THE ITO, KOTTAYAM vs. M/S.POONJAR SERVICE CO-OP BANK LTD,, KOTTAYAM

PER GEROGE GEORGE K, JM:

These cross appeals and the Cross Objection at the instance of the assessee are

restored to the Tribunal by the judgment of the Hon’ble jurisdictional High Court in ITA

Nos.65, 66 and 72 of 2016 (judgment dated 18.10.2016)

2 Briefly stated the facts of the case are as follows:

ITA Nos 58, 529 & CO 5/C/2015

The assessee is admittedly a primary agricultural credit society. The assessment

u/s 143(3) of the I T Act was completed vide order dated 30.12.2011. The Assessing

Officer was of the view that out of the total interest received, interest amounting to

Rs. 2,79,63,652/-, is on loans disbursed, not for agricultural purposes. The Assessing

Officer held that the interest income amounting to Rs. 2,79,63,652/- is not eligible for

deduction u/s 80P of the Act and hence, assessable u/s 56 of the I T Act. The relevant

observations of the Assessing Office, read as follows:

“The assessee’s arguments as detailed above have been carefully considered. The assessee is a primary agricultural credit co-operative society (PACS) registered under the Co-operative Societies Act. Therefore, subject to satisfaction of provisions of section 80P(1), if the gross total income includes any income referred in sub-section (2) of section 80P, the assessee shall be eligible only for that income for deduction in computing the total income.

As per details filed in respect of different type of loans, it is seen that the minimum rate of interest on loan was from 7% to 15.5%. Though the primary agricultural credit societies are formed for the purpose of providing finance to farmers, there are non- agricultural loans, like gold loans, housing loans and trade loans etc. Though the loans are paid to its members, the purpose of loan could not be proved to be fore agricultural purposes other than the loans such as Kissan Credits, Agricultural Short Term and Biogas loans.

In the assessee’s case. it is observed that majority of loans given were for non- agricultural activities. On gold-loan, housing loan and ordinary loan etc. the rate of interest was from 12% to 15.5%. Therefore, the loans bearing the lowest interest rate and for agricultural purposes are accepted to be agricultural loans. Out of the total interest received, the interest received on the following loans comes to Rs.27963652/- which is not for the benefit of agricultural members and for the purpose of the activities of the society. Hence this income is not eligible for deduction u/s. 80P(1) and hence assessed under section 56.

(i) Own Fund Long Term Loan - 70,60,773/- (ii) Own Fund Short Term Loan - 1,31,80,270/- at 12.5% to 14% (iii)Gold Loans - 23,64,719/- at 13% (iv) Housing Loans - 8,94,833/- at 12% (v) Ordinary Loan - 42,86,229/- at 15.5% (vi) Trade Loan - 1,58,258/- at 13% (vii) Housing Repair - 18,570/- at 12.5% _________ 2,79,63,652/-“

ITA Nos 58, 529 & CO 5/C/2015

2.1 Further, the Assessing Officer held that interest received on short term deposit

with bank amounting to Rs. 33,85,886/- was also not eligible for deduction u/s 80P. The

relevant findings of the Assessing Officer, read as follows:

“During the relevant asst year, the assessee had surplus funds which the assessee had invested in the short term deposits with Banks as follows and earned interest to Rs.3385886/-. 1. District Co-operative Bank, Pala Rs. 5,57,461/- 2. District Co-operative Bank, pala Rs. 417/- 3. District Co-operative Bank, Erattupetta Rs.20,08,270/- 4. Meenachil Taluk Co-operative Employees Society Rs. 3,19,738/- 5. Meenachil Rubber Marketing Co-operative Society Rs. 5,00,000/- Total Rs.33,85,886/- As per Sec 2(24)(1), both the above income of Rs.2,79,63,652/- and Rs.33,85,886/- includes profit and gains. Here the interest income received cannot fall under the business income attributable to the activities of the society and cannot be considered for deduction u/s. 80P(1). Hence it is assessable u/s. 56 for income from other sources based on the hon’ble apex courts decision in the case of Totgar’s Co-op sales society Ltd.”

3 Aggrieved by the assessment completed, the assessee preferred an appeal to

the first appellate authority. The CIT(A) confirmed the assessment order in

disallowance u/s 80P (2) of the Act amounting to Rs. 33,85,886/-. As regards, the

addition of Rs. 2,79,63,652/-, the CIT(A) deleted the same.

4 Aggrieved, both the assessee and the revenue filed appeals to the Tribunal.

The assessee has also filed cross objection against the revenue’s appeal. The Tribunal,

vide its order dated 3.11.2015, restored the assessment order and rejected the claim

of the assessee for deduction u/s 80P(2) of the I T Act.

5 Aggrieved by the order of the Tribunal, the assessee preferred appeal before

the Hon’ble High Court u/s 260A of the Act. The Hon’ble High Court, vide judgment

ITA Nos 58, 529 & CO 5/C/2015

dated 18.10.2016 restored the matter to the Tribunal. The Hon’ble High Court directed

the Tribunal to decide the issue afresh in light of the judgment of the Hon’ble

jurisdictional High Court in the case of Chirakkal Service Co-op Bank Ltd vs CIT

reported in 384 ITR 490 and the Board Circular No. 18/2015 dated 2.11.2015. It is in this context, the cases were heard on 20th March, 2017.

6 The ld counsel for the assessee submitted that the circular no.18 of 2015 dated

2.11.2015 clearly states interest on deposits on non SLR securities is taxable under

the head ‘income from business” and are eligible for deduction u/s 80P(2)(a)(i) of the

Act. It was submitted that in the instant case, the assessee is a cooperative Society

providing credit facility to its members and therefore, provisions to circular no.18 of

2015 will have clear application to the facts of the instant case. It was further

submitted that the Hon’ble jurisdictional High Court in the case of Chirakkal Service Co-

op Bank Ltd (supra) had clearly held that primary agricultural society registered as

such under the Kerala Cooperative Society Act, is entitled to the benefit of deduction

u/s 80P(2) of the Act. Further, it was submitted that the Tribunal, in the case of the

Kizhathadiyoor Service Coop Bank ltd in ITA No.525/Coch/2016 dated 20.7.2016, held

that investment in treasury/bank and earning interest is part of banking activities and

the said income is eligible for deduction u/s 80P(2)(a)(i) of the Act.

6.1 The ld DR, on the other hand submitted that interest income amounting to

Rs. 2,79,63,652/- and Rs.33,85,886/- is clearly not income relatable to the activities of

the Society and the same should be assessed under the head ‘income from other

ITA Nos 58, 529 & CO 5/C/2015

sources’. The ld DR relied on the judgment of the Hon’ble Supreme Court in the case

of Totgar’s Cooperative Sales Soc. Ltd vs ITO reported in 322 ITR 283 (SC).

8 We have heard the rival submissions and perused the material on record. As

regards the interest income received on various loans given to the assessee’s members

amounting to Rs. 2,79,63,652/-, the details are as follows:

a) Own fund long term loan Rs. 70,60,773/- b) Own Fund short term loan Rs. 1,31,80,270/- c) Gold Loans Rs. 23,64,719/- d) Housing Loans Rs. 8,94,833/- e) Ordinary Loan Rs. 42,86,229/- f) Trade loan Rs. 1,58,258/- g) Housing Repair Loan Rs. 18,570/- Total Rs. 2,79,63,652/-

8.1 As regards the above interest income received on disbursement of loans to its

members, we find, on identical facts, the Cochin Bench of the Tribunal in the case of

the Muttom Service Cooperative Bank Ltd., in ITA No. 372/Coch/2010 had decided the

matter in favour of the assessee. The Cochin Bench of the Tribunal, in the case of

Muttom Service Cooperative Bank Ltd (supra), had distinguished the judgment of the

Hon’ble Apex Court in the case of Totgar’s Cooperative Sale Society Ltd (supra). The

relevant finding of the coordinate Bench of the Tribunal in the case of the Muttom

Service Cooperative Bank Ltd (supra) read as follows:

“5. We have considered the rival submission on either side and also perused the material available on record. We have also carefully gone through the order of the lower authority. No doubt, the latest judgment in Totgar’s Co-operative Sale Society Ltd vs ITO (supra), the Apex court found that the deposit of surplus funds by the co- operative society is not eligible for deduction u/s 80P(2). In the case before the Apex Court in Totgar’s Co-operative Sale Society Ltd vs ITO (supra), the assessee co- operative society was to provide credit facility to its members and market the agricultural produce. The assessee is not in the business of banking. Therefore, this 5

ITA Nos 58, 529 & CO 5/C/2015

Tribunal is of the opinion that the judgment of the Apex court in Totgar’s Co-operative Sale Society Ltd (supra) is not applicable in respect of the co-operative society whose business is banking. Admittedly, the assessee has invested funds in state promoted treasury small savings fixed deposit scheme. Since Government of India has withdrawn India Vikas Patra, as a small savings instrument, funds invested at the discretion of the bank is one of the activities of the banking as per the Banking Regulation Act. Since the assessee co-operative society is in the 4 ITA No.372/Coch/2010 business of banking the investment in the state promoted treasury small savings fixed deposit certificate scheme is a banking activity, therefore, the interest accrued on such investment has to be treated as business income in the course of its banking activity. Once it is a business income, the assessee is entitled for deduction u/s 80P(2)((a)(i). therefore, this Tribunal is of the opinion that the judgment of the Larger Bench of the apex Court in Karnataka State Cooperative Apex Bank (supra) is applicable to the facts of this case. By respectfully following the judgment of the Apex court in Karnataka State Co-operative Bank (supra), the order of the Commissioner of Income-tax(A) is upheld.”

8.2 In the instant case, the assessee is a cooperative credit society providing credit

facility to its members and the same is evident from the loans disbursement and it is

part of the banking activity of the assessee’s cooperative bank. Therefore, the said

income is eligible for deduction u/s 80P(2)(a)(i) of the Act. Moreover, the Board

Circular no 18 of 2015 dated 2.11.2015 had clearly states that interest on deposits on

non SLR securities is taxable under the head ‘income from business” and are eligible

for deduction u/s 80P(2)(a)(i) of the Act, in the case of Cooperative banks carry on the

business of banking. As mentioned earlier, in this case, the assessee is a cooperative

credit society providing credit facility to its members, which is akin to the banking

activity. Therefore, we are of the view that the CIT(A) had correctly deleted the

addition made by the Assessing Officer amounting to Rs. 2,79,63,652/-.

8.3 However, the Hon’ble Kerala High Court in the case of Chirakkal Service Co-op

Bank Ltd (supra) had clearly held that primary agricultural societies registered under

ITA Nos 58, 529 & CO 5/C/2015

the Kerala Cooperative Society Act and classified so, under that Act, are entitled to the

benefit of deduction u/s 80P(2) of the Act. The relevant portion of the judgment of

the Hon’ble Kerala High Court (supra) reproduced as under:

“In the light of the aforesaid, we answer substantial question “a” in favour of the appellants and hold that the Tribunal erred in law in deciding the issue regarding the entitlement of exemption under section 80P against the appellants. We hold that the primary agricultural credit societies, registered as such under the KCS Act; and classified so, under that Act, including the appellants are entitled to such exemptions.”

8.4 In the instant case, admittedly, the Joint Registrar (General) Kottayam, by

certificate dated 23.12.2011 had certified that the assessee is a primary agricultural

credit cooperative society. This fact also admitted by the Assessing Officer at page 2 of

the assessment order. In view of the clear finding of the Hon’ble jurisdictional High

Court, we are of the view that the assessee is entitled to the benefit of deduction u/s

80P(2) of the Act.

9 The details of interest income of Rs.33,85,886/-, which was denied the benefit

of deduction u/s 80P(2) are as follows:

a) District Coop Bank, Pala Rs. 5,57,461/- b) District Coop Bank, Pala Rs. 417/- c) District Coop Bank, Erattupetta Rs. 20,08,270/- d) Meenachil taluk Coop Employees Soc. Rs. 3,19,738/- f) Meenachil Rubber Mktg Coop Soc. Rs. 5,00,000/ Total Rs 33,85,886/-

9.1 As per section 80P(2)(d) of the I T Act, interest income received by the

cooperative society from its investment from another cooperative society, is eligible for

exemption from taxation. The whole of interest income was received from other

ITA Nos 58, 529 & CO 5/C/2015

cooperative society/banks and hence, as per provisions of section 80P(2)(d) of the Act,

the same is to be allowed as deduction. This issue was considered by the Cochin Bench

of the Tribunal in the case of the Kizhathadiyoor Service Cooperative Bank Ltd in ITA No. 525/Coch/2014 vide order dated 20th July 2016. The relevant findings of the

Tribunal read as follows:’

“7.1 From the above, it is clear that a major portion of the investment income was interest receipt from other cooperative societies. Section 80P(2(d) provides for deduction in respect of any income by way of interest or dividend derived by a cooperative society from its investment in another cooperative society. Therefore, interest income received from other cooperative societies are eligible for deduction u/s 80P(2)(d) of the Act and cannot be assessed as “income from other source.”

9.2 Moreover, by virtue of section 80P(2)(a)(i) in the case of cooperative society

carrying on the business of banking or providing credit facilities to its members, whole

of the profits and gains attributable to such activities is eligible for deduction. If the

income is derived by a cooperative society from the business of banking or providing

credit facility to its members it will fall within the exemption. The Hon’be Supreme

Court, in the case of CIT vs Karnataka State Cooperative Apex Bank reported in 251 ITR

194(SC), held that interest from surplus funds kept as deposits in banks, being ancillary

and incidental to the carrying on of the business of providing credit facility by the

assessee cooperative society to its members, is entitled to deduction u/s 80P(2)(a)(i).

9.3 In light of the aforesaid reasoning, we hold that the Assessing Officer is not

justified in denying the benefit of deduction u/s 80P in respect of the amounts of

Rs.2,79,63,652/- and Rs. 33,85,886/-. It is ordered accordingly.

ITA Nos 58, 529 & CO 5/C/2015

10 In the result, the appeal filed by the revenue is dismissed and the appeal by the

assessee is allowed.

CROSS OBJECTION no.5/Coch/2015(by the assessee)

11 The cross objection filed by the assessee is supporting the order of the CIT(A).

Since we have dismissed the appeal filed by the revenue, the cross objection by the

assessee has become infructuous and the same is dismissed.

12 To sum-up, the appeal filed by the revenue and the cross objection by the

assessee are dismissed; whereas the appeal filed by the assessee is allowed. Order pronounced in the open Court on this 22nd day of March 2017.

Sd/- Sd/- (ABRAHAM P GEORGE) (GEORGE GEORGE K) Accountant Member Judicial Member Cochin: Dated 22nd March 2017 Raj*

ITA Nos 58, 529 & CO 5/C/2015

Copy to:

By order

Assistant Registrar ITAT, COCHIN