TMI Blog2023 (3) TMI 1137X X X X Extracts X X X X X X X X Extracts X X X X ..... above judgement. Therefore the case is remanded back to the file of the AO for a fresh consideration. Needless to say that reasonable opportunity be given to the assessee and the assessee is also directed not to seek unnecessary adjournments for early disposal of the appeal. Appeal filed by the assessee is allowed for statistical purposes. - ITA No. 23/Bang/2023 - - - Dated:- 14-2-2023 - Shri Laxmi Prasad Sahu, Accountant Member For the Assessee : Shri Siva Prasad Reddy, IRS (Retd) For the Revenue : Shri Ganesh R. Ghale, Standing Counsel ORDER PER: LAXMI PRASAD SAHU, A.M. This is an appeal filed by the assessee against the order passed by the learned CIT(A)/NFAC, Delhi in appeal DIN and order No. ITBA/NFAC/S/ 250//2022-23/1047496227(1) dated 18.11.2022 for AY 2017-18. 2. The assessee has raised the following grounds of appeal: - 1. The impugned assessment order made u/s 143(3) of the Act dated, 25-11-2019, is arbitrary and opposed to the facts of the case and the principles of natural justice and therefore, the same is liable to be vacated as void. 2. The learned CIT(A) failed to appreciate: (i) That the interest income accruing from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and any sum earned by way of interest from the activities carried out among the members is eligible for deduction under Section 80P(2)(a)(i) of the Act. The AO did not accept the claim of the assessee and he treated it at as income from other sources. The AO also discussed the provisions of Section 80P(2) of the Act as well as the distinction between cooperative bank and cooperative society. He also relied on the judgement of the Hon'ble Supreme Court in the case of Totagars Co-operative Sale Society (2017) 395 ITR 611 (Kar). The AO also upheld that the income by way of interest earned on deposit or investment on ideal surplus funds does not change its characteristics irrespective of the fact that whether such interest income earned from scheduled bank or a cooperative bank, thus clause (d) of Section 80P(2) of the Act would not apply in the case of the assessee. Alternatively, the assessee also claimed expenditure under Section 57 of the Act for earning income under Section 56 of the Act but the AO denied it by observing that the assessee would not have incurred expenditure towards earning of income and accordingly disallowed the claim of expenditure under Section 57 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended that majority of the interest income is earned out of investments made with Central Co-operative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance with the Karnataka Co-operative Societies Act, necessarily, the same is to be assessed as income from business, which entails the benefit of deduction u/s 80P(2)(a)(i) of the I.T. Act. Insofar as deduction u/s 80P(2)(d) of the I.T. Act is concerned, we make it clear that interest income received out of investments with cooperative societies is to be allowed as deduction. 4.2. It may be necessary to mention here that the Hon'ble Tribunal has relied on the judgment of the Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. (Supra) and mentioned the gist of the said judgment vide para 7,3 of its order which is as under: 7.3 Moreover, the Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. v. CIT Anr. (supra) had settled various issues for claiming deduction u/s 80P(2)(a)(i) of the I. T. Act. The gist of the judgment of the Hon'ble Apex Court are as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Tribunal are reproduced hereinbelow (para 5 of page 3 of the decision): Accordingly, there is merit in the prayer of the assessee. Accordingly, we set aside the order of the CIT(A) on this issue and restore the same to the file of the AO with the direction to allow the deduction u/s 80P(2)(a)(i) of the Act on the interest income earned from investments made with the banks in compliance with the requirements under the Karnataka Co-operative Societies Act and Rules. The assessee should be given adequate opportunity of being heard. (Emphasis added) 4.4. It is submitted that the detailed submissions on the covered issues relying on the aforementioned decisions of the Hon'ble Tribunal in assessee's own case others were made before the learned CIT(A) vide Written Submissions dated, 17-11-2022. However, the learned CIT(A) has not commented upon the same for the reasons not known. 6. On the other hand, the learned D.R. relied on the orders of the lower authorities and he submitted that both authorities had examined the issue in detail and relied on the judgement of the Hon'ble Supreme Court in the case of Totgar s Co-operative Sale Society. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scrutiny. However, when the potential escapement of income 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. 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 Cooperative 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 concerned, only those interest received from investments with co-operative societies alone would be entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, was invested in a short-term 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 Co-operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me earned by the assessee was taxable under the head 'Income from Other Sources' under Section 56 of the Act and was not 100% deductible from the Gross Total Income under Section 80P(2)(a)(i) of the Act, is not applicable to the present Assessment Years 2007-2008 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 cooperative society. The words 'Co-operative Banks' are missing in clause (d) of subsection (2) of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon'ble Supreme Court's decision in the case of Respondent assessee itself is otherwise.(Paragraph 16 of the Judgment) 5. On 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 co- ordinate 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 Co-operative Bank is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. The Hon ble Gujarat High Court therefore held that decision in the case of Totagar Co-operative Sales 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Karn.). The reliance placed by the learned counsel for the Assessee on the earlier decisions of the Hon ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision in Totgars Co-operative Sale Society (supra) stands explained 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 hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments with co-operative societies is to be allowed as deduction. 7.3 Moreover, the Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. v. CIT Anr. (supra) had settled various issues for claiming deduction u/s 80P(2)(a)(i) of the I.T.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 Co- operative Law) provides for enrollment of 'nominal members', the loans given to such nominal members would qualify for the purpose of deduc ..... 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