THE CHITRADURGA CITY MULTI PURPOSE CO-OP SOCIETY,CHITRADURGA vs. CIT, DAVANGERE

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IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'C', BANGALORE BEFORE SHRI. N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T.A No.302/Bang/2014 (Assessment Year : 2010-11) The Chitradurga City Multi Purpose Co-Op Society, Vasavi Circle, D C Office Road, Chitradurga 577 501 ..Appellant PAN : AAABT2628R v. Income-tax Officer, Ward – 1, Chitradurga ..Respondent

Assessee by : Shri. Dinesh P, Advocate Revenue by : Shri. Anurag Sahay, CIT - III Heard on : 20.08.2015 Pronounced on : 04.09.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : In this appeal filed by assessee, it assails an order dt.31.12.2013 passed u/s.263 of the Income-tax Act, 1961 (‘the Act’ in short) by the CIT, Davangere, for the assessment year 2010-11.

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deduction u/s.80P(2)(a)(i) of the Act. Assessment was completed on 23.11.2012, u/s.143(3) of the Act.

Interest on bank deposit Rs.72 Interest on deposit Rs.4,328 Rent from building Rs.7,24,000 Rent on land Rs.1,58,500 Total taxable income Rs.8,86,900

As per the CIT in view of the judgment of Hon’ble Apex Court in the case of Totgars Cooperative Sale Society Ltd [322 ITR 285], interest earned on surplus funds invested in short-term deposits, securities and other income which was not in the nature of business income had to be brought to tax and would not be eligible for deduction u/s.80P(2)(a)(i) of the Act. 04. Assessee in its reply dt.23.12.2013 stated that SB account, on which interest was received was maintained with District Central Cooperative Bank, Chitradurga. As per the assessee, interest on FD was also earned from the verysame cooperative bank. Funds used for the deposit were, according to the assessee. a part of the statutory reserve fund. Vis-a-vis rent, argument of the assessee was that it was shown under the head ‘business’ since many years and

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earning of rent was treated by the society as a part of its business only. As per the assessee judgment of Hon’ble Apex Court in the case of Totgars Cooperative Sale Society Ltd (supra) would not apply on facts. However, CIT was not impressed. According to him, what could be maximum claimed for deduction against the rental income was at the most Rs.50,000/- as stipulated u/s.80P(2)(c) of the Act. Vis-a-vis interest on deposit, CIT noted that deduction for such interest provided u/s.80P(2)(d) of the Act would apply only if the deposits were with cooperative societies and not with cooperative bank. He therefore set aside the assessment with a direction to assess the following income : (i) Interest on deposits .. Rs. 4,328/- (ii) Rental income .. Rs.8,32,500/- Total .. Rs.8,36,828/- 05. Now before us, Ld. AR strongly assailing the order of CIT submitted that interest earned on deposits with a cooperative bank was also eligible for deduction u/s.80P(2)(d). As per the Ld. AR, a cooperative bank was also a cooperative society and therefore eligible for claiming the benefit of the said section. Reliance was placed on the decision of coordinate bench in the case of Menasi Seemeya Group Gramagala Seva Sahakari Sangha Niyamitha V. CIT [ITA Nos.609 & 610/Bang/2014, dt.06.02.2015]. Vis-a-vis the rental income, Ld. AR submitted that Hon’ble jurisdictional High Court in the case of CIT v. The Grain Merchants Co-operative Bank Ltd [(2004) 267 ITR 742], had held that income received from letting out of premises was a part of the income from

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the business of banking. As per the Ld. AR, banking business as per clause ((b) of Section 6 of the Banking Regulation Act, 1949, took into its ambit various types of business referred in clause (a) to (o) of sub-section (1) of section 6, as well. According to him, clause (b) covers rental income. Thus according to him assessee was justified in treating rental from building as a part of its business income. Once the rental income is treated as attributable to the banking business, such amounts have to be considered as profits and gains of business attributable to carrying on the business of banking or providing credit facilities. Hence according to him, deduction u/s.80P(2)(a)(i) was available on such sum also. Ld. AR submitted that assessee was not hit by the limitation set out u/s.80P(4) of the Act because it was not a cooperative bank as recognised by RBI and the judgment of Hon’ble jurisdictional High Court in the case of Hon’ble High Court of Karnataka in CIT v. Sri Biluru Gurubasava Pattin Sahakari Sangh Niyamit, Bagalkot [ITA No.5006/2013, dt.05.02.2014], would come to its aid. Reliance was also placed on the judgment of Hon’ble jurisdictional High Court in the case of Venugram Multipurpose Cooperative Credit Society Ltd v. ITO [ITA No.100042 of 2014, dt.17.09.2014] in support of his contention that even a multi purpose cooperative society would also fall under the definition of primary agricultural credit cooperative society given in Karnataka Cooperative Societies Act, 1959. Thus according to him, CIT fell in error in construing the order of AO, as erroneous and prejudicial to the interests of Revenue.

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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 the 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 In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order. Appeal is allowed." 08. Vis-a-vis the rental income what we find is that in the case of Grain Merchants Cooperative Bank Ltd (supra), an issue had arose as to whether income received from letting out of premises could be deemed as income from business of banking. Their Lordships after assimilating the facts held as under from para 2 to 10 of the judgment :

“2. The respondent is the Grain Merchants Co-operative Bank (hereinafter referred to as “the assessee”), engaged in banking activity. The assessee filed its return for the assessment years 1989-90, 1990-91 and 1991-92. The Assessing Officer, while completing the assessment, took the view that the rental income received by the assessee in letting out the portion of the building partly occupied by it and the interest received from setting apart certain funds as reserve fund, does not come within the purview of section 80P(2)(a)(i) of the Act and as such are not deductible while computing the income of the assessee. Aggrieved by the said assessment order, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals)-II (hereinafter referred to as “the Appellate Commissioner”). The Appellate Commissioner, by means of his order dated March 16, 1993, allowed the appeals accepting the contention of the assessee that the rental income received by it as well as the interest received on reserve fund are exempted from payment of tax under section 80P(2)(a)(i) of the Act.

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Aggrieved by the said order of the Appellate Commissioner, the Revenue took up the matter in appeal to the Tribunal. The Tribunal, as noticed by us earlier, in the impugned order affirmed the order passed by the Appellate Commissioner. 3. Sri M. V. Sesachala, learned counsel appearing for the Revenue, challenging the correctness of the orders impugned, made two submissions. Firstly, he submitted that the Tribunal as well as the Appellate Commissioner have seriously erred in law in taking the view that the interest derived out of the income from funds maintained as reserve funds is also an income derived by the assessee on account of the banking activities carried on by the assessee and as such the same is deductible under section 80P(2)(a)(i) of the Act while computing the income of the assessee. Elaborating this submission, learned counsel pointed out that the Tribunal as well as the Appellate Commissioner have failed to consider that the funds maintained as reserve funds have not been utilised by the assessee for its business activities. Secondly, he submitted that the Tribunal as well as the Appellate Commissioner have also seriously erred in law in taking the view that the rental income received by the assessee is an income received by it in carrying on the business of banking and as such is entitled for exemption under section 80P(2)(a)(i) of the Act. It is also his submission that the letting out of premises by the assessee and receiving rent out of it cannot be considered as carrying on the business of banking activity or providing credit facilities by the assessee to its members ; and hence the income received by the assessee by way of rent in respect of the premises let out must be treated as an income which is liable for payment of tax under section 22 of the Act. In support of this submission, he referred to us clauses (a) to (f) of sub-section (2) of section 80P of the Act. It is also pointed out by him that clause (f) of sub-section (2) of section 80P of the Act clearly spells out that in the case of a co-operative society, not being a housing society or an urban consumers society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, wherein the gross total income does not exceed Rs. 20,000, the amount earned by way of interest on securities on any income from certain property is chargeable under section 22 of the Act. He pointed out that clause (f) of sub-section (2) of section 80P of the Act should be understood as making an exception to clause (a)(i) of sub-section (2) of section 80P of the Act wherein it is provided that if a co-operative society carrying on banking business receives income from house property, such an income is liable to be taxed under section 22 of the Act. It is his submission that when Parliament had made a distinction between the income received from banking business and the income received from non-banking business by way of rental income on account of letting out of premises

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belonging to the assessee, it is not permissible for the assessee to claim exemption relying upon clause (a)(i) of sub- section (2) of section 80P of the Act. It is also his submission that the assessee cannot derive any assistance from clauses (k) and (l) of sub-section (1) of section 6 of the Banking Regulation Act, 1949 (hereinafter referred to as “the Regulation Act”), as according to learned counsel the said provision only empowers the banking institution to carry on certain activities which are not considered as a banking business. In this connection, he referred to us the language employed in section 6 of the Regulation Act wherein it is referred that in addition to the business of banking, a banking company may engage in any of the businesses referred to in the said section. 4. However, Sri K. R. Prasad, learned senior counsel appearing for the assessee in this appeal, and Sri G. Sarangan, learned senior counsel appearing for assessee in other connected matters, strongly supported the impugned orders. So far as the first contention of Sri Sesachala is concerned, they pointed out that the contention urged by Sri Sesachala is covered against the Revenue by our earlier decision rendered in the case of ITO v. Karnataka Central Co-operative Bank Ltd. [2004] 266 ITR 635 made in I. T. A. No. 183 of 2003 disposed of on August 7, 2003. Therefore, they pointed out that for the very reason assigned by us in the said decision, the first contention urged by Sri Sesachala is required to be held against the Revenue. Further, Sri Prasad also relied upon the decision of the hon'ble Supreme Court in the case of Gujarat State Co-operative Bank Ltd. v. CIT [2001] 251 ITR 522. With regard to the second contention of Sri Sesachala, they pointed out that in view of clauses (k) and (l) of sub-section (1) of section 6 of the Regulation Act, 1949, which provides that the acquisition, construction of a building and leasing of building belonging to a banking company as a banking business, the income received by the assessee by way of rent in respect of premises let out by it must be treated as an income received by the assessee by way of profit and gains and the business attributable to the banking activities of the assessee. It is their further submission that clauses (a) to (f) of sub-section (2) of section 80P of the Act are mutually exclusive and independent of each other. It is also their submission that so far as clause (a)(i) of sub-section (2) of section 80P is concerned, it is only controlled by clause (c) of sub-section (2) of section 80P of the Act. In support of their submission that clause (l) of sub-section (1) of section 6 of the Regulation Act must be understood as banking business, they referred to us the decision of the hon'ble Supreme Court in the case of Gujarat State Co-operative Bank Ltd. v. CIT [2001] 251 ITR 522 and referred to us the observation made at page 524 of the judgment ; and the judgment of the hon'ble Supreme Court in the case of Kerala State

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Co-operative Marketing Federation Ltd. v. CIT [1998] 231 ITR 814 and referred to us the observation made at page 819 of the judgment. They also relied upon the judgment of the hon'ble Supreme Court in the case of CIT v. Ramanathapuram District Co-operative Central Bank Ltd. [2002] 255 ITR 423 and drew our attention to pages 424 and 425 of the judgment. 5. Now, we will proceed to consider each one of the contentions advanced by Sri Sesachala. So far as the first contention is concerned, the same is covered against the Revenue by our earlier decision rendered in the case of Karnataka Central Co-operative Bank Ltd. [2004] 266 ITR 635. In the said decision, we have taken the view that the income received out of the reserve fund is exempted from payment of tax. The said decision was rendered by us following the decision of this court rendered in the case of CIT v. Sri Ram Sahakari Bank Ltd. [2004] 266 ITR 632, made in I. T. A. No. 137 of 2002 disposed of on September 5, 2002, wherein the Division Bench of this court following the decision of the hon'ble Supreme Court in the case of Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114, has taken the view that the income received out of reserve fund is exempted from payment of tax. In the case of Bihar State Co-operative Bank Ltd. [1960] 39 ITR 114, the hon'ble Supreme Court has observed as follows : “As we have pointed out above, it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits as in the instant case would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owe it to the bank to make invest ments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the bank which were not lent to borrorwers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-intrade of the bank, or that the interest arising therefrom did not form part of its business profits.” Therefore, there is no merit in the first contention advanced by Sri Sesachala. In the light of the above discussion, we find it unnecessary to refer to the decision of Gujarat State Co-operative Bank Ltd. [2001] 251 ITR 522 (SC) relied upon by Sri Prasad.

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To examine the correctness of the second contention of Sri Sesachala, it is useful to refer to clauses (k) and (l) of sub-section (1) of section 6 of the Regulation Act, which reads as hereunder : “6. Forms of business in which banking companies may engage.— . . . (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company ; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company ;” From the reading of clauses (k) and (l) of section 6 of the Regulation Act, to our mind, it appears that in addition to the business of banking set out in clause (b) of section 5 of the Regulation Act, acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the banking company and also selling/improving or leasing or otherwise dealing with all or any part of the property and rights of the company, also should be treated as a banking business. No doubt, it is true, as contended by Sri Sesachala that the businesses referred to in clauses (a) to (o) of sub-section (1) of section 6 of the Regulation Act cannot be treated as a banking business within the meaning of clause (b) of section 5 of the Regulation Act. But as noticed by us earlier, section 6 of the Regulation Act intends to make several businesses referred to in clauses (a) to (o) of sub-section (1) of the Act as “banking business” in addition to the definition of “banking” provided under clause (b) of section 5 of the Regulation Act. In support of our view, we derive support from the observation made by the hon'ble Supreme Court in the case of Gujarat State Co-operative Bank Ltd. [2001] 251 ITR 522. In the said decision, while considering the question whether locker rent received by the banking company is not deductible under section 80P(2)(a)(i) of the Act, the hon'ble Supreme Court has taken the view that the safe-deposit vault is part of the ordinary banking business of the bank in terms of section 6(1)(a) of the Regulation Act. It is useful to refer to the observation made by the hon'ble Supreme Court at page 524 of the judgment, which reads as follows : “ . . . it is clear that the provision of safe deposit vaults is part of the ordinary banking business of a bank ; this is shown by section 6(1)(a) of the Banking Regulation Act, 1949. Therefore, the income derived by the assessee from the hiring out of safe deposit vaults is income from

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the business of banking and, therefore, deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.” Clause 6(1)(a) is one of the items of businesses referred to in section 6(1) of the Regulation Act. Further, in the case of Kerala State Co- operative Marketing Federation Ltd. [1998] 231 ITR 814, the hon'ble Supreme Court has observed that whenever a question arises as to whether any particular category of income of a co-operative society is exempt from tax, what has to be considered is, as to whether the income falls within one of the several heads of exemption and if it falls within any one of the heads of exemption, it would be free from taxes notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. The hon'ble Supreme Court has observed that the correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. In this connection, it is useful to refer to the observation made by the court at page 819 of the judgment, which reads as hereunder : “We may notice that the provision is introduced with a view to encouraging and promoting the growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government, the correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether the income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. The expression ‘marketing’ is an expression of wide import. It involves exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial activities such as standardisation, financing, marketing intelligence, etc. Such activities can be carried on by an apex society rather than a primary society.” In our view, the provisions contained in clause (f) of sub-section (2) of section 80P of the Act strongly relied upon by Sri Sesachala, are of no assistance to him.The said clause provides that the income derived by the housing society is chargeable under section 22 of the Income-tax Act. The housing society referred to in clause (f) of the said section must be understood as a society which is not carrying on banking business or providing credit facilities which is included under section

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80P(2)(a)(i) of the Act. So far as the assessee is concerned, as noticed by us earlier, it is not in dispute that the assessee is carrying on the business of banking. Under these circumstances, the provisions of clause (f) of the section cannot control the benefit of exemption extended to the assessee from payment of tax. In the light of the discussion made above, the second contention advanced by Sri Sesachala is also liable to be rejected. Accordingly it is rejected.

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pleading of the assessee into consideration which in our opinion was not proper. At the same time it is also true that AO had made no enquiries on these vital issues at the time of assessment. Hence we are of the opinion that Ld. CIT (A) was justified in considering the assessment order as erroneous and prejudicial to the interests of Revenue. However in the circumstances of the case, direction of the CIT to assess the incomes mentioned at para four above is not correct. Therefore, while upholding the order of CIT u/s.263 of the Act, we modify it and direct the AO to do the assessment afresh in accordance with law, untrammelled by the observation of the CIT on merits regard.

Sd/- Sd/-

(N. V. VASUDEVAN) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income-tax 4. Commissioner of Income-tax(A) 5. DR 6. GF, ITAT, Bangalore By Order Assistant Registrar