TMI Blog2023 (5) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple under Income-tax Act being that only net income has to be taxed and not the gross income, especially in the light of the judgment of Totagars Sale Cooperative Society [ 2015 (4) TMI 829 - KARNATAKA HIGH COURT] Accordingly, the case is restored to the file of the A.O. with a direction to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources . If so, the same shall be allowed as deduction u/s 57 - AO is directed to decide the issue as per law. The assessee is directed to co-operate with the department and furnish the necessary evidence for expeditious disposal of the matter. It is ordered accordingly. This ground is partly allowed for statistical purpose. Deduction u/s. 80P(2)(a)(i) on other receipts under different heads in the Profit Loss account - AO has not considered the nature of receipts and whether it is part and parcel of the business income of the assessee or not. CIT(Appeals) has also not discussed this issue. Therefore, this issue should go back to the AO for examining the nature of receipts and whether it is connected to the regular business activity carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils filed by the assessee, the AO allowed deduction u/s. 80P(2)(a)(i) of Rs.33,94,955. The AO further observed that assessee has received interest income from fixed deposits in Axis Bank, SBI, KVG Bank, Canara Bank, ICICI and BDCC Bank, etc. The AO examined the issue in the light of section 80P(2)(d) of the Act and observed that the interest received from cooperative bank and commercial banks do not qualify for deduction u/s. 80P(2)(d) of the Act and completed the assessment accordingly. 4. Aggrieved, the assessee filed appeal before the CIT(Appeals), and filed detailed written submissions relying on various judgments. The CIT(Appeals) observed that the interest received on deposits of Rs.8,45,161 does not qualify for deduction u/s. 80P(2)(d) of the Act and Other receipts of Rs.262,834 are also not covered u/s. 80P(2)(d) of the Act and upheld the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal. 5. The ld. AR reiterated the submissions made before the lower authorities and submitted that the assessee has sufficient internal funds and external funds which were invested in the banks. The funds invested in fixed deposits were excess funds received from m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported in 395 ITR 0611 (Karnataka), the Hon ble Court had decided that deduction u/s. 80P(2)(d) is allowable on the interest income received from cooperative society. He strongly relied on the following judgments:- (a) M/s. Vasavamba Co-operative Society Ltd. v. PCIT, ITA No.453/Bang/2020 dated 13.8.2021. (b) M/s. Manjunatheshwara Credit Co-op. Society Ltd. v. ITO, ITA No.2238/Bang/2019 dated 4.10.2021. (c) Judicial Employees House Building Coop Society Ltd. in ITA No.108/Bang/2023 dated 11.04.2023. 8. In the rejoinder, the ld. AR submitted that in the case of PCIT v. Totagars Co-operative Sale Society {2017] 78 taxmann.com 169 (Karnataka) order dated 05.01.2017, the Hon ble Court has held that even section 56(i)(ccv) of the Banking Regulation Acts Act, 1949, defines a primary co-operative bank as the meaning of co-operative society, therefore a co-operative society bank would be included in the words Co-operative Society . 9. After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, I note that the assessee has received on interest on deposits of Rs.8,45,161 from cooperative banks and commercial banks on which ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble jurisdictional High Court in the case of PCIT v. Totagars Co-operative Sale Society {2017] 78 taxmann.com 169 (Karnataka). However, the Hon ble jurisdictional High Court in the later judgment dated 16.6.2017 in the case of PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka) for AYs 2007-08 to 2011-12 has decided in the issue in favour of the revenue by observing as under for claiming deduction u/s 80P(2)(d) on interest received from Cooperative bank:- 9. We have heard the learned counsels at length and perused the record and the judgments cited at the Bar. 10. Admittedly and undoubtedly, the respondent assessee is a Cooperative Society engaged mainly in the activity of marketing of agricultural produces grown by its members. The assessee co-operative society also accepts deposits from its members and provides credit facility to its members, runs Kirana Stores, rice mills, live stocks, van section, medical shops, Areca-nut trading section, lodging, plying and hiring of goods carriage, etc. 11. The Assessment Years involved in the present batch of appeals are Assessment Years 2007-2008 to 2011- 2012. The bone of contention is that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk of providing credit facility to its members continued to be governed by the ambit and scope of deduction under Section 80P of the Act. 14. The banking business, even though run by a Co-operative 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 sub-section (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any co-operative 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 co-operative 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 in Section 80P(2)(d) of the Act is sufficient to deny the claim of the respondent assessee for deduction under Section 80P(2)(d) of the Act. The only except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s appeals by referring, but not applying the decision of the Hon'ble Supreme Court, we observe with greatest respects that we do not find any detailed discussion of the facts and law pronounced by the Hon'ble Supreme Court in the case of the respondent assessee in the said order passed by the co-ordinate Bench and therefore, we are unable to follow the same in the face of the binding precedent laid by the Hon'ble Supreme Court. We find in paragraph 8 of the said order passed by a co- ordinate bench that the learned Judges have observed that the issue whether a cooperative 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 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 Act and not under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock and hence, it was not entitled to claim the deduction under Section 80P(2)(e). In this case, the issue price was set off against the sale price which clearly indicated that the netting/difference between the two prices constituted receipt on a commercial basis or net profit. A. Venkata Subbarao v. State of Andhra Pradesh AIR 1965 SC 1773 applied. CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117 (SC) distinguished. Surath Venkar Sahakari Sangh Ltd v. CIT [1971] 79 ITR 722 (Guj) approved. Decision of the Rajsthan High Court in CIT v. Udaipur Shahakari Upbhokta Thok Bhandara Ltd. [2007] 295 ITR 164 Affirmed. 21. The aforesaid decision of the Hon'ble Supreme Court in the case of Totgar's Co-operative Sale Society Ltd. (supra) was followed by a Division Bench of the Gujarat High Court in the case of State Bank of India v. CIT [2016] 389 ITR 578/241 Taxman 163/72 taxmann.com 64 and the Division Bench of the Gujarat High Court has held as under: (ii) That the assessee did not carry on any banking business and its objects did not contemplate investment of surplus funds received from its members. The business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. 22. Again, the Division Bench of Punjab and Haryana High Court in still a later decision reported in the same volume of ITR in the case of CIT v. Punjab State Co-operative Agricultural Development Bank Ltd. [2016] 389 ITR 607/76 taxmann.com 307 (Punj. Har.) concurred with the aforesaid view of the Gujarat High Court, distinguishing the view taken by the Andhra Pradesh High Court and Karnataka High Court, held in the following terms: '30. We are entirely in agreement with the judgment of the Gujarat High Court especially the observation that the judgment of the Supreme Court is not restricted only to the investments made by the assessee from the amounts retained by it which were payable to its members and that the judgment also applies in respect of other funds not immediately required for business purposes. We reproduced paragraph 15 of the judgment only to indicate that we uphold the appellant's case only on the ground that the assessee is not entitled to the said deduction on the basis that it is engaged in carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under section 80P of the Act. 9. In this context when we look at the judgment of the apex court in the case of Totgar's Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee co- operative society, apart from providing 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 retaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of banking the result may be different. In any event assuming that the judgment is not distinguishable on this ground, we would with respect disagree with the same in view of the judgments that we have already referred to and on the basis of our interpretation of Totgar's case. In any event, we are with respect unable to agree with the observations that the Supreme Court in Totgar's case (supra) did not lay down any law. 33. For the same reason, the judgment of the Karnataka High Court in Guttigedarara Credit Co-operative Society Ltd. v. ITO [2015] 377 ITR 464 (Karn); [2015] 60 taxmann.com 215 (Karn) is of no assistance to the respondent-assessee.' 23. Thus, the aforesaid judgments supports the view taken by this Court that character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified Clauses of Section 80P(2) of the Act, but on a deeper analysis of the facts, it may become ineligible for deduction under Section 80P(2) of the Act. The case in Udaipur Sahakari Upbhokta Thok Bhandar Ltd. (supra) was that of Section 80P(2)(e) of the Act, wherea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness operations, which made it ineligible for deduction under Section 80P of the Act. The case in hand is also similar and the character of income will not change. Accordingly interest received on investments with cooperative bank as well as other banks shall be treated as income from other sources and it is not the business income of the assessee, therefore does not quality for deduction u/s. 80P(2)(d) of the Act. 11.1. Since the entire interest received has been taxed as income from other source, I am of the view that the fundamental principle under Income-tax Act being that only net income has to be taxed and not the gross income, especially in the light of the judgment of the Hon ble jurisdictional High Court in the case of Totagars Sale Cooperative Society v. ITO [2015] 58 taxmann.com 35 (Karnataka) the judgments cited above. Accordingly, the case is restored to the file of the A.O. with a direction to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources . If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. The AO is directed to decide the issue as per law. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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