DURGAPUR RAYATWARI COLLIERY KAMGAR SAHAKARI PAT SANSTHA,CHANDRAPUR vs. ITO WARD-2, CHANDRAPUR

Date of Hearing – 18/11/2024 Date of Order – 28/11/2024

O R D E R PER K.M. ROY, A.M.

These appeals are filed by the assessee challenging the impugned orders of even date 09/02/2024, passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, Delhi, [“learned CIT(A)”], for the assessment year 2018–19 and 2020–21.

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./2024 Assessee’s Appeal – A.Y. 2018–19

3. In this appeal, the assessee has raised following grounds:–

“1) Whether on the facts and circumstances of case, the Ld CIT(A) was justified in assuming that the Co-operative Bank is not a Co-operative Society as envisaged by provisions of Sec.80P(2)(d) of IT Act 1961. 2) The Ld. CIT(A) committed a patent mistake in assuming that the Co- operative Bank Was not a Co-operative Society and for that reason the legitimate claim about the Deduction us.80P(2)(d) in respect of Interest earned on Investment with Cooperative Bank deductibility of which has been upheld by several appellate Authorities including ITAT and High Courts but was denied to the Appellant. 3) The appellant craves leave to add, alter, clarify, explain, modify, delete any of the grounds of appeal, and to seek any just and fair relief.”

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Sr. Deduction claimed u/s Amount no. i) Under section 80P(2)(a)(i) ` 47,20,046 ii) Under section 80P(2)(c)(i) ` 50,000 ` 90,30,908 iii) Under section 80P(2)(d)

Sr. Deduction claimed u/s Amount no. i) Under section 80P(2)(a)(i) ` 34,14,217 ii) Under section 80P(2)(c)(i) NIL iii) Under section 80P(2)(d) ` 91,47,236

4 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 The Assessing Officer, therefore, in view of the detailed analysis made in the assessment order vide Page–2 to 10, the deduction of ` 91,47,236, claimed by the assessee under section 80P(2)(d) of the Act is hereby disallowed which was added back to the total Income of the assessee–society. The assessee being aggrieved, carried the matter in appeal before the first appellate authority.

7. The learned CIT(A) partly allowed the assessee’s appeal by observing as follows:–

“5.1 I have perused the order passed by the AC the AO and the written submissions filed by the appellant. The issues raised in the grounds, which require adjudication are as under. (a) Disallowance of deduction claimed u/s 80P(2)(d) of the Act (b) Levy of Interest u/s 234B and 234C of the Act 6. Disallowance of deduction claimed u/s 80P(2)(d) of the Act 6.1 During the course of appeal proceedings, the appellant furnished copy of the order of the earlier CIT(A) on identical issue, dated 05.06.2023 for the AY 2017-18 in appellant's own case, allowing the claim made u/s 80P(2)(d) of the IT Act by holding that "Co-operative Banks are also Co-operative Societies unless they hold a licence issued by the RBI and interest income earned by the Co-operative Society from the investment made with the Cooperative Banks is eligible for claim of deduction u/s 80P(2)(d) of the IT Act." 6.2 The above said observation of the earlier CIT(A) is very crucial to decide the deduction of 80P(2)(d) of the IT Act. He held that if a co- operative bank holds a licence of banking from RBI, then the appellant will not be eligible to claim deduction on the Interest earned from the deposits made. In order to get the facts, the appellant was asked to furnish the audited P&L account as well as details of deposits made with co-operative banks and co-operative societies. It was provided by the appellant, which is as under:

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1. 1. As per Sec. 80P(2)(a), a co-operative society engaged in various business activities given in clause (1) to (vii) is eligible to claim deduction in computing total income.

2. As per Sec. 80P (2)(b), a co-operative society, being a primary society engaged in supplying milk, oil seeds, fruits or vegetables raised or grown by its members to a federal co-operative society or the government or local authority or a govt company defined in Sec. 617 of the Companies Act or a Corporation established by or under a Central, State or Provincial Act is eligible to claim deduction of the whole amount of profit and gains of such business.

3. As per Sec. 80P(2)(c), a co-operative society engaged in activities other than those specified in clause (a) or (b), can claim deduction of its the profits and gains attributable to such activities does not exceed Rs.1,50,000/- (if that was a consumer co-operative society) and Rs.50,000/- in any other case.

4. As per Sec. 80P(2)(d), in respect of any income by way of interest or dividend derived by the co-operative society, from its investments, with any other co-operative society, the whole such income.

5. As per Sec. 80P(2)(e), in respect of any income derived by the co- operative society from the letting of go downs or warehouses for storage, processing or facilitating the marketing of commodities, the whole such income.

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10. In the present case, the assessee claimed that they are a co- operative society engaged in carrying on the business of maintenance of Business Park.

8 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 1912 or under any other law for time being in force in any State for the registration of co-operative societies.

20. With this background, the issue here is whether interest income derived by the assessee co-operative society from its investment with any other co-operative bank or scheduled bank was eligible to claim deduction u/s 80P(2)(d) of the IT Act has to be examined. The following factual and legal aspects are crucial to determine the claim of deduction:

1. 1. The assessee being a co-operative society engaged in maintenance of business park. They also eamed interest income from time deposits with The Akola Urban Co-operative Bank and Chandrapur District Co- operative Bank.

2. It is an admitted fact that The Akola Urban Co-operative Bank and Chandrapur District Co- operative Bank are co-operative bank and approved by RBI and it is not a co-operative society. When those Banks obtained licence from RBI and functioning as scheduled bank, it cannot be classified as co-operative society.

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10 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 of the Income Tax Act, 1961 and not on the interest income earned on the investment made with Co-operative Bank. My predecessor has also held the same in his appeal order for the AY 2017-18.

The assessee being aggrieved by the order of the learned CIT(A), filed further appeal before the Tribunal.

“9. Upon hearing both the counsel and perusing the record, we find that the issue involved is covered in favour of the assessee by a catena of decisions from ITAT as well as a decision of jurisdictional High Court. In this regard we may gainfully refer the Hon‟ble Jurisdictional High Court decision in the case of CIT vs. Solapur Nagri Audyogik Sahakari Bank Ltd. 182 Taxman 231 wherein the following question was raised.

11 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 “Whether the interest income received by a Co-operative Bank from investments made in Kisan Vikas Patra („KVP‟ for short) and Indira Vikas Patra („IVP‟ for short) out of voluntary reserves is income from banking business exempt under Section 80P(2)(a)(i) of the Income Tax Act, 1961?” After considering the issue, the Hon‟ble Jurisdictional High Court has concluded as under : “12. Therefore, in all these cases, where the surplus funds not immediately required for day-to-day banking were kept in voluntary reserves and invested in KVP/IVP, the interest income received from KVP/IVP would be income from banking business eligible for deduction under section 80P(2)(i) of the Act.

10. Similarly we find that similar issue was considered by this Tribunal on similar grounds raised

by the Revenue in the case of MSEB Engineers Co-Op. Credit Society Ltd., wherein the ITAT, Nagpur Bench, vide order dated 05/05/2016 held as under : “Upon hearing both the counsel and perusing the records, we find that the above issue is covered in favour of the assessee by the decision of this ITA, referred by the Ld. CIT(A) in his appellate order. The distinction mentioned in the grounds of appeal is not at all sustainable. We further find that this Tribunal again in the case of Chattisgarh Urban Sahakari Sanstha Maryadit Vs. ITO in vide order dated 27.05.2015 has adjudicated similar issue as under:-

11. Upon careful consideration, we not that identical issue was the subject matter of consideration by ITAT, Ahmedabad Bench decision in the case of Dhanlaxmi Credit Cooperative Society Ltd (supra), in which one of us, learned Judicial Member, was a party. The concluding portion of the Tribunal‟s decision is as under:

4. With this brief background, we have heard both the sides. It was explained that the Co-operative Society is maintaining “operations funds” and to meet any eventuality towards repayment of deposit, the Co- operative society is maintaining some liquidated funds as a short term deposit with the banks. This issue was thoroughly discussed by the ITAT “B” Bench Ahmedabad in the case of The Income Tax Officer vs. M/s.Jafari

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Momin Vikas Co-op Credit Society Ltd., bearing (for A.Y. 2009-10) and CO No. 138/Ahd/2012 (by Assessee) order dated 31/10/2012. The relevant portion is reproduced below :- “19. The issue dealt with by the Hon‟ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts as under : What is sought to be taxed under section 56 of the Act is interest income arising on the surplus invested in short term deposits and securities, which surplus was not required for business purposes? The assesse(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question before us, is whether interest on such deposits/securities, which strictly speaking accrues to the members‟ account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of „income from other sources‟ hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer…..” 19.1 However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon‟ble Supreme Court – “(on page 286) 7 …….. Before the assessing officer, it was argued by the assesse(s) that it had invested the funds on short term basis as the funds were not required immediately for business purposes and consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence these civil appeals have been filed by the assessee(s). 19.2 From the above, it emerges that (a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits; (b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members;

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(c) that assessee carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii)marketing the agricultural produce; and (d) that the surplus had arisen emphatically from marketing of agricultural produces. 19.3 In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds. 19.4 While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely: (1) in the case of assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds:- - in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members; (2) in the case of present assessee, it had not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such; - in the case of Totgars, the Hon‟ble Supreme Court had not spelt out anything with regard to operational funds; 19.5 Considering the above facts, we find that there is force in the argument of the assessee that the assessee not a co-operative bank, but its nature of business was coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds. That was why, it was submitted by the assessee that it had invested in short- term deposits. Furthermore, the assessee had maintained overdraft facility with Dena Bank and the balance as at 31.3.2009 was Rs.13,69,955/- [source : Balance Sheet of the assessee available on record]. 19.6 In overall consideration of all the aspects, we are of the considered view that the ratio laid down by the Hon‟ble Supreme Court in the case of Totgars Co-op Sale Society Ltd (supra) cannot in any way come to the rescue of either the Ld. CIT (A) or the Revenue. In view of the above facts, we are of the firm view that the learned CIT (A) was not justified in coming to a conclusion that the sum of Rs.9,40,639/- was to be taxed u/s 56 of the Act. It is ordered accordingly.”

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5. Respectfully following the above decision of the Co-ordinate Bench, we hereby hold that the benefit of deduction u/s 80P(2)(a)(i) was rightly granted by ld. CIT(A), however, he has wrongly held that the interest income is taxable u/s 56 of the Act so do not fall under the category of exempted income u/s 80P of the Act. The adverse portion of the view, which is against the assessee, of ld. CIT(A) is hereby reversed following the decision of the Tribunal cited supra, resultantly ground is allowed. 8. We find that the ratio of above case also applies to the present case. As observed in the above case law, in this case also the submissions of the assessee‟s counsel is that the assessee society is maintaining operational funds and to meet any eventuality towards repayment of deposit the cooperative society is maintaining some liquidated funds as short term deposits with banks. Hence adhering to the doctrine stair desises, we hold that the assessee should be granted benefit of deduction under section 80P(2)(a)(i). Accordingly, the interest on deposits would qualify for deduction under the said section. Accordingly, we set aside the order of authorities below and decide the issue in favour of assessee. “ 4. We further find that batch of similar appeals decided by the ITAT in favour of the assessee has also been considered by the Jurisdictional High Court. The Hon‟ble Jurisdictional High Court has duly affirmed of this Tribunal. Accordingly, in the background aforesaid discussion, we do not find infirmity in the order of Ld. CIT(A).” 11. In the background of aforesaid discussion and decisions, we find that CIT (A) has erred in upholding the assessment order. The Appellant Co-operative society is entitled for deduction u/s 80P as claimed in the return.”

15 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 18/06/2024, set aside the impugned order passed by the learned CIT(A) and allow the grounds raised by the assessee.

./2024 Assessee’s Appeal – A.Y. 2020–21

11. In this appeal, the assessee has raised following grounds:–

“1) The Ld CIT(A) was duty bound to adjudicate the following ground as specifically raised before him. The order passed Us 143(3) since is based on surmises, conjectures and in contempt of ratios laid down by judicial authorities is devoid of law and hence untenable. Whether on the facts and circumstances of case, the Ld AO was justified in adding to total income as per intimation u/s 143(1)(a) dated 24.12.2021 Rs. 6823460/- which consist of a) Contingent liability Rs. 5495265/- which was neither debited to P&L A/c nor claimed deduction out of the income of any previous assessment years; b) The additional impact of ICDS Rs.343462/- and c) The less deduction u/s 80P Rs.984733/-Total (a+b+c) Rs.6823460/- The Ld AO was not justified by not disposing off the petition dt. 21.01.2022 u/s 154 against the order u/s 143(1) on dt.24/12/2021. 2) Whether on the facts and circumstances of case, the Ld CIT(A) was justified in assuming that the Co-operative Bank is not a Co-operative Society as envisaged by provisions of Sec.80P(2)(d) of IT Act 1961. 3) The Ld. CIT(A) committed a patent mistake in assuming that the Co- operative Bank Was not a Co-operative Society and for that reason the legitimate claim about the Deduction us.80P(2)(d) in respect of Interest earned on Investment with Cooperative Bank deductibility of which has been upheld by several appellate Authorities including ITAT and High Courts but was denied to the Appellant. 4) The Ld CIT(A) was not justified on the facts of the case and in law by not providing a copy of remand report dt. 30.01.2024 sent by the Assessing officer to the appellant.

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5) The appellant craves leave to add, alter, clarify, explain, modify, delete any of the grounds of appeal, and to seek any just and fair relief.”

12. The learned Authorised Representative appearing for the assessee submitted that the case of the assesse for the year assessment year 2020– 21, is also on similar lines as that of the assessment year 2018-19, which has been discussed in detail in the preceding paras of this order. The Assessing Officer observed that the assessee–society has earned interest income of ` 79,65,842, from its investment with Cooperative Banks and in the computation of income submitted during the scrutiny proceedings, the assessee has also claimed the said interest income as deduction under section 80P(2)(d) of the Act to the tune of ` 79,65,842/- under Chapter-VIA of the Act. The Assessing Officer disallowed the deduction claimed under section 80P(2)(d) of the Act pertaining to this interest income i.e., ` 79,65,841, which was added back to the total income of the assessee–society. The assessee being aggrieved, carried the matter in appeal before the first appellate authority.

13. The learned CIT(A) dismissed the assessee’s appeal and the observations of the learned CIT(A) are reproduced above vide Para–7 of this order. The assessee being aggrieved by the order of the learned CIT(A), filed further appeal before the Tribunal.

17 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 adjudicated is similar to that of the assessment year 2018-19 which is to the tune of ` 79,65,841, and following the decision of the Co–ordinate Bench in The Ismailia Urban Co–operative Society v/s ITO, ITA no.122/Nag./2023, order dated 18/06/2024, we set aside the impugned order passed by the learned CIT(A) and allow the grounds no.2 and 3, raised by the assesse pertaining to interest income earned form the Co-operative Banks.

16. Considering the fact that this ground pertains to contingent liability of ` 54,95,265/- (which was neither debited to Profit & Loss Account, nor claimed deduction out of the income of any previous assessment years), the impact of ICDS of ` 4,43,462, and lesser deduction claimed under section 80P of the Act to the tune of ` 9,84,733, even if the disallowances are made, the said disallowance shall form part of business income of the assesse society, which stands eligible to be claimed as deduction under section 80P of the Act.

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17. Fact which needs attention is that while assessing income of an assessee, income under all heads of “income” is compiled and the aggregate income is known as “Gross Total Income‟. Further, from this Gross Total Income, deductions under Chapter VI-A are allowed and resultant amount is “Total Income” on which tax is calculated. Thus, when expenditure is disallowed, it would get added back in the income under the head business and profession (if the expenditure relates to that business) and shall stand as a part of gross total income. On this income then the deductions under Chapter VI-A will be allowed. In nut shell, the deduction under section 80P of the Act in assessee’s case ought to have been allowable on the extended income (generated by disallowing such expenses).

18. It is pertinent to refer to the CBDT Circular No.37/2016 dated 02/11/2016, wherein it has been clarified that Chapter VI–A deductions shall be allowed on the enhanced income. The relevant para of this circular is extracted below:–

“In view of the above , the Board has accepted the settled position that the disallowances made under section 32, 40(a)(ia), 40A(3), 43B, etc of the Act and other specific disallowances , related to the business activity against which the Chapter VI A Deductions has been claimed, result in enhancement of the profits of eligible business, and that deduction under Chapter VI A is admissible on the profits of the eligible business, and that deduction under chapter VI A is admissible on the profits so enhanced by the disallowance.”

19. Thus, even if the disallowances are made pertaining to items relating to business of the assesse society, it shall ultimately form part as an enhanced income of the assesse society and shall be available to be claimed as 19 Durgapur Rayatwari Colliery Kamgar Sahakari Pat Sanstha A.Y. 2018–19 and 2020–21 deducted under section 80P of the Act as business income. On this count, this ground raised by the assesse is hereby allowed.