THE ITO,, KOTTAYAM vs. M/S.SAHYADRI CO-OP CREDIT SOCIETY LTD, KOTTAYAM

Per ABRAHAM P.GEORGE, ACCOUNTANT MEMBER:

These are cross objections filed by Revenue and Assessee respectively

against an order dated 31/05/2016 of CIT(A), Kottayam.

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on the deletion of disallowance of a deduction of Rs.90,29,958/- claimed by the

assessee u/s. 80P(2) of the Income Tax Act, 1961 (in short “the Act”).

judgment of the Jurisdictional High Court in the case of Chirakkal Service Co-

operative Bank Ltd. vs. CIT 384 ITR 0490 while giving the deduction to the

assessee. As per the Ld. DR, the said judgment was in relation to Primary

Agricultural Credit Societies registered under the Kerala Co-operative Societies

Act, whereas assessee here was not such a Society. According to the Ld. DR,

assessee was a Multi State Co-operative Society and did not have any income

which was eligible for deduction u/s. 80P of the Act. Contention of the Ld. DR

was that assessee was functioning like a commercial Bank and they also

provided non agricultural credit. Hence according to him it was not eligible for

deduction u/s. 80P of the Act. As per the Ld. DR, there was nothing in the bye-

law of the assessee-Society which limited its power to give loans to only

members who were agriculturists. Further as per the Ld. DR by virtue of section

80P(4) of the Act, deduction u/s. 80P(1) of the Act could not be given to any Co-

operative Bank.

submitted that assessee was not a Co-operative Bank as per Part V of the

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Banking Regulations Act, 1949. As per the Ld. AR, it was a Multi State Co-

operative Society registered u/s. 7 of the Multi State Co-operative Societies Act,

2002 and such registration was given by Department of Agriculture & Co-

operation of Government of India. Contention of the Ld. AR was that mere

acceptance of bank deposits and advancing loans to members would not convert

the assessee to a Co-operative Bank, unless and until it was so declared by the

Reserve Bank of India.

dated 16-03-2004 issued by the Office of Central Registrar of Co-operative

Societies under the Department of Agriculture & Cooperation of Government of

India clearly states that assessee is a Multi State Co-operative Society registered

u/s. 7 of the Multi State Co-operative Societies Act, 2002. It is not disputed that

the earnings of the assessee Society were from credit facilities given by it to its

members. Section 80P(1) of the Act is reproduced hereunder:

“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 deducted, 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 a co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

4 I.T.A. No.340/Coch/2016 & CO No.26/Coch/2016 (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:— (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government; (b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to— (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii) the Government or a local authority; or (iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public), the whole of the amount of profits and gains of such business; (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,— (i) where such co-operative society is a consumers' co-operative society, one hundred thousand rupees; and (ii) in any other case, fifty thousand rupees. Explanation.—In this clause, "consumers' co-operative society" means a society for the benefit of the consumers; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;

5 I.T.A. No.340/Coch/2016 & CO No.26/Coch/2016 (e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22. Explanation.—For the purposes of this section, an "urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.”

It is clear from the above that the profits and gains of business or profession

attributable to carrying on a business of providing credit facility to members will

be eligible for deduction u/s. 80P(1) of the Act. Hence assessee is eligible for

claiming such deduction. Only question that remains is whether assessee could

be denied this claim, on account of restrictions placed by Section 80P(4) of the

Act. Section 80P(4) is reproduced hereunder:

“(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 purpose 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.”

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Hence the question boils down to whether assessee could be considered as a Co-

operative Bank. Nothing was brought on record by the Revenue to show that

Reserve Bank of India declared it as a Co-operative Bank. Neither was the

assessee a Primary Agricultural Credit Society nor was it a Primary Co-operative

Agricultural and Rural Development Bank. Hon’ble Karnataka High Court in the

case of CIT Vs. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha,

Bagalkot, (2014) (369 ITR 86) has clearly held that for a Co-operative Society to

be considered as a Co-operative Bank, it was necessary that Reserve Bank of

India should have given such a classification to the said Co-operative Society. A

similar view was taken by the Hon’ble Gujarat High Court in the case of Jafari

Momin Vikas Co-op Credit Society Ltd.(2014) (362 ITR 331). In the

circumstances, we are of the opinion that section 80P(4) had no application in

the case of the assessee. We do not find any reason to interfere with the order

of CIT(A) in this regard. Appeal of the Revenue is thus dismissed.

of interest, under the head ‘income from other sources’ instead of ‘income from

business’. The Assessing Officer, while doing the assessment, had considered

interest earned by the assessee on bank deposits under the head ‘income from

other sources’. Assessee had earned interest of Rs.51,93,347/- on bank

deposits. Since the above income was treated under the head ‘income from

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other sources’, claim of deduction u/s. 80P(1) of the Act stood automatically

denied. Reliance was placed by the Assessing Officer on the judgment of

Hon’ble apex Court in the case of Totgar’s Co-operative Sale Society vs.ITO (322

ITR 283). Assessee’s appeal on this issue before the CIT(A) did not meet with

success.

Court in the case of Totgar’s Co-operative Sale Society Ltd. (supra) was not

applicable since in the said case the issue was treatment of interest received on

deposits created from retention of sale proceeds, not immediately required for

business purpose. As per the Ld. AR, in the case of the assessee deposits on

which interest income was earned were not from any such retention but were

deposits for meeting the statutory reserve requirements under section 64 of the

Multi State Co-operative Societies Act, 2002. The Ld. AR also placed reliance on

Board Circular No. 18/2015 in F.1279/Misc./140/2015/ITJ dated 02/11/2015. As

per the Ld. AR by virtue of the judgment of the Hon‘ble Apex Court in the case of

Nawanshahar Central Co-operative Bank Ltd. (2007) 160 Taxman 48 the interest

income would be considered only under the head of ‘business’.

disputed that interest income earned by the assessee were from deposits placed

by it in Banks. Contention of the assessee is that such interest should be

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considered only as part of its business income since the deposits were placed for

meeting the requirements of statutory reserves under the Multi State Co-

operative Societies Act, 2002. No doubt, the Hon’ble Apex Court in the case of

Totgar’s Co-operative Sale Society Bank Ltd.(supra) had held that interest

received on deposits created out of sale proceeds received from the members

not immediately disbursed to such members, was to be considered under the

head ‘income from other sources’. However, in the case before us, admittedly,

the deposits were not out of sale proceeds from the members of the assessee-

Society. Revenue has not rebutted the claim of the assessee that deposits on

which interest was earned was for meeting investment requirement on statutory

reserves under the Multi State Co-operative Societies Act, 2002. Clearly, it was

out of compulsions of business that the deposits were placed by the as in the

Banks. Earning of interest there from, in our opinion, could only be treated as

income from its business. It is also interesting to have a look at Circular dated

02/11/2015 (supra) issued by the CBDT which is reproduced hereunder:

“New Delhi, 2nd November,2015

Subject: Interest from Non-SLR securities of Banks – reg

It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, “expenses relatable to investment in non-SLR securities need to be disallowed u/s. 57(i) of the Act as interest on non-SLR securities is income from other sources.”

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3.2 Even though the abovementioned decision was in the context of co- operative societies/Banks claiming deduction u/s.80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.

sd/- (D S Chaudhry) CIT(A&J), CBDT, New Delhi

Para 3.2 of the above circular clearly indicates that the judgment of the Hon’ble

Apex Court in the case of Nawanshahar Central Co-operative Bank Ltd. (supra)

can be applied to a Co-operative Society also where there is a claim of deduction

u/s. 80P(2)(a)(i) of the Act. Considering all these aspects, we are of the opinion

that the interest earned by the assessee could not have been treated under the

head ‘income from other sources’ but only as a part of its business income. Cross

Objection of the assessee is allowed.

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Objection of the assessee is allowed.

Pronounced in the open court on 26-05-2017.

sd/- sd/- (GEORGE GEORGE K.) ( ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 26th March, 2017 GJ Copy to: 1. M/s. Sahyadri Co-operative Credit Society Ltd., 1st Floor, Amal Jyothi building, Cathedral Road, Kanjirapally, Kottayam. 2. The Income Tax Officer, Ward-4, Kottayam. 3. The Pr. Commissioner of Income-tax(Appeals), Kottayam. 4. The Commissioner of Income-tax, 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin