If the claim of the Credit society U/s 80P(2)(a)(i) is rejected then assessee will be entitled to deduction on account of expenses: ITAT Bangalore

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If the claim of the Credit society U/s 80P(2)(a)(i) is rejected then assessee will be entitled to deduction on account of expenses: ITAT Bangalore

Here is an interesting case before ITAT Bangalore wherein it has been held that if the claim of the Credit society U/s 80P(2)(a)(i) is rejected then assessee will be entitled to deduction on account of expenses .

The copy of the order is as under:

 

KARINJE SERVICE CO-OPERATIVE SOCIETY TACCODE LTD. vs. INCOME TAX OFFICER

IN THE ITAT BANGALORE BENCH ‘A’ BENCH ‘SMC’

  1. V. VASUDEVAN, VP.

ITA No. 955/Bang/2022

Feb 2, 2023

(2023) 67 CCH 0077 BangTrib

Legislation Referred to

Section 80P(2)(a)(i), 57, 194A(3)(v)

Case pertains to

Asst. Year 2017-18

Counsel appeared:

Ganesh R. Ghale, Standing Counsel for the Revenue

ORDER

  1. This is an appeal by the assessee against the order dated 31.08.2022 of NFAC, Delhi, relating to Assessment Year 2017-18.
  1. The assessee is a Primary Agricultural Co-operative Society registered under the Karnataka Co-operative Socieites Act, 1959 and is engaged in providing agricultural credit facilities to the members of the society. The assessee received interest on investments made in SCDC Bank (a co-operative Bank) of a sum of Rs.17,63,679/-. The assessee claimed that the aforesaid interest income is originally for a deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The claim of the assessee was rejected by the AO based on the decision of the Hon’ble Karnataka High Court in the case of PCIT, Hubli Vs. Totgars Co-operative Sale Society Ltd., (2017) 83 Taxmann 140 (Karnataka). The alternative claim of the assessee for deduction under section 80P(2)(d) of the Act was also rejected by the AO by relying on the decision of the Hon’ble Karnataka High Court in the case of Totgars Co-operative Sale Society Ltd., (supra). The CIT(A) confirmed the order of the AO.
  1. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. The assessee has raised the following grounds before the Tribunal:
  2. That the learned Commissioner of Income Tax (Appeals) [CIT(A)] erred on facts and circumstances of the case and in law so far as it is prejudicial to the interest of the Appellant.
  3. The learned CIT(A) has erred on facts and in circumstances of the case and in law by considering that the interest received by the Appellant from Co-operative Bank is not eligible for deduction under section 8oP(2)(d) of the Act.
  4. The learned CIT(A) has erred on facts and in circumstances of the case and in law by considering that the interest received by the Appellant from Co-operative Bank is not eligible for deduction even under section 8oP(2)(a)(i) of the Act.
  5. The learned CIT(A) has erred on facts and in circumstances of the case and in law by considering that the interest received by the Appellant from Co-operative Bank for deposit of amount of General Reserve which is required to be statutorily maintained (in accordance with Section 57 of the Karnataka Co-operative Societies’ Act, 1959 read with Rule 23 of the Karnataka Co-operative Societies’ Rules, 1960) is not eligible for deduction under section 80P(2)(a)(i) of the Act.
  6. The learned CIT(A) has erred on facts and in circumstances of the case and in law by considering that the interest received by the Appellant from Co-operative Bank for deposit of amount of Cash Reserve and Liquid Assets which is required to be statutorily maintained (in accordance with the Karnataka Co-operative Societies’ Act, 1959 read with the Order of the Registrar of Co-operative Societies) is not eligible for deduction under section 80P(2)(a)(i) of the Act.
  7. The learned CIT(A) has erred on facts and in circumstances of the case and in law by considering that the Appellant is not entitled for deduction under section 57 of the Act for the expenses incurred by it against interest received from Co-operative Bank.
  8. The learned CIT(A) has erred in confirming the levy of interest under sections 234A and 234B of the Act though the same should not have been levied in the present situation.
  9. That the Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this appeal.
  1. Learned Counsel for the assessee filed an application or adjournment on the ground that the authorized representative is on medical leave. None appeared at the time of hearing. The learned DR filed before us copy of the decision of the ITAT, Bengaluru Bench, in the case of M/s. Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd., Vs. PCIT ITA No.514/Bang/2021 order dated 08.02.202 wherein on identical issues raised by the assessee was considered and decided by this Tribunal.
  1. We have perused the above said order by the learned DR and are of the view that the issue raised by the assessee in the grounds of appeal has already been decided by this Tribunal. Accordingly, I have rejected the request of the Counsel for the assessee for adjournment and proceed to decide the appeal.
  1. The Tribunal in the case of M/s. Krishnarajapet Taluk Agri Pro Co-op Marketing Society Ltd., (supra) held as follows:

“….The Hon’ble Supreme Court in the case of the The Totgars Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283 (SC) held that Income from utilization of surplus funds was taxable under the head income from other sources, and therefore not eligible for deduction u/s 80P. The Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO (230 Taxman 309), was dealing with a case where deduction u/s.80P(2)(a)(i) of the Act was claimed on interest from the deposits made in a nationalized bank out of the amounts which was used by the assessee for providing credit facilities to its members. The Assessee claimed that the said interest amount is attributable to the credit facilities provided by the assessee and forms part of profits and gains of business. The Hon’ble Karnataka High Court after considering SC judgment in case of Totgars(supra) held that since the word income is qualified by the expression “attributable” to the business of Banking is used in Sec.80P(2)(a)(i) of the Act, it has to receive a wider meaning and should be interpreted as covering receipts from sources other than the actual conduct of business. The Court held a Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. The Hon’ble Court also distinguished the decision of the Hon’ble Supreme Court in the case of Totgars (supra) by observing that 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, was invested in a short-term deposit/security. 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. The Court also observed that even the Hon ‘ble Supreme made it clear that they are confining the said judgment to the facts of that case. The Court therefore concluded that Hon’ble Supreme Court was not laying down any law. Similar view taken in Guttigedarara Credit Co-operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 392 ITR 0074 (Karn) in the context of deduction u/s.80P(2)(d) of the Act, it was held that Sec.80P(2)(d) of the Act allows deduction 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 Hon’ble Court held that the aforesaid Supreme Court’s decision in the case of Totgars (supra), was not applicable to deduction u/s.80P(2)(d) of the Act, because the said decision was rendered with regard to deduction under Section 80P(2)(a)(i) of the Act and not under Section 80P(2)(d) of the Act.

 

  1. However, the Hon’ble Karnataka High Court in the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 395 ITR 0611 (Karn) took a different view and held that interest income earned on deposits whether with any other bank will be in the nature of income from other sources and not income from business and therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed to the Assessee. The Hon’ble Court followed decision of Hon’ble Gujarat High Court in the case of SBI Vs. CIT 389 ITR 578(Guj.) in which the Hon’ble Gujarat High Court dissented from the view taken by the Hon’ble Karnataka High Court in the case of Tumkur Merchants case (supra) The Hon’ble Court had to deal with the following substantial question of law:

“(I)Whether the assessee, Totagar Co-operative Sale Society, Sirsi, is entitled to 100% deduction under Section 80P(2)(d) of the Income Tax Act, 1961 (for short ‘the Act) in respect of whole of its income by way of interest earned by it during the relevant Assessment Years from 2007-2008 to 2011-2012 on the deposits or investments made by it during these years with a Co-operative Bank, M/s. Kanara District Central Co-operative Bank Limited?

(II) Whether the Supreme Court decision in the case of the present respondent assessee, Totgar Co-operative Sale Society Limited itself rendered on 08th February 2010, in Totgar’s Co-operative Sale Society Limited v. Income Tax Officer, reported in (2010) 322 ITR 283 SC : (2010) 3 SCC 223 for the preceding years, namely Assessment Years 1991-1992 to 1999-2000 (except Assessment Year 1995-1996) holding that such interest income earned by the assessee was taxable under the head ‘Income from Other Sources’ under Section 56 of the Act and was not 100% deductible from the Gross Total Income under Section 80P(2)(a)(i) of the Act, is not applicable to the present Assessment Years 2007-2008 to 2011-2012 involved in the present appeals and therefore, whether the Income Tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100% deductible under Section 80P(2)(d) of the Act?”

 

  1. The Hon’ble Court held that such interest income is not income from business but was income chargeable to tax under the head income from other sources and therefore there was no question of allowing deduction u/s.80P(2)(d) of the Act. The following points can be culled out from the aforesaid decision:
  2. society. The words ‘Co-operative Banks’ are missing in clause (d) of subsection (2) of Section 80P of the Act. Even though a co- operative bank may have the corporate body or skeleton of a co-operative society but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation Act, 1949. Only the Primary Agricultural Credit Societies with their limited work of providing credit facility to its members continued to be governed by the ambit and scope of deduction under Section 80P of the Act. (Paragraph 13 of the Judgment).
  3. The banking business, even though run by a Co-operative bank is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act. The purpose of bringing on the statute book sub-section (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any co-operative bank and to exclude the normal banking business income from such exemption/deduction category. The words used in Section 80P(4) are significant. They are: “The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society ….. “. The words “in relation to” can include within its ambit and scope even the interest income earned by the respondent-assessee, a co-operative Society from a Co-operative Bank. This exclusion by Section 80P(4) of the Act even though without any amendment in Section 80P(2)(d) of the Act is sufficient to deny the claim of the respondent assessee for deduction under Section 80P(2)(d) of the Act.The only exception is that of a primary agricultural credit society. (Paragraph-14 of the judgment)
  4. The amendment of Section 194A(3)(v) of the Act excluding the Co-operative Banks from the definition of “Co- operative Society” by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A of the Act also makes the legislative intent clear that the Co-operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act. (Paragarph 15 of the Judgment)
  5. If the legislative intent is so clear, then it cannot contended that the omission to amend Clause (d) of Section 80P(2) of the Act at the same time is fatal to the contention raised by the Revenue before this Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon’ble Supreme Court’s decision in the case of Respondent assessee itself is otherwise.(Paragraph 16 of the Judgment)
  6. On the decision of the earlier decision of the Hon’ble Karnataka High Court referred to in the earlier part of this order, the Court held that it did not find any detailed discussion of the facts and law pronounced by the Hon’ble Supreme Court in the case of the respondent assessee (Totagars Sales Co-operative society) and hence unable to follow the same in the face of the binding precedent laid by the Hon’ble Supreme Court. The Hon’ble Court observed that in paragraph 8 of the said order passed by a co- ordinate bench that the learned Judges have observed that “the issue whether a co-operative bank is considered to be a co- operative society is no longer res integra, for the said issue has been decided by the Income Tax Appellate Tribunal itself in different cases…. “.

 

No other binding precedent was discussed in the said judgment. Of course, the Bench has observed that a Co-operative Bank is a specie of the genus co- operative Society, with which we agree, but as far as applicability of Section 80P(2) of the Act is concerned, the applicability of the Supreme Court’s decision cannot be restricted only if the income was to fall under Section 80P(2)(a) of the Act and not under Section 80P(2)(d) of the Act.(Paragraph-18 of the Judgment)

  1. The Court finally concluded that it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Co-operative Bank. Therefore, the said decision of the Co-ordinate Bench is distinguishable and cannot be applied in the present appeals, in view of the binding precedent from the Hon’ble Supreme Court. ” (Paragraph 19 of the Judgment)
  2. The Hon’ble Karantaka High Court in the aforesaid decision also placed reliance on a decision of the Hon ‘ble Gujarat High Court in the case of STATE BANK OF INDIA (SBI) vs. COMMISSIONER OF INCOME TAX 389ITR 0578 (Guj) did not agree with the view taken by the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. The Hon’ble Gujarat High Court held that in the case of Totgars Co-operative Sale Society (supra) decided by Hon ‘ble Supreme Court, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. The Hon’ble Gujarat High Court in this regard referred to the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. The Hon ‘ble Gujarat High Court therefore held that decision in the case of Totagar Co-operative Sales Society rendered by the Hon’ble Supreme Court is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression “profits and gains of business” and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business ofproviding credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as “investment” are ineligible for deduction under section 80P(2)(a)(i) of the Act. (Paragraph-13 of the Judgment)

 

  1. It can thus be seen that the ratio laid down by the Hon’ble Karnataka High Court in the case of Totalgars Cooperative Sales Society in 395 ITR 611 (Karn) is that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act.

………..

  1. Another aspect with regard to the deduction u/s.80P(2)(d) of the Act, is with regard to what is the quantum of interest income that should be brought to tax by the AO, in case the deduction is denied to the assessee u/s.80P(2)(d) of the Act. On this aspect, the Hon’ble ITAT, Bengaluru Bench in the case of Puttur Primary Co-operative Agriculture and Rural Development Bank Ltd., Vs. ITO in ITA No. 1449/Bang/2019, order dated 14.06.2021 for Assessment Year 2016-17, the tribunal held that the assessee should be allowed expenses and the entire gross interest cannot be taxed. The following were the relevant observations of the Tribunal:
  2. The next issue relates to the deduction claimed by the assessee u/s 80P(2)(d) of the Act in respect of interest income. Identical issue has been considered by the co-ordinate bench in the case of Karkala Co-op S Bank Ltd (supra). For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench:-
  3. The next common issue relates to rejection of deduction claimed u/s 80P(2)(d) of the Act in respect of interest income earned from fixed deposits kept with bank. We noticed earlier that the A.O. has observed in Assessment Year 2015-16 that the interest income received by the assessee from deposits kept with banks is not eligible for deduction u/s 80P(2)(c) & 80P(2)(d) of the Act since the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act. In AY 2016-17, the AO assessed the interest income received on bank deposits under the head “Income from other sources” and denied deduction claimed u/s 80P(2)(d) of the Act. The Ld CIT(A) confirmed the action of the AO on this issue.

 

  1. The Ld. A.R. submitted that the assessee is entitled to claim deduction allowable u/s 57 of the Act in respect of cost of funds and proportionate administrative and other expenses. In support of this submission, the Ld. A.R. placed reliance on the decision rendered by Hon’ble High Court of Karnataka in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO (2015) 58 , 35 (Karn). The Ld. A.R. submitted that the assessee in the above said case had put forth identical claim claim before Hon’ble Supreme Court in the case reported as Totgars Co-operative Sale Society Ltd. Vs. ITO (2010) 188 ,282 and the Hon’ble Supreme Court, vide 14 of its order, had restored the question raised by the assessee to the file of Hon’ble High Court of Karnataka. Consequent thereto, the Hon’ble High Court of Karnataka has passed the order in the case reported in 58, 35 and held that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of proportionate cost, administrative expenses incurred in respect of such deposits. Accordingly, the Ld. A.R. prayed that the A. O. may be directed to allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head “other sources”.
  • We heard Ld. D.R. on this issue. We find merit in the prayer of the assessee, since it is supported by the decision rendered by Hon’ble High Court of Karnataka in the case of Totgars Co-operative Sale Society Ltd. Vs. ITO (2015) 58 ,35 (Karn). Accordingly, we direct the A.O. to allow deduction of proportionate cost, administrative and other expenses, if the A.O. proposes to assess the interest income earned from bank deposits as income under the head “other sources”.”
  • In the instant case, the assessee has earned both interest income and dividend income. In view of the decision rendered by the jurisdictional Hon’ble High Court of Karnataka, the assessee is entitled for deduction of proportionate cost, administrative and other expenses. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with similar directions.”
  • The conclusion on the grounds of appeal raised by the assessee on the basis of the aforesaid decision would be that the assessee would not be entitled to deduction under section 80P(2)(d) of the Act in respect of interest received from another Co-operative Bank. The assessee would also not be entitled to deduction under section 80P(2)(a)(i) of the Act. However the claim of the assessee that the interest was received by it by reason of the investment of its funds with a view to comply with the mandatory requirements of section 57 of the Co-operative Societies Act, 1959 and with a view to maintain the cash reserve ratio needs to be examined by the AO and if the contention is found to be correct then the question whether it can be regarded as profits of business has to be examined by the AO. In so far as deduction under section 57 of the Act is concerned, if the claim of the assessee for deduction under section 80P(2)(a)(i) of the Act is rejected then in terms of paragraph 16 of the Tribunal’s order referred to above, the assessee will be entitled to deduction on account of expenses. The issues are accordingly restored to the file of the AO to decide the same afresh in accordance with law after affording the assessee opportunity of being heard and in the light of the decisions referred to above.
  1. In the result, appeal of the assessee is treated as partly allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.

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