SESEC, ECO. RAILWAY EMPLOYEES CO OPERATIVE CREDIT SOCIETY LTD.,KOLKATA vs. PCIT-10, KOLKATA, KOLKATA

The captioned appeal filed by the assessee pertaining to A.Y. 2011-12, is directed against the order passed by the Principal Commissioner of Income Tax -10, Kolkata u/s 263 of the Income tax Act, 1961 (in short the Act) dated 02.03.2016 , which in turn arises out of an order passed by the Ld. Assessing Officer u/s 143(3) of Income Tax Act, 1961, dated 24.01.2014.

2 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 “i) During the course of assessment u/s 143(3) of the Act dated 24/01/2014, it was held that the assessee had earned bank interest income of Rs.40,87,926/- which was not from activity of providing credit facilities to its members, and this income is not eligible for deduction under section 80P(2)(a)(i) of the Act. In the said assessment order, the assessing officer assessed this income as income from other sources, and allowed proportionate interest expenses against this income, by way of interest on deposits from your members; (ii) On perusal of the balance sheet it is revealed that the assessee had enough interest free funds in the form of share capital and free reserves which can be considered to have been invested in bank deposits fetching the interest income to the assessee; & (iii) The interest on house building advance to the staff of the assessee and miscellaneous receipts are not income from providing credit facilities to its members and is not eligible for deduction under section 80P(2)(a)(i) and needed to be assessed as income from business/other sources.”

3 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 7.1 The first issue involved is whether the interest income on bank interest to the tune of Rs.40,87,926/- is deductible u/s 80P of the Act. The A.O. has attributed this interest to the income arising out of bank interest under the head income from other sources.

7.l.1 The assessee has highlighted the word "attributable to" in the said section, citing the case of Cambay Electric Supply Industrial Co Ltd Vs Commissioner of Income Tax, Gujrat-Il [ITR 113 (1978) 842]. The contention being that the whole of the amount of profits and gains of business, whatever the source, is deductible u/s 80P. However, the said judgment was related with general business of the assessee, and has not dealt with co-operative societies. In the said section, the word "attributable to" has been used in respect of carrying on the business of banking or providing credit facilities to its members.

7.l.2 In the case of the assessee, carrying on the business of banking or / providing facilities to its members include giving loan/credit to its members, receiving interest thereon, taking deposit from its members and giving .interest thereon to the members. In other words, the income generated by the assessee is to be from its members and any expenditure made by way of interest should also be attributable to its members. As long as the banking business / providing credit facility is limited to its members, the assessee is eligible for deduction u/s 80P. However, making deposit to Bank, which is not its member, does not constitute the 'business of banking or providing facilities to its members" by the assessee, and the assessee is not at all eligible for deduction u/s 80P in respect of such income.

7.2 The second issue involves allowance of deduction u/s 80P of the Act in respect of income from house building loan to staff of the assessee society. The assessee has contended that the staffs are the members of the society and therefore interest earned from providing loan facility is eligible u/s 80P of the Act. However, the members of a co-operative are an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. Whereas, the staff of the co-operative are paid employee, having an employer-employee relationship with the co-operative. Hence, it can never be said that the staff is a member of the society, and hence any income generated from them, by way of interest or otherwise, becomes ineligible for deduction u/s 80P.

7.3. The third issue is regarding income under the head Miscellaneous Receipts. The assessee has contended that the assessee recovered from the members the printing and stationery cost and instead of adjusting the same with the cost of Printing & Stationary of the assessee, such amount was separately shown in the income side as Miscellaneous Receipts. This should have been looked into by the A.O. during the course of assessment proceedings. It has already been stated that the failure on the part of the Assessing Officer to make an enquiry on a relevant issue/point would render the assessment erroneous and prejudicial to the interest of the revenue. Hence, not having enquired into the above issue has resulted in an erroneous order which is prejudicial to the interest of the revenue.

8. In the totality of the position of law and facts & circumstances of the case, the assessment order passed by the Assessing Officer on 24/01/2014 is hereby set aside in respect of the points stated in the show-cause notice. The A.O. is directed to initiate

4 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 fresh assessment proceedings & carry out necessary enquiries /verification & provide reasonable opportunity to the assessee firm to produce documents & evidences which it may chose to rely upon for substantiating its own claim. Thereafter a fresh assessment order may be passed in accordance with the relevant provisions of law.”

but at the time of assessment proceedings, the grievance of the assessee has been confined to ground Nos. 2,3,4 and 5 and the other grounds have not been pressed. Ground Nos. 2 to 5 are solitary grievances of the assessee which read as under :- “2. For that the Ld. CIT erred in exercising the power of revision for the purpose of directing the A.O. to hold another investigation when the order of the A.O. was neither erroneous nor prejudicial to the interest of the revenue.

3. (a) For that the Ld. CIT was not justified in holding that the bank interest income earned by the assessee co-operative credit society amounting to Rs.40,87,926/- does not qualify for deduction u/s. 80P. (b) For that the issue whether the bank interest income earned by the assessee qualifies for deduction u/s 80P has already been considered and inquired into by the A.O. and the issue is also subject-matter of adjudication before the CIT(A). As such, the Ld. CIT has no jurisdiction to invoke revisionary power in regard thereto.

4. For that the Ld. CIT was not justified in holding that the income earned from the house building loan to staff does not qualify for deduction u/s 80P.

5. (a) For that the Ld. CIT was not justified in holding that the receipt from the members towards the printing & stationery cost, which was credited to Miscellaneous Receipts account, does not qualify for deduction u/s 80P. (b) For that the Ld. CIT ought to have considered the fact that receipts on account of printing & stationery from members were required to be netted against the printing & stationery expenses. As such, the same had no income element.”

5. Ground No.2:The ld. AR for the assessee submitted that the ld. CIT was wrong in exercising the powers to hold another investigation that the order of the AO was neither erroneous nor prejudicial to the interest of the revenue. The ld. AR submitted that everything was available on record of the AO and nothing was hidden by the assessee. Hence order passed by the AO cannot be erroneous and prejudicial to the interest of the revenue.

5 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 6. On the other hand, the ld. DR for the revenue has primarily reiterated the stand taken by the ld. CIT and stated that order was erroneous and prejudicial to the interest of the revenue because the interest income are from the cooperative society at Rs.40,87,926/- does not qualify for deduction u/s 80P of the Act and the income earned from the house building loan does not qualify for deduction u/s 80P of the Act and printing and stationery which are credited does not qualify for deduction u/s 80P of the Act. Therefore order was erroneous and prejudicial to the interest of the revenue and CIT has rightly exercised his jurisdiction u/s 263 of the Act.

6 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 The ld. AR has further submitted that section 80P(1) of the Act states that “the amount of profits and gains of business attributable to any one or more activity” would be eligible for deduction u/s 80P(1) of the Act. The relevant portion of section 80P(1) reads as follows :- “80P(1) Where, in the case of an asessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub- section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:- (a) in the case of a co-operative society engaged in – (i) carrying on the business of banking or providing credit facilities to its members or………………………………………………………………….. the whole of the amount of profits and gains of business attributable to any or more of such activities.”

The above cited section clearly shows that the income attributable out of the investment of the funds credited u/.s 63 of the Cooperative Society is an income attributable to the business.

The assessee has also stated in his ground that the said subject matter was before ld CIT(A) for adjudication, therefore the CIT had no power to invoke revisionary power U/s 263 of the Act. We do not find any force in the statement of the ld AR because he does not show us the relevant proof that the said matter was pending before the ld CIT(A) for adjudication.

We also noticed that the following judicial precedents are available on the issue under consideration:

(i). BIHAR STATE HOUSING CO-OPERATIVE FEDERATION LTD. vs. COMMISSIONER OF INCOME TAX-HIGH COURT OF PATNA (2009) 315 ITR 286 The interest earned on the deposits made does not arise out of one or more of the activities specified in s. 80P(2)(a)(i) but the interest received by the assessee on the bank deposit is ancillary and incidental to carrying on the business of providing credit facility to its members and, as such, exempt under the aforesaid provisions. It may be stated herein that the assessee deposits surplus funds available with it in banks and earns interest thereon. The nature of activity in which the assessee is involved clearly creates a situation when surplus fund is available to it which it deposits in bank and earns interest thereon. The placement of such fund being incidental and ancillary to carrying on of the business of providing credit facility to its members by reason of s. 80P(2)(a)(i), same is exempt under the aforesaid provisions.—CIT vs. Karnataka State Cooperative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) relied on (ii). GUTTIGEDARARA CREDIT CO-OPERATIVE SOCIETY LTD. vs. INCOME TAX OFFICER-HIGH COURT OF KARNATAKA (2015) : 377 ITR 464:

“Certain sums of interest were earned from short-term deposits and from savings bank account. The assessee is a Co-operative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest.(para 7)

Co-operative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, the society cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the 8 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.(para 10)

Amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to its members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of Commissioner of Income Tax-III, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., reported in (2011) 200 Taxman 220/12. Order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law.

(iii). THE TOTGARS CO-OPERATIVE SALE SOCIETY LTD. vs. INCOME TAX OFFICER- SUPREME COURT OF INDIA (2010): 322 ITR 283 Assessee markets the produce of its members whose sale proceeds at times were retained by it. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. Such interest income would come in the category of "income from other sources", hence, such interest income would be taxable under s. 56 as rightly held by the AO. An income, which is attributable to any of the specified activities in s. 80P(2) would be eligible for deduction. Assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-society provides credit facilities to its members, it earns interest income. Interest held as ineligible for deduction under s. 80P(2)(a)(i) is not in respect of interest received from members. Assessee markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-society, was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in s. 80P(2)(a)(i) or in s. 80P(2)(a)(iii). Therefore, looking to the facts and circumstances of this case, the AO was right in taxing the interest income, indicated above under s. 56.(Para 10)

The alternative submission advanced by the assessee stating that, if interest income in question is held to be covered by s. 56, even then, the assessee-society is entitled to the benefit of s. 80P(2)(a)(i) in respect of such interest income has no merit. Sec. 80P(2)(a)(i) cannot be placed at par with Expln. (baa) to s. 80HHC, s. 80HHD(3) and s. 80HHE(5). Each of the said sections has to be interpreted in the context of its subject-

9 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 matter. The scope of s. 80HHC is different from the scope of s. 80P, which deals with deduction in respect of income of co-operative societies. Even Expln. (baa) to s. 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Expln. (baa) to s. 80HHC, therefore, cannot be compared with the words used in s. 80P which grants deduction in respect of "the whole of the amount of profits and gains of business".(Para 11)

(iv). COMMISSIONER OF INCOME TAX vs. KARNATAKA STATE COOPERATIVE APEX BANK-SUPREME COURT OF INDIA (2001):251 ITR 194:

The assessee co-operative bank is required to place a part of its funds with the SBI or the RBI 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 s. 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee’s business. There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.—Karnataka State Co-operative Apex Bank (Judgment dt. 12th Jan., 2000, of the Karnataka High Court in IT Ref. No. 876-878 of 1998) affirmed; M.P. Cooperative Bank Ltd. vs. Addl. CIT (1996) 134 CTR (SC) 92 : 1996 (2) SCC 541 : TC S26.2715 overruled; CIT vs. Bangalore District Cooperative Central Bank Ltd. (1998) 148 CTR (SC) 226 : 1998 (6) SCC 129 : TC S26.2714 approved sans reasoning.

(v) COMMISSIONER OF INCOME TAX vs. NAWANSHAHAR CENTRAL CO-OP. BANK LTD.SUPREME COURT OF INDIA (2012): 349 ITR 689 The income earned by the Assessee which was derived from underwriting the issue of bonds and investments in PSEB Bonds is in the nature of income from banking business and hence qualified for deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961.

The assessee under consideration is not a co-operative bank therefore decision in NAWANSHAHAR CENTRAL CO-OP. BANK LTD and KARNATAKA STATE COOPERATIVE APEX BANK ( supra) are not applicable, as the facts and nature of business is different and these judgments can be distinguished on facts. Besides, the facts narrated in the judgment of Hon`ble S.C. in THE TOTGARS CO-OPERATIVE SALE SOCIETY LTD. vs. INCOME TAX OFFICER- (2010): 322 ITR 283, are distinguishable, in this case assessee was carrying on the business of providing credit facilities to its members and marketing of the agricultural produce of its members U/s 80P(2)(a)(iii), hence does not applicable squarely to the facts of the assessee under consideration.

The ld. AR for the assessee has cited a judgment, which is held by the Hon’ble Calcutta High Court in assessee`s own case in CIT vs South Eastern Railway Employees Co-op Credit Society Ltd. In of 2007 wherein the court has taken the following view: “ In that view of the matter, the question raised for decision is answered in the affirmative and in favour of the revenue to the extent as indicated above. The appeal is allowed. The matter is , however, remanded to the Assessing Officer (a) to work out

10 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 the interest earned u/s 63 and 64 of Multi State Cooperative Societies Act, 2002 and to allow the benefit u/s 80-P and (b). to ascertain the interest paid to the members for the purpose of earning the sums of Rs. 99 lakhs and 1.2 crores on account of interest from investments. Such interest shall be deducted from the expenses of eligible business. Consequent increased amount of profits of eligible business as discussed above, shall be the amount of deduction available to the assessee u/s 80P of the Act.”

Respectfully, following the judgment of Hon`ble High Court of Calcutta, in assessee`s own case, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly we set aside the order of the ld. CIT and restore this issue to the file of the AO with the direction to ascertain the deduction u/s 80P of the Act, in the light of the discussion in assessee`s own case, supra.

15.The ld. AR for the assessee has stated that the staff of the cooperative society who are working for the society and their object is to enhance the business activities of the society. Therefore the house building loan provided to the staff should be available as deduction u/s 80P of the act in the hands of the assessee.

11 S.E.S.E.C.,E.Co.Railway Employees Co-op.Credit Society Ltd. A..Y.2011-12 attributable to the business and is not eligible for deduction u/s 80P. We have also consulted section 80P of the Act, where nothing is mentioned about the building loan to the staff ,claimed u/s 80P of the Act. Therefore in view of the above cited facts, we confirm the order of CIT.

Order pronounced in the court on 28.09.2016.