M/S FARMERS AGRICULTURAL CREDIT CO-OPERATIVE SOCIETY LTD.,,KOPPA vs. ITO, MYSORE

This appeal by the assessee is directed against the order of CIT(A), Mysore dated 03-02-2015 for the assessment year 2009-10.

2. The assessee is primarily an agricultural co-operative society in the business of providing credit facilities to its members. It is also engaged in the purchase of seeds, fertilizers etc., intended for agriculture for the purposes of supplying the same to its members. For the assessment year 2009-10, the net profit earned by the society from all the activities amounting to Rs.14,34,451/- and the gross total income was Rs.15,41,553/-. The assessee claimed deduction u/s 80P(2)(a)(i) of Rs.14,34,510/- towards providing credit facilities to its member and Rs.50,000/- u/s 80P(2)c) of the IT Act. The assessee submitted before the AO that in the case of M/s Totgar’s Co-Operative Sale Society Ltd Vs ITO 322 ITR 283(SC), the assessee was in the business of marketing agricultural produce of its members and earned income from huge bank deposits made out of its sales. This interest was claimed as exempt u/s 80P which was denied by the Court. However, in the case of assessee, the assessee is primarily agricultural credit society mainly in the business of providing credit to its members and not that of marketing of agricultural produce of its members. In the case of Totgar’s, they denied the deductions mainly on the ground that it was not carrying on the business of banking or on providing credit facilities to its members and investment only out of surplus funds invested in bank deposits. In the case of assessee, the assessee invested out of working capital. The assessee needs heavy cash at a time to lend to agriculturists and at the same time the agriculturists repay the loans at a time soon after harvesting. The seasonal excess funds are kept in deposits with Syndicate Bank in short term deposits. Hence, it is not surplus fund that was deposited. The deposits are not for investments, but for parking of funds for maximization of profit. Hence, it is in the usual course of business. The AO disallowed the deduction claimed u/s 80P(2)(a)(i) of the Act, relying on the decision in the case of M/s Totgar’s Co-operative Sale Society Ltd Vs ITO 383 ITR 283(SC). The AO brought to tax amounting to Rs.12,78,331/- under the head “Other Sources”.

4. The CIT(A) confirmed the order of the AO in totality.

5. Aggrieved, the assessee preferred an appeal before the ITAT raising the following grounds;

“1. The ld.CIT(A) is not justified in holding that the income earned by the assessee on fixed deposits requires to be assessed under the head “Other Sources” and not as part of the business of providing credit facilities and thereby holding that the assessee is not entitled to deduction u/s 80P(2)(a)(I) of the Act as claimed by the assessee in the return of income under the facts and in the circumstances of the case of the assessee.

3. The ld.CIT(A) is not justified in holding that the assessee was only entitled to claim deduction u/s 80P(2)(a)(i) of the Act, at Rs.2,01,829/- being the income arrived at by the ld.AO after deducting the loss worked out from the business of providing credit facilities from the income derived by the assessee from the business of trading in agricultural implements, which computation made is opposed to law and facts of the assessee’s case in as much as the assessee was entitled to claim deduction in respect of the entire profits from the business of trading in agricultural implements without setting of the losses incurred by the assessee from other activities.

The assessee has also challenged the levy of interest u/s 234A, 234B & 234C of the IT Act, 1961.

“9. In this context when we look at the judgment of the Apex Court in the case of M/s.Totagars Co-operative Sale Society Ltd, on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Co-operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit / security. 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 under section 80P(2)(a){!ii) of the Act. Therefore in the facts of the said case, the Apex Court held the Assessinq Officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore, it is clear, Supreme Court was not laying down any law.

10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It 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 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(J) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT III, Hyderabad Vs. Andhra Pradesh State Co-operative Bank Ltd., reported in (2011) 200 Taxman 220112. 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”. 6.3.2 Respectfully following the decision of the Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd.(Supra), we hold that the learned CIT(A) was not correct in denying the assessee the deduction claimed under section 80P(2)(a)(i) of the Act in respect

of Rs.26.16,800/- earned by the assessee. The judgment of the Hon’ble Apex Court in the case of Totgar’s Co-operative Sale Society Ltd (Supra) relied upon by the learned CIT(A) has been considered and distinguished by the Hon’ble High Court on Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd(Supra). We find that the facts of the case on hand are similar to the facts of the aforesaid case decided by the Hon’ble High Court of Karnataka, since in both cases the assessee was a credit co-operative society and invested in fixed deposits out of the surplus funds of business. Applying the ratio of the judgment of the Hon’ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd (Supra), we hold that the assessee is entitled to deduction under section 80P(2)(a)(i) of the Act, in respect of interest income earned on fixed deposits, as well as that the said interest income forms art of the business income earned by the assessee and the same is not to be taxed under the head “Other Sources”. In view of the matter, the deduction claimed by the assessee under section 80P(2)(a)(i) of the Act in respect of interest of Rs.26,16,800/- earned from investments in fixed deposits and Govt. Securities out of surplus funds from business, is allowed. Consequently, the grounds raised y the assessee on this issue are allowed.

7. In the result, the assessee’s appeal for assessment year :2010-11 is allowed”.