TMI Blog2021 (12) TMI 563X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the judgment in case of Citizen Co-operative Society Ltd. [ 2017 (8) TMI 536 - SUPREME COURT] - A.O. has merely denied the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act for the reason that the assessee was also dealing with associate / nominal members, which is against the dictum laid down by the Hon ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. Ors. (supra). The Hon ble Apex Court has settled many issues We are of the view that the issue of deduction u/s 80P(2)(a)(i) of the Act, needs to be examined by the A.O., in the light of the principles enunciated by the Hon ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. Ors. (supra). Accordingly, the CIT(A) order on this issue is set aside and the same is restored to the files of the A.O. for examination of the case in the light of the principles laid down. Rejection of claim of deduction u/s 80P(2)(a)(i) of the Act with regard to interest income earned from fixed deposits kept with co-operative banks - Insofar as deduction u/s 80P(2)(d) we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction. Deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected for scrutiny and the assessment order was completed u/s 143(3) of the Act vide order dated 22.12.2018. The Assessing Officer denied the claim of deduction u/s 80P(2)(a)(i) of the Act by placing reliance on the judgment of the Hon ble jurisdictional High Court in the case of Pr.CIT Anr. v. Totagars Co-operative Sale Society reported in 395 ITR 611 (Kar.). Further, the A.O. also denied the benefit of section 80P(2)(d) of the Act since the interest income was received from co-operative banks and not from co-operative societies. The A.O. also held that the assessee has violated the principle of mutuality since it was dealing with non-members. In this context, the A.O. relied on the judgment of the Hon ble Apex Court in the case of The Citizen Co-operative Society Ltd. v. ACIT reported in 397 ITR 1 (SC). 4. Aggrieved, the assessee filed an appeal to the first appellate authority. The CIT(A) upheld the view taken by the A.O. that the assessee has violated the principle of mutuality, and hence, it was concluded by him that the assessee was not entitled to deduction u/s 80P(2)a)(i) and 80P(2)(d) of the Act. 5. Aggrieved by the order of the CIT(A), the assessee filed this ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee was also dealing with associate / nominal members, which is against the dictum laid down by the Hon ble Apex Court in case of Mavilayi Service Co-operative Bank Ltd. Ors. (supra). The Hon ble Apex Court has settled many issues. The gist of the judgment of the Hon ble Apex Court, are as follows: (i) Section 80P is a benevolent provision enacted by the Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, if there is ambiguity, in favour of the assessee (para 45 of the judgment). (ii) The co-operative societies extending credit facilities are entitled to deduction u/s 80P(2)(a)(i) and if there are loans to non-members, only profits attributable to the transactions with the non-members alone is liable to be excluded from the deduction. That is to say that the transactions with non-members per se would not disentitle a co-operative society from claiming the deduction under the section. If the state Act (the Cooperative Law) provides for enrollment of 'nominal members', the loans given to such nominal members would qualify for the purpose of deduction u/s 80P(2)(a)(i). (Para 30 to 46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation of surplus funds was taxable under the head income from other sources, and therefore not eligible for deduction u/s 80P. The Hon ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO (230 Taxman 309), was dealing with a case where deduction u/s.80P(2)(a)(i) of the Act was claimed on interest from the deposits made in a nationalized bank out of the amounts which was used by the assessee for providing credit facilities to its members. The Assessee claimed that the said interest amount is attributable to the business of providing credit facilities by the assessee and forms part of profits and gains of business. The Hon ble Karnataka High Court after considering SC judgment in case of Totgars(supra) held that since the word income is qualified by the expression attributable to the business of Banking is used in Sec.80P(2)(a)(i) of the Act, it has to receive a wider meaning and should be interpreted as covering receipts from sources other than the actual conduct of business. The Court held a Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows deduction in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income. The Hon ble Court held that that the aforesaid Supreme Court's decision in the case of Totgars (supra), was not applicable to deduction u/s.80P(2)(d) of the Act, because the said decision was rendered with regard to deduction under Section 80P(2)(a)(i) of the Act and not under Section 80P(2)(d) of the Act. 10. However, the Hon ble Karnataka High Court in the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 395 ITR 0611 (Karn) took a different view and held that interest income earned on deposits whether with any other bank will be in the nature of income from other sources and not income from business and therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed to the Assessee. The Hon ble Court followed decision of Hon ble Gujarat High Court in the case of SBI Vs. CIT 389 ITR 578(Guj.) in which the Hon ble Gujarat High Court dissented from the view taken by the Hon ble Karnataka High Court in the case of Tumkur Merchants case ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated by the provisions of the Banking Regulation Act, 1949. Only the Primary Agricultural Credit Societies with their limited work of providing credit facility to its members continued to be governed by the ambit and scope of deduction under Section 80P of the Act. (Paragraph 13 of the Judgment). 2. The banking business, even though run by a Cooperative bank is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act. The purpose of bringing on the statute book subsection (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any cooperative 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 cooperative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to fall under Section 80P(2)(a) of the Act and not under Section 80P(2)(d) of the Act.(Paragraph-18 of the Judgment) 6. The Court finally concluded that it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Cooperative Bank. Therefore, the said decision of the Coordinate Bench is distinguishable and cannot be applied in the present appeals, in view of the binding precedent from the Hon'ble Supreme Court. (Paragraph 19 of the Judgment) 12. The Hon ble Karantaka High Court in the aforesaid decision also placed reliance on a decision of the Hon ble Gujarat High Court in the case of STATE BANK OF INDIA (SBI) vs. COMMISSIONER OF INCOME TAX 389 ITR 0578 (Guj) did not agree with the view taken by the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision of the Supreme Court in Totgars Co-operative Sale Society (supra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 395 ITR 611 (Karn) is that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a cooperative society, is not deductible under section 80P(2)(d) of the Act. 14. The CIT was therefore justified in exercising his powers of revision u/s.263 of the Act and directing the AO to tax interest income in question as it is neither of the nature specified in Sec.80P(2)(a)(i) or 80P(2)(d) of the Act. 15. The argument of the learned counsel for the Assessee has been that the AO has applied his mind and allowed the deduction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nataka Co-operative Societies Act, 1959 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961 in respect thereof was rightly allowed by the Income Tax Officer. 7. Without prejudice to the above, the learned Principal Commissioner ought to have considered the submissions of the appellant to the effect that the interest received by it amounting to ₹ 1,32,726 from deposits with Mysore Chamarajanagar District Central Co-operative Bank made in compliance with rule 28 of the Karnataka Co-operative Societies Rules, 1960 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the appellant was eligible for deduction thereof under section 80-P(2)(a)(i) of the Income Tax Act, 1961. 18. The issue raised by the Assessee in the aforesaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments have business nexu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from other sources , the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the next income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. 13. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits. 7.5 The assessee has not raised the plea before the Income Tax Authorities that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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