INCOME TAX OFFICER, WARD-1(1), NASHIK, NASHIK vs. MICO EMPLOYEES CREDIT COOP SOCIETY LTD., NASHIK

आदेश / ORDER

PER ASTHA CHANDRA, JM :

2. The Revenue has raised the following grounds of appeal :-

“1. Whether on the facts and in law the CIT(A), NFAC has erred in deleting the disallowance made by AO of Rs.1,54,21,304/.

2. Whether on the facts and circumstances of the case the CIT(A), NFAC has erred in deleting the addition without appreciating the fact that interest received from Nationalised banks is disallowed as per the provision of section 80(2)(d).

3. Whether on the facts and circumstances of the case the CIT(A), NFAC has erred in deleting the disallowance without appreciating the fact that the interest earned by the assessee society is earned on surplus funds and not its operational income inserted in Co-operative Bank and is to be taxed as income from other sources.

4. Whether on the facts and circumstances of the case the CIT(A), NFAC has erred in deleting the addition and not justifying the decision of Hon'ble Supreme Court is Civil Appeal 1622 of 2010 in the case of Totgars, Co- operative Sale Society Ltd. Vs ITO[2010] 188 Taxman 282 (SC), wherein the Apex court has held that the words used in section 80P "the whole of the amount of profits & gains of business" emphasize that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society & as such interest earned on funds which are not required for business purpose falls under the category of other income taxable under the Income tax Act.

6. The appellant craves leave to add, alter, amend and delete any of the above ground of appeal.”

3. Briefly stated, the facts of the case are that the assessee is a Co- operative Society registered under the Maharashtra State Co-operative Act, 1960 and it is engaged in the business of providing credit facilities to its members. The assessee filed its return of income for AY 2017-18 on 29.10.2017 declaring total income of Rs.3,74,320/-. The case was selected for complete scrutiny under CASS and statutory notice(s) u/s 143(2)/142(1) of the Income Tax Act, 1961 (the “Act”) were issued calling for various details. During the assessment proceedings, the Ld. Assessing Officer (“AO”) found that the assessee claimed deduction of Rs.1,59,47,234/- u/s 80P(2)(a)(i) of the Act. The Ld. AO further found that the assessee has made investments in Fixed Deposits in certain Nationalized Bank(s) and earned interest of Rs.1,53,46,148/- thereon and interest of Rs.75,156/- from saving bank account from Nationalized Bank totaling to Rs.1,54,21,304/-. According to the Ld. AO, since, the interest of Rs.1,54,21,304/- earned by the assessee is not from the Co-operative sector and is not operational income, the Ld. AO issued show cause notice to the assessee as to why the deduction claimed be not disallowed and added to the income of the assessee as income from other sources u/s 56 of the Act. In response to the said show cause notice, the assessee furnished its written submission on 05.12.2019 which reads as under : “ASSESSEE’S PLEA 1. MICO Employee Credit Cooperative Society is carrying on the activity of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only.

4. Sec. 80P of the Act grants deduction in respect of various categories of income of a cooperative society. If any co-operative society carries on the business of banking, the interest income received by a co- operative society on its investment/deposits is attributable to banking business. The provision does not make any distinction insofar as the interest earned by deposit in a bank and interest earned on the compulsive deposit which is made as required under the relevant statute. It is no doubt true that a co-operative society may be required to earmark some portion of its capital for exclusive deposit in Government prescribed securities or banks. A co-operative society may earn profits by way of interest by parking their funds in highyielding deposits or may earn income by circulating its capital among its members in the course of their banking business. All the income from banking business which is referable to s. 80P(2)(a)(i) of the Act should qualify for deduction under the Act. DISTINGUISHING FACTOR BETWEEN TOTGARS COOPERATIVE SALE SOCIETY LTD. VS. ITO 322 ITR 283 AND MICO EMPLOYEE CREDIT CO- OPERATIVE SOCIETY 1. Scope of Activities The Totgars' Cooperative Sale Society Limited The Totgars' Cooperative Sale Society Limited was engaged in two activities 1. Credit Facilities to Members 2. Sale of Agricultural Produce of its members MICO Employee Credit Co-Operative Society Limited MICO Employee Credit Co-Operative Society Limited is engaged only in the activity of providing credit facilities to its members. The assessee society is not engaged in any other activity.

As referred on Page 11 It retains the sale proceeds in many cases. It is this “retained amount” which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. 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 in Section 80P(2)(a)(iii) of the Act. MICO Employee Credit Co-Operative Society Limited The Assessee Society has deposited the Fixed Deposits for Three primary reasons 1.Meeting the guidelines of SLR as prescribed by RBI.

2. Deposit of Non SLR Funds as per guidelines of Reserve Bank of India as revised from time to time, latest being on 10/05/2019 wherein RBI has permitted to deposit non SLR funds with nationalized banks as well.

3. The Balance amount if any after meeting of loans to its members and requisite deposit for SLR and NON SLR funds are kept as temporary deposits with Nationalized Banks. It is pertinent to note here that Assessee Society has even taken temporary overdraft on various instances against this Fixed Deposits. Copy of the same is enclosed herewith. ASSESSEE’S PRAYER ON DISTINGUISHING FACTOR BETWEEN TOTGARS COOPERATIVE SALE SOCIETY LTD. VS. ITO 322 ITR 283 AND MICO EMPLOYEE CREDIT CO-OPERATIVE SOCIETY 1. The facts of The Totgars' Cooperative Sale Society Limited are not applicable in the case of the Assessee as pointed out in Point No 17 and 18 above. The major difference being between the source of investment made and multiple line of operation. ASSESSEE’S PRAYER 1. The Assessee Society being a cooperative society is engaged purely in providing credit facilities to its members. Assessee Society would like to place reliance upon decision in case of CIT v/s Nawanshahar Central Cooperative Bank Limited (2007) 160 Taxmann 48 (SC), whereinthe Apex Court held that the investments made by banking concerns are part of the business of banking. Therefore the Income arising from such investment is attributable to the business of banking falling under the head of ‘ Profits and Gains of Business and Profession’ 2. Assessee Society would also like to bring to your honors notice Circular No 18/2015 dated 02/11/2015 wherein the Board has clarified that Interest Income earned on Non SLR investments is also to be treated as income from ‘Profits and Gains of Business and Profession’ and not as income from Other Sources. Copy of the same is enclosed herewith. It is a settled law that circular issued by the board are binding on the officer and the department. 3. It is therefore to request your honor to kindly allow deduction under section 80P of the Income Tax Act, 1961 as the same has been rightly claimed by the assessee. In case your honor differs we request your honor to give us a final opportunity for hearing before coming to any conclusion.”

5. Aggrieved, the assessee carried the matter before the Ld. CIT(A) who vide his order dated 22.12.2023 allowed the deduction of interest claimed by the assessee u/s 80P(2)(a)(i) of the Act by placing reliance on the decision of Hon’ble Supreme Court in the case of CIT Vs. Nawanshahar Central Co-operative Bank Ltd. (2007) 289 ITR 6 (SC) and Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO (2015) 55 taxmann.com 447 (Kar.) and CBDT Circular No. 18/2015 dated 02.11.2015 and also holding that the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. Vs. CIT (2010) 322 ITR 283 (SC) does not apply to the facts of the assessee’s case. The relevant observations and findings of the Ld. CIT(A) reads as under : “6. It is not in dispute that the appellant is a ‘co-operative credit society'. The appellant is engaged in extending credit facilities to its members and accepting deposits from members. The appellant also earns interest from deposit of its funds with banks. The appellant has disclosed its income under the head business. It has also disclosed a small amount as income under the head, house property. The Appellant has claimed the whole of its business income as deduction u/s 80P(2)(a)(i). 6.1. While completing assessment, the AO held that interest income from deposits with nationalised banks (Rs.1,54,21,304) was outside the purview of business income. The AO argued that such interest was earned by investment of surplus funds and hence could not be “attributed to” the credit activity of the appellant. Hence it was held that interest income from deposits with nationalised banks should be treated under the head, Income from other sources. Since deduction under section 80P(2)(a)(i) is limited to income attributable to the activity of carrying on the business of banking or providing credit facilities to its members, the AO denied deduction u/s 80P(2)(a)(i) to interest from nationalised banks. The AO also held that deduction 80P(2)(d)

was not available to the interest from nationalised banks. Therefore, AO added Rs.1,54,21,304 to the total income. 6.2. The AO has invoked the decision of the Hon Supreme Court in Totgars CoOperative Sales Society Ltd vs CIT [2010] 322 ITR 283 (SC). The Hon. Supreme Court held that income from investment was liable to treated under the head Income From Other Sources under certain circumstances and that such income will not be therefore eligible for deduction under section 80P(2)(a)(i). In the case before the Hon. Supreme Court, the assessee had two distinct activities, giving of credit to members and marketing of agricultural produce of members. There was a finding that amount invested was the idle funds of members parked temporarily with the assessee. Therefore the Hon. Supreme Court reached the conclusion that it was not operational funds. The observations of the Hon. Supreme Court is reproduced below: “We are confining this judgment to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of section 80P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in section 80P(2)(a ) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee-Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "Other Income" which has been rightly taxed by the Department under section 56 of the Act.” 6.3. However the decision of the Hon. Supreme Court in Totgars has limited applicability. In this case, (i.e. case before me) the appellant does not carry on two distinct activities. It carried on only the activity of extending credit to members. As part of this activity it deposited part of its funds with nationalised banks either as a statutory obligation or as a prudent business strategy. Therefore, income from interest is very much attributable to the activity of extending credit to members. It follows that this income comes within the purview of section 80P(2)(a)(i). Reliance is placed on the decision of the Hon. Karnataka High Court in Tumkur Merchants Souharda Credit Co Operative Ltd vs ITO [2015] 55 taxmann.com 447 (Karnataka). The observations of the Hon Court are reproduced below: “A co-operative society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under section 80P.” “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(1)”. 6.4. The reference can also be made to the decision of the the Hon Supreme Court in Commissioner of Income-tax vs. Nawanshahar Central Co-operative Bank Ltd [2007] 289 ITR 6 (SC). The Supreme Court held as under: “This Court has consistently held that investments made by a banking concern are part of the business of banking. The income arising from such investments would, therefore, be attributable to the business of bank falling under the head "Profits and gains of business" and thus deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961. …The principle in these cases would also cover a situation where a Co- operative bank carrying on the business of banking is statutorily required to place a part of its funds in approved securities. The appeals are accordingly dismissed without costs.” 6.5. This decision was given before the introduction of section 80P(4) (with effect from 01.04.2007) that denies the benefit of section 80P to cooperative banks. However, the larger principle that income from investment activity is ‘attributable to’ the business activity of banking and hence covered by section 80P(2)(a)(i) is very much applicable to this case. The CBDT Circular 18/2015 reiterates the Supreme Court decision in Nawanshahar Central Co- operative Bank Ltd. 6.6. In the light of the foregoing discussion, I hold that the interest earned by the appellant from investment in banks is attributable to the activity of banking and extending credit facility to its members. Therefore it is part of the business income of the appellant and is covered by deduction under section 80P(2)(a)(i). The AO is directed to delete the addition made. Since I have found that the interest income from banks is covered by section 80P(2)(a)(i), other issues raised by the appellant have become redundant.”

11. In the light of the above factual and legal position, we do not find any infirmity in the order of the Ld. CIT(A)/NFAC and direct the Ld. AO to allow the claim of deduction u/s 80P(2)(a)(i) of the Act on the interest income earned on investment made out of surplus fund with Nationalized Bank(s).

Order pronounced in the open court on 18th September, 2024.