TMI Blog2018 (9) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and same is entitled to deduction u/s 80P(2)(a)(i). We are of the view that the assessee are entitled to deduction u/s 80P(2)(a)(i) in respect of interest income received on investments made with co-operative Banks. - Decided against revenue. - ITA No.232/Coch/2018, ITA No.233/Coch/2018 And ITA No.234/Coch/2018 - - - Dated:- 3-9-2018 - Shri Chandra Poojari, AM And Shri George George K, JM For The Appellant : Smt. A.S.Bindhu For The Respondent : None ORDER Per Bench These appeals at the instance of the Revenue are directed against separate orders of CIT(A). The relevant assessment year(s) in respect of ITA No. 232/Coch/2018 is A. Y. 2013-2014 and in respect of ITA Nos. 233 234/Coch/2018 are A. Ys 2013-2014 and 2014-2015, respectively. 2. In the grounds raised, two issues are involved, viz. , (i) Whether the assessee is entitled to deduction u/s 80P(2) of the I. T. Act? (ii) Whether the interest income received from investments with co-operative banks is entitled to deduction u/s 80P(2)(a)(i) of the I. T. Act? 3. Brief facts of the case are as follows:- The assessees are a primary agricultural credit societies. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (Appeals), Trivandrum erred in concluding that the appellant being a Primary Agricultural Credit Cooperative Society registered under the Kerala Cooperative Societies Act is entitled for exemption of its entire income u/s 80P(2)(a)(i) as originally claimed and they cannot be treated as Primary Co-operative Bank so as to invoke the provisions of section 80P(4) of the Act. 1. 1 It is respectfully submitted that the respondent is essentially, a Co- operative bank and not merely a primary agricultural credit Society and hence the allowance of deduction u/s 80P to the respondent assessee while computing the total income was irregular in nature and also against law. 1. 2 The present appeal involves substantial question of law. ( i) The Ld. CIT(A) ought to have seen that the Honble Supreme Court in the case of Sabarkhanta Zilla Kharid Vechar Sangh Ltd. Vs CIT reported in 203 ITR 1027 (SC) has held that eligible deduction u/s 81(1)(d) (substituted by section 80P by Finance (No. 2)Act, 1967 w. e. f. 01. 04. 1968) 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 gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empted from tax by virtue of the provisions of section 80P(2)(d) and in deleting the amount of ₹ 1, 84, 87, 294/;- which was brought to tax as income from other sources . 2. 1 While relying on the decision of Hon 'ble High Court in the case of Ottoor Service Co-operative Bank Ltd, the CIT(A) ought to have noticed that the matter is not reached finality in the said order as it is an order on writ petition on stay application, and not on the appeal on disallowance. Further, there is no findings or conclusions in the order, on this issue rather a prima facie observation. 2. 2 While stating that, the Honble Supreme Court decision in the case of Totgar's Co-operative Sale Society Ltd relied on by the AO is distinguishable on facts, CIT(A) ought to have agreed with his earlier findings in the order on stay petition in assessee's own case, for the same A Y. In this order CIT(A) has held that the assessee sought exemption/ deduction not from the operational income which they earned from loan and advances given to the members of the society but from the income which accrued from the surplus amount deposited with the district co-operative bank. Since regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent 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 soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee therein has carved out a category of nominal members who are infact not the members in the realsense. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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. 1 In view of the above orders of the Cochin Bench of the Tribunal, which has elaborately considered the judicial pronouncements on the subject, we are of the view that the CIT(A) is justified in granting deduction u/s 80P(2) of the I. T. Act. 7. 2 As regards the interest received on investments with cooperative Banks, we are of the view that the deduction u/s 80P(2)(d) can be granted only if the interest income is received out of investments made with co-operative societies. In the instant cases, it is not clear that the interest income was received out of investments made with co-operative societies. Therefore, we are of the view that deduction u/s 80P(2)(d) of the I. T. Act cannot be granted. Further, we find that the investments are made by the assessee-societies in the course of its banking b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mary cooperative agricultural and rural development bank. They did not want to extend the said benefit to a Cooperative 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 cooperative 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 cooperative society is in the 4 ITA No. 372/Coch/ 2010 business of banking the investment in the state promoted treasury small savings fixed deposit certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s are allowed. 7. 2 In view of the above order of the Tribunal, we are of the view that the assessees are entitled to deduction u/s 80P(2)(a)(i) of the I. T. Act in respect of interest income received on investments made with co-operative Banks. 7. 3 Before concluding, it is to be mentioned that the order of the Cochin Bench of the Tribunal in the case of M/s. Mutholy SCB Ltd. v. ITO [ITA No. 11/Coch/2014 order dated 24. 09. 2014] which was relied on by the learned AO, was set aside by the Hon ble High Court and was remitted to the Tribunal for de novo consideration. Subsequent to the remand, the Tribunal vide its order dated 23. 03. 2017 decided the issue in favour of the assessee by holding that interest income received on investments with sub-treasuries and cooperative banks was entitled to the benefit of deduction u/s 80P(2)(a)(i) of the I. T. Act. The relevant finding of the Tribunal subsequent to the remand by the Hon ble High Court (order dated 23. 03. 2017) reads as follows:- 4. We have considered the rival contentions and perused the orders of the authorities below. Hon'ble Jurisdictional High Court had remitted the appeal back to us with a cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect for cooperative societies /banks claiming deduction u/s. 80P(2)(a)(i) of the Act. In other words, the Board has taken a view that interest earnings of a cooperative society which was having as its primary business, providing credit facilities to its members who were agriculturists, could be considered under the head income from business and not from income from other sources. Similar view was taken by the Co-ordinate Bench in the case of The Kizathadiyoor Service Cooperative Bank Ltd vs. ITO (in ITA No. 525/Coch/2014) dated 20. 07. 2016. In the circumstances, we are of the opinion that assessee has to succeed in this appeal. Interest earned by the assessee from its deposits placed in Sub-Treasury and banks are eligible for deduction u/s. 80P(2)(a)(i) of the Act. Ordered accordingly. 5. In the result, the appeal of the assessee stands allowed. Order pronounced in the open court on 23-03-2017. 7. 4 The latest judgment of the Hon ble Telangana Andhra Pradesh High Court in the case of Vaveru Co-operative Rural Bank Ltd. v CIT [(2017) 396 ITR 371] had also decided on identical issue in favour of the assessee. The Hon ble High Court had held that co-operative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conferred a special benefit. 34. The case before the Supreme Court in Totgars was in respect of a Co-operative Credit Society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the Society. It is also found from Paragraph-3 of the decision of the Karnataka High Court in Totgars that the business activity other than marketing of the agricultural produce actually resulted in net loss to the Society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in Clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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