BLACK DIAMOND KARMACHARI CREDIT CO-OP. SOCIETY LTD.,NAGPUR vs. INCOME TAX OFFICER WARD-3(4), NAGPUR

Date of Hearing – 26/09/2024 Date of Order – 01/10/2024

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

The assessee has filed this appeal challenging the impugned order dated 16/10/2023, passed for the assessment year and order dated 17/10/2023, passed for the assessment year 2020–21, by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”].

2. When the appeal was called for hearing, no one was present on behalf of the assessee to represent the case. There is no application for adjournment

2 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023 of hearing either. Therefore, the Bench was of the view to proceed to dispose off the appeal ex–parte qua the assessee after hearing the learned Departmental Representative and on the basis of material available on record.

./2023 Assessee’s Appeal – A.Y. 2018–19

“On the facts and in the circumstances of the case and in law........ 1. The Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi has erred in confirming action of Ld AO of disallowing the deduction claimed u/s 80P(2)(a)(i) of Rs.38,88,015/–. 2. The Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi has erred in confirming action of AO not allowing the deduction u/s 80P(2)(d) of Rs. 38,88,015/-. The appellant craves leave to add, amend, modify or delete any grounds of appeal.”

3 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023 1,05,14,217. According to the Assessing Officer the assessee society claimed deduction of ` 38,88,015, as a deduction under section 80P(2)(a)(i) of the Act on the interest income earned out of surplus fund invested with a Co- operative Banks namely Nagpur District Central Co-operative Bank and State Bank of India in the form of fixed deposits. The Assessing Officer made a detailed analysis and concluded that the surplus amount invested with Urban Co-operative Bank and nationalised bank is not eligible to claim deduction. He concluded that this interest income earned out of the investment made in the form of time deposits with those banks has to be assed as income from other sources. After considering the facts, the Assessing Officer completed the assessment under section 143(3) of the Act by assessing the total income at ` 42,30,876, wherein he disallowed deduction claimed under section 80P(2)(a)(i) of the Act for a sum of ` 38,88,015. The assessee being not satisfied with the order passed by the Assessing Officer, filed appeal before the first appellate authority.

8. The learned Departmental Representative supported the order of the authorities below.

4 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023 below, we find that the assessee is a Credit Co–operative Society and the assessee has deposited certain funds with Nagpur District Central Co– operative Bank Ltd., Kanhan and State Bank of India, Kanhan, and has received interest income which was claimed the as deduction under section 80P(2)(a)(i) / 80P2(d) of the Act. The case of the Assessing Officer is that, interest income received by the assessee is from income from other sources not eligible for deduction under section 80P(2)(a)(i) / 80P2(d) of the Act. While coming to this conclusion, the Assessing Officer referred to the conclusion of the judgment of the Hon'ble Supreme Court in The Totgars’ Co– operative Sale Society Ltd. v/s ITO, [2010] 188 taxman 282 (SC). We find that similar issue came up for adjudication before the Tribunal, Nagpur Bench, wherein the very same Bench was a party to that order rendered in The Ismailia Urban Co–operative Society v/s ITO, ITA no.122/Nag./2023, order dated 18/06/2024, wherein the Tribunal has considered this issue in detail and held that interest income earned by the assessee trust is eligible for deduction under section 80P(2)(a)(i) / 80P2(d) of the Act. The relevant portion of the order reproduced below:–

“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. “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 :

5 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023 “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.

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 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

6 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023 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; (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:-

7 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023 - 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.”

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.

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.”

10. In the above decision, the Co–ordinate Bench has already considered the judgment of the Hon’ble Supreme Court in The Totgars’ Co–operative Sale Society Ltd. (supra) and held that the facts of this case are distinguishable in nature and not applicable to the facts of the present case. We, therefore, respectfully following the decision of the Co–ordinate Bench in The Ismailia Urban Co–operative Society v/s ITO, Nag./2023, order dated 18/06/2024, we set aside the impugned order passed by the learned CIT(A) and hold that the assessee is eligible to claim deduction under section 80P(2)(a)(i) of the Act. Thus, grounds no.1 and 2 are allowed.

./2023 Assessee’s Appeal – A.Y. 2020–21

“On the facts and in the circumstances of the case and in law, 1. The Ld. Commissioner of income Tax (Appeals), NFAC, Delhi has erred in confirming action of Ld AO of disallowing the deduction claimed u/s 80P(2)(a)(i) of Rs. 46,86,362/-. 2. The Ld Commissioner of Income Tax (Appeals), NFAC, Delhi has erred in confirming action of AO not allowing the deduction u/s 80P(2)(d) of Rs. 46,86,362/-. The appellant craves leave to add, amend, modify or delete any grounds of appeal.”

9 Black Diamond Karmachari Credit Co–operative Society Ltd. & 405/Nag./2023

13. In the result, appeal filed by the assessee for A.Y. 2020–21 is allowed.