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Income Tax Appellate Tribunal, VISAKHAPATNAM “SMC” BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE
O R D E R
Per Shri Duvvuru RL Reddy, Judicial Member :
This appeal is filed by the assessee against the order of Commissioner of Income Tax (Appeal) [CIT(A)], National Faceless Appeal Centre (NFAC), Delhi vide DIN & Order No. ITBA/NFAC/S/250/2022- 23/1051742265(1) dated 31.03.2023 arising out of the assessment order passed u/s 143(3) of the Income Tax Act, 1961 (in short “Act”) dated 28.12.2019 for the Assessment Year (A.Y.)2017-18.
Brief facts of the case are that the assessee, an agricultural cooperative society registered under the Society Act, provides credit Rangaraya Large Sized Cooperative Society, Pasivedala facilities such as crop loans, agricultural loans, gold loans etc. to it’s registered members and also markets the agricultural produce such as feritilizers, pesticides and seeds, filed it’s return of income for the A.Y.2017-18 on 31.03.2018 admitting NIL income, after claiming Chapter VIA deduction u/s 80P of Rs.70,73,619/-. The Assessing Officer (AO) relied on the decisions in the case of CIT Vs. Jilla Jahakari Kendriya Bank Manyadit (1997) 225 ITR 421(MP), which held that income from interest on securities earmarked to reserve fund is not eligible for deduction u/s 80P and also relied on the decision of Hon’ble Supreme Court of India in Civil Appeal No.1622 of 2010, in the case of M/s Totgars Co-operative Sale Society Ltd. which held that “investment of surplus on hand not immediately required in Short Term deposits and securities by a co- operative society providing credit facilities to members or marketing agriculture produce to member”. Interest on such deposits is not business income and hence the same is treated as income from other sources. Hence, the AO completed the assessment u/s 143(3) and passed an order dated 28.12.2019 and arrived at taxable income at Rs.3,13,822/- by disallowing deduction claimed u/s 80P of the Act, being the interest on Reserve Fund deposits.
Rangaraya Large Sized Cooperative Society, Pasivedala
Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) and the Ld.CIT(A), relying on the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-Operative Bank Ltd. Vs. Commissioner of Income Tax (2021) 431 ITR 1(SC) dated 12.01.2021 and Totgars Co-operative Sale Society Ltd. Vs. Income Tax Officer (2010) 311 ITR 283 (SC) dated 08.02.2010, upheld the addition made by the AO, holding that interest income earned by the assessee society from fixed deposits pertaining to reserve fund kept with nationalized (schedule) banks / cooperative banks is not eligible for deduction u/s 80(P)(2)(a) and 80P(2)(d) and dismissed the appeal of the assessee.
4. Aggrieved by the order of the Ld.CIT(A), the assessee preferred an appeal before us by raising the following grounds of appeal :
1. The order of the learned Commissioner of Income Tax (Appeals) is contrary to the facts and also the law applicable to the facts of the case.
2. The learned Commissioner of Income Tax (Appeals) ought to have held the adjustment made in the order passed u/s 143(3) of the Income Tax Act is beyond the scope of permissible adjustments and consequently the Learned Commissioner of Income Tax (Appeals) ought to have directed the Assessing Officer to rectify.
3. The learned Commissioner of Income Tax (Appeals) ought to have known that the interest income pertaining to deposits earmarked for reserve funds is in the course of its business. The deposits were made in DCC Bank as usual along with other deposits.
Rangaraya Large Sized Cooperative Society, Pasivedala The appellant assessee did not make investments for getting any extra benefit. These deposit were not made with the intention to gain any benefit from other sources. Hence, the deposits were made in due course of its business and are eligible for deduction u/s 80P. Business of banking and providing credit facilities to the members of the assessee society, therefore, is eligible for claim u/s 80P of the I.T.Act.
The adverse view taken by the Commissioner of Income Tax (Appeals) in this regard runs contrary to the provisions of the law and facts of the case and the facts and circumstances laid down in the cases referred in a. Mavilayi Service Co-Operative Bank Ltd. Vs. Commissioner of Income Tax (2021) 431 ITR 1 (SC) dated 12.01.2021 b. M/s Totgars Cooperative Sale Society Ltd. is different.
5. The learned Commissioner of Income Tax (Appeals) ought to have known that 80P of the I.T.Act is a beneficial provision and the interpretation of the Assessing Officer while taking an adverse view of the eligibility of the claim does not go in the true spirit of the provisions of the section.
The learned Commissioner of Income Tax (Appeals) ought to known that the income in respect of which the disallowance was made is nothing but the operational income in the form of interest pertaining to the deposits made towards the reserve fund, deposits being is a statutory obligation, which the assessee during the course of carrying its activities is required to deposit, therefore, under such circumstances denying the claim is not legally tenable.
7. The Hon’ble Commissioner of Income Tax (Appeals), Rajahmundry & NFAC (Delhi) has allowed the appeals in the subject of interest on Reserve Fund and allowed the deductions a. The Malakapalli Large Sized Co-operative Society for the AY 2015-16 & 2016-17 – Order passed by the Hon’ble CIT(Appeals) – Rajahmundry b. The Kommugudem Large Sized Co-op Credit Society Ltd. – 2023 – Passed by the CIT Appeals NFAC, Dated 15.03.2023 8. Any other grounds that may be urged at the time of hearing of the appeals.
Rangaraya Large Sized Cooperative Society, Pasivedala
All the grounds of appeal
are related to disallowance of deduction claimed u/s 80P of the Act. At the outset, the Ld.AR submitted that the assessee society, being a cooperative society, make deposits in its regular course of business and accordingly the deposits were made in DCC bank as usual, but not with any intention to gain any benefit from other sources. The Ld.AR further submitted that the facts relied on by the revenue authorities in the case of M/s. Totgars Cooperative Sale Society Ltd (supra) are entirely different from that of the instant case. The Ld. AR also submitted that as per Para-11 of the judgment in the case of M/s. Totgars Cooperative Sale Society Ltd (supra) it is clearly mentioned that “this judgment is confined to the facts of the present case” and therefore it cannot be applied in the assessee’s case, hence, eligible for deduction u/s 80P of the Act. He, therefore, pleaded to quash the order passed by the Ld.CIT(A) and allow deduction u/s 80P of the Act.
6. Per contra, the Ld.DR argued that the Ld.CIT(A) has rightly upheld the addition made by the AO as the assessee is not eligible to claim deduction u/s 80P of the Act. He, therefore, pleaded to uphold the order passed by the Ld.CIT(A) and dismiss the appeal of the assessee.
Rangaraya Large Sized Cooperative Society, Pasivedala
I have heard both the parties and perused the material placed on record. Now the question before me is to decide whether the assessee is eligible for deduction u/s 80P on interest earned on deposits pertaining to reserve fund with DCC Bank, which is a cooperative bank, or not. It is an admitted fact that the assessee has claimed deduction u/s 80P of the Act. The contention of the AO is that interest accrued on Reserve Fund Deposits is not eligible for deduction u/s 80P. He relied on the decision of CIT Vs. Jilla Jahakan Kendriya Bank Maryadit (1997) 225 ITR 421(MP) that income from interest on securities ear marked to reserve fund has been held not eligible for deduction u/s 80P. He has also placed relied on the decision of Hon’ble Supreme Court of India in Civil Appeal No.1622 of 2010 in the case of M/s Totgars Cooperative Sale Society Ltd., which held that “investment of surplus on hand not immediately required in Short Term deposits and securities by a co-operative society providing credit facilities to members or marketing agriculture produce to member”. However, in the instant case, the facts are distinguishable and hence, in my view, the ratio laid down in the case of M/s Totgars Cooperative Sale Society Ltd.(supra) shall not be applied. On similar set of facts, coordinate bench of this Tribunal in the case of Kakateeya Mutually Aided Thrift and Credit Co-op Society held in favour of the assessee vide Rangaraya Large Sized Cooperative Society, Pasivedala I.T.A.No.107/Viz/2022, CO No.07/Viz/2022 dated 30.08.2023. For the sake of clarity and convenience, relevant part of the order is extracted as under :
“8. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. It is an admitted fact that the assessee has claimed deduction U/s. 80P(2)(a)(i) of the Act on the interest accrued and received by the assessee U/s. 80P(2)(a)(i) of the Act. The contention of the Ld. AO is that as per section 80P(2)(d), the assessee is eligible to claim deduction U/s. 80P(2)(a)(i) of the Act only when it is invested with any other cooperative society. The Ld. AO also placed heavy reliance in the case of M/s. Totgars Cooperative Sale Society Ltd (supra) while disallowing the claim made by the assessee U/s. 80P(2)(a)(i) of the Act. We have perused the ratio laid down by the Hon’ble Apex Court in the case of M/s. Totgars Cooperative Sale Society Ltd (supra) and found that in that case the society is engaged in marketing of the agricultural produce by its members as per section 80P(2)(a)(iii) while carrying on the business of banking or providing credit facilities to its members U/s. 80P(2)(a)(i) of the Act. In that case, the Society retained the sale proceeds which was otherwise payable to its members from whom the produce was bought which was invested in short term deposits / securities. It is also found that the amount payable to its members realized from sale proceeds of the agricultural produce of its members was retained by the society and was shown as liability on the balance sheet. Therefore, the Hon’ble Apex Court has held that interest earned from retaining the amount payable to its members shall not be considered as income from other sources. However, in the instant case the facts are distinguishable and hence in our view the ratio laid down in the case of M/s. Totgars Cooperative Sale Society Ltd (supra) shall not be applied. Section 80P(1) of the Act entitles the Cooperative Societies to deduct the sums specified in sub- section (2) from its gross total income while computing the total income. Sub-section (2) of section 80P, in the sub-clause (a) allows deduction to cooperative society which is engaged in the following activities: “(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 Rangaraya Large Sized Cooperative Society, Pasivedala intended for agriculture for the purpose of supplying them to its members, or (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:”
Further, we also extract below the provisions of section 80P2(d) and (e) of the Act for reference: “(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; (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;”
From the plain reading of section 80P(2)(a)(i) of the Act, the whole of amount of profits and gains of the business attributable to one or more of such activities shall be allowed as a deduction. Further, section 80P(2)(d) and 80P(2)(e) of the Act also allows similar deductions. It is clear that the deductions available under clauses (a) to (e) of section 80P(2) are activity based whereas clauses (d) and (e) are investment based. The distinction between clauses (a) and clauses (d) & (e) on the other hand is that the benefit under clause (a) is restricted to only into those activities of a cooperative society enlisted in sub-clause (a) whereas the benefit of clauses (d) & (e) are available to all cooperative societies without any restriction on the activities carried on by them. In simple terms, the benefit under clause (a) will be limited only to the profits & gains of the business attributable to any one or more of such activities. But in case, if the cooperative society has an income not attributable to any one or more of such activities listed in sub-clauses (i) to (vii) of clause-(a), the same may go out of the purview of clause (a) but still the cooperative society may claim the benefit of clause (d) or (e) as per the conditions laid down therein. In the instant case, the original source of investments made by the assessee in Nationalized Banks is admittedly the income of the assessee derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income must be last, especially when the statute uses the expression “attributable to” and not any one of the expressions viz., “derived from” or “directly Rangaraya Large Sized Cooperative Society, Pasivedala attributable to”. The Hon’ble jurisdictional High Court of Andhra Pradesh and Telangana in the case of Vavveru Cooperative Rural Bank Ltd vs. Chief Commissioner of Income Tax and Another [2017] 396 ITR 0371 (AP) in para 34 has discussed about the decision of the Hon’ble Supreme Court in the case of Totgar’s Cooperative Sale Society Ltd (supra) and distinguished the facts while deciding the case. For the sake of brevity, we extract the relevant para 34 of the judgment of the Hon’ble Andhra Pradesh and Telangana High Court herein below: “34. The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.”
Further, the Hon’ble jurisdictional High Court of Andhra Pradesh and Telangana in the case of Vavveru Cooperative Rural Bank Ltd vs. Chief Commissioner of Income Tax and Another (supra) held that the cooperative society is eligible for deduction U/s. 80P(2)(a)(i) of the Act on the interest income received from investment in banks. The Hon’ble High Court in paras 35 to 37 of its judgment held as under: 35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
Rangaraya Large Sized Cooperative Society, Pasivedala
The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to".
Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.” 12. Further, the Coordinate Bench of Hyderabad in Tirumala Tirupati Devasthanams Employees Coop. Credit Society vs. ITO also affirmed the same view by following the decision of the Hon’ble AP High Court in the case of Vavveru Cooperative Rural Bank Ltd (supra). In the instant case also, the assessee has invested surplus funds out of the activities carried out as per the provisions of section 80P(2)(a) of the Act. We therefore by respectfully following the jurisdictional High Court are of the view that interest income should be allowed as deduction U/s. 80P(2)(a)(i) of the Act and thereby the Ld. CIT(A)- NFAC has rightly held by deleting the addition made by the Ld. AO and hence we find no infirmity in the order of the Ld. CIT(A)-NFAC. 13. In the result, appeal of the Revenue is dismissed.” Respectfully following the decision of the Hon’ble High Court of Andhra Pradesh in the case of Vavveru Cooperative Rural Bank Ltd.(supra) and the ratio laid down by the coordinate bench of the Tribunal in the case of Kakateeya Mutually Aided Thrift and Credit Co-op Society Limited (supra), I am inclined to quash the order passed by the Ld.CIT(A) and allow the appeal of the assessee.
In the result, appeal of the assessee is allowed.
Rangaraya Large Sized Cooperative Society, Pasivedala Order pronounced in the open court on 18th October, 2023.
Sd/- (दुव्वूरु आर.एल रेड्डी) (DUVVURU RL REDDY) न्याधयक सदस्य/JUDICIAL MEMBER Dated : 18.10.2023 L.Rama, SPS आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. ननधधाऩरती/ The Assessee – Rangaraya Large Sized Cooperative Society NO WG 445 Pasivedala, Kovvur Mandalam, Pasivedala 2. रधजस्व/The Revenue – The Income Tax Officer, Tanuku 3. The Principal Commissioner of Income Tax, Visakhapatnam 4. नवभधगीय प्रनतनननध, आयकर अपीलीय अनधकरण, नवशधखधपटणम / DR,ITAT, Visakhapatnam 5..गधर्ा फ़धईल / Guard file आदेशधनुसधर / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam