The Ld. CIT(A), NFAC is also wrong and has erred in law in confirming disallowance of deduction of Rs. 3,06,77,872/- by the Ld AO under section 80P(2)(a)(i) of the I.T. Act, 1961. 1.2 The Ld CIT(A), NFAC is also wrong and has erred in law in confirming disallowance of deduction of Rs. 11,57,981/- being the Other Business related Income viz Commission, Miscellaneous and Sundries by the Ld AO under section 80P(2)(a)(i) of the I. T. Act, 1961. 2. The Ld. CIT(A) NFAC was not made any comments against the action of the Ld. AO in respects of wholly unjustified in addition of Overdue Interest amounting to Rs.17,76,82,947/- which is against the Prudential Norms in respect of non- performing assets, interest is not recognized on accrual basis but is booked as income only when actually received. Therefore, the addition made by the Ld. AO should be deleted. 2. That the learned Commissioner of income tax (Appeals) has erred both on facts and in law in not providing sufficient opportunity of being heard to the assessee co-operative Society to represent the case virtually. 3. That the learned Commissioner of Income Tax (Appeals) NFAC and Ld. AO both has erred in relying on the decision of Totgars' Cooperative Sale Society Ltd. v. ITO [322 ITR 283 (SC)] in which the decision in TOTAGARS CO-OPERATIVE LTD.(supra) rendered by the Hon'ble Supreme Court is clearly distinguishable on facts as the Appellant society was a cooperative agricultural society and also found that the facts in the case of M/s. JAFRI MOMIN VlKASH COOPERATIVE SOCIETY LTD. of High Court of Gujarat and very recent judgement of Jurisdictional High Court in the case of Principal Commissioner of Income Tax Vs Gunja Samabay Krishi Unnayan ... Citation : 2023 Latest Case law 122 Cal/2 would squarely apply to the case in respect of interest earned from deposits with Bank, though in the said order, the Calcutta High Court has specifically decided in favour of the Assessee. 4.The Ld. ClT(A) NFAC was not made any comments against the action of the Ld. AO in respects of wholly unjustified in not granting cost of corresponding expenses against the interest received from bank and Personal Loan in his own motion and the action of the AO is wholly bad & illegal and the appellant being fully entitled for such expenses and in view of the facts and circumstances it may kindly be granted accordingly. 5. That the appellant craves leave to amend, alter modify, substitute, add to, abridge and/or rescind any or all of the above grounds.” 3. Brief facts of the case as culled out from the order of the Ld. CIT(A) are that the assessee, The W.B. State Co-op Agri and Rural Development Bank Ltd. (WBSCARDB) is a Cooperative Society originally constituted

3 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 under the West Bengal Cooperative Societies Act, 1940 on 07.01.1958 vide registration no. 1 of 1958. The main business activity of the society, is lending money to its Members, the Primary Co-operative Agriculture & Rural Development Banks (PCARDBs), primarily for Agricultural & Rural Development purposes. 4. The assessee filed its return of income for the assessment year 2013-14 on 31.10.2013, declaring the total income of Rs. 10,49,660/-. The return was selected for scrutiny and the Assessing Officer passed the impugned assessment order dated 30th March, 2016 under section 143(3) of the said Act, making addition in respect of Overdue Interest amounting to Rs. 17,76,82,947/- and also disallowed the deduction u/s 80P of the Act 1961. 5. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A) who confirmed the addition after making elaborate discussion and dismissed the appeal of the assessee. Aggrieved with the appeal order, the assessee has filed this appeal before the Tribunal. 6. We have heard the rival contentions and have also gone through the submission filed. Ground Nos. 1 & 1.1 relate to disallowance under section 80P(2)(a)(i) of the Act out of the interest income of Rs. 2,83,02,934/- earned by the assessee on FDRs with the Scheduled Banks, interest on Personal Loans to members of Rs. 21,98,448/- and interest on HBL to staff of Rs. 1,76,490/- while Ground No. 3 is against the Ld. CIT(A) applying the decision in Totgars’ Cooperative Sale Society Ltd. v ITO (supra). The Assessing Officer noticed that the assessee had claimed the sum of Rs. 11,35,000/- u/s 80P and claimed that it is neither a cooperative bank nor under the Banking Regulation Act, 1949 and therefore, was a cooperative society eligible to get deduction under section 80P of the Act. It was claimed that it is a land mortgage bank as they lend against mortgage of land. The Assessing Officer noted that the assessee

4 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 is the apex society of the State Agricultural and Rural Development Bank (Primary ARDB) in the cooperative sector and does the business of long- term lending, mostly to the members of the society for agricultural and rural development through 24 member units i.e. primary ARDBs or other cooperative societies or individuals through its own branches. The ARDBs are all primary cooperative societies, which in turn provide loans to the individual members. The principal source of loan was received from NABARD, which in turn is disbursed to the individuals who are in fact members of the Primary ARDBs. The Assessing Officer categorised the income under the category of ‘eligible income’ being the interest or dividends derived from investment with any other cooperative society and ‘ineligible income’. In the course of the assessment proceedings, breakup of various incomes clubbed under various heads was examined and it was noticed that the assessee had not segregated its eligible income from certain other income arising out of its other activities, which had no direct nexus with its principal activities. The Assessing Officer noted that the claim of deduction made was in respect of a higher proportion of its income then was eligible under the law. The Assessing Officer noted that the assessee had credited amount of Rs. 89,30,14,529/- towards interest received and receivable out of which an amount of Rs. 3,84,60,422/- had been earned from interest on deposits with banks and Rs. 11,35,000/- was earned by way of dividends received from different cooperative societies. Out of the bank interest, an amount of Rs. 1,01,57,488/- was earned by way of interest received from deposit with co-operative banks and Rs. 2,83,02,934/- was earned by way of interest received from other than cooperative banks. The Assessing Officer was of the view that as per the provisions of the Act, Rs. 1,01,57,488/- and Rs. 11,35,000/- were the eligible incomes as per section 80P(2)(d) of the Act. However, interest either realised or accrued from deposits with other banks for an amount of Rs. 2,83,02,934/- was ineligible for deduction under section 80P(2)(d)

5 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 of the Act. The Assessing Officer relied upon the decision in the case of The Totgars' Co-operative Sale Society Ltd. vs. ITO 322 ITR 283 (SC) in which it has been held that interest earned by the appellant cooperative society on surplus funds invested in short-term deposits with banks and in government securities is not eligible for deduction under section 80P. In response to the query in this regard, the Ld. AR of the assessee submitted that during the relevant year, NABARD had granted loan of Rs.100 crore and Rs.56.34 crore which in turn was lent to the members in several instalments. The assessee borrowed wholesale and lent on retail basis. It claimed that there is always some floating fund which has a cost, i.e. the interest payable to NABARD. It was also stated that repayments from the borrowers were received in hundreds of instalments while the repayment to the lender viz. NABARD took place only twice a year, i.e. on 31st January and 31st July. The society has to accumulate funds to pay the instalments on the scheduled dates. The interest income so derived or the capital, if not immediately required to be lent to members and for payment of instalments falling due after some period, cannot be kept idle and it deposits this amount in banks to earn interest; the said income so derived has the attributes of the profits and gains of the business of providing credit facilities to members only, it was so argued before the Ld. AO. Further, the society was not carrying on any separate business for earning of the interest. The contention of the assessee was analysed but the Assessing Officer was of the view that in the instant case, the assessee society regularly invests funds, not immediately required for business purposes, and interest on such investments, therefore, cannot fall within the meaning of the expression ‘profits and gains of business’. Such interest income cannot be said to be attributable to the activities of the society, namely carrying on the business of providing credit facilities to its members. He held that when the assessee provides credit facilities to members, it earns interest income but the interest held as ineligible for

6 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 deduction under section 80P(2)(d) of the Act is not in respect of interest received from members. Further, the deduction under section 80P of the Act is allowable on interest and dividend derived by the cooperative society from its investment with any other cooperative society. This was to foster the cooperative spirit in the country. The Assessing Officer was of the view that the assessee could have kept idle funds with the state cooperative banks or any other cooperative bank to earn interest deductible under section 80P and since the assessee failed to do so, such interest income is not allowable as deduction under section 80P(2)(d) of the Act. As expenses on other income had been claimed to the tune of Rs. 30,65,000/- as attributable to earning other income in the computation of income, which has been allowed, hence no more expenses were allowable as attributable to earning interest on its deposit with other banks. Therefore, he held that a sum of Rs. 2,83,02,934/- was not allowable as eligible for deduction under section 80P(2)(d) of the Act and is to be charged under the head ‘income from other sources’. Similarly interest of Rs.21,98,448/- received on personal loans and another amount of Rs. 1,76,490/- shown as interest on House Building Loan (HBL), being outside the line of business of the assessee, were also chargeable as income from other sources and therefore a sum of Rs.23,74,938/- was also included as other interest. The assessee had received commission of Rs. 97,706/- on non-life UIIC to the tune of Rs. 59,635/- and miscellaneous receipts to the tune of Rs.2,47,506/-, none of which were directly relatable to the principal business activities of the assessee and formed part of ineligible income for the purpose of deduction under section 80P(2)(d) of the Act. Another sum of Rs. 7,53,134/- shown under the head ‘sundries’ was also treated as ineligible for the purpose of deduction under section 80P(2)(d) of the Act. Thus, aggregate sum of Rs. 11,57,981/- was also treated as ‘other income’ and a sum of Rs.

7 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 3,18,35,853/- was treated as ineligible for consideration while computing deduction under section 80P of the Act. 7. The Ld. CIT(A), after analysing the decision in The Totgars' Co-operative Sale Society Ltd. vs. ITO 322 ITR 283 (SC) and the decision of the Bangalore Bench of the Tribunal in the case of M/s. Vasavamba Co- operative Sciety Ltd. which has held in para 13 that the Hon’ble Karnataka High Court in the case of Totgars’ Cooperative Sales Society in 395 ITR 611 (Kar) in the light of the principles enunciated by the Hon’ble Supreme Court in The Totgars' Co-operative Sale Society Ltd. (supra) have laid down the ratio that in case of a society engaged in providing credit facilities to members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act, denied the deduction claimed. However, section 80P(2)(d) of the Act specifically exempts interest earned from investment made with any other cooperative society; a cooperative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a cooperative society, is not deductible under section 80P(2)(d) of the Act. The Ld. CIT(A) held that the assessee was not entitled to deduction u/s 80P(2)(d) nor u/s 80P(2)(a)(i) of the Act on the interest earned from investments with the banks and dismissed the related grounds of appeal. Moreover, the breakup of miscellaneous income besides interest income consists of income from various activities and the heading of each of such activities shows that income from these activities is in no way directly attributable to the business of providing credit facilities to its members by the appellant society, therefore, following the ratio decidendi of the case discussed, he concluded that such income of the appellant society, which is not attributable to the business of providing credit facilities to members, does not qualify for deduction

8 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 under section 80P(2)(d) of the Act and dismissed the appeal of the assessee. 8. Before us also, similar arguments as made before the Ld. AO and the Ld. CIT(A) were made by the Ld. AR which have been considered while the Ld. DR defended the order of the Ld. CIT(A). 9. Similar issue came up in the assessee’s own case for AY 2006-07 in The West Bengal State Cooperative Agricultural & Rural Development Bank Ltd. vs ACIT, Circle -32, Kolkata before the ITAT ‘A’ Bench, Kolkata in ITA No. 1434/Kol/2023 and the relevant extracts from the order dated 05.08.2024 is as under: 7. Hon’ble ITAT, Kolkata vide its order dated 16th September, 2015 decided the appeal of the assessee by holding as under:- “9. We have heard the rival submissions and perused the materials available on record. In this case, the case laws cited by the Id. AR are not applicable to the present case. Reliance is placed on the decision of the Hon’ble Supreme Court in the case of M/s. The Totgars’ Cooperative Sale Society Ltd. vs ITO in Civil Appeal No. 1622 of 2010 The Hon’ble Supreme Court has held as under "An important point needs to he mentioned. 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”. In view of the above the appeal of the assessee is dismissed.

9 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 restore this matter to the file of AO for fresh adjudication in accordance with law. Accordingly, this additional ground raised by the assessee is allowed for statistical purposes.

10 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 books of account were maintained with regard to the income under dispute with a comment that such claims of the appellant have already analysed under para 6 of his order, whereas no expenses were incurred for earning of such income. However, no comment was made in respect of deduction under section 80P(2)(a)(i) related to the business of banking as also lending to its members. Aggrieved with the order of ld. CIT(Appeals), the assessee is now in appeal before the ITAT.

Since the issue relating to the deduction u/s 80P on the interest from the Banks and Co-operative banks has been decided against the assessee in the appeal for AY 2006-07, hence following the order of AY 2006-07 in the assessee’s own case, the order of the Ld. CIT(A) is upheld and Ground Nos. 1, 1.1 and 3 are dismissed. As regards interest on personal loans and interest on HBL to staff, it may also be mentioned that in the case of Bihar Rajya Sahakari Bhoomi Vikas Cooperative Bank Limited -vs- CIT reported in 186 taxman 54 (Patna), it has been held that income earned by a Cooperative Bank by way of interest on P.F. amounts of employees and rent from house property could not be treated as income attributable to the banking business and hence would not qualify for deduction. Since it was not the business of the assessee to lend money to employees and being a Cooperative Society, its business is to lend money to its members and since the employees do not fall under the category of members, therefore, the claim of allowing deduction under section 80P(2)(a)(i) for interest on HBL to staff and on personal loans is also rejected. Similarly,

11 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 on the same reasons, as income from commission, miscellaneous income and sundry income also do not relate to the business activities of the assessee, the same do not qualify for deduction under section 80P(2)(d) of the Act or 80P(2)(a)(i) of the Act and Ground No. 1.2 relating to disallowance of deduction for Rs. 11,57,981 is also rejected and the addition is confirmed. Thus Ground Nos. 1, 1.1, 1.2, and 3 are rejected. The total disallowance made by the Ld. AO at Rs. 3,18,35,853/- is hereby confirmed. 10. As regards ground no. 4 relating to the allowability of expenses against the interest received from the banks and on personal loans, the Ld. AO has held that as regards expenses on other income, such expenses have already been claimed to the tune of Rs. 30,65,000/- as attributable to earning other income the compression of income, which have been allowed. Hence no more expenses are liable as attributable to earning interest on fixed deposit with other banks and other income as above. Thus, Ground No. 4 is also rejected. 11. Ground No. 2 (the 2nd Ground No. 2) is regarding the Ld. CIT(A) not providing sufficient opportunity of being heard to the assessee to represent the case virtually. The Ld. CIT(A) has considered the contentions of the assessee and decided the appeal, therefore, as the assessee has not been able to make out a case of lack of opportunity, Ground No. 2 of the appeal is also rejected. 12. As regards Ground No. 2 (the assessee has numbered two different grounds as Ground No. 2) relating to overdue interest amounting to Rs. 17,76,82,947/- being against the prudential norms in respect of non- performing assets and the claim that the interest is not recognised on accrual basis but is booked as income only when actually received, it is noted that in the year under consideration for the first time the assessee made a claim that such interest was not to be included. The Prudential

12 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 Norms for ARDB – Income Recognition, Assets Classification etc. were notified vide NABARD No. NB.DOS/HYD/POL/P57(A)/97-98 dated 19.06.1997 while all along the assessee had been charging interest and showing the same as income. The prudential norms were to be made applicable from AY 1997-98 and nothing has been brought on record to demonstrate that they were applied in the past. In para 3 thereof, it is mentioned that the requirements of State Cooperative Societies Act and/or Rules made thereunder or other Statutory enactments may continue to be followed, if those are more stringent than the guidelines being prescribed. Moreover, these are only guidelines. The income is to be computed as per the accounting standards specified under the Act or by the concerned statutory authority. The Income Recognition Norms as per the Annexure thereof mention that the prudential norms for income recognition should be based on the record of recovery and therefore, unrealised income should not be taken to profit and loss accounts by SCARDBs/PCARDBs. However, in the case of certain states where the State Cooperative Act/Rules/Order or Manual provide for taking such unrealised interest to the income head in the profit and loss account, it is necessary for those SCARDBs/PCARDBs to make full provision for an equivalent amount by charging to profit and loss account. In other words, the SCARDBs/PCARDBs which are charging interest on all overdue loans and if such interest remains unrealised, the same may be taken to income account provided matching provision is fully made for the same by charging to profit and loss account. Accrued interest taken to income account in the previous year should also be provided in full in case the same becomes overdue within the current year. Apparently, this issue has not been adjudicated upon by the Ld. CIT(A) although it was raised before the Ld. CIT(A). Although, there does not appear any reason to change the method of accounting in this year in this regard, however in the interest of justice, this issue is hereby set aside to

13 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 the Ld. AO who shall examine the claim of the assessee and exclude the interest on non-performing assets only if there is any statutory guideline of the appropriate authority in this regard/the same meets the accounting standards specified under the Act and the assessee is able to demonstrate and quantify the interest on such nonperforming assets. For statistical purposes, this ground of appeal is allowed. 13. Ground No. 5 is general in nature and does not require any separate adjudication. 14. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 3rd September, 2024.

Sd/- Sd/- (Sanjay Garg) (Rakesh Mishra) Judicial Member Accountant Member

Dated: 3rd September, 2024 AK, PS

14 ITA Nos. 1320 /Kol/2023 The W.B. State Co-op. Agri & Rural Dev. Bank Ltd. AY: 2013-14 Copy to:

Assistant Registrar ITAT, Kolkata Benches, Kolkata