TMI Blog2021 (11) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... was exceeding Rs.10 lakh, the A.O. has power to convert the limited scrutiny to a complete scrutiny assessment. There is no examination of the issue by the A.O. in the assessment order whether the escapement had resulted in excess of Rs.10 lakh. In this context also, the assessment order is erroneous and prejudicial to the interest of the revenue. Therefore, this ground of the assessee is also rejected. Whether the assessee is entitled to deduction u/s 80P(2)(a)(i) and 80P(2)(d) ? - As recent order of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd. v. The Pr.CIT[ 2021 (8) TMI 706 - ITAT BANGALORE] after considering the judicial pronouncements on the issue held that interest income earned out of investments made from surplus funds would be taxable under the head `income from other sources and would not be eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. It was further held by the Tribunal insofar as deduction u/s 80P(2)(d) only those interest received from investments with co-operative societies alone would be entitled to deduction. Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. v. CIT Anr. ( 2021 (1) TMI 488 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.2.2, the learned PCIT failed to appreciate that the disallowance of NPA provision would result in enhanced profits eligible for the deduction u/s 80P(2)(a)(i) and consequently, there was no prejudice to the Revenue to justify revision u/s 263. 2.4 The learned PCIT failed to appreciate that it is incumbent on his part to point out a specific `error in the assessment order to assume jurisdiction u/s 263 and it cannot be exercised to direct the AO to conduct enquiry, that too on issues which stood clarified. 2.5 The learned PCIT failed to appreciate that the case was selected for scrutiny in Computer Aided Scrutiny Selection (CASS) cycle and the enquiry in the assessment proceedings was restricted only to the issues which formed the basis for selecting the case for scrutiny as per the Instructions of the CBDT and in this view, there was no `error in the assessment order to invoke section 263. 3. The grounds are taken without prejudice to one another and the appellant craves leave to add or delete or modify or revise any ground at the time of hearing before the Hon ble ITAT. For these and other grounds that may be urged at the time of hearing, it is prayed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 80P(2)(d). Further, the AO, had failed to examine he claim of reversing of interest of Rs.17,78,298/-, being a provision for interest on non performing assets converted to doubtful assets has been written off in the books or not, rendering the assessment erroneous, which amounted to prejudicial interest of revenue. Thus, the order passed by the AO [ITO, Ward-2, Hospet], u/s 143(3) dated: 30.11.2016, had rendered the assessment order as erroneous in as much as prejudicial to the interest of the revenue. Accordingly, the assessment order is hereby setaside with a direction to the AO, to pass a fresh assessment order in accordance with law and after giving necessary opportunity of being heard to the assessee in order to examine the following issues, for allowing deduction u/s 80P(2)(a)(i) or 80P(2)(d) as well as the issue of allowing deduction of claim of interest on NPAs. (a) Whether the banks/co-op banks with which deposits kept are the members of the assessee society or not for examining the concept of mutuality. (b) Whether is there any obligation on assessee to invest its surplus funds with the banks (c) Whether the interest earned from deposits/in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ict central cooperative bank. The deposits in the Bellary District Central Cooperative (BDCC) Bank are made in compliance of the said Act. (Reference is invited to the assessee-submissions made before the learned PCIT and reproduced in para 5.0 of page 5 of his order u/s 263 The said provisions of the Societies Act are enclosed herewith for ready reference) (b) Whether is there any obligation on assessee to invest its surplus funds with the banks. Yes, as above submitted. (c) Whether the interest earned from deposits / investments in to other societies / banks had constituted to be business income. The issue is settled by the Hon ble Supreme Court in the above mentioned case holding that the interest income is entitled to the deduction u/s 80P(2)(a)(i) itself as it forms part of the business income in the case of a co-operative society extending credit facilities to its members. (d) Whether the FDs made with the banks / co-op banks are out of reserve and surplus fund available with the cooperative society. This issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had resulted in excess of Rs.10 lakh. In this context also, the assessment order is erroneous and prejudicial to the interest of the revenue. Therefore, this ground of the assessee is also rejected. 7.1 As regards whether the assessee is entitled to deduction u/s 80P(2)(a)(i) and 80P(2)(d) of the I.T.Act, the recent order of the Tribunal in the case of M/s.Vasavamba Co-operative Society Ltd. v. The Pr.CIT in ITA No.453/Bang/2020 (order dated 13.08.2021), after considering the judicial pronouncements on the issue held that interest income earned out of investments made from surplus funds would be taxable under the head `income from other sources and would not be eligible for deduction u/s 80P(2)(a)(i) of the I.T.Act. It was further held by the Tribunal insofar as deduction u/s 80P(2)(d) of the I.T.Act is concenred, only those interest received from investments with co-operative societies alone would be entitled to deduction. The relevant finding of the Tribunal reads as follows:- 9. The Hon ble Supreme Court in the case of the The Totgars Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283 (SC) held that Income from utilisation of surplus funds was taxable under the head in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to its members from whom produce was bought, was invested in a shortterm deposit/security. 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. The Court also observed that even the Hon ble Supreme made it clear that they are confining the said judgment to the facts of that case. The Court therefore concluded that Hon ble Supreme Court was not laying down any law. Similar view taken in Guttigedarara Credit Cooperative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 392 ITR 0074 (Karn) in the context of deduction u/s.80P(2)(d) of the Act, it was held that Sec.80P(2)(d) of the Act allows deduction in respect of any income by way of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to 2011-2012 involved in the present appeals and therefore, whether the Income Tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100% deductible under Section 80P(2)(d) of the Act? 11. The Hon ble Court held that such interest income is not income from business but was income chargeable to tax under the head income from other sources and therefore there was no question of allowing deduction u/s.80P(2)(d) of the Act. The following points can be culled out from the aforesaid decision: 1. What Section 80P(2)(d) of the Act, which was though not specifically argued and canvassed before the Hon'ble Supreme Court, envisages is that such interest or dividend earned by an assessee co-operative society should be out of the investments with any other co-operative society. The words 'Co-operative Banks' are missing in clause (d) of subsection (2) of Section 80P of the Act. Even though a cooperative bank may have the corporate body or skeleton of a co-operative society but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision of the earlier decision of the Hon ble Karnataka High Court referred to in the earlier part of this order, the Court held that it did not find any detailed discussion of the facts and law pronounced by the Hon'ble Supreme Court in the case of the respondent assessee (Totagars Sales Co-operative society) and hence unable to follow the same in the face of the binding precedent laid by the Hon'ble Supreme Court. The Hon ble Court observed that in paragraph 8 of the said order passed by a coordinate bench that the learned Judges have observed that the issue whether a co-operative bank is considered to be a co- operative society is no longer res integra, for the said issue has been decided by the Income Tax Appellate Tribunal itself in different cases .. . No other binding precedent was discussed in the said judgment. Of course, the Bench has observed that a Cooperative Bank is a specie of the genus co- operative Society, with which we agree, but as far as applicability of Section 80P(2) of the Act is concerned, the applicability of the Supreme Court's decision cannot be restricted only if the income was to fall under Section 80P(2)(a) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les Society rendered by the Hon ble Supreme Court is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression profits and gains of business and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as investment are ineligible for deduction under section 80P(2)(a)(i) of the Act. (Paragraph-13 of the Judgment) 13. It can thus be seen that the ratio laid down by the Hon ble Karnataka High Court in the case of Totalgars Cooperative Sales Society in 395 ITR 611 (Karn) is that in the lig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lained by the later decision in the case of Totagar co-opeartive sales society 395 ITR 611 (Karn.). 17. We however find that the Assessee has raised the following grounds of appeal in its appeal, viz., 5. Without prejudice to the above, the learned Principal Commissioner ought to have considered the submissions of the appellant to the effect that interest received by it amounting to Rs. 1,32,726 from deposits with Mysore Chamarajanagar District Central Co-operative Bank made out of Reserve Fund in compliance with rule 23(2) 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 Income Tax Officer rightly allowed deduction thereof under section 80-P(2)(a)(i) of the Income Tax Act, 1961. 6. Without prejudice to the above, the learned Principal Commissioner ought to have taken note of the submissions made by the appellant that interest received by it amounting to Rs. 1,32,726 from deposits with Mysore Chamarajanagar District Central Co-operative Bank made in compliance with section 58 of the Karnataka Co-operative Societies Act, 1959 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 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 CoITA operative 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 of the Judgment) (iii) Under clause (d) of section 80P(2), the interest or dividend income derived by a co-operative society from investments with other co-operative society is also eligible for the deduction whole of such income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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