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TMI Blog2018 (9) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessees 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. CIT [(2016) 384 ITR 490 (Ker.)]. As regards the interest received from co-operative banks, it was contended that it was part of the banking business of the assessees, hence, entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 benefits available, and he would not merely look at the registration certificate issued under the relevant Co-operative Societies Act or at nomenclature of cooperative bank. (iv) The appeal involving similar question is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, CIT(A) ought to have confirmed the findings made in his own order on stay petition in appellant's own case for the same A Y that "the benefit available u/ s 80P(2)(d) also cannot be availed by the assessee since no investment was made in another cooperative society registered under the cooperative societies Acts envisaged in the said section of the Act but in the District Cooperative Bank, State Co-operative Bank and Treasuries". 2.3 The assessees eligibility of deduction u/s 80P has not been reached finality and the issue is challenged by the Revenue before the Hon'ble Apex Court in the case of M/ s Karakulam Service Co-operative Bank Ltd. The CIT(A) , therefore, ought to have found that interest income earned by assessee will be qualified for deduction u/s 80(P)(2)(d), only if the assessee is not hit by the provisions of section 80P(4) of the Act. 3. For these and other grounds that may be advanced at the time of hearing the order of the learned Commissioner of Income tax (Appeals), Thiruvananthapuram on the above points may be set aside and that of the Assessing Officer restored." 6. The learned Departmental Representative relied on the grounds raised. The learned AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority 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 mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cooperative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olative 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 K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business / providing credit facilities to its members and hence such income will form part of banking activities of the assessees and same is entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act. On identical 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 80P deduction. 7.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Cooperati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clear direction to consider circular No.l8/2015, dated 02.11.2015 and judgment of their lordship in the case of Chirakkal Service Co-operative Bank Ltd. vs. CIT 384 ITR 490. Circular No.18/2015, dated 02.11.2015 is reproduced hereunder:- "Subject Interest from Non-SLR securities of Banks-reg. It has 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned 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 societies engaged in providing credit facilities to its members had in course of business made investments with treasury, bank etc. and earned interest income, such income was eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. The relevant finding of the Hon'ble High Court reads as follows:- "32. In simple terms, the position can 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 profits and gains of business. This is why Totgars struck a different note. 35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other Co-operative Societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under Clause (d) or (e), as the case may be." 7.5 In the instant cases the assessees had made investments with co-operative banks in the course of its business of banking / providing credit facilities to it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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