RAJARSHI SHAHU MULTISTATE CO-OPERATIVE CREDIT SOCIETY LTD,,BULDHANA vs. ITO, WARD 2, KHAMGAON

The assessee has filed this appeal challenging the impugned order dated 13/12/20223, passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2018–19.

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1. On the facts and circumstances of the case and in law, the AO grossly erred in denying and the CIT(A) grossly erred in confirming the denial of benefit of deduction under section 80P, despite the same being beyond the scope of Limited Scrutiny and consequently the denial of benefit of deduction under section 80P is bad in law and liable to set aside in the interest of justice.

2. On the facts and circumstances of the case and in law, the Ld. AO and the CIT(A) grossly erred in treating the interest income of Rs.74,49,847 earned

2 Rajarshi Shahu Multistate Co–operativeCredit Society Ltd. ITA no.64/Nag./2024 from banks on account of investments to comply with statutory compliance as Income from Other Sources. The investments being made in the regular course of business and in compliance with statutory requirements ought to be treated as income from business and consequently deduction under section 80P, which otherwise is held allowable to the Appellant ought to have been extended to this interest income as well as per law.

4. The AO grossly erred in treating an amount of Rs.74,79,847 instead of the correct amount of Rs.74,49,847 as interest income which deserves to be corrected as per law.

5. The Appellant craves leave to add, amend, alter, vary and / or withdraw the above ground of appeal with the kind permission of the Hon'ble Tribunal.”

3. Facts in brief are that the assessee is a Co–operative Society engaged in the business of providing credit facilities to its members. The assessee has computed its profit from business at ` 7,46,086. The assessee filed its return of income on 07/10/2018, disclosing nil income. The case of the assessee was selected for limited scrutiny under CASS on the issue of low income in comparisons to investment / advances and mismatch in disallowances of personal expenses as per audit report and as per ITR. In the return of income, the assessee claimed deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 ("the Act") for ` 7,76,086. The Assessing Officer stated that the assessee has not filed any details regarding interest received from Co–operative Bank. The Assessing Officer, on a perusal of the Profit & Loss Account, noticed that the assessee received interest income from investment of ` 74,49,847, which is apart from interest from members and other income of ` 24,18,177. He was of the view that the assessee is a Co-operative Society engaged in providing credit facilities to its members hence the income generated from investment / bank interest and other income is not derived

3 Rajarshi Shahu Multistate Co–operativeCredit Society Ltd. ITA no.64/Nag./2024 from the business of providing credit facilities to its members and is liable to be taxed as income from other sources. Reducing the interest income, the profits from business is negative, hence the Assessing Officer held that the claim of deduction under section 80P(2) of the Act of ` 7,46,086, is not allowable. The Assessing Officer, while disallowing the deduction claimed under section 80P(2) of the Act, the Assessing Officer also held that the deduction under section 80P(2)(d) of the Act is allowed on interest received from co–operative societies, whereas the assessee has received interest from Bank. The disallowing the deduction, the Assessing Officer relied upon the judgment of the Hon’ble High Court of Karnataka in PCIT v/s The Totgars’ Co– operative Sale Society Ltd. v/s ITO, [2017] 395 ITR 611 (Kar.). The assessee being not satisfied filed appeal before the first appellate authority.

5 Rajarshi Shahu Multistate Co–operativeCredit Society Ltd. ITA no.64/Nag./2024

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 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

6 Rajarshi Shahu Multistate Co–operativeCredit Society Ltd. ITA no.64/Nag./2024 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:- - 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

7 Rajarshi Shahu Multistate Co–operativeCredit Society Ltd. ITA no.64/Nag./2024 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.

8 Rajarshi Shahu Multistate Co–operativeCredit Society Ltd. ITA no.64/Nag./2024 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 hold that the assessee is eligible to claim deduction under section 80P(2)(a)(i) of the Act. Thus, all the grounds raised by the assessee are allowed.