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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A” , HYDERABAD
Before: SHRI LALIET KUMAR, HON’BLE & SHRI MADHUSUDAN SAWDIA
O R D E R PER BENCH:
These appeal are filed by Sree Kanyaka Mutually Aided Co-op Thrift Credit and Marketing Society Limited, Hindupur (“the assessee”), feeling aggrieved by the separate orders passed by the learned Commissioner of Income Tax (Appeals)- National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), dated 06.02.2024 and 04.01.2024 for the A.Ys. 2018-19 and 2020-21, respectively.
Since, the facts are identical and issues are common but for the figures, for the sake of convenience, these two appeals were heard together and are being disposed of, by this consolidated order.
The assessee has raised the following grounds of appeal in A.Y. 2018-19.
“1. That the order of the CIT(A) in so far it is prejudicial to the interest of the appellant is bad and erroneous in law and against the facts and circumstances of the case.
2. That the order of the CIT(A) erred in law and on facts in disallowing the sum of Rs.4,06,224/- claimed as deduction u/s 80P(2)(a)(i) of the Act.
3. That the ld.CIT(A) erred in law and on facts in stating that the income is not an operational income and hence not eligible to claim deduction u/s 80P(2)(a)(i).
4. That the ld.CIT(A) erred in law and on facts in not allowing the proportionate expenditure on interest income earned from the deposits made on the principle of commercial expediency”.
3.1 Similar grounds were raised by the assessee in the other appeal i.e., for A.Y. 2020-21.
The appeal filed by the assessee in is barred by limitation by 94 days. The assessee has moved a condonation petition explaining reasons thereof. We have heard both the parties on this preliminary issue. Having regard to the reasons given in the condonation petition, we condone the delay and admit the appeal for hearing.
Facts of the case, in brief, are that the assessee is a Co- op Society which is carrying on the business of banking and providing credit facilities to its members, which is registered under the Andhra Pradesh Mutually Aided Co-operative Societies Act, 1995. The assessee filed the return of income for the A.Y.2018-19 declaring total income at Rs.NIL after claiming deduction of Rs.26,21,085/- u/s.80P of the Income Tax Act, 1961 (“ the Act” ). Subsequently, the case of the assessee was selected for limited scrutiny on the issue of deduction from total income under Chapter-VI-A of the Act. The learned Assessing Officer ( “ Ld. AO” ) completed the assessment u/s.143(3) of the Act on 16/04/2021, disallowing the claim of deduction u/s.80P of the Act on account of interest received from IDBI Bank amounting to Rs.4,06,244/- and added the same to the total income of the assessee under the head income from other sources u/s.56 of the Act. The observation of the Ld. AO for such disallowance is covered under para no. 5 to 10 of his order, which is reproduced as under : 5. In response to this, the assessee has submitted his reply and stated the facts of the case. The assessee has stated that assessee’s society is not doing any banking business except accepting deposits from its own members and advancing loans to members.. Assessee has submitted that they have to make deposits with nationalized banks with only intention to get reasonable interest on such deposits. Reply of the assessee has been examined and found to be satisfactory but not justifiable on the point of receipt of Interest income from IDBI bank.
Assessee has also relied upon the judgement of The Hon’ble High Court of AP in the case of CIT Vs Andhra Pradesh State Cooperative Bank Ltd, which is not applicable to the fact of the case under scrutiny. Hence, the interest income received from investments in Banks cannot be presumed to be or attributed as the income of the Society from its business activity. Interest on such investments, therefore, cannot fall within the meaning of the expression “profits and gains of business” and not eligible for deduction under section 80P(2)(a)(iv) of the Act. Such interest income cannot be said also to be attributable to the activity of the society, namely, carrying on the business of providing credit facilities to its members. When the assessee – society provides credit facilities to its members, it earns interest income which only is eligible for deduction under section 80P(2)(a)(i) of the Act. Similarly, the other case laws relied upon by the assessee in the submissions has been examined and it has been found that the set of facts and circumstances discussed in these cases are distinguishable from the set of facts and circumstances of the assessee’s case and with due regards to the respective Courts, I am of the considered view that none of the decision relied upon is of any help to the assessee. Hence the reply of the assessee has been duly considered but not found tenable and hence not acceptable.
The assessee case is squarely covered by this decision of the Hon’ble Supreme Court in the case of Totgar’s Co-operative Sale Society Ltd. V ITO, [2010] 322 ITR 0283 dated 08.02.2010. In the said decision, the Hon’ble Supreme Court has held that the scope of special deduction must relate to the operational income of the Co-operative Society providing credit facility to its members and the interest earned on investments in short term deposits and securities out of surplus funds, not immediately required for business activity, is not business income but income from other sources u/s 56 and the Society is not entitled to special deduction u/s 80P on such interest etc.
8. I also find support for the conclusion arrived at from the amendment to the Income Tax Act, 1961, effected by the Finance Act, 2006, w.e.f. 01.04.2007, wherein section 2(24)(viia) has been inserted and the definition of income, inter-alia, has also been defined as “the profit and gains of any business of Banking (including providing credit facilities) carried on by a co-operative society with its members”. This amendment makes it abundantly clear that if a co-operative society (and not a cooperative bank) undertakes any banking activity with its members, including the activity of providing credit facility, and earns profits &gains from such activity, then such sums will be its income. This in turn implies that such profits and gains of the Co-operative Society will be entitled for exemption / deduction u/s 80P. Thus, profits & gains of a Co- operative Society from its business activity of providing Banking facility, including providing credit facility, to its members only will be its income entitle for deduction u/s 80 P, and no other income, which is not attributable to its business activity, will be entitled for such a deduction.
9. It is clearly mentioned in above section that the interest and dividend are to be derived from the Co-operative society. However, in this case, income was derived from the Co-Operative Bank. Further, reference is invited to Section 80P(4) of the Income Tax Act, 1961, reproduced hereunder: “(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation.—For the purposes of this sub-section,— (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities. ” 9.1 In view of above discussion , it is evident that deduction u/s 80P(2)(d) is available on interest or dividend derived from its investment made in co- operative society and not available if interest/dividend was received from investment made in bank as per section 80P(4).
10. Keeping in view of the above facts and circumstances of the case, the submissions filed by the assessee in response to notice u/s 142(1) dated 24/02/2021 is accepted but not found to be tenable as discussed above. Therefore, the interest income received from IDBI Bank amounting to Rs. 4,06,244/- is not found to be exempted under section 80P and hence is added back to the total Income of the assessee for the year under consideration, under the Head “Income from other sources” u/s 56 of the Income Tax Act,1961. (Addition: Rs. 4,06,244/-) 6. Feeling aggrieved by the order passed by the Ld. AO, assessee filed appeal before the Ld. CIT(A), who dismissed the appeal of assessee as per his observation under para no. 4.3 to 4.6, which is reproduced as under : “4.3. The above submission of the appellant has been considered. It is notable that as per the Section 80P (2) (a) (i) and 80P (2) (d) of the Income Tax Act, 1961 the interest earned by way of investments made with other co-operative societies alone eligible for deduction. The relevant portion of the same is reproduced below: “80P. (1) Where, in the case of an assessee 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 subsection (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” .(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other cooperative society, the whole of such income;” 4.4. From the above, it is ascertained that the Section 80P (2) (a) (i) of the Income Tax Act, 1961 allows the Co-operative Societies to claim the deduction of the income earned by providing credit facilities to its members alone and not for the interest income earned on the deposits held with various banks. In other words, the deduction is allowable only on ‘operational income’ of the appellant society by way of providing credit facility to its members. In the instant case, the appellant has earned interest out of fixed deposits made in IDBI Bank during the year. Hence, it is clear that the said interest receipt is not out of providing credit facilities to its members. Hence, the appellant is not eligible for deduction u/s.80P(2)(i) of the Act. 4.5. It is further notable that, the said interest was received from IDBI Bank out of the fixed deposits invested by the appellant. Hence, it is clear that, the said receipt is not from the co-operative societies as it is contempt as per section 80P(2)(d) of the Act. Accordingly, the said receipt is not eligible for deduction u/s.80P of the Act as per the decision of Hon’ble Supreme Court’s judgment in the case of Totgar’s Co-Op Sale Society Ltd. Vs. ITO {229 CTR 209(sc) (2010)} and Hon’ble Delhi High Court in the case of Mantola Cooperative Thrift Credit Society Ltd. V. CIT(2014) 50 taxmann.com 278(2015) 229 Taxman 68, where in it was held that the interest received out of investments made in the banks on the surplus of the co-operative societies is not eligible for the claim of deduction u/s.80P(2)(d) of the Act. Further clarity, the relevant part of the decision of Hon’ble SC in the case of Totgar’s Cooperative sale society Ltd. is as under:
“In the present case, as stated above, 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. As stated above, in this case, interest held as ineligible for deduction under Section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) 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 Section 80P(2)(a)(i) of the Act or in Section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act.” 4.6. Hence, respectfully following the above said Hon’ble Supreme Court’s judgment and provisions contained in the Section 80P(2)(a)(i) & 80P(2)(d) of the Income Tax Act, 1961, the stand taken by the AO in the assessment order of not allowing deduction of the receipt of interest income of rs.4,06,244/- out of its investment made in IDBI Bank u/s. 80P of the Income Tax Act, 1961 is hereby confirmed.
7. Feeling aggrieved with the order of Ld. CIT(A), the assessee is now in appeal before us. The argument of Ld. AR were two fold. Firstly, the assessee is eligible for grant of deduction u/s 80P(2)(a)(i) of the Act and secondly, if the first contention is not acceptable, then the assessee is entitled for claim of deduction u/s 57 of the Act.
With regards to the first contention, the Ld. AR submitted that the assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act on account of interest received from IDBI Bank amounting to Rs.4,06,244/- . The ld. AR also submitted that, in support of their claim the assessee rely on the decision co-ordinate Bench of the Tribunal in the case of the Ghatkesar Farmers Service Cooperative Society Limited Vs. ITO (ITA No.111/Hyd/2023 dt.11.04.2023) placed at page 51 of the paper book. For this the Ld. AR brought to our notice the relevant para no. 7 & 8 of the order of the Tribunal in Ghatkesar Farmers Service Cooperative Society Limited (supra), which are reproduced as under :
“7. Coming to the objection of the authorities that any interest accrued from investment with a commercial bank and not attributable to the activities specified in section 80P(2)(a) of the Act, cannot be allowed as a deduction is concerned, this issue is no longer res integra. Hon’ble jurisdictional High Court considered the same in extenso in The Vavveru Co-operative Rural Bank Ltd. (supra). On a threadbare analysis of the provisions under section 80P of the Act in the light of various decisions including the decision of the Hon’ble Apex Court in the case of Totgars Co- operative Sale Society Ltd. (supra) and jurisdictional High Court in the case of CIT vs. Andhra Pradesh State Co-operative Bank Ltd [2011] 12 taxmann.com 66 (Andhra Pradesh), the Hon’ble High Court reached a conclusion that if the investment is made in fixed deposits in nationalised banks from out of the own funds of the assessee, the interest derived from such investment would be from the activities listed in clause (i) to (vii) of section 80P(2)(a) of the Act and would be eligible for deduction. For the sake of completeness, we deem it necessary to extract the relevant observations of the Hon’ble High Court hereunder,- “28. ……… Before considering the effect of the various decisions cited on both sides, we think it would be ideal to look at the statutory prescription in pure and simple form. As we have indicated earlier, section 80P(2) is actually divided into six parts, categorised under clauses (a), (b), (c), (d), (e) and (f). Each one of these clauses deal with different types of co- operative societies engaged in different types of activities. The benefit made available to each one of them is also different from the other. Therefore, it may be useful to present a tabular form, the six categories of co-operative societies covered by clauses (a) to (f) and the nature and extent of the benefit available to each one of them, as follows : … … … … … … 30. Therefore, what follows is that when a co- operative society engaged in any one of the activities stipulated in sub-clauses (i) to (vii) of clause (a) makes profits and gains out of business attributable to anyone of those activities, the case would fall under clause (a). The moment the income derived from one of those activities is invested in another co-operative society and an interest or dividend is derived therefrom, the case would be covered by clause (e). In case the profits and gains of business arising out of the activities listed in sub-clauses (i) to (vii) of clause (a) is invested in immovable properties, such as, godowns or warehouses and an income is derived therefrom, the case would be covered by clause (e) of section 80P(2).
The only area of distinction between clause (a) on the one hand and clauses (d) and (e) on the other hand is that the benefit under clause (a) is restricted only to those activities of a co-operative society enlisted in sub-clauses (i) to (vii) of clause (a). On the other hand, the benefit under clauses (d) and (e) are available to all co-operative societies, without any restriction as to the nature of the activities carried on by them.
In simple terms, the position can be summarised like this. If there is a co-operative society, which is carrying on several activities including those activities listed in sub-clauses (i) to (vii) of clause (a), the benefit under clause (a) will be limited only to the profits and gains of business attributable to any one or more of such activities. But, in case the same cooperative society has an income not attributable to any one or more of the activities listed in sub-clauses (i) to (vii) of clause (a), the same may go out of the purview of clause (a), but still, the co-operative society may claim the benefit of clause (d) or (e) either by investing the income in another cooperative society or investing the income in the construction of a godown or warehouse and letting out the same.
In other words, the benefit conferred by clause (d) upon all types of co-operative societies is restricted only to the investments made in other co-operative societies. Such a restriction cannot be read into clause (a), as the temporary parking of the profits and gains of business in nationalised banks and the earning of interest income therefrom is only one of the methods of multiplying the same income. To accept the stand of the Department would mean that co- operative societies carrying on the activities listed in clauses (i) to (vii), which invest their profits and gains of business either in other co-operative societies or in the construction of godowns and warehouses, may benefit in terms of clause (d) or (e), but the very same societies will not be entitled to any benefit, if they invest the very same funds in banks. Such an understanding of section 80P(2) is impermissible for one simple reason. The benefits under clauses (d) and (e) are available in general to all co-operative societies, including societies engaged in the activities listed in clause (a). Section 80P(2) is not intended to place all types of co- operative societies on the same pedestal. The section confers different types of benefits to different types of societies. Special types of societies are conferred a special benefit.
The case before the Supreme Court in Totgar's Co- operative Sale Society Ltd.'s case (supra) was in respect of a cooperative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.
But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub- clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to". 37. Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside”. 8. It is therefore, clear that the assessee being a primary agricultural co- operative society invested the own surplus funds with the Union Bank of India and, therefore, the assessee is entitled to claim the deduction under section 80P(2)(a)(i) of the Act. With this view of the matter, we direct the learned Assessing Officer to delete the addition made by disallowing the deduction claimed under section 80P(2)(a)(i) of the Act.”
With regards to the second contention, the Ld. AR submitted that, if the first contention is not acceptable, then the assessee is entitled for deduction u/s 57 of the Act. The ld. AR also submitted that, in support of their claim the assessee rely on the decision of co- ordinate Bench of the Tribunal in the case of The Totgars’ Cooperative Sale Society Ltd. Vs. ITO reported, 58 Taxmann.com 35, placed at Page 11 of the paper book, wherein the Tribunal at para nos.9.1 to 9.4 has held as under :
“9.1 In the instant case, the amount which was invested in banks to earn interest was not any amount due to its members. Further the claim of the assessee in u/s 80P(2)(d) 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 co-operative bank again which interest/dividend was earned. 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 CIT v. Andhra Pradesh State Co-operative Bank Ltd. [2011] 336 ITR 516/200 Taxman 220/12 taxmann.com 66. 9.2 Therefore, reliance was placed by the Ld.DR on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. vs. ITO reported in (2010) 188 Taxman 282 is distinguishable on facts. The adjudication by the Hon’ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. vs. ITO(supra) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction under Sec.80P(2)(d) on the interest income on the investments/deposits parked with a cooperative bank. 9.3 At this juncture, we refer to subsequent decision of Hon'ble Karnataka High Court in the case of PCIT Vs. Totagars cooperative Sale Society reported in (2017) 395 ITR 611, wherein Hon’ble Court held that, a co- operative society would not be entitled to claim of deduction under Sec. 80P(2)(d). At the same time, we find, that the Hon'ble Karnataka High Court in the case of PCIT & Anr. vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, held, that the interest income earned by a co-operative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. 9.4 It is directed that the interest earned by the assessee from commercial banks may be considered under the head ‘income from other sources’ and relief may be granted as available to the assessee u/s 57 of the Act in accordance with law. “
Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.
We have heard the rival contentions of both the parties and perused the material available on record. As far as the first issue is concerned, the case Ghatkesar Farmers Service Cooperative Society Limited Vs. ITO (Supra), relied upon by the assessee, deals with the case of Primary Agricultural Co-operative Society and do not apply to the case of the assessee. So far as the case of The Totgars Cooperative Sale Society Ltd. Vs. ITO(Supra), relied upon by assessee, at para 9.1 to 9.3 (at page no. 12 of the paper book), the co-ordinate Bench of the Tribunal has held that the assessee is not eligible for deduction u/s 80P(2)(d) of the Act. The observations made by the Tribunal is reproduced hereinabove. Hence with respect to the first ground, the issue is decided against the assessee by the co-ordinate Bench of the Tribunal. Therefore, the first issue regarding the entitlement of deduction u/s 80P is decided against the assessee, by respectfully following the decision of co-ordinate Bench of the Tribunal in the case of The Totgars’ Co-operative Sale Society Ltd (supra).
As far as the second issue is concerned, by the same judgment in the case of The Totgars’ Co-operative Sale Society Ltd(Supra) at para no. 9.4, the co-ordinate Bench of the Tribunal has held that the assessee is entitled to the relief available u/s 57 of the Act in accordance with law. Hence if the income of the assessee is computed under income from other sources, then the deductions provided u/s 57 of the Act are allowed from such income. For the purpose of allowance of deduction in the case of the assessee, it is necessary to go through the provisions contained in section 57(iii) of the Act, which provides as under :
“Section 57 The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely: -- (i)------------ (ia)----------- (ii)------------ (iia)---------- (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”
12.1. From the reading of Section 57(iii) of the Act, it is clear that, such expenditure which is wholly and exclusively spent for the purpose of earning such other income is only required to be allowed. The Ld. AR brought our attention to the page no. 6 of the paper book filed by the assessee containing the details of the expenditure under the head “cost of administration” claiming to be the expenditure which is wholly and exclusively spent for the purpose of earning such other income, which is to the following effect :
On a pointed query, whether the said “cost of administration” can be said to be the expenditure wholly and exclusively relatable to the income earned by the assessee from other sources. The Ld. AR has fairly submitted that the whole expenditure under “cost of administration” is not attributable to the income earned by the assessee and only part of it is relatable to the income earned by the assessee from other sources. In the light of the above, we are of the considered opinion that the matter is required to be remanded back to the file of the Ld. AO for limited purpose of verifying and computing what is the actual expenditure incurred by the assessee which is wholly and exclusively relatable to the income earned i.e., income earned from interest on account of amount deposited with IDBI Bank. For the above said limited purpose, the appeal of the assessee is remanded back to the file of the Ld.AO. Needless to mention that, the Ld. AO should provide reasonable opportunity of being heard to the assessee before deciding the issue.
In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. for A.Y. 2020-21
Now coming to the other appeal of assessee i.e., ITA 602/Hyd/2024 for A.Y. 2020-21, which is identical to the facts and issues raised in ITA 224/Hyd/2024 for A.Y. 2018-19, our decision in would apply mutatis mutandis to this appeal also. Accordingly, is partly allowed for statistical purposes.
In the result, appeal of assessee in is partly allowed for statistical purposes.
In the combined result, both the appeals of assessee are partly allowed for statistical purposes.
Order pronounced in the Open Court on 22nd July, 2024.