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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ C ’
Before: SMT. P. MADHAVI DEVI & SHRI JASON P. BOAZ
O R D E R
Per Shri Jason P. Boaz, A.M. : This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-III, Bangalore dt.16.10.2014 for Assessment Year 2010-11. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is a co-operative society registered under the Co-operative Societies Act, 1959 and is engaged in the business of providing credit facilities to its member s, facilitating the purchase and supply of agricultural implements, seeds, live-stock and marketing of agricultural products grown by its members. For Assessment Year 2010-11, the assessee filed its return of income on 28.9.2010 declaring income of Rs.88,170 after claiming deduction under Section 80P(2) of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The case was selected for scrutiny and the assessment was concluded under Section 143(3) of the Act vide order dt.5.3.2013, wherein the income of the assessee was determined at Rs.18,48,220. While doing so, the Assessing Officer observed that the assessee had earned interest income of Rs.26,16,800 from banks on fixed deposits that were kept out of surplus funds, brought the same to tax under the head ‘Income from Other Sources’ and denied the assessee's claim for deduction under Section 80P(2)(a)(i) of the Act. In this regard, the Assessing Officer placed reliance on the decision of the Hon'ble Apex Court in Totagars Co-op Sales Society 322 ITR 283 (SC). The Assessing Officer allowed NIL deduction under Section 80P(2) of the Act as the assessee's business income assessed by him was a loss. In this manner, the total income of the assessee was determined at Rs.18,48,200 after setting of losses under the head ‘Business’. 2.2 Aggrieved by the order of assessment for Assessment Year 2010-11 dt.5.3.2013, the assessee preferred an appeal before the CIT (Appeals), Mysore. The learned CIT(A) observed that the assessee is a credit co-operative society that carries on the business of providing credit facilities to its members and it was entitled to deduction under Section 80P(2)(a)(i) of the Act as per the decision of the Hon'ble High Court of Karnataka in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha in dt.5.2.2014. The learned CIT(A) further observed that the assessee had interest income of Rs.26,16,800 on fixed deposits kept with banks and not from members to whom loans were advanced. The learned CIT(A) held that the assessee cannot be allowed deduction in respect of the interest income earned from the banks as the same has to be assessed under the head ‘Other Sources’ and since Hon'ble Apex Court in the case of Totagars Co-operative Sales Society Ltd. (supra). The learned CIT(A) disposed off the assessee's appeal vide order dt.16.10.2014 allowing the assessee partial relief. 3. Aggrieved by the order of the CIT (Appeals), Mysore dt.16.10.2014 for Assessment Year 2010-11, the assessee has preferred this appeal raising the following grounds :- “
1. The learned CIT (Appeals), on facts and in law, erred in upholding the action of the Assessing Officer in assessing the interest received by the appellant on short term deposits with Syndicate Bank amounting to Rs.26,16,800 under the head ‘Income from other sources’ and denying the deduction under Section 80P(2)(a)(i) thereon.
2. The learned CIT (Appeals) erred in holding that the issue of taxability of interest received on deposits with scheduled banks under the head ‘Interest from other sources’ and non-availability of deduction thereon under Section 80P(2)(a)(i) is covered by the decision of the Supreme Court in Totagar’s Co-operative Sale Society Ltd. V ITO 188 Taxman 282; 322 ITR 283 which was followed by the Income Tax Appellate Tribunal – Bangalore Bench in Tumkur Merchants Souharda Credit Co-operative Society Ltd. V. ITO in ITA No.1622/Bang/2012.
3. The learned CIT (Appeals) failed to take note of the fact that the decision of the ITAT, Bangalore Bench in Tumkur Merchants Souharda Credit Co-operative Society Ltd. V. ITO in has been set aside by the Karnataka High Court vide its judgement dt.28.10.2014 in ITA No.307 of 2014 wherein the High Court distinguished the decision of the Supreme Court in Totagar’s Co-operative Sale Society Ltd. (supra) and held that interest earned on short term deposits in banks made out of amounts not immediately required for lending to members constituted income attributable to the activity of providing credit facilities to its members by a co-operative society and, therefore, was eligible for deduction under Section 80P(2)(a)(i).
4. Without prejudice to the above, the learned CIT (Appeals) ought to have taken note of rule 28 of the Karnataka Co-operative Societies Rules, 1960 and the order passed by the Registrar of Co-operative Societies thereunder requiring credit co-operative societies to maintain not less than 3% of the deposits received from members in savings bank account and not less than 10% of such deposits in banks and accordingly, ought to have held that the interest received by the appellant on short term deposits with Syndicate Bank made in compliance with statutory provisions to enable it to carry on business constituted its income from the business of providing credit facilities to the members.
5. The learned Commissioner (Appeals) ought to have taken cognizance of Rule 23 of the Karnataka Co-operative Societies Rules, 1960 which requires co-operative societies to invest the Reserve Fund in any scheduled bank or financial institution controlled by the Reserve Bank of India and accordingly, ought to have held that the interest received by Syndicate Bank made out of Reserve Fund constituted its income from the business of providing credit facilities to the members.
6. Without prejudice to the above, the learned Commissioner (Appeals) ought to have taken note of section 58 of the Karnataka Co-operative Societies Act, 1959 requiring co- operative societies to deposit their funds with any scheduled banks and accordingly, ought to have held that the interest received by the appellant on short term deposits with Syndicate Bank made in compliance with statutory provisions constituted its income form the business of providing credit facilities to the members.
7. Without prejudice to the above, the learned Commissioner (Appeals) erred in not considering and adjudicating upon Ground Nos.6 to 11 raised by the appellant before him.
8. Without prejudice to the above, the learned Commissioner (Appeals) erred in not considering and adjudicating upon Ground No.12 raised by the appellant before him.
9. The learned Commissioner (Appeals) ought to have adjudicated upon Ground No.13 raised by the appellant before him and accordingly, ought to have held that the appellant was entitled to deduction under Section 80P(2)(c) to the extent of Rs.50,000 in respect of income from house property amounting to Rs.1,38,173.
10. The learned Commissioner (Appeals) ought to have adjudicated upon Ground Nos.14 & 15 raised by the appellant before him and accordingly, ought to have cancelled the interest levied by the Assessing Officer under Section 234A amounting to Rs.9,444.
The learned Commissioner (Appeals) ought to have adjudicated upon Ground No.16 raised by the appellant before him and accordingly, ought to have cancelled the interest levied by the Assessing Officer under Section 234B amounting to Rs.1,69,992.
The learned Commissioner (Appeals) ought to have adjudicated upon Ground Nos.17 & 18 raised by the appellant before him and accordingly, ought to have cancelled the interest levied by the Assessing Officer under Section 234C amounting to Rs.17,472.
The learned Commissioner (Appeals) erred in not considering and adjudicating upon Ground No.19 raised by the appellant before him.
The assessment of the appellant having been made by the Assessing Officer in the status of an Association of Persons, the learned Commissioner (Appelas) ought to have annulled the same.
The learned Commissioner (Appeals) failed to take note of the facts of the case and the weight of evidence on record.
The order of the learned Commissioner (Appeals), in so far as it is against the appellant, is opposed to law and facts of the case.
The learned Commissioner (Appeals) erred in passing the order in the manner he did.
For these and other grounds that may be urged at the time of hearing, the appellant prays that the appeal may be allowed.”
The Grounds at S.Nos.13 to 18 being general in nature and not being urged before us, are dismissed as infructuous.
In the Grounds at S.Nos.10 to 12, the assessee denies itself liable to be charged interest under Section 234B and 234C of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B and 234C of the Act, if any, while giving effect to this order. 6.1 The Grounds at S.Nos.1 to 9 pertain to the sole effective issue in this appeal that arises for our consideration. The learned Authorised Representative submitted that the assessee had placed the surplus funds raised from members for carrying on the business of providing credit facilities to its members in fixed deposits and had earned interest income of Rs.26,16,800. He submitted that the said interest arose to the assessee as a part of the business of providing credit facilities to its members and therefore the same ought to be assessed as business income. The learned Authorised Representative contends that the exemption claimed under Section 80P(2)(a)(i) of the Act, in respect of interest income of Rs.26,16,800 derived by the assessee from investments in fixed deposits was in order. The learned Authorised Representative submitted that the learned CIT(A) had held that the assessee is not entitled to the said deduction in respect of the interest income in the light of the judgment of the Hon'ble Apex Court in the case of Totagars Co-operative Sale Society Ltd. (supra), as the said income has to be taxed under the head ‘Other Sources.’ However, he submitted that the Hon'ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. in of 2014 dt.28.10.2014, wherein their Lordships after considering the judgment of the Hon'ble Apex Court in the case of Totagars Co-operative Sale Society Ltd. (supra), have held that the interest earned by a co-operative society engaged in the business of providing credit facilities to its members has to be regarded as income eligible for deduction under Section 80P(2) of the Act. 6.2 The learned Departmental Representative submitted that the issue decided by the Hon'ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. (supra) was different and the said judgement was not applicable to the facts of the case on hand as the interest income covered by the judgment of the Hon'ble High Court was the interest income earned from short term deposits. It was submitted that the interest income earned by the assessee was not from short term deposits and hence the ratio of the said judgment is not applicable to the facts of the assessee's case. 6.3.1 We have heard the rival submissions on the issue before us and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. We find that both the authorities below have placed reliance on the judgment of the Hon'ble Apex Court in the case of Totagars Co-operative Sale Society Ltd. (supra) and held that the interest income earned by co-operative societies from bank deposits cannot be regarded as income earned from the business of providing credit facilities to its members and thereby, are not entitled to deduction under Section 80P(2)(a)(i) of the Act. However, the Hon'ble High Court of Karnataka in the case of Tumkur Merchants Souharda Credit Co-operative Society Ltd. (supra), has observed that the judgment of the Hon'ble Apex Court in the case of Totagars Co-operative Sale Society Ltd. (supra) was confined to the facts of that case and that there was no law laid down by the Hon'ble Apex Court that interest income has to be assessed under the head ‘Other Sources’. The relevant observations of the Hon'ble High Court of Karnataka at paras 6 to 10 are extracted hereunder :- “6. From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs.1,77,305 represents the interest earned form short term deposits and from savings bank account. The assessee is a co-operative society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i) : “ Deduction in respect of income of co-operative societies : 80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deduced, in accordance with and subject to the provisions of this section, the sums specified in sub- section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely : (a) in the case of co-operative society engaged in – (i) carrying on the business of banking or providing credit facilities toits members, or (ii) xxx (iii) xxx (iv) xxx (v) xxx (vi) xxx (vii) xxx the whole of the amount of profits and gains of business attributable to any one or more of such activities.”
The word ‘attributable’ used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. CIT, Gujarat-II reported in ITR Vol. 113 (1978) Page 842 at page 93 as under : “ As regards the aspect emerging from the expression ‘attributable to’ occurring in the phrase ‘profits and gains attributable to the business of’ the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the legislature has deliberately used the expression ‘attributable to’ and not the expression ‘derived from’. It cannot be disputed that the expression ‘attributable to’ is certainly wider in import than the expression ‘derived from’. Had the expression ‘derived from’ been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression ‘derived from’, as, for instance, in section 80J. In our view, since the expression of wider import, namely, ‘attributable to’, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.”
Therefore, the word ‘attributable to’ is certainly wider in import than the expression ‘derived from’. Whenever the legislature wanted to give a restricted meaning, they have used the expression’ derived from’. The expression ‘attributable to’ being of wider import, the said expression issued by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. 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 aid 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 of the Act.
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)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the Assessing 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.
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) 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 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.” 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 Totagars Co-operative Sale Society Ltd. (supra) relied upon by the learned CIT(A) has been considered and distinguished by the Hon'ble High Court of 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 part of the business Sources’. In this 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
by the assessee on this issue are allowed.
7. In the result, the assessee's appeal for Assessment Year 2010-11 is allowed. Order pronounced in the open court on 3rd July, 2015.