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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI JASON P.BOAZ
Date of hearing : 21/01/2015. Date of pronouncement: 30/01/2015. O R D E R Per Smt. P.MADHAVI DEVI, JM:
This is an appeal filed by the assessee against the order of the CIT, Davangere dated 20/03/2014 for the assessment year 2009-10.
Brief facts of the case are that the assessee is a co- operative society carrying on business of banking. It filed its return of income for the relevant assessment year and during the assessment proceedings u/s 143(3) of the Income-tax Act, 1961[hereinafter referred to as 'the Act'], the Assessing Officer
M/s.Daivagna Credit Co-operative Society Ltd. Page 2 of 8 (AO) accepted the income returned by the assessee. Thereafter, the AO sent a proposal for revision of assessment in the case of the assessee for the assessment year 2009-10 and on going through the proposal of the AO, the CIT was satisfied that the AO had failed to examine the applicability of sub-sec.(4) of sec.80P to the assessee and also the judgment of the Hon’ble Supreme Court in the case of Totgars Credit Co-operative Society as far as income of Rs.1,71,298/- being interest received from banks or investments made in FDs is concerned. Therefore, he came to the conclusion that the assessment order is erroneous and prejudicial to the interests of revenue. He, accordingly, issued a show cause notice to the assessee on 24/5/2013. The assessee filed its submission dated 14/06/2013 on 19/06/2013 justifying the claim of the assessee of deduction u/s 80P(2)(a)(i) of the Act. The CIT, thereafter, proceeded to consider the applicability of sub-sec.(4) of sec.80P to the assessee and also the allowability of interest income and remanded the issue to the file of the AO for verification of these two issues and for fresh assessment.
Aggrieved, the assessee is in appeal before us. At the outset, it was noticed that the registry had pointed out that the assessee has not filed the assessment order. The assessee filed the same at the time of hearing vide letter dated 21/1/2015. Therefore, we proceeded to hear and dispose of the appeal as under. The learned counsel for the assessee Shri Srinivasan,
M/s.Daivagna Credit Co-operative Society Ltd. Page 3 of 8 submitted that the assessee is a co-operative society carrying on the activity of banking and the issue as to whether the provisions of sec.80P(4) are applicable to the co-operative society is covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, Bagalkot in dated 05/02/2014. As regards the interest income earned by the assessee and allowability of the same u/s 80P, he placed reliance upon the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-operative society Ltd. vs. ITO in ITA No.307 of 2014 dated 28/10/2014. Thus, according to him, both the issues on which the CIT has found the order of the AO to be erroneous and prejudicial to the interests of revenue are covered in favour of the assessee and therefore the order of the AO could not be held to be erroneous and prejudicial to the interests of the revenue. Thus, according to him, the revision order is not sustainable.
Learned Departmental Representative, Shri Patanjali, on the other hand, supported the order of the CIT and submitted that as is evidenced in the assessment order, the AO has merely accepted the income returned by the assessee without examining any of the claims of the assessee and therefore it is clear that the assessment order was erroneous and prejudicial to the interests of the revenue.
M/s.Daivagna Credit Co-operative Society Ltd. Page 4 of 8 4. Having regard to the rival contentions and the material on record, we are satisfied that during the assessment proceedings u/s 143(3), the AO has failed to consider or verify the assessee’s claim u/s 80P of the Act. Therefore, to this extent the assessment order is erroneous. But whether it is also prejudicial to the interests of revenue is to be examined. We find that the issues on which the CIT has held the assessment order to be erroneous and prejudicial to the interest of revenue, are covered in favour of the assessee by the decisions of the Hon’ble Karnataka High Court cited by the learned counsel for the assessee. The Hon’ble High Court in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha (cited supra) has held as under:
In the assessment order, the Assessing authority has clearly stated that the assessee is a Cooperative society and has not obtained any banking license. The business of the assessee is to provide credit facilities to its members. Since the assessee cannot carry on any banking business, the interest on investment is taxable as income from other source. Therefore the aforesaid facts, which is not in dispute clearly establishes that it is not a Co-operative Bank. In fact, the Revisional Authority also in its order has categorically stated that the assessee is a Co-operative society, which provides credit facilities. Section 80P of the Act deals with the deduction of income of a society. In the case of any assessee being a Co-operative society, the whole of the amounts of profits and gains of business attributable to any of other activities referred to sub-section (2) of Section 80P shall be deducted in computing the total income of the assessee. In other words, the said income is not taxable. It is a benefit given to the Co-operative society. Section 80P(4) was introduced by Finance Act, 2006 with effect from 01.04.2007 excluding the said benefit to a Co- operative Bank. The said provision reads as under:- “(4) The provisions of this section shall not apply in relation to any ca-operative bank other than a M/s.Daivagna Credit Co-operative Society Ltd. Page 5 of 8 primary agricultural credit society or a primary co- operative agricultural and rural development bank. (a) “cooperative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long- term credit for agricultural and rural development activities.” Therefore, the intention of the legislature is clear, If a Cooperative 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 purport of this amendment. Therefore, as the assessee is not a Cooperative bank carrying on exclusively banking business and as it does not possess a license 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. Therefore, there was no error committed by the Assessing Authority. The said order was not prejudicial to the interest of the Revenue. The condition precedent for the commissioner to invoke the power under Section 263 is that the twin condition should be satisfied. The order should be erroneous and it should be prejudicial to the interest of the revenue.
9. This Court had an occasion to consider section 263 of the Act in the case of Commissioner of Income-tax and another v. Digital Global Soft Ltd.(2013) 354 ITR 489(Karn)wherein paragraph-18. It has held as under:
M/s.Daivagna Credit Co-operative Society Ltd. Page 6 of 8 ‘As is clear from the wording in section 263, the Commissioner gets the jurisdiction to revise any proceedings under this Act if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. Therefore, it is clear that he cannot exercise the power of revision solely on the ground that the order passed is erroneous. He gets jurisdiction only if such erroneous order is prejudicial to the interest of the Revenue. ‘Prejudicial to the Revenue’ means, lawful revenue due to the State has not been realized or cannot be realized. In other words, by the order of the assessing authority if the lawful revenue to the State has not been realized or cannot be realized, as the said order is prejudicial to the interests of the Revenue and also erroneous, he gets jurisdiction to interfere with the said order under section 263. Therefore, for attracting section 263, the condition precedent is (a) the order of the Assessing Officer sought to be revised is erroneous, and (b) it is prejudicial to the interests of the Revenue. If one of them is absent, i.e. if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue, recourse cannot be had to section 263(1) of the Act. The satisfaction of both the conditions stipulated in the section is the sine qua non for the Commissioner to exercise his jurisdiction under section 263.”
The Hon’ble High Court in the case of Tumkur Merchants Souharda Credit Co-operative society Ltd. (cited supra) has held as under:
“8. 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 is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earned 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 M/s.Daivagna Credit Co-operative Society Ltd. Page 7 of 8 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. They 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.Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee- Cooperative 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 COMMISSIONER OF INCOME TAX III, HYDERABAD VS. ANDHRA PRADESH STATE COOPERATIVE BANK LTD. VS. ANDHRA PRADESH STATE COOPERATIVE BANK LTD., reported in (2011) 200 TAXMAN 220/12. In that view of the matter, the order
M/s.Daivagna Credit Co-operative Society Ltd. Page 8 of 8 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. The impugned order is hereby set aside. Parties to bear their own cost.” Therefore, we hold that the assessment order is not erroneous and prejudicial to the interest of revenue warranting revision u/s 263 of the IT Act.
In the result, the assessee’s appeal is allowed.