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TMI Blog2018 (9) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessments were completed by denying the deduction claimed u/s 80P of the I. T. Act. The reasoning of the Assessing Officer was that the assessees were primarily doing the business of banking and in view of insertion of provisions of section 80P(4) of the I. T. Act with effect from 01. 04. 2007, the assessees were not entitled to deduction u/s 80P(2) of the I. T. Act. Further, the Assessing Officer treated interest income received on investments made with co-operative banks as 'income from other sources', thereby denying the claim of deduction u/s 80P(2)(a)(i) of the I. T. Act. The Assessing Officer also held that the assessees were not entitled to deduction u/s 80P(2)(d) of the I. T. Act since the interest income received by the assessees were not from a co-operative society but a co-operative bank. 4. Aggrieved by the order of the Assessing Officer, the assessee preferred appeals to the first appellate authority. Before the first appellate authority, it was contended that the assessees were entitled to deduction u/s 80P(2) of the I. T. Act in view of the judgment of the Hon'ble jurisdictional High Court in the case of The Chirakkal Service Co-operative Bank Ltd. & Ors. vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be limited to the profits generated from agricultural activities alone performed by such assessee. " (ii) The Ld. CIT(A) ought to have seen that the above decision of the Apex Court is in sharp contrast to the decision of the Kerala High Court in the case of M/s Chirakkal Service Co-operative Bank & Ors. in ITA No. 212 of 2013, where it was held that the authorities under the Income tax Act cannot probe into question 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. (iii) The Ld. CIT(A) ought to have brought his attention to the decision of the Hon'ble High Court of Kerala in the case of Perinthalmanna service Cooperative Bank Ltd reported in (2014 363 ITR 68 (Kerala) wherein it was held that "with introduction of section 80P(4) necessarily, an enquiry has to be conducted into factual situation whether co-operative bank is conducting business as a primary agricultural and rural development Bank and depending upon transactions, Assessing officer has to extend bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest received from the deposit the assessee had with the District Cooperative Bank, State Cooperative Bank and Treasuries shall necessarily be treated as income from other sources only and accordingly be brought to tax. " 6. The learned Departmental Representative relied on the grounds raised. None was present on behalf of the assessee, however, we proceed to dispose off the appeal on merits. 7. We have heard the learned Departmental Representative and perused the material on record. As regards the issue whether the assessees are entitled to deduction u/s 80P(2) of the I. T. Act, the Cochin Bench of the Tribunal in the case of ITO v. The Chengala Service Co-operative Bank Ltd. [ITA No. 434/Coch/2017 & Ors. - order dated 05th April, 2018], after elaborately considering all the judicial pronouncements had decided the issue in favour of the assessee. The Cochin Bench of the Tribunal had followed the dictum laid down by the Hon'ble jurisdictional High Court in the case of The Chirakkal Service Co-operative Bank Ltd. & Ors. (supra). The relevant finding of the Cochin Bench of the Tribunal reads as follows:- "7. We have heard the rival submission and perused the material on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Cooperative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal facts, the Cochin Bench of the Tribunal in the case of The Azhikode Service Cooperative Bank Ltd. & Ors. [ITA No. 261/Coch/2017 & Ors. - order dated 12th July, 2017] after considering all the judicial pronouncements had decided the issue in favour of the assessees. The relevant finding of the Tribunal reads as follows:- "7 I have heard the rival submissions and perused the material on record. The solitary issue for my 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 80P deduction. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(1) of the Act. In fact 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 decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cooperative 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 Merchantgs Souharda Credit Coop Ltd (supra)and Cochin Bench of the Tribunal in the case of Service Coop Bank Ltd. , (supra), I am of the view that the assessee is entitled to the benefit of deduction u/s 80P(2) with regard to interest received on deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, "expenses relatable to investment in non- SLR securities need to be disallowed under section 57(i) of the Act as interest on non-SLR securities is income from other sources". 2. Clause (id) of sub-section (1) of section 56 of the Act provides that income by way of interest on securities shall be chargeable to income-tax under the head "Income from other sources", if, the income is not chargeable to income-tax under the head "Profits and gains of business and profession" . 3. The matter has been examined in light of the judicial decisions on this issue. In the case of CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 160 Taxman 48 (SC), the apex court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and gains of business and profession". 3. 2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be summarized like this. If there is a Co-operative Society, which is carrying on several activities including those activities listed in sub- Clauses (i) to (vii) of Clause (a), the benefit under Clause (a) will be limited only to the profits and gains of business attributable to anyone or more of such activities. But, in case the same Co-operative Society has an income not attributable to anyone or more of the activities listed in sub-Clauses (i) to (vii) of Clause (a), the same may go out of the purview of Clause (a), but still, the Cooperative Society may claim the benefit of Clause (d) or (e) either by investing the income in another Cooperative Society or investing the income in the construction of a godown or warehouse and letting out the same. 33. In other words, the benefit conferred by Clause (d) upon all types of Co-operative Societies is restricted only to the investments made in other Cooperative Societies. Such a restriction cannot be read into Clause (a), as the temporary parking of the profits and gains of business in nationalized Banks and the earning of interest income therefrom is only one of the methods of multiplying the same income. To accept the stand o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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