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These are cross appeals, one by Revenue and the other by the assessee, directed against the order of the CIT(A)-33, Mumbai dated 31.3.2014 for the Asstt. Year 2010-11.
2.The facts of the case, briefly, are as under :-
2.1 The assessee a co-operative society, engaged in providing credit facilities to its members, filed its return of income for assessment year 2010-11 on 13/08/2010 declaring Nil income, after claiming deduction u/s.80P(a)(i) of the Act. Under section 80P(2)(a)(i) of the IT Act, 1961 (in short the Act) where the gross total income of a co-operative society includes income from carrying on the business of banking or providing credit facilities to its members, the same is allowed as deduction upto the assessment year 2007-08. By Finance act, 2006, w.e.f. 1/4/2007, sub section (4) was inserted in section 80P which provides as follows-
“(4) The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation— For the purposes of this sub-section,- -(a) "co-operative 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.”
The Assessing Officer (AO) was of the view that after the amendment inserted by Finance Act, 2006 w.e.f. 1/4/2007, by which sub section (4) was inserted in section 80P of the Act, the assessee which is a co-operative society carrying on banking business was not entitled to deduction u/s. 80P(2)(a)(i) of the Act. According to the Assessing Officer , the assessee was a co-operative bank and, therefore, the deduction u/s. 80P(2)(a)(i) of the Act cannot be allowed. In coming to this view, the Assessing Officer observed that the nature of activity of the assessee, though registered as a credit co –operative society, is that of a banking institution, notwithstanding the fact that the receipt of and lending of money is limited to its members. The Assessing Officer further noticed that clause (viia) in section 2(24) of the Act was inserted by the Finance Act, 2006 w.e.f. 1/4/2007, which provides that profits and gains of any business (including providing of credit facilities) carried on by a co–operative society with its members was also “income”. The Assessing Officer observed that the deduction from gross total income of certain receipts is available only to primary agricultural credit societies or primary co–operative agricultural and rural development banks and that the benefit of such deduction is not available to institutions like the assessee society. The Assessing Officer also referred to Part-V, section 56(b),(cci), (ccv) and (ccvi) of the Banking Regulation Act, 1949 to hold that, if one of the two conditions of the assessee, i.e., its primary object should be banking or its principal business must be transaction in banking business, is sufficient to bring the assessee into the concept of banking institution. The Assessing Officer referred to the objectives of the assessee society in its bye- laws, to observe that the activities of the assessee fall within the provisions if section 56(b), 56(cci), 56(ccv) and 56(ccvi) of Part V of the Banking Regulation Act, 1949 and held that broadly, they are in the nature of banking activity. In the light of the above observations, the Assessing Officer held that the assessee was not entitled to deduction u/s. 80P(2)(a)(i) of the Act and accordingly concluded the assessment u/s. 143(3) vide order dated 28/3/2013 determining the assessee’s income at Rs.1,52,65,030/-.
4. Aggrieved, by the order of the assessment for assessment year 2010- 11 dated 28/3/2013 denying it the deduction claimed u/s. 80P(2)(a)(i) of the Act, the assessee preferred an appeal before the CIT(A)-33, Mumbai. The ld. Commissioner of Income tax(Appeals) vide order dated 31/3/2014 disposed off the assessee’s appeal, allowing it partial relief .The ld. Commissioner of Income tax(Appeals) following the decision of the Gujarat High Court in Jafari Momin Vikas Co –op. Credit Society Ltd.(2004) (362 ITR 331) (Guj.) held that the assessee is entitled to deduction u/s. 80P(2)(a)(i) of the Act claimed by it in respect of the profits of its business of providing credit facilities to its members. However, with respect to interest of Rs.5,63,180/- received on Secured Redeemable Non-convertible Debentures of Maharashtra Co –op. Development Corporation Ltd. and interest of Rs.1,49,500/- earned from Government Security Bonds, the ld. Commissioner of Income tax(Appeals) following the decision of the Hon’ble Apex Court in the case of Totgar’s Co –operative Sale Society Ltd.(2010)(322 ITR 283)(SC) held that the same are not entitled to deduction u/s. 80P(2) of the Act as they are not part of the assessee’s business income and are to be taxed under the head income from other sources.
5. Both the revenue and the assessee are aggrieved by the order of the CIT(A)-33, Mumbai and have preferred appeals against this order before the Tribunal .
6. In this appeal, Revenue has raised the following grounds :- “
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the assessee is a Co-operative Society and not a Co-operative Bank and thereby allowing the deduction u/s. 80P(2) of the I.T. Act, 1961.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the principal business of assessee is banking and its share capital and reserves exceeds Rs.one lakhs, hence it squarely falls within the definition of co-operative bank u/s. 5(cci) of Banking Regulation Act, 1949.
3. The appellant prays that the order of CIT(A) on the above grounds be reversed and that of the Assessing Officer be restored. The appellant craves leave to amend or after any grounds or add a new ground which may be necessary.”
7. Grounds No.1 and 2: Deduction u/s. 80P(2)(a)(i) of the Act: 7.1 In these grounds, revenue assails the order of the ld. CIT(A) as being erroneous in holding that the assessee is a co-operative society and not a co –operative bank and thereby allowing the deduction u/s. 80P(2)(a)(i) of the Act. It was further contended that the assessee’s principal business being banking, it would squarely fall within the definition of a co-operative bank u/s. 56(cci) of the Banking Regulation Act, 1949.The Ld. Departmental Representative for the Revenue was heard in the matter and placed strong reliance on the order of the Assessing Officer in denying the assessee deduction u/s. 80P(2)(a)(i) of the Act, since the assessee is a co-operative bank and its principal activity is banking.
7.2 Per contra, the Ld. Representative for the assessee for the assessee submitted that the impugned order of the ld. Commissioner of Income tax(Appeals), holding that the assessee being a co-operative society is entitled to deduction u/s.80P(2)(a)(i) of the Act in respect of the profits of its business of providing credit facilities to its members, is in order and is supported by judicial precedents laid down by the various High courts and Tribunals. In support of this proposition, the ld. AR placed reliance on the following judicial pronouncements:-
(i) CIT vs. Jafari Momin Vikas Co –op. Credit Society Ltd.(2004) (362 ITR 331) (Guj.); (ii) CIT vs. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha Bagalkot [2014] 369 ITR 86 (Kar); (iii) Shree Laxmananda Multipurpose Co-op. Society Ltd. (2014) 34 ITR (Tribunal) 472(Bang.Trib.);
7.3.1 We have heard the rival contentions and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon . From the material on record, it is seen that the ld. CIT(A) while disposing off the appeal for assessment year 2007-08 in the case on hand, which order has been followed by the ld. CIT(A)in the impugned order for the assessment year 2010-11, has observed that there is no dispute that the assessee accepts deposits only from its members and advances loans only to its members and does not have any banking licence. It was also observed that all the deposits on the liability side of its balance sheet only reflect deposits from members and that it accepts deposits only from its members and not from the public at large. In the above factual matrix, the ld. CIT(A) came to the view that the assessee is a co-operative society and not a co-operative bank as held by the Assessing Officer .
7.3.2 At the time of hearing, it was brought to the notice of the Bench that this very issue was for consideration before the Hon’ble Gujarat High Court in the case of CIT vs. Jafari Momin Vikas Co –op. Credit Society Ltd.(2004) (362 ITR 331) (Guj.).In this case, the question, of law before the Hon’ble Court was :-
“Whether the Hon’ble Tribunal is correct in allowing the deduction u/s.80P(2)9a)(i) to the assessee’s society eventhough the same is covered u/s.80P(4) read with section 2(24)(viia) being income from providing credit facilities carried on by a co-operative society with its member?” The Hon’ble Court held as under :-
"(4) The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation.—For the purposes of this sub-section,— (a) 'co-operative 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."
As per section 80P(4), the provisions of section 80P would not apply in relation to any co-operative bank other than primary agricultural credit society or primary co-operative agricultural and rural development bank. As per the Explanation, the terms "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949.
The Assessing Officer held that by virtue of section 80P(4), the respondent- assessee would not be entitled to the benefits of deduction under section 80P. The Commissioner (Appeals) as well as the Tribunal reversed the decision of the Assessing Officer on the premise that the respondent- assessee not being a bank, exclusion provided in sub-section (4) of section 80P would not apply. This, irrespective of the fact that the respondent would not fall within the expression "primary agricultural credit society".
Had this been the plain statutory provisions under consideration in isolation, in our opinion, the question of law could be stated to have arisen. When, as contended by the assessee, by virtue of sub-section (4) only co- operative banks other than those mentioned therein were meant to be excluded for the purpose of deduction under section 80P, a question would arise why then the Legislature specified primary agricultural credit societies along with primary co- operative agricultural and rural development banks for exclusion from such exclusion and, in other words, continued to hold such entity as eligible for deduction. However, the issue has been considerably simplified by virtue of the Central Board of Direct Taxes Circular No. 133 of 2007, dated May 9, 2007. Circular provides as under : "Subject : Clarification regarding admissibility of deduction under section 80P of the Income-tax Act, 1961. 1. Please refer to your letter No. DCUS/30688/2007, dated March 28, 2007, addressed to the Chairman, Central Board of Direct Taxes, on the above given subject. 2. In this regard, I have been directed to state that sub-section(4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agri cultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co-oper ative bank shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949. 3. In Part V of the Banking Regulation Act, 'co-operative bank' means a State co-operative bank, a Central co-operative bank and a primary co-operative bank. 4. Thus, if the Delhi Co-op. Urban Thrift and Credit Society Ltd. does not fall within the meaning of 'co-operative bank' as defined in Part V of the Banking Regulation Act, 1949, sub-section (4) of section 80P will not apply in this case. 5. This is issued with the approval of the Chairman, Central Board of Direct Taxes." 7. From the above clarification, it can be gathered that sub-section (4) of section 80P will not apply to an assessee which is not a co-operative bank. In the case clarified by the Central Board of Direct Taxes, the Delhi Co-op. Urban Thrift and Credit Society Ltd. was under consideration. The circular clarified that the said entity not being a co-operative bank, section 80P(4) of the Act would not apply to it. In view of such clarification, we cannot entertain the Revenue's contention that section 80P(4) would exclude not only the co- operative banks other than those fulfilling the description contained therein but also credit societies, which are not co-operative banks. In the present case, the respondent-assessee is admittedly not a credit co- operative bank but a credit co-operative society. The exclusion clause of sub-section(4) of section 80P, therefore, would not apply. In the result, the tax appeals are dismissed.”
The above finding has been followed by a Bench of the ITAT, Bangalore in Shree Laxmananda Multipurpose Co-op. Society Ltd. (2014) 34 ITR (Tribunal) 472(Bang.Trib.). Similar view has also been held by the Hon’ble Karnataka High Court in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha Bagalkot , [2014] 369 ITR 86 (Kar). Respectfully following the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Jafari Momin Vikas Co –op. Credit Society Ltd.(2004) (362 ITR 331) (Guj.), we uphold the finding of the ld.CIT(A) that the assessee is a credit co-operative society with no banking licence , accepting deposits and advancing loans only to its members, and is, therefore, entitled to deduction u/s. 80P(2)(a)(i) of the Act. We find there is no merit in the grounds of appeal raised by the revenue and accordingly dismiss Grounds raised at Sl. No.1 and 2.
8. The Ground at Sl.No.3 and 4 being general in nature, no adjudication is called for thereon.
In the result, Revenue’s appeal for assessment year 2010-11 is dismissed.
10. In this appeal for assessment year 2010-11, the assessee has raised the following grounds :-
“ 1. On the facts and in the circumstances of the case, and also ill law, the learned CIT(A) erred in treating interest of Rs.1,49,500/ - received by the appellant on Govt. Securities income from other sources, and, therefore, also erred in not allowing deduction u/s.8OP(2)(a)(i for the same. Your appellant, therefore, prays that the said interest be assessed as business income, and deduction u/s. 8OP(2)(a)(i) be allowed for the same.
Without prejudice, the appellant further submits that if deduction u/s.80P(2) is not to be allowed for the interest referred to in Ground No.1 above, and is to be taxed, then the same should be assessed net of interest cost incurred by the appellant. Your appellant, therefore, prays accordingly.
3. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in treating interest of Rs.5,63,180/- received on Secured Redeemable Non-convertible Debentures issued by Maharashtra Co- operative Development Corporation Ltd. as income from other sources, and, therefore, erred in not allowing deduction u/s.8OP(2)(a)(i) for the same. Your appellant, therefore, prays that the said interest be assessed as business income, and deduction u/s. 8OP(2)(a)(i) be allowed for the same.
4. Without prejudice, the appellant further submits that if deduction u/s.8OP(2) is not to be allowed for the interest referred to in Ground No.3 above, and is to be taxed, then the same should be assessed net of interest cost incurred by the appellant. Your appellant, therefore, prays accordingly.
5. Your appellant craves leave to alter, modify, amend or delete any of the above grounds of appeal, or to add one or more new ground(s), at or before the hearing of this appeal, as may be necessary.” 11.1.1 In Grounds at sl No.1 & 3 the assessee contends that the Ld. CIT(A) erred in holding that the interest of Rs.1,49,500/- received by it from Government Security Bonds and Rs.5,63,180/- received on secured redeemable non-convertible debentures of Maharashtra Co-op Development Corporation Ltd. is not entitled to deduction under section 80P(2)(a)(i) of the Act, as it is not generated from the assessee’s business and is therefore, to be assessed under the head ‘income from other sources’. In coming to this finding, the Ld. CIT(A) had placed reliance on the decision of the case of M/s.Totgars Co-Op Sale Society Ltd. (2010) (229 CTR (SC) 209).
11.1.2 The Ld. Representative for the assessee submitted that the decision in the case of Totgars Co-op. Sale Society Ltd.,(supra) had been rendered in a different context and, therefore, the CIT(A)’s reliance there on was not justified. The Ld. Representative for the assessee drew the attention of the Bench to the to the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-op. Ltd., (2015) (230 Taxman 309), submitting that the Hon’ble Karnataka High Court has discussed and considered the decision of the Hon’ble Apex Court (supra) at para-9 of their order and held that the finding therein has been rendered in the facts of that case and that therefore, the Hon’ble Apex Court was not laying lying down any law. It is submitted that the Hon’ble Karnataka High Court observed that the provisions of Section 80P(2)(a)(i) of the Act provides for deduction of the whole profits and gains of business attributable to the activity carried on by the assessee and, therefore, following decision rendered by the Hon’ble Apex Court in the case of Cambay Electric Supply Industrial Company Ltd.(1978) (113 ITR 84), held that the interest earned by the from deposits kept in banks in attributable to the profits and gains of business of providing credit facilities to its members. The Ld. Representative for the assessee in support of this proposition also placed reliance on the decision of the Co-ordinate bench of the ITAT, Mumbai in the case of Jaoli Taluka Sahakari Patpedhi Maryadit v. ITO in dated 10/08/2015 which followed the aforesaid decision of the Hon’ble Karnataka High Court (supra) on this issue.
11.2 Per contra, the Ld. Departmental Representative vehemently supported the order of the Ld. CIT(A) on this issue.
11.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. Taking into consideration the factual matrix and circumstances of the case, we are of the considered opinion that the decision rendered by the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co-op Ltd.(2015) (230 Taxman 309) (Kar) squarely applies to the facts of the case on hand. In this cited case, the assessee claimed deduction under section 80P(2)(a)(i) of the Act on the interest earned from surplus funds deposited with banks to earn interest as being attributable to its business of providing credit facilities to its Members. In the case on hand also, the surplus funds of the assessee’s business of providing credit facilities to its members, which were not due to the Members was invested in Central Govt. Bonds specified under section 70 of the MSC Act and in 11% Secured Redeemable Non-convertible Bonds issued by Maharashtra Co-op Development Corpn. Ltd. as per Circular dated 22/11/2002 issued by the Co-operative Commissioner and Registrar, Maharashtra State. These surplus funds are attributable to the assessee’s business of providing credit facilities to its members and, therefore, the resultant interest income invested in specified Government Securities and bonds would also, in our view, constitute business income. In this regard, it would be relevant to extract hereunder, the observations of the Hon’ble Karnataka High Court in its order (supra) at paras 8 to 10 thereof.
“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, 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 of the Act.
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-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 whichwas 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 v. Andhra Pradesh State co- operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com66. 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.”
11.3.2 Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Co- operative Ltd. (supra), we set aside the order of the Ld. CIT(A) and direct the Assessing Officer to grant the assessee deduction under section 80 P of the Act on this issue. Consequently, grounds raised at S.No.1 and 3 of the assessee’s appeal are allowed.
In view of our finding, in respect of grounds at S.Nos. 1 and 3 of the assessee’s appeal(supra), that the assessee is entitled to deduction under section 80P of the Act in respect of interest earned, we do not deem it necessary at this juncture to adjudicate the alternative grounds raised at S.No.2 and 4 of this appeal.
In the result, the assessee’s appeal for assessment year 2010-11 is allowed as indicated above.
To sum up, Revenue’s appeal for assessment year 2010-11 is dismissed and the assessee’s cross appeal is allowed as indicated above.
Order pronounced in the open court on 20/01/2016