TMI Blog2017 (7) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... nk and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under Section 80P of the Act, as held by the Hon’ble Supreme Court. Appeals filed by the Revenue deserve to be allowed and the appeals filed by the assessee deserve to be dismissed. - Income Tax Appeal No.100066 of 2016, Income Tax Appeal Nos.100064, 100065, 100067, 100068 & 100051-100054 of 2016 - - - Dated:- 16-6-2017 - Vineet Kothari And H. B. Prabhakara Sastry, JJ. For the Petitioner : Sri. Y. V. Raviraj, Adv For the Respondent : Sri. A. Shankar, M. Lava S. S. Hegde, Advs JUDGMENT 1. The aforesaid five Income Tax Appeals are filed by the Revenue while another set of five appeals have been filed by the assessee and all the ten appeals are being disposed of by this common judgment. 2. The substantial questions of law involved in the present appeals filed by the Revenue are as follows: (I) Whether the assessee, Totagar Co- o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is - whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under Section 28 of the Act? In our view, such interest income would come in the category of Income from other sources , hence, such interest income would be taxable under Section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze Section 80P of the Act. This section comes in Chapter VI- A, which, in turn, deals with Deductions in respect of certain Incomes . The Heading of Section 80P indicates that the said section deals with deductions in respect of income of cooperative Societies. Section 80P(1), inter alia, states that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by Section 56 of the Act, even then, the assessee-Society is entitled to the benefit of Section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject- matter. For example, Section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of Section 80HHC is, therefore, different from the scope of Section 80P of the Act, which deals with deduction in respect of income of cooperative Societies. Even Explanation (baa) to Section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to Section 80HHC, therefore, cannot be compared with the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 the agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles 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: Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:- (1) the individuals who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of this section an urban consumers' co- operative society means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. (3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80IA or section 80J, the deduction under subsection (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub- section (2), shall be allowed with reference to the income, if any, as referred to in those clause included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ. (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation.- For the purposes of this sub- section,- (a) co-operative bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 80P of the Act and therefore, even the interest income earned by the respondent-assessee from the deposits from investments made by it with the Co-operative Bank, namely M/s.Kanara District Central Co-operative Bank Limited would not be exempted or 100% deductible under clause (d) of the Section 80P(2) of the Act, which stipulates that the income by way of interest or dividends derived by a Co-operative Society from its investments with any other co-operative society, would be so deductible. The learned counsel for the Revenue submitted that the Co-operative Bank even though might be registered as a Co- operative Society is not a Co-operative Society eligible for receiving the benefit of exemption or 100% deduction under Section 80P of the Act, as its Banking business is governed by the provisions of a special law like Banking Regulation Act, 1949. (iii) The learned counsel for the Revenue further urged that the amendment of Section 194A(3)(v) of the Act by Finance Act, 2015 with effect from 01st June 2015 excluding the Co-operative Banks from the genus category of Co- operative Societies and making it liable to deduct income tax at source on the interest paid by it to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, which was not the claim of deduction made before the Hon ble Supreme Court as the deposits were not with the Co-operative Society / Co-operative Bank and interest income was not received from another Co-operative Society but Scheduled Banks. (II) The learned counsel for the assessee also urged that the Co-operative Society is a genus term and the co-operative Bank is also a specie of Co-operative Society and since, clause 80P(2)(d) of the Act permits such 100% deduction in respect of the income by way of interest or dividends derived by the Co- operative Society (Assessee) from its investments with any other Co-operative Society (including Co-operative Bank) and the whole of such interest income is eligible for 100% deduction. (III) It was also urged that the provisions of Section 80P(4) of the Act inserted by the Finance Act 2006 with effect from 01st April 2007, excluding the applicability of Section 80P of the Act to any Co-operative Bank other than a Primary Agricultural Credit Society or a Rural Development Bank, is not applicable in the present case because the Assessee Co- operative Society is not a Co-operative Bank, but is only a Co- operative Society re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested the matter further. However, in the absence of any such material placed before us, we are unable to verify the same and in the absence of any such question raised before us for those Assessment Years, the answer to the questions raised before us cannot depend upon that. 9. We have heard the learned counsels at length and perused the record and the judgments cited at the Bar. 10. Admittedly and undoubtedly, the respondent assessee is a Co-operative Society engaged mainly in the activity of marketing of agricultural produces grown by its members. The assessee co-operative society also accepts deposits from its members and provides credit facility to its members, runs Kirana Stores, rice mills, live stocks, van section, medical shops, Areca-nut trading section, lodging, plying and hiring of goods carriage, etc. 11. The Assessment Years involved in the present batch of appeals are Assessment Years 2007-2008 to 2011- 2012. The bone of contention is that the deduction under Section 80P(2) of the Act is now claimed by the respondent assessee under Section 80P(2)(d) of the Act and not under Section 80P(2)(a) of the Act. The reason is that now the investments and deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. The depository Kanara District Central Bank Limited in the present case is admittedly not such a primary agricultural credit society. 15. The amendment of Section 194A(3)(v) of the Act excludi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the co-ordinate Bench and therefore, we are unable to follow the same in the face of the binding precedent laid by the Hon ble Supreme Court. We find 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. 19. In our opinion, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Venkata Subbarao Vs. State of Andhra Pradesh AIR 1965 SC 1773 applied. CIT vs. South Arcot District Co-operative Marketing Society Ltd., (1989) 176 ITR 117 (SC) distinguished. Surath Venkar Sahakari Sangh Ltd Vs. CIT (1971) 79 ITR 722 (Guj) approved. Decision of the Rajsthan High Court in CIT Vs. Udaipur Shahakari Upbhokta Thok Bhandara Ltd. (2007) 295 ITR 164, Affirmed. 21. The aforesaid decision of the Hon ble Supreme Court in the case of Totgar was followed by a Division Bench of the Gujarat High Court in the case of State Bank of India Vs. Commissioner of Income-Tax, reported in [2016] 389 ITR 578 (Guj.) and the Division Bench of the Gujarat High Court has held as under: (ii) That the assessee did not carry on any banking business and its objects did not contemplate investment of surplus funds received from its members. The business of a credit society like that of the assessee was limited to providing credit to its members and the income that was earned by providing such credit facilities to its members was deductible under section 80P(2)(a)(i). The character of interest was different from the income attributable to the business of the assessee-socie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Co-operative Agricultural Development Bank Limited, reported in [2016] 389 ITR 607 (P H) concurred with the aforesaid view of the Gujarat High Court, distinguishing the view taken by the Andhra Pradesh High Court and Karnataka High Court, held in the following terms: 30. We are entirely in agreement with the judgment of the Gujarat High Court especially the observation that the judgment of the Supreme Court is not restricted only to the investments made by the assessee from the amounts retained by it which were payable to its members and that the judgment also applies in respect of other funds not immediately required for business purposes. We reproduced paragraph 15 of the judgment only to indicate that we uphold the appellant's case only on the ground that the assessee is not entitled to the said deduction on the basis that it is engaged in carrying on the business of providing credit facilities to its members. We do not express any opinion as to whether the appellant would be entitled to the said benefit in the event of it being held that the assessee is also engaged in carrying on the business of banking. That is an issue that the Tribunal would decide upon re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociety 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. 9. In this context when we look at the judgment of the apex court in the case of Totgar's Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-co-operative 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 brought, 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 can not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. In any event, we are with respect unable to agree with the observations that the Supreme Court in Totgar's case (supra) did not lay down any law. 33. For the same reason, the judgment of the Karnataka High Court in Guttigedarara Credit Co-operative Society Ltd. v. ITO [2015] 377 ITR 464 (Karn) ; [2015] 60 taxmann.com 215 (Karn) is of no assistance to the respondent- assessee. 23. Thus, the aforesaid judgments supports the view taken by this Court that character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified Clauses of Section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under Section 80P(2) of the Act. The case in Udaipur Sahakari (supra) was that of Section 80P(2)(e) of the Act, whereas in the present case, it is under Section 80P(2)(d) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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