THE ITO, WD-2(5), TRIVANDRUM vs. PAZHAYAKUNNUMEL SERVICE CO-OP BANK LTD, TRIVANDRUM

O R D E R Per Bench: The captioned appeals raising a common issue, were heard together, and are being disposed of per a common order for the sake of convenience.

3.2 Deduction, on their entire income, had been claimed in the instant cases u/s. 80P(1) r/w s. 80P(2)(a)(i). The same was denied by the AO on the ground that the assessee/s does not, in view of it’s lending profile, qualify as a PACS, i.e., given the definition thereof under the Banking Regulation Act, 1949 (BRA) – which stands coopted in the Act, and the Kerala Act. As such, despite being registered as a PACS, it would attract the disqualification of sec. 80P(4). The asssessee’s reliance on Chirakkal SCB Ltd. (supra) was met through reliance on Perinthalmanna SCB Ltd. [2014] 363 ITR 268 (Ker), which was not considered in Chirakkal SCB Ltd. (supra), besides the provisions of ss. 5(cciv)& 7 of BRA and s. 2(oa) of the Kerala Act. Further, income by way of interest on deposits with banks and treasuries was not an operational income, but on surplus funds therewith, and therefore, assessable as income from other sources, relying for the purpose on Totgar’s Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC). The relief allowed, where so, by the first appellate authority, has been on the basis of the decision in Chirakkal SCB Ltd. (supra), leading to the instant appeals.

5.3 Section 80P(2)(d), falling u/c VIA-C of the Act, reads as under: 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 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)..(c) ; (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; The operative part of the decision in Peroorkada Service Co-operative Bank Ltd. (supra) reads as under: (pgs. 156-157) “12.1 The decisions relied on by the Supreme Court refer to co-operative banks but not co-operative societies. The issue on hand is about the interest income earned by way of investments made with institutions other than co-operative societies. We are of the view that by referring to the order in Nawanshahar Central Co-operative Bank Ltd. case it cannot be held that the income has to be brought under section 80P(2)(a)(i) of the Act. 12.2 Section 80P deals with co-operative societies' computation of income. As already noted, it has four sub-sections and several clauses and sub-clauses. Parliament has considered the various situations in which the exigible income and the deductible income of the assessee is considered while computing the income of the assessee. For getting deduction, in our considered view, the assessee must also establish that the interest income earned by the assessee is from a co-operative society. As a matter of fact, in the case on hand, there is no dispute that it is not from a co-operative society registered under Kerala Co-operative Societies Act. The interest income earned from District co-operative bank/State co-operative bank, in the facts and circumstances of the case, do come within section 80P(2)(d). Therefore, the income constitutes income from other sources and the only eligible deduction is covered by section 80P(2)(d), viz., interest or dividend derived 5 & Ors. ITO v. The Adichanalloor Farmers SCB Ltd. & Ors. by the assessee from its investments with any other co-operative society. The source of interest income is from bank and treasury, interest income received from treasury be included in the computation of total income of the assessee. In other words, interest earned from treasury is inadmissible for deduction and interest income from co-operative societies registered under the Kerala Co-operative Societies Act are eligible for deduction. The contra consideration of the Commissioner of Income-tax (Appeals) and the Tribunal is incorrect and liable to be modified as stated above. Hence, it is held that the interest income earned by the assessee does not come within the ambit of section 80P(2)(a)(i) and permissible deduction of interest income is limited to co-operative societies/banks registered under Kerala Co-operative Societies Act under clause (d) of the Act and effect order on the above lines is made by the Assessing Officer. The questions are accordingly answered.” In fine, interest from co-operative banks, inasmuch as they are also cooperative societies under the Kerala Act, is deductible u/s.80P(2)(d), while that from the treasury or other institution, not being a co-operative society, is not. The matter, in view of the said binding decision, admits of no two views, at least insofar as the Cochin Bench of the Tribunal is concerned. No contrary judgment has even otherwise been brought to our notice by the Revenue, even as the decision in Totgar’s CSS Ltd. (supra) stands considered in Peroorkada SCB Ltd. (supra).

5.4 We may, however, before parting with our order, place on record our humble view in the matter. The Hon’ble Apex Court in Mavilayi Service Co-operative Bank Ltd.(supra), while discussing the import of sec.80P(4), which reads as under, clarified that the exclusion thereby extends only to co-operative banks, i.e., co- operative societies in the business of banking as defined in sec.5(b) of the Banking Regulation Act, 1949 (BRA), under the license from RBI: ‘(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.’ Whether, therefore, the co-operative societies were PACS or not, which aspect informed the decision by the Hon’ble High Court, was immaterial. In other words, even if a co-operative society was not a PACS, as contended by the Revenue with reference to s.5(cc)(iv) of the BRA, as indeed the relevant provisions of the Kerala Act (i.e., under which Act the co-operative societies were registered and 6 & Ors. ITO v. The Adichanalloor Farmers SCB Ltd. & Ors. constituted)– which we find to be even more stringent than that of the BRA, it was immaterial. That is, any co-operative society, as long as it is not a co-operative bank, would not be ousted by s.80P(4) and, thus, deprived of the benefit of s.80P. On quantum, though, the benefit of s.80P(2)(a)(i) shall extend only to the provision of credit to it’s members, which shall include notional members (i.e., without the right to vote; participate in surplus, etc.) as well inasmuch as the Kerala Act provided for such membership. Income attributable to the credit to non-members would, accordingly, stand excluded while computing the amount deductible u/s.80P(2)(a)(i). This, to our mind, represents the said decision in substance, i.e., its ratio. The Revenue’s contention of the assessee extending bulk of it’s loans for non- agricultural purposes, and were in effect acting as banks, albeit without license from RBI, did not find traction with it inasmuch as their activity did not answer the definition of banking u/s.5(b) of BRA, the prime condition of which is the acceptance of deposits from the public for the purpose of lending. That being the case, the Hon’ble High Court in Peroorkada SCB Ltd. (supra) extending the benefit of sec.80P(1) to deposits with co-operative banks, on the basis that they are also co- operative societies, though in the business of banking, so that income therefrom would fall to be covered u/s. 80P(2)(d), may be, with respect, inconsistent with the decision by the Hon’ble Apex Court in Mavilayi SCB Ltd.(supra),which concerns itself in the main with the scope of the exclusion clause of s.80P(4). Sec.80P(4) ousts from the purview of sec.80P any co-operative bank (i.e., other than the specified categories thereof). Sec.80P(2)(d) clearly provides exemption of income on investment in a co-operative society, which therefore ought not to be extended to a co-operative bank, excluded u/s. 80P(4). Co-operative banks are public entities, operating as banks, and which is the only reason for their exclusion from s. 80P per sub-section (4) thereof. When, therefore, a co-operative society places it’s money with them, the same becomes in turn available for the business of banking by the co- operative banks, including, inter alia, lending to the members of the public, i.e., goes