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2019 (8) TMI 508

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..... collected from the members is eligible for deduction under section 80P(2)(a)(i). Insofar as the judgment of the Hon'ble Supreme Court in the case of Totgars Co-operative Credit Society Ltd. [2010 (2) TMI 3 - SUPREME COURT] is concerned, the Hon'ble Andhra Pradesh High Court has considered and discussed elaborately. In view of the above, the order passed by the ld. CIT(A) is to be reversed, accordingly we reverse the order passed by the ld. CIT(A). Thus, this appeal filed by the assessee is allowed. We find that the order passed by the AO is neither erroneous nor prejudicial to the interests of the Revenue. Therefore, the order passed by the ld. Pr. CIT is hereby quashed and the appeal filed by the assessee is allowed. - ITA No. 26/VIZ/2018 - Dated:- 7-8-2019 - Shri V. Durga Rao, Hon ble Judicial Member And Shri D.S. Sunder Singh, Hon ble Accountant Member For the Assessee : Shri K.S.S. Sarma - Adv. For the Department : Shri D.K. Sonawal- CIT DR ORDER PER V. DURGA RAO, JUDICIAL MEMBER This appeal by the assessee is directed against the order of Principal Commissioner of Income Tax-1, Visakhapatnam, dated 31/03/2017 for the Assessment Year 2012-13. 2. Facts of the case, in b .....

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..... ciety, has deposited surplus funds with various banks and interest received of ₹ 8,41,002/-, the same is claimed as deduction u/sec.80P(2)(a)(i) of the Act. The Assessing Officer after calling various information from time to time and also after examining the evidence in respect of deduction u/sec. 80P(2)(a)(i), allowed the claim made by the assessee. Subsequently, ld.Pr.CIT by exercising powers conferred on him u/sec. 263 and by relying upon the judgment of the Hon'ble Supreme Court in the case of Totgar s Co-operative Sale Society (supra) opined that the assessee is not entitled for deduction in respect of interest received on account of surplus funds deposited with the banks and directed the Assessing Officer to redo the assessment because the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. We find from the assessment order that the Assessing Officer has called the various details and also evidence in respect of claim of deduction u/sec. 80P(2)(a)(i) and on verification of the same, the Assessing Officer has allowed the claim made by the assessee, therefore it cannot be said that the order passed by the Assessing Offi .....

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..... ng the decision of the Hon'ble Karnataka High Court in the case of Guttigedarara Credit Co-op Society Ltd. Vs. ITO [(2015) 66 (I) ITCL 343 (Kar. HC)] and also by following the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Andhra Pradesh State Co-op Bank Ltd., (2011) 336 ITR 516 (AP) has held that interest earned on deposits by the assessee-cooperative society providing credit facilities to its members would qualify for deduction under section 80P(2)(a)(i) of the Act. For the sake of convenience, the relevant portion of the order is extracted as under:- 9. We have heard both the parties, perused the records and gone through the orders of the authorities below. The assessee is Kakinada Co-operative Building Society engaged in the business of collecting the deposits, lending loans to its members for purchase of sites, buildings and construction of houses. When the assessee society receives the deposits from the members in the course of its business, if the deposits received is not necessary for immediate use of its business i.e. lend it to the members the same is deposited with the bank and interest income is earned. According to the A.O., the intere .....

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..... f sub-section (2) of section 80P or not. 9. While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co-operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283. 10. In order to understand the scope of the controversy, it would be better to present in simple terms, the ambit of clause (a) of sub-section (2) of section 80P. This clause is intended for the benefit of (1) certain types of co-operative societies but (2) confined only to the activities listed in sub-clauses (i) to (vii). In other words, clause (a) of sub-section (2) confers a benefit only upon co-operative societies, but the benefit is restricted only to some and not to all of the activities of such co-operative societies. To put it differently, an institution claiming the benefit of clause (a) of sub-section (2) of section 80P should cross 2 check-posts. In the 1st check-post, the institution will have to establish that it is a co-operative society. In the 2nd check-post, the .....

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..... from a distributive society and a marketing society and that the tax relief under section 80P(2)(a) is a grant by Parliament not to a category of income but to a category of assessee, namely, a co-operative society answering the description of a society engaged in the business of providing credit facilities to its members. In other words, the court came to the conclusion that the income derived by the society by purchasing autorickshaws and selling them to its members under hire-purchase agreements will not be exempt under section 80P(2)(a)(i). This decision of the Division Bench of the Madras High Court was confirmed by the Supreme Court in a very brief order Madras Autorickshaw Drivers' Co-operative Society vs. CIT [2001] 117 Taxman 370/249 ITR 330. 16. In CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 289 ITR 6/160 Taxman 48 (SC), the Supreme Court was concerned with a case where a co-operative society carrying on the business of banking and which is statutorily required to park a part of its funds in approved securities would be entitled to deduction under section 80P(2)(a) of the interest income arising from such investments. 17. In CIT v. Ponni Sugars & Che .....

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..... on appeal to the Supreme Court. In a decision reported in Totgar's Co-operative Sale Society Ltd.'s case (supra), the Supreme Court held that the interest income arising out of the investment of surplus funds cannot be attributed to the activities of the society. The relevant portion of the judgment of the Supreme Court reads as follows (page 289) : "The head note to section 80P indicates that the said section deals with deductions in respect of income of co-operative societies. Section 80P(2), inter alia, states that where the gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities in section 80P(2) of the Act, would be eligible for deduction. The word 'income' has been defined under section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. Parliament has included specifically 'business profits' into the definition of the word 'income'. Therefore, we are required .....

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..... from salaried employees of the State Bank with a view to promote thrift and provide credit facilities, was entitled to the benefit of section 80P(2)(a)(i)(2)(a). Following the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) the Gujarat High Court held that while the interest income earned by the co-operative society by extending credit facilities to its members may be business income, the interest income earned on the deposits of surplus funds with the State Bank of India may not qualify for deduction under section 80P(2)(a)(i). 23. Similarly, it was held in Mantola Co-operative Thrift & Credit Society Ltd. v. CIT [2014] 50 taxmann.com 278/[2015] 229 Taxman 68 (Delhi), that the word "Banking" appearing in section 80P(2)(a)(i) cannot be given an extended and broad meaning and that to do so would be contrary to the ratio laid down in Totgars Co-operative Society. 24. In CIT v. Punjab State Co-operative Agricultural Development Bank Ltd. [2016] 389 ITR 607/76 taxmann.com 307 (Punj. & Har.), a Division Bench of the Punjab and Haryana High Court held that the interest earned on reserve funds and call deposits could not be .....

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..... h-yielding deposits or may earn income by circulating its capital among its members in the course of their banking business. Adverting to the fact that the phrase "business of banking" is not defined in the Income-tax Act, this court referred to the definition of the expression "banking" appearing in section 5(b) of the Banking Regulation Act to come to the conclusion that the income received by a co-operative bank from deposits, whether or not they are made in the discharge of statutory obligation would be eligible for exemption, since it would tantamount to income from banking business. 27. Taking clue from the aforesaid decision of this court in Andhra Pradesh State Co-operative Bank Ltd.'s case (supra), yet another distinction was sought to be made by Mr. A. B. Krishna Koundinya, learned senior counsel appearing for the writ petitioners, to the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra). In paragraph-10 of its decision in Totgar's Co-operative Sale Society Ltd.'s case (supra), the Supreme Court pointed out that what was invested by Totgar's was the sale proceeds payable to the members, but .....

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..... ties. (b) Primary co-operative society engaged in supplying milk, oil seeds, fruits or vegetables grown by its members to- (1) a federal co-operative society, engaged in the same business ; (2) the Government or a local authority ; (3) the Government company or Corporation engaged in the same business ; The whole of the amount of profits and gains on such business. (c) (1) A consumer co-operative society engaged in activities other than those specified in clause (a) or clause (b) either independently of, or in addition to, all or any of the activities so specified. So much of the profits and gains attributable to such activities not exceeding ₹ 100,000 (one hundred thousand rupees). (2) Co-operative society other than a consumer co-operative society engaged in activities other than those specified in clauses (a) and (b). So much to these profits and gains attributable to such activities not exceeding ₹ 50,000 (fifty thousand rupees). (d) Interest or dividends derived by the co-operative society from its investments with any other co-operative society ; The whole of such income. (e) Any income derived by the co-operative society from the letting of godowns or warehouses .....

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..... arehouses and an income is derived therefrom, the case would be covered by clause (e) of section 80P(2). 31. The only area of distinction between clause (a) on the one hand and clauses (d) and (e) on the other hand is that the benefit under clause (a) is restricted only to those activities of a co-operative society enlisted in sub-clauses (i) to (vii) of clause (a). On the other hand, the benefit under clauses (d) and (e) are available to all co-operative societies, without any restriction as to the nature of the activities carried on by them. 32. In simple terms, the position can be summarised 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 any one or more of such activities. But, in case the same co operative society has an income not attributable to any one 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 co-operative society may claim the benefit of clause (d) or (e) eithe .....

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..... 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 Totgar's 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. 36. The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and .....

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