M/S BANGALORE CREDIT CO-OPERATIVE SOCIETY LTD.,,BANGALORE vs. DCIT, BANGALORE

PER SHRI VIJAYPAL RAO, JM:

This appeal by the assessee is directed against the order dated 01-

04-2014 of CIT(A) for the assessment year 2010-11. The assessee has

raised the following grounds;

“1.The order of the CIT is bad in law

2.The ld. Appellate Authority erred in confirming the action of the ld. Assessing Authority in applying the concept of NPA treating the appellant as a Bank and not as Co-

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operative Society making addition of Rs.19,16,609/- on account of interest receivable on standard asset from loan granted to the members. 3. Without prejudice to the above, L.A.A erred in following the judgment of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd Vs ITO, which is not applicable to facts of the case. 4. The L.A.A erred in not granting deduction on account u/s 80P(2)(a)(i) on excess depreciation amounting to Rs.41.578/- 5.The L.A.A. erred in not granting deduction on account u/s 80P(2)(a)(i) on provision towards gratuity amounting to Rs.1,10,000/-“.

finding, as the assessee has not advanced any argument except on the

merits of the case.

respect of interest receivable on standard asset. The assessee is a Co-

operative Society registered under the Karnataka State Co-operative Act,

1959. The assessee provides credit facility and financial services to its

members. The assessee filed its return of income for the year under

consideration on 26-09-2010 declaring NIL income, after claiming

deduction u/s 80P of the IT Act, 1961. The AO in the course of assessment

proceedings u/s 143(3) asked the assessee to furnish the details of the

interest receivable on non-performing assets as well as on standard assets

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which has not been accounted by the assessee. The Secretary of the

Society appeared before the AO and submitted that there is no concept of

NPA in the Co-operative Society, as it is in the case of Bank as well as non-

financial banking business however, the details of interest receivable on

standard assets were provided by the assessee. The AO disallowed the

deduction u/s 80P in respect of the interest receivable amounting to

Rs.19,16,609/- and the same is brought to tax. The AO has also

disallowed the deduction u/s 80P of the IT Act, in respect of other interest

of the assessee by treating the assessee as a Co-operative Bank and

holding that the assessee is engaged in the business of banking. On

appeal, the CIT(A) accepted the claim of the assessee u/s 80P in respect of

the other incomes, but confirmed the disallowance of the deduction u/s

80P of the IT Act, 1961 in respect of the interest receivable on the standard

assets. Thus, the CIT(A) has granted part relief to the assessee.

is a Co-operative Society registered under Karnataka State Co-operative

Societies Act, 1959. The assessee is following cash method of accounting

and recognize the income only on the receipt and therefore, the interest

receivable on the loans to the members has not been accounted by the

assessee. The AO treated the activity of the assessee has co-operative

banking business and therefore, disallowed the claim of the assessee u/s

80P of the IT Act, 1961. The CIT(A), though accepted the claim of Section

4 ITA No.903(Bang)14

80P of the assessee in respect of other interest incomes except the interest

receivable on the standard assets which is not accounted by the assessee

as it was outstanding.

operative society as accepted by the CIT(A) than, the interest earned but

not received by the assessee on the loans given to the members cannot be

brought to tax by denying deduction u/s 80-P of the IT Act, 1961. In

support of his contention he has relied upon the following decisions;

“1. ACIT Vs M/s Bangalore Commercial Transport Credit Co-operative Society Ltd. ITA No.1069(B)/2010 dated 08/04/2011 (ITAT, Bench’B’ Bangalore. 2. ITO Vs M/s Jankalyan Nagri Sahakari Pat Sanstha Ltd (2012) 24 Taxman.com 129(Pune-Trib.) dated 26/06/2012). 3. DCIT Vs Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd ITA Nos.1 to 3(PNJ) 1012 dated 30/03/2012. 4.CIT Vs Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, Bagalkot ITA No.5006/2013 of the Hon’ble High Court of Karnataka. 5. CIT Vs Nomin Vikas Co-operative Society :Ltd. In Tax Appeal No.442 of 2013 of the Hon’ble High Court of Gujarat.

jurisdictional High Court in the case of Tumkur Merchants Souharda

Credit Co-operative Ltd Vs ITO (2015) 55 Taxman.com 447.

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not furnished the details of the loans given to the members and therefore, it

is not clear from the record whether the interest receivable on the standard

asset is in respect of the loan given to the members of the assesee society.

He has further submitted that in the case of Merchants Souharda Credit

Co-operative Ltd Vs ITO, (Supra), the Hon’ble High Court has distinguished

the judgment of the Hon’ble Supreme Court in case of Totgars Co-operative

Sale, Society Ltd Vs ITO(2010) 322 ITR 283 by noting the fact that the

interest income derived by the society on the short term deposit of the

income or capital not immediately required to be lend to the members.

Further, the society in the said case, shown the said interest income on the

short term deposit as a liability in the balance sheet payable to the

members and therefore, it was not shown as income of the assessee.

Thus, the learned DR has submitted that the decision relied upon by the

learned AR is not applicable in the facts of the present case. He has relied

upon the orders of the authorities below.

material on record. There is no dispute regarding the fact that the assessee

society is registered under the Karnataka State Co-operative Societies Act

and the CIT(A) has accepted the claim of the assessee u/s 80P of the IT Act,

that the assessee is not a banking co-operative society. The interest income

on which the deduction u/s 80P of the Act was denied by the CIT(A) is the

6 ITA No.903(Bang)14

interest earned on standard assets which was outstanding as on 31st

March, 2010. The learned AR of the assessee has contended that the

standard assets is nothing but it represents loan given to the members of

the assessee co-operative society and therefore, the interest earned on the

said loan cannot be given a different treatment than the interest received

by the assessee during the year. Once CIT(A) has accepted the assessee

society as a co-operative society and engaged in providing credit facility to

its members than the interest earned by the assessee on the loans to its

members cannot be given a different colour than the income of interest

received by the assessee on the other loans given to the members. Further,

merely because, the assessee has not accounted the said interest due on

the loan given to the members because of the reason that it was

outstanding, the said income would not partake a different character, than

the income on the other loans provided to the members and received during

the year under consideration. The Hon’ble jurisdictional High Court in

the case of CIT Vs Sri Biluru Gurubasava Pattina Sahakari Sangha

Niyamitha (Supra) while dealing with an identical issue of allowability of

deduction u/s 80P has held as under;

“8.1. The Hon’ble High Court of Karnataka in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, supra which was followed in the cases of General Insurance Employees Co-operative Credit Society Ltd. and Karnataka High Court decision in the case of Vasavi Multipurpose Souharda Sahakari Niyamitha, ITA

7 ITA No.903(Bang)14

No.505/2013 dated 27/06/2014, supra, has clearly held that a co-operative society registered as co-operative society, providing credit facilities to members and not registered with the RBI cannot be denied the exemption under section 80P(1)(i) of the IT Act. The operative part of the judgment reads as follows; “Therefore, the intention of the legislature is clear, if a co-operative bank is exclusively carrying on banking business, then the income derived from the said business cannot be deducted in computing the total income of the assessee. The said income is liable for tax. A co-operative bank as defined under the Banking regulation Act includes the primary agricultural credit society or a primary co- operative agricultural and rural development bank. The legislature did not want to deny the said benefits to a primary agricultural credit society or a primary co-operative agricultural and rural development bank. They did not want to extend the said benefit to a co-operative bank which is exclusively carrying on banking business i.e the purpose of this amendment. Therefore, as the assessee is not a Co- operative bank carrying on exclusively banking business and as it does no possess a licence from Reserve Bank of India to carry on business, it is not a co-operative bank. It is a co-operative society which also carries on the business of lending money to its members which is covered under section 80P(2)(a)(i) i.e carrying on the business of banking for providing credit facilities to its members. The object of the aforesaid amendment is not to exclude the benefit extended under section 80P(1) to such society………………….in the instant case, when the status of the assessee is a co-

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operative society and is not a co-operative bank, the order passed by the Assessing authority extending the benefit of exemption from payment of tax under section 80P(2)(a)(i) of the Act is correct”.

8.2 The fact that the appellant is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 engaged in providing credit facilities to its members has been clearly mentio0ned by the AO in para-3 of his aforesaid assessment order. It is also not the case of the AO that the assessee is registered with the RBI as a bank. In its aforesaid submissions dated 18-11-2014 the appellant has clearly stated with the help of necessary evidence and an affidavit dated 02-9-2014 to this effect that the appellant is a co-operative society registered under the Karnataka Co- operative Societies Act, 1959 engaged in providing credit facilities only to its members and it does not possesses any banking licence from the RBI. It is therefore, clear that the appellant’s case is squarely covered by the aforesaid decisions of the jurisdictional High Court of Karnataka in the cases of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, supra which was followed in the case of General Insurance Employees Co-operative Credit Society Ltd, and Karnataka High Court decision in the case of Vasavi Multipurpose Souharda Sahakari Niyamitha ITA NO.505/2013 dated 7-06-2014, supra. Therefore, in view of the foregoing discussion and respectfully following the aforesaid decisions of the jurisdictional High Court of Karnataka. It is held that the appellant case is not covered by section 80P(4) as it is not a’ co-operative bank’ and

9 ITA No.903(Bang)14

therefore, it is entitled to the exemption u/s 80P(2)(a)(i) of the IT Act”.

Co-operative Ltd.(Supra) the Hon’ble jurisdictional High Court has

reiterated its earlier view and held in para-9 to 10 as under;

“ 9. In this context when we look at the judgment of the Apex Court in the case of M/s Totgars 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 to 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)(iii) of the Act. Therefore, in the facts of the said case, the Apex Court held the AO was right in taxing the interest income indicated above under section 56 of the IT 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.

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Accordingly, in the facts and circumstances of the case, as well as in

view of the judgment of the jurisdictional High Court we hold that if the

interest amount of Rs.19,06,609/- on the standard assets representing the

loan given to the members of the assessee society , than the said income is

eligible for the deduction u/s 80P being the income from the activity of

credit facility to the member of the society. Therefore, subject to the

verification of this fact that the interest income of Rs.19,,06,609/- is

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earned by the assessee on the loan to the members of the society, the claim

of the assessee is allowed.

terms.

Pronounced in the open Court on the 26th June, 2015

Sd/- Sd/- (JASON P BOAZ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER Place: Bangalore D a t e d : 26th June, 2015 am* Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order

AR, ITAT, Bangalore