Income from house property is not entitled to deduction under any of the clauses of Sec.80P(2)(a) of the I.T.Act.   

 

IN THE INCOME TAX APPELLATE TRIBUNAL 

COCHIN BENCH, COCHIN 

Before Shri Chandra Poojari, AM & Shri George George K, JM  

ITA No.547/Coch/2017 : Asst.Year 2007-2008 ITA

No.548/Coch/2017 : Asst.Year 2008-2009 ITA

No.549/Coch/2017 : Asst.Year 2009-2010 ITA

No.550/Coch/2017 : Asst.Year 2012-2013 ITA

No.551/Coch/2017 : Asst.Year 2013-2014 

The Income Tax Officer  Ward 1  Kasaragod.	Vs.	M/s.Hosdurg Service Co operative Bank Limited Hosdurg,   Kanhangad-671 315.  PAN : AAAAH0337C.
(Appellant)		(Respondent)

CO No.09/Coch/2018 : Asst.Year 2007-2008 CO

No.10/Coch/2018 : Asst.Year 2008-2009 CO

No.11/Coch/2018 : Asst.Year 2009-2010 CO

No.12/Coch/2018 : Asst.Year 2012-2013 CO

No.13/Coch/2018 : Asst.Year 2013-2014 

M/s.Hosdurg Service Co operative Bank Limited Hosdurg,   Kanhangad-671 315.	Vs.	The Income Tax Officer Ward 2  Kasaragod.
(Cross Objector)		(Respondent)

ITA No.627/Coch/2017 : Asst.Year 2007-2008 ITA

No.628/Coch/2017 : Asst.Year 2008-2009 ITA

No.629/Coch/2017 : Asst.Year 2009-2010 ITA

No.630/Coch/2017 : Asst.Year 2012-2013 ITA

No.631/Coch/2017 : Asst.Year 2013-2014

M/s.Hosdurg Service Co operative Bank Limited Hosdurg,   Kanhangad-671 315.	Vs.	The Income Tax Officer Ward 2  Kasaragod.
(Appellant)		(Respondent)

 

Revenue by : Smt.A.S.Bindhu 

Assessee by : Sri. H.S.Bhatt 

Date of Hearing : 17.09.2018

Date of  Pronouncement : 18.09.2018

O R D E R 

Per Bench 

These cross appeals and Cross Objections at the  instance of the assessee are directed against the consolidated  order of the CIT(A) dated 13.06.2017. The relevant  assessment years are 2007-2008, 2008-2009, 2009-2010,  2012-2013 and 2013-2014. Since common issues are raised  in these cross appeals and cross objections, they were heard  together and are being disposed off by this consolidated order.  First we shall adjudicate the Revenue’s appeals and the Cross  Objections of the assessee. 

ITA Nos.547 to 551/C/2017 & COs 09 to 13/C/2018 : 

2. The brief facts in relation to the above issue are as  follows: 

The assessee is a primary agricultural credit society  registered under the Kerala Co-operative Societies Act, 1969.  For the assessment years 2007-2008, 2008-2009, 2009-2010,  2012-2013 and 2013-2014, the returns were filed claiming  deduction u/s 80P(2) of the I.T.Act. The assessments were  completed for the concerned assessment years by denying the  deduction claimed u/s 80P(2) of the I.T.Act. The reason of the  Assessing Officer to deny the benefit of deduction u/s 80P(2)  of the I.T.Act was that the assessee was primarily engaged in  the business of banking and by virtue insertion of section  80P(4) of the I.T.Act with effect from 01.04.2007, the assessee  was not entitled to deduction claimed u/s 80P(2) of the  I.T.Act. 

3. Aggrieved by the assessments completed for the  concerned assessment years, the assessee had preferred  appeals to the first appellate authority. The CIT(A) following  the judgment of the Hon’ble jurisdictional High Court in the  case of The Chirakkal Service Co-operative Bank Ltd. and  Others [(2016) 384 ITR 490 (Ker.)] held that the assessee was  entitled to the benefit of deduction u/s 80P(2) of the I.T.Act.  

4. Revenue being aggrieved by the orders of the CIT(A), has  preferred the above appeals before the Tribunal,, raising  following grounds:- 

1. In view of the recent decision of the Hon’ble  Supreme Court in the case of The Citizens Co Operative Society limited vs Assistant Commissioner  of Income Tax, Circle- 9(1), Hyderabad dated 8th  August 2017, is not the order of the learned  Commissioner of Income Tax (Appeals) against law  and the facts and circumstances of the case?  

2. The Commissioner of Income Tax (Appeals) had  in the instant case placing reliance on the decision of  the Honourable High Court of Kerala in the case of  M/s Chirakkal Service Co-op Bank ltd. And others in  TA 212 of 2013, held that the assessee is eligible for  deduction u/s 80P of the Income Tax Act solely on  the basis that it has been registered and classified  as a Primary Agricultural Credit Society by the  Competent Authority under the Kerala Co-operative  Societies (KCS) Act. As against this, the Honourable  Supreme Court has while deciding in the case of The  Citizen Co-Operative Society limited vs Assistant  Commissioner of Income Tax, Circle- 9(1), Hyderabad  taken into consideration the activities of the assessee  society and not relied only on the certificate of  registration issued by the Central Registrar of Co operative societies. In view of this, is not the decision  of the CIT(A) against the prevailing positions of law  that differentiates between de jure and de facto  positions and which permits the principle of  penetration of the corporate veil to determine the true  nature of the activities of the cooperative society?  

3. Whether on the facts and in the circumstances  of the case, the Commissioner of Income Tax  (Appeals) is right in law in holding that the assessee  is eligible for claiming deduction u/s 80P on the  above lines, when in the recent decision in the case  of The Citizen Co-Operative Society, the Honourable  Supreme Court has, after taking into account the  activities of the appellant Co-operative Society, held  that the appellant could not be treated as a co operative society meant only for its members and  providing credit facilities only to its members.  

4. The Honourable Supreme Court: had in the case  of The Citizen Co-Operative Society limited Vs  Assistant Commissioner of Income Tax, Circle- 9(1), Hyderabad observed that the depositors and  borrowers in the appellant cooperative society are  distinct and therefore, in reality, the activities of the  appellant are that of a finance business and cannot  be termed as those of a co-operative society. The  facts in the present case also fall within the same  contextual fabric. The categories of resident  members, ordinary members and nominal members  exist. This invokes the question of whether the  assessee is merely providing agricultural credit to its  members thereby validating the claim of tax  exemption u/s 80P(4) or performing activities beyond  its approved framework that enables disallowance of  such claim. In view of this, is not the decision of the  CIT(A) without merits?

5. The learned CIT(Appeals) ought to have seen  that the Honourable Supreme Court in the case of  Sabarkantha Zilla Kharid Vechan Sangh Ltd Vs CIT  reported in 203 ITR 1027 (SC) had held that the  eligible deduction under Section SOP of the Income  Tax Act, 1961 in respect of Co-operative societies/ banks doing both agricultural and non agricultural  activities should not be 100% of the gross  profits of such societies etc. but should be limited to  the profits generated from agricultural activities alone  performed by such assessees.

6. The learned CIT(Appeals) ought to have seen  that the above Apex Court’s decision is in sharp  contrast to the decision of the Kerala High Court in  the case of M/s Chirakkal Service Co-operative Bank  & others in ITA 212 of 2013 that held that the  authorities under the Income Tax Act cannot probe  into the question of whether the assessee  Cooperative society is a primary agricultural credit  society once it is registered and classified as primary  agricultural credit society by the competent  authorities under the provisions of the Kerala Co  operative Societies Act,1969.  

7. The judicial ratios in the cases of Rodier Mill  Employees Co-op Stores Ltd. vs CIT 135 ITR 355  (Mad), CIT vs Kerala State Co-operative Marketing  Federation Ltd.[1998] 234 ITR 301(Ker) and Kerala  State Co-operative Agricultural Rural Development  Bank Ltd. vs ACIT [ITA No.506/Coch/2010 & S.P.  No.67/Coch/2010 hold that carte blanche deductions u/s 80P are not available to cooperative  societies merely on the basis of professed  agricultural credits on the basis of mere registration  and classification. In view of this, is not the decision  of the CIT(A) without merits?

8. For these and other grounds that may be urged  at the time of hearing, it is requested that the order of  the CIT(A) may be set aside and that of the  Assessing Officer restored.” 

5. The learned Departmental Representative relied on the  grounds raised. The learned AR, on the other hand, submitted  that the issue in question is covered in favour of the assessee  by the judgment of the Hon’ble jurisdictional High Court in  the case of The Chirakkal Service Co-operative Bank Ltd. and  Others (supra). 

6. We have heard the learned DR and perused the material  on record. We find that an identical issue was considered in  the case of ITO v. The Chengala Service Co-operative Bank  Limited [ITA No.434/Coch/2017 & Ors. – order dated 05th April, 2018]. In that case, identical grounds have been raised  to that of the grounds raised in the present appeals. The  Tribunal after considering the judicial pronouncements, held  that the assessee is entitled to deduction u/s 80P(2) of the  I.T.Act. The relevant finding of the Tribunal reads as follows:- 

“7. We have heard the rival submission and  perused the material on record. The undisputed facts  are that the assessees in these cases are primary  agricultural credit societies, registered as such under  the Kerala Co-operative Societies Act. The Hon’ble  jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Limited & Ors. (supra) had  categorically held in para 17 page 14 of the judgment  that when a primary agricultural credit Society is  registered as such under the Kerala Co-operative  Societies Act, 1969, such society is entitled to the  benefit of deduction u/s 80P(2) of the Income-tax Act.  The Hon’ble High Court was considering the following  substantial question of law: 

“a) Whether on the facts and in the circumstances of  the case under consideration/ the Tribunal is correct  in law in deciding against the assessee/ the issue  regarding entitlement for exemption under section  80P, ignoring the fact that the assessee is a primary  agricultural credit society?” 

7.1 In considering the above question of law, the  Hon’ble High Court rendered the following findings: 

“15. Appellants in these different appeals are  indisputably societies registered under the Kerala  cooperative societies Act 1969, for sort, KCS Act and  the bye-laws of each of them, as made available to  this court as part of the paper books, clearly show  that they have been classified as primary  agricultural credit societies by the competent  authority under the provisions of that Act. The  parliament, having defined the term ‘co-operative  society’ for the purposes of the BR Act with reference  to, among other thing the registration of a society  under any State law relating to co-operative societies for the time being; it cannot but be taken that the  purpose of the societies so registered under the State  Law and its objects have to be understood as those  which have been approved by the competent  authority under such State law. This, we visualize as  due reciprocative legislative exercise by the  Parliament recognizing the predominance of decisions  rendered under the relevant State Law. In this view  of the matter, all the appellants having been  classified as primary agricultural credit societies by . the competent authority under the KCS Act it has  necessarily to be held that the principal object of  such societies is to undertake agricultural credit  activities and to provide loans and advances for  agricultural purposes; the rate of interest on such  loans and advances to be at the rate fixed by the  Registrar of co-operative societies under the KCS Act  and having its area of operation confined to a village,  panchayat or a municipality. This is the consequence  of the definition clause in section 2(oaa) of the KCS  Act. The authorities under the IT Act cannot probe  into any issue or such matter relating to such  applicants. 

16. The position of law being as above with reference  to the statutory provisions, the appellants had shown  to the authorities and the Tribunal that they are  primary agricultural credit societies in terms of clause  (cciv) of section 5 of the BR Act having regard to the  primary object or principal business of each of the  appellants. It is also clear from the materials on  record that the bye-laws of each of the appellants do  not permit admission of any other co-operative  society as member, except may be, in accordance  with the proviso to sub-clause 2 of section 5(cciv) of  the BR Act. The different orders of the Tribunal which  are impeached in these appeals do not contain any  finding of fact to the effect that the bye- laws of any  of the appellant or its classification by the competent  authority under the KCS Act is anything different  from what we have stated herein above. For this  reason, it cannot but be held that the appellants are  entitled to exemption from the provisions of section  8OP of the IT Act by virtue of sub-section 4 of that  sect; on. In this view of the matter, the appeals  succeed. 

17. 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 exemption.”

7.2 In the instant cases, the assessees are primary  agricultural credit societies registered under the  Kerala Cooperative Societies Act, 1969. The  certificate has been issued by the Registrar of  Cooperative Societies to the above said effect and the  same is on record. The Hon’ble High Court, in the  case cited supra, had held that primary agricultural  credit society, registered under the Kerala  Cooperative Societies Act, 1969, is entitled to the  benefit of deduction u/s 80P(2). Since there is a  certificate issued by the Registrar of Cooperative  Societies, stating that the assessees are primary  agricultural credit societies, going by the judgment of  the Hon’ble jurisdictional High Court, assessees are  entitled to deduction u/s 80P(2). However, the  Revenue’s contention is that the Hon’ble Apex Court  in the case of Citizens Co-operative Society Ltd.  (supra) categorically decided when deposits are  received from general public / nominal members or  loans are disbursed to general public / nominal  members, the assessee would be doing the business  of banking and therefore, would not be entitled to  deduction u/s 80P(2) of the Income-tax Act. In the  context of the submission made by the Revenue, let  us examine whether the judgment of the Hon’ble  Apex Court in the case of Citizens Co-operative  Society Ltd. (supra) has application to the facts of the  present cases.  

8. The Hon’ble Apex Court judgment in the case of  Citizen Co-operative Society (supra) Ltd. was  rendered in the context of eligibility of a Credit Co operative Society for deduction under section 80 P of  the Act. The Apex Court, referring to the specific facts  of the case held that the assessee therein is not entitled for deduction under section 80P of the  Income-tax Act. In the aforesaid case, the Hon’ble  Apex Court was not dealing with a case of eligibility  of a Primary Agricultural Credit Society for deduction  under section 80P of the Income-tax Act. The Hon’ble  Supreme Court at Para 23 of the aforesaid judgment  had emphasized that even after the amendment  made to the provisions of section 80P of the Act by  insertion of section 80P(4) of the Income-tax Act, the  Primary Agricultural Credit Society is eligible for  deduction under section 80P of the Act.

8.1 The assessee society in the case considered by  the Hon’ble Supreme Court was established on 31-5- 1997 and was registered under section 5 of the  Andhra Pradesh Mutually Aided Co-operative  Societies Act, 1995. Thereafter as the operations of  the assessee had increased manifold and were  spread over states of Erstwhile, Andhra Pradesh,  Mahrashtra and Karnataka, the assessee-society got  itself registered on 26.07.2005 under the Multi State  Co-operative Societies Act, 2002 (MACSA) 

8.2 The Hon’ble Apex Court in the aforementioned  case specifically took note of the factual findings of  the Assessing Officer (which was stated in para 15 of  the judgment) referring to the bye laws and the  provisions of Mutually Aided Co-operative Societies  Act, 1995. The Assessing Officer was of the view that  the assessee therein cannot admit `nominal  members’ and most of the deposits were taken from  such category of person (as they were not members  as per the provisions referred). The Apex Court in  para 25 of the Judgment has pointed out that the  main reason for disentitling the assessee from getting  the deduction provided under section 80P of the Act  is not sub-section (4) of the Act. On the contrary, the  Hon’ble Apex Court held that the Credit Co-operative  Society was not entitled for deduction u/s 80P of the  Act for the reason of categorical finding of the A.O.  that the activities of the assessee are in violation of  the Provisions of the MACSA under which it is formed  as the substantial deposits were from `nominal  members’ who are actually non-members as per the  provisions of law referred. The Hon’ble Apex Court  specifically took note of the fact that the assessee  therein has carved out a category of `nominal  members’ who are infact not the members in the real sense. Therefore the deposits received from the  carved out category viz nominal members who are  not the members as per the provisions of the law  referred to therein and without the permission of the  Registrar of Societies was held to be violative of the  provisions and were treated/ proceeded with as  deposits from the Public. In other words, in the case  before the Hon’ble Supreme Court, the finding on the  principle of mutuality was arrived at interalia; on the  factual finding that the assessee was receiving  deposits mostly from a carved out category of  member viz `nominal member’ who are not members  as per the provisions of law referred, and that most  of the business of the assessee therein was with this  carved out category of person and also granting  loans to public and without the approval from the  Registrar of the Societies. 

8.3 As far as the Kerala Co-operative Societies Act  which is applicable to the present case is concerned,  the definition of a ‘member’ as provided in Section  2(1) of the Kerala Co-operative Societies Act includes  a nominal member. Section 2 (1) of the said Act is as  follows:  

“Member” means a person joining in the application  for the registration of a co-operative society or a  person admitted to membership after such  registration in accordance with this Act, the Rules  and the Bye law and includes a nominal or associate  member”  

8.4 The `normal member’ is defined under 2(M) of  the Kerala Co-operative Societies Act, 1969, which  reads as follow:-

“(m) `nominal or associate member’ means a member  who possesses only such privileges and rights of a  member and who is subject only to such liabilities of  a member as may be specified in the bye-laws;” 

8.5 Therefore, in the present cases, the nominal  members are members as provided in law and  deposits from such nominal members cannot be  considered or treated as from the non-members or  from public as was noted by the Apex Court  judgment cited supra. 

8.6 In this context, it is relevant to mention that the  Hon’ble Supreme Court in the case of U.P.Co operative Cane Union v. Commissioner of Income-tax  (1999) 237 ITR 574 (SC)-para 8 of the judgment has  observed as under:- 

“8. The expression “members” is not defined in the  Act. Since a co-operative society has to be  established under the provisions of the law made by  the State Legislature in that regard, the expression  “members” in section 80P(2)(a)(i) must, therefore, be  construed in the context of the provisions of the law  enacted by the State Legislature under which the co 

operative society claiming exemption, has been  formed. It is, therefore, necessary to construe the  expression “members” in Section80P(2)(a)(i) of the Act  in the light of the definition of that expression as  contained in Section 2(n) of the Co-operative Societies  Act.”  

8.7 The Bombay High Court in Jalgaon District  Central v. UOI (2004) 265 ITR 423 (Bom) in the light  of the above Supreme Court judgment had held that  nominal member is also member under the  Maharashtra Co-operative Societies Act and entitled  for benefits under section 80P. [Para 17 to 20 of the  judgment], as under:- 

“17. In case of M/s U.P.Co-op. Cane Union  Federation Ltd., Lucknow (cited supre), the Supreme  Court has held that the expression “Member” is not defined in the Income Tax Act. Since the Co-operative  Society has to be established under the provisions of  law made by the State Legislature in that regard, the  expression “Member” in Section 80P(2)(a)(i) must,  therefore, be construed in the context of the  provisions of law enacted by the State Legislature  under which the co-operative society claiming  exemption has been formed. The Supreme Court has  further observed that it is necessary to construe the  expression “Member” in Section 80P(2)(a)(i) of the Act  in the light of the definition of “Member” given under  Section 2(n) of the U.P.Co-operative Societies Act,  1965. 

18. The definition of “Member” given in Section  2(19) of the Maharashtra Co-operative Societies Act,  1960 takes within its sweep even a nominal member,  associate member and sympathizer member. There is  no distinction made between duly registered member  and nominal, associate and sympathizer member. 

19. In the case of K.K.Adhikari (cited supra),  Division Bench of this Court has held that the  definition of a Member under Section 2(19) of the  Maharashtra Co-operative Societies Act, 1960  includes a nominal member or a sympathizer  member. It is further held that notwithstanding the  fact that a nominal member does not enjoy all the  rights and privileges which are available to an  ordinary member, his status is that of a member as  defined in Section 2(19) of the Act. 

20. Division Bench of this Court in the case of The  Commissioner of Income Tax, Nasik (cited supra) has  also taken a similar view that the definition of  “Member” under section 2(19)(a) of the Maharashtra  Co-operative Societies Act, 1960 includes a nominal  member. It is further held by the Division Bench that  there is nothing in Section 80P(2)(iii) of the Income  Tax Act to the contrary.”
    

8.8 As per section 3 of the Banking Regulation Act,  1949, the provisions of Banking Regulation Act shall  not apply to Primary Agricultural Credit Societies. The  explanation to section 80P(4) states that ‘Primary  Agricultural Credit Society’ and ‘Co-operative Bank’  will have the same meaning as provided in Part V of  the Banking Regulation Act, 1949. The explanation  provided after clause (ccvi) of section 5 r.w.s 56 of  the Banking Regulation Act specifically provides that  if any dispute arises as to the primary object or  principal business of any co-operative society  referred to in clauses (cciv), (ccv) and (ccvi), a  determination thereof by the Reserve Bank shall be  final. The Reserve Bank of India, which is the  competent authority as per the Banking Regulation  Act, treats assessee society and similar societies as  only “Primary Agricultural Credit Society” not falling  within the ambit of Banking Regulation Act. The  Reserve Bank of India has given letters to the  societies similar to assessee stating that they are  Primary Agricultural Credit Societies and therefore in  terms of section 3 of the Banking Regulation Act are  not entitled for banking license; (Copies of such letter  from RBI are placed on record). 

8.9 That being the case, the Assessing Officer was  not competent and did not possess the jurisdiction to  resolve / decide the issue as to whether the assessee  was a ‘Primary Agricultural Credit Society’ or a ‘Co 

operative bank’, within the meaning assigned to it  under the provisions of the Banking Regulation Act  and to take a contrary view especially in view of the  Explanation provided after the clause (ccvi) of section  5 r.w.s Section 56 of the Banking Regulation Act.  

8.10 In view of the aforesaid reasoning, we hold that  the judgment of the Hon’ble Apex Court in Citizen Co operative Society Ltd. is not applicable to the facts of  the present cases. According to us, the judgment of  the Hon’ble jurisdictional High Court is identical to  the facts of the present case and is squarely  applicable. Therefore, we hold that the CIT(A) has  correctly allowed the claim of deduction in the above  cases and we uphold the orders of the CIT(A). It is  ordered accordingly.  

9. In the result, these appeals filed by the Revenue  are dismissed. 

7. In view of the above order of the Tribunal, we hold that  the CIT(A) is justified in directing the A.O. to grant deduction  u/s 80P(2)(a)(i) of the I.T.Act. It is ordered accordingly. 

8. The Cross Objections filed by the assessee are only  supportive of the CIT(A)’s order for grant of deduction u/s  80P(2). Since we have already dismissed the Revenue’s  appeals, the COs filed by the assessee become infructuous  and the same are dismissed as infructuous. 

ITA Nos.627 to 631/Coch/2017  

9. In these appeals filed by the assessee, three issues are  raised, viz., (i) whether the assessee is entitled to the benefit  of deduction u/s 80P in respect of interest received on sub treasury; (ii) whether the assessee is entitled to deduction u/s  80P in respect of trade income; and (iii) whether rental income  received by the assessee, the CIT(A) is justified in holding that  the assessee is not entitled to deduction u/s 80P(2) of the  I.T.Act. 

10. Interest received on sub-treasury

10.1 The CIT(A) has decided the issue against the assessee by  observing as under:-

“7. The appellant earned interest amounting to  Rs.356/- in A.Y.2007-08, Rs.483/- in A.Y.2008-09,  Rs.580/- in A.Y. 2009-10, Rs.1,004/- in A.Y.2012-13  and Rs.1,091/- in A.Y. 2013-14 on treasury deposits  and claimed these amounts as deduction under  section 80P of the Income Tax Act. However, the  Hon’ble Supreme Court has held in the case of  M/s.Tatgars’ Co-operative Sale Society Ltd. Vs  Income Tax Officer (322 ITR 283) that – “such  interest income cannot be said to be  attributable either to the activity mentioned in  section 80P(2)(a)(i) of the Act or in section  80P(2)(a)(iii) of the Act.” 

10.2 The assessee being aggrieved has filed the present  appeals before the Tribunal. It was contended by the learned  Counsel for the assessee that the issue in question is squarely  covered in favour of the assessee by the order of the Tribunal  in the case of The Padne Service Co-operative Bank Ltd. v. ITO  [ITA No.584 & 585/Coch/2017 – order dated 11.01.2018]. It  was submitted that the Tribunal after considering the judicial  pronouncements on the issue had decided the matter in  favour of the assessee. The learned Departmental  Representative present was duly heard.  

10.3 We have heard the rival submissions and perused the  material on record. We find an identical issue was decided by  the Tribunal in the case The Padne Service Co-operative Bank  Ltd. (supra). The relevant finding of the Tribunal reads as  follows:- 

“7. We have heard the rival submissions and perused the  material on record. The solitary issue for our consideration is  whether interest received on investments with sub-treasury is liable to be assessed under the head ‘income from other  sources’ or ‘income from business’. If the same is to be  assessed under the head ‘income from business’, the  assessee would be entitled to deduction u/s 80P(2) of the I T  Act, in respect of interest received on such investments. The  assessee admittedly is providing credit facilities to its  members. Section 5(b) of the banking regulation Act 1948  defines banking as ‘the accepting for the purpose of lending or  investment of deposits of money from the public, repayable on  demand or otherwise and withdrawal by cheque, draft, order,  otherwise. Now the question is whether a cooperative society  or a primary agricultural society can do banking business and  whether by doing such an activity, it loses the eligibility for  deduction u/s 80P(2) of the Income-tax Act. The Hon’ble High  Court of Karnataka in the case of Sri Biluru Gurubasava  Pattina Sahakari Sangha Niyamamitha vs ITO has clearly  answered the issue. The Hon’ble High Court, after  considering the amendment introduced by Finance Act 2006  w.e.f 1.4.2007 (insertion of section 80P(4) of the income-tax  Act, had rendered the following findings: 

“Therefore, the intention of the legislature is clear. If a  cooperative bank is exclusively carrying on banking business, then  the income derived from the said business cannot be deducted in  computing the total income of the assessee. The said income is  liable for tax. A Cooperative bank as defined under the Banking  Regulation Act includes the primary agricultural credit society or a  primary cooperative agricultural and rural development bank. The  Legislature did not want to deny the said benefits to a primary  agricultural credit society or a primary cooperative agricultural and  rural development bank. They did not want to extend the said  benefit to a Co-operative bank which is exclusively carrying on  banking business i.e. the purport of this amendment. Therefore,  as the assessee is not a Co- operative bank carrying on  excursively banking business and as it does not possess a licence  from Reserve Bank of India to carry on business, it is not a Co operative bank. It is a Co-operative society which also carries on  the business of lending money to its members which is covered  under Section 80P(2)(a)(i) i.e. carrying on the business of banking  for providing credit facilities to its members. The object of the  aforesaid amendment is not to exclude the benefit extended  under Section 80P(1) to such society, Therefore, there was no  error committed by the Assessing Authority. The said order was  not prejudicial to the interest of the Revenue. The condition  precedent for the commissioner to invoke the power under  Section 263 is that the twin condition should be satisfied. The  order should be erroneous and it should be prejudicial to the  interest of the revenue.”

7.1 From the above judgment of the Hon’ble Karnataka  High Court, it is quite clear that a primary agricultural credit  society or a primary cooperative agricultural and rural  development bank who do not have license from Reserve  Bank of India to carry on the business of banking, is not a  cooperative bank, hit by the provisions of section 80P(4) of the  Act. The judgment of the Hon’ble jurisdictional High Court in  the case of Chirakkal Service Co-op Bank Ltd (supra), is also  in support of the assessee as regards the grant of deduction  u/s 80P of the income-tax Act. 

7.2 In the instant case, the assessee do not posses any  banking license from the Reserve Bank of India and is not  exclusively carrying on any banking facility; but it is carrying  on business of lending money to its members and therefore is  covered u/s 80P(2) of the Act. The judgment of the Hon’ble  Apex Court in the case of M/s Totgars Cooperative Sales  Society Ltd. (supra) relied by the CIT(A) is distinguishable on  facts. The Hon’ble Apex Court in the case of M/s Totgars  Cooperative Sales Society Ltd (supra) was dealing with the  case where the assessee apart from providing credit facilities  to its members was also marketing agricultural produces  grown by its members. Sale consideration received from the  marketing of agricultural produce of its members was retained  by the assessee in that case and was invested in short term  deposits/securities. Such amount retained by assessee’s  society was shown as a liability in the balance sheet and  therefore, to that extent interest income cannot be attributable  neither to the activity mentioned in section 80P(2)(a)(i) or u/s  80P(2)(a)(iii) of the Act. This distinguishable feature has been  taken note by the Hon’ble Karnataka High Court in the case of  Tumkur Merchants Souharda Credit Cooperative Ltd in ITA  No.307 of 2014 ( judgment dated 28th Oct 2014). The Hon’ble  Karnataka High Court was considering the following  substantial question of law: 

“Whether the Tribunal failed in law to appreciate that the interest  earned on short term deposits were only investment in the course  of activity or providing credit facilities to members and that the  same cannot be considered as investment made for the purpose  of earning interest income and consequently passed a perverse  order?“ 

7.3 In answering the above question of law, the Hon’ble  Karntaka High Court distinguished the judgment of the Apex  Court in the case of Totgars Cooperative Sales Society Ltd  (supra) and rendered the following findings:

 

“9. In this context when we look at the judgment of the Apex  Court in the case of M/s Totgars Cooperative Sales 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, deposit/ security. was invested In a short-term Such  an amount which was 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.  

10. In the instant case, the amount which was invested in banks  to earn interest was not an amount due to any members. It was  net 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(l) of the Act. In tact similar view is taken by the  Andhra Pradesh High Court in the case of COMMISSIONER OF  INCOME- TAX III, HYDERABAD VS. ANDHRA PRADESH STATE  COOPERATIVE BANK LTD., reported in (2011) 200 TAXMAN  220/12. 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: Appeal is allowed.”  

7.4 The Cochin Bench of the Tribunal in the case of the  Kizhathadiyoor Service Coop Bank Ltd., on identical facts has  rendered a decision in favour of the assessee. The relevant  finding of the Cochin Bench of the Tribunal in the case of  Kizhathadiyoor Service Cooperative Bank (supra) in ITA No.  525/Coch/2014, read as follows: 

7.2 As regards the interest from treasury and banks, 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) has  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 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.” 

7.3 In the instant case, the assessee is a cooperative  Bank. The investment in treasury/banks and earning interest  on the same 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. Therefore, the Income  Tax Authorities were not justified in treating interest income  received by the assessee as ‘income from other source’ and denying the benefit of section 80P(2) of the Act. It is ordered  accordingly.” 

7.5 In view of the judgment of the Hon’ble Karnataka High  Court in the case of Tumkur Merchants Souharda Credit Coop  Ltd (supra)and Cochin Bench of the Tribunal in the case of  Service Coop Bank Ltd.,(supra), we are of the view that the  assessee is entitled to the benefit of deduction u/s 80P(2) of  the income-tax Act, with regard to interest received on  deposits made by the assessee with sub treasury amounting  to Rs.3,30,866 for assessment year 2007-2008. It is ordered  accordingly.” 

10.4 In view of the above order of the Tribunal, we hold that  the interest received on investments with sub-treasury is part  of banking activities of the assessee and the same is entitled  to deduction u/s 80P(2)(a)(i) of the I.T.Act. It is ordered  accordingly.  

10.5 In the result, ground No.2 filed in ITA No.627 to  631/Coch/2017 is allowed. 

11. Trade Income

11.1 The CIT(A) had decided the above issue by observing as  under:- 

“The appellant derived trade income amounting to  Rs.89,529/- in A.Y.2007-08, Rs.99,459/- in A.Y.  2008-09, Rs.84,768 in A.Y. 2009-10, Rs.1,88,844/- in A.Y. 2012-13 and Rs.86,956/- in A.Y. 2013-14.  These amounts are not eligible for deduction under  section 80P(2)(a) and hence, may be dealt with in  accordance with the provisions of Income Tax Act,  1961.”

11.2 The assessee being aggrieved has filed the present  appeals before the Tribunal. The learned AR submitted that  an identical issue was considered by the Tribunal in the case  of The Secretary, The Panathady Service Co-operative Bank  Ltd. v. ITO [ITA Nos.574 to 578/Coch/2017 – order dated  23.07.2018] wherein the Tribunal has restored the issue to  the A.O. for de novo consideration. The learned Departmental  Representative present was duly heard. 

11.3 We have heard the rival submissions and perused the  material on record. We find that an identical issue was  considered by the Tribunal in the case of The Panathady  Service Co-operative Bank Ltd. (supra). The Tribunal has  restored the issue to the A.O. for de novo consideration. The  Tribunal’s finding in the case of The Panathady Service Co 

operative Bank Ltd. (supra) is reproduced below:- 

“5. Aggrieved by the order of the CIT(A), the assessee has  filed the present appeals before the Tribunal. The learned AR  submitted that the trade income was earned by the assessee society on purchase and sale of agricultural implements,  seeds, livestock or other articles for supplying them to its  members. Further it was submitted that income received by  the assessee-society from CAMPCO was for marketing of  agricultural produce of its members. Therefore, it was  submitted that such income was entitled to deduction u/s  80P(2)(a)(iii) and (iv) of the I.T.Act. The learned DR present  was heard.  

6. We have heard the rival submissions and perused the  material on record. The Assessing Officer has disallowed the  entire claim of deduction. There was no specific reasoning given by the assessee nor the CIT(A) for denying the benefit of  deduction u/s 80P(2) of the I.T.Act. The trade income  according to the assessee was earned by it on account of  purchase and sale of agricultural implements, seeds, livestock  or other articles intended for agriculture for the purpose of  supplying them to its members. Income accrued from CAMPCO  according to the assessee was on account of marketing of  agriculture produce of its members. Therefore, it was  submitted that such income was entitled to deduction u/s  80P(2)(a)(iii) and (iv) of the I.T.Act. Since the A.O. nor the CIT(A)  has not given any specific reasons for denying the benefit of  deduction claimed u/s 80P(2) of the I.T.Act, we deem it  appropriate to remand the case to the A.O. for fresh  consideration. The assessee shall prove with necessary  evidence that the trade income it had earned and the income it  had received from CAMPCO was entitled to deduction u/s  80P(2) of the I.T.Act.”

11.4 It was submitted by the learned AR that the trade  income was derived by the assessee on account of purchase  and sale of agricultural implements, seeds etc. for its  members. Therefore, it was stated that the trade income was  entitled to deduction u/s 80P(2)(a)(iii) / 80P(2)(a)(iv) of the  I.T.Act. There is no specific reasons given by the A.O. nor  CIT(A) for denying the deduction claimed u/s 80P(2) for trade  income derived by the assessee. Therefore, we restore the  issue of trade income whether it is entitled to deduction u/s  80P(2) of the I.T.Act, to the file of the A.O.. It is ordered  accordingly.  

12. Rental Income

12.1 The CIT(A) had held rental income received by the  assessee was not entitled to deduction u/s 80P(2) of the  I.T.Act. The relevant finding of the CIT(A) reads as follows:- 

“The appellant derived rental income amounting to  Rs.24,400/- in A.Y. 2007-08, Rs.21,950/- in A.Y.  2008-09, Rs.16,700/- in A.Y. 2009-10, Rs.28,550/- in A.Y. 2012-13 and Rs.15,200/- in A.Y. 2013-14. 

These amounts are not eligible for deduction under  section 80P and hence, may be dealt with in  accordance with the provisions of Income Tax Act,  1961.” 

12.2 The assessee being aggrieved has filed the present  appeals before the Tribunal. The learned AR stated that the  rental income has been taken as income of the assessee in the  returns of income filed. It was submitted by the learned AR  that again taxing the rental income is not correct. The learned  Departmental Representative present was duly heard. 

12.3 We have heard the rival submissions and perused the  material on record. The submission of the assessee is not  correct. The assessee is not entitled to deduction u/s 80P for  the income from house property. We have perused the orders  giving effect to the CIT(A)’s order. There is no double addition  of rental income after giving effect to the CIT(A)’s order.  Income from house property is not entitled to deduction  under any of the clauses of Sec.80P(2)(a) of the I.T.Act.  Therefore, we confirm the CIT(A)’s order on this issue. It is  ordered accordingly.  

12.4 Therefore, ground No.4 filed in assessee’s appeals are  dismissed. 

13. In the result – (i) the Revenue’s appeals are dismissed;  (ii) the Cross Objections filed by the assessee are dismissed;  and (iii) the assessee’s appeals are partly allowed, as indicated  above.
    

Order pronounced on this 18th day of September, 2018.  

 Sd/-                                   Sd/- 

(Chandra Poojari)                              (George George K.) 

ACCOUNTANT MEMBER     JUDICIAL MEMBER  

Cochin ; Dated : 18th September, 2018. 

Devdas*

Copy of the Order forwarded to : 

1. The Appellant  

2. The Respondent. 

3. The CIT (Appeals)-Kozhikode. 

4. The Pr.CIT Kozhikode. 

5. DR, ITAT, Cochin 

6. Guard file.

BY ORDER, 

(Asstt. Registrar) 

ITAT, Cochin