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TMI Blog2024 (6) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the order passed by the P.C.I.T. requires to be cancelled. 3. The learned P.C.I.T. is not justified in holding that the order of assessment passed u/s. 143[3] of the Act, dated 15/06/2021 was erroneous and prejudicial to the interest of revenue on the ground that the same was not passed in accordance with the decision of the Hon'ble Supreme Court and Jurisdictional High Court of Karnataka prejudicial to the interests of the assessee under the facts and in the circumstances of the appellant's case. 4. The learned PCIT ought to have appreciated that the interest income earned by the appellant on deposits in SDCC bank and other nationalized banks was regarded as income under the head "Other Sources" and therefore, the appellant had neither claimed as deduction u/s. 80P[2][a][i] or u/s. 80P[2][d] of the Act in first instance at all and therefore, the assessment order passed by the learned A.O. u/s. 143(3) cannot be considered as prejudicial to the interest of revenue under the facts and in the circumstances of the appellant's case. 5. Without prejudice to the above, the learned PCIT ought to have appreciated that the interest income earned by the appellant was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,72,071/- 4. During the course of assessment proceedings, assessee was directed to explain how the aforesaid interest amounting to Rs.3,67,72,071/- was entitled to deduction under section 80P(2)(a)(i) of the Act. In response to the show cause notice, assessee filed its submissions dated 13.04.2021 wherein it was submitted that interest income earned from FDs with SCDCC Bank Ltd., is out of statutory compulsions as mandated under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, hence liable to be assessed under the head 'profits and gains of business / profession' entailing the benefit of deduction under section 80P(2)(a)(i) of the Act. The AO held that the interest income earned out of the investments in FDs amounting to Rs.3,58,68,999/- is to be allowed as a deduction under section 80P(2)(a)(i) of the Act, since assessee was under statutory obligation to make investments in such FDs. However, with regard to a sum of Rs.14,03,072/- earned as interest from bank account maintained with other banks / financial institutions, the same was disallowed and added back to the total income of the assessee society. The AO, thus accepting the argument of the assessee wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act on 03.11.2023. The relevant finding of the PCIT reads as follows: "6. As seen from para 10 of the order of Karnataka High Court in the case of Totagars Co-operative Sales Society (395 1TR 611), the said assessee was also accepting deposits from its members and provides credit facility to its members in addition to the other activities of marketing of agricultural produce. Even under such circumstances Hon'ble Supreme Court has held such income as not part of operational income in the decision reported in 322 ITR 283. When the interest so received from co-operative bank is not operational income as held by the Apex Court deduction u/s 80P(2)(a)(i) cannot be granted on such income. Further, such income i.e. income from SCDCC Bank is not eligible for deduction U/s 80P(2)(d) in view of the binding decision of Karnataka High Court in the case of Totagars Co-operative Sales Society reported in 395 ITR 611. Although Authorized representative of the assessee quoted another decision of Karnataka High Court in this issue, the same was rendered in January 2017 i.e prior to the decision reported in 395 ITR 611. As per the ratio laid down in Govinda Nayak v/s Western Patent Pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Other Sources" and denied the benefit of deduction under section 80P of the Act. In the said show cause notice, the AO has referred to the judgment of the Hon'ble Apex Court in the case of Totagar Co-operative Sales Society Vs. ITO reported in 322 ITR 283 (SC) as well as the judgment of the Hon'ble jurisdictional High Court in the case of PCIT Vs. Totagar Co-operative Sales Society reported in 395 TR 711 (Karnakata). A copy of the show cause notice issued by the AO has been placed on record from pages 90 to 101 of the Paper Book filed by the assessee. In response to the show cause notice, assessee had categorically contended that the investment with SCDCC Bank Ltd., is as per statutory requirement and not made out of choice to earn extra profits. In this context, assessee submitted that it is part of the operational income and the same is to be assessed under head 'income from business / profession' which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. The AO accepted the contention of the assessee and completed the assessment by granting deduction under section 80P of the Act with reference to interest income received on FD investments with SCDCC B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taka and as per assessee's Bye Law, the balance held in Reserve Fund shall not be utilised as working capital and shall be invested outside the business as stipulated in Sec 58 of the KCS Act 1959. By Law No.26.2 of the assessee also mandates that the Reserve Fund shall be invested as specified in the Act. d) It is mandatory for a Co-operative Society registered under the KCS Act 1959 to maintain 3 % of the Total Deposits accepted by it from Members as Cash Reserve Ratio. 11. Details of assessee Total Deposits, SLR Investments mandatorily required, Reserve Fund Investment which is statutorily required etc., is as under : Particulars Investment which is Statutory in Nature Investments held as at 31-03-2018 25% of our Total Deposits from Members mandatorily required to be invested as SLR with District Central Co Op Bank - 25% of Rs 270,61,58,909 67,65,39,727 20,59,76,231 Balance in Reserve Fund as at 31- 03-2018, which is statutorily required to be invested in District Central Co Operative Bank 22,38,22,197 22,38,22,197 TOTAL 90,03,61,924 42,97,98,428 12. From the above, it is obvious that assessee's entire Investment of Rs 42,97,98,428 as on 31-03-2018 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from cooperative society but it was received from Scheduled bank and co-operative bank. Therefore, entire deduction was not allowable on these incomes. After consideration of all facts of the case with the circular dated 06.05.2014 issued by the Managing Director of the Sou Canallict Central Co-operative Bank Limited, I find that all primary co-operative society has to be mandatorily made investment of 25% of total deposits as Liquid Fund (SLR) and 3% of the total deposits as Cash Reserve (CRR) with the concerned District Central Co Operative society in the state of Karnataka. Further, the CBDT's Circular No.18/2015 dated 02.11.2015 has clarified that the interest income from SLR / Non SLR investments by a banking company and co -operative societies shall be chargeable under the head "Profits and Gains of Business or Profession". In view of these Circulars, I don't find any merit in the AO's treatment of interest and dividend income of Rs.6,26,78,196/- on such investment under the head "Income from Other Sources" because the appellant is obliged to maintain these investment with concerned DCCB for running the credit facility. Thus, the_ nature of interest income on investment wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by it amounting to Rs. 1,32,726 from deposits with Mysore & Chamarajanagar District Central Cooperative Bank made in compliance with section 58 of the Karnataka 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 Rs. 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." 16. With reference to the above grounds, the Tribunal restored the matter to the AO with the following observations: "18. The issue r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the Tribunal reads as follows: "8. I have heard the rival submissions and perused the material on record. The solitary issue for adjudication is whether a sum of Rs.5,07,822/- can be allowed as a deduction under sections 80P(2)(a)(i) of the Act. Admittedly, the amount of Rs.5,07,822/- has been received by the assessee from South Canara District Central Co-operative Bank Ltd. It is the claim of the assessee that the amounts are invested in compliance with the relevant Acts and Rules. On identical facts, the Bangalore Bench of the Tribunal in the case of Bharat Co-operative Credit Society Vs. ITO (supra) by following the Co-ordinate Bench's order in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT in ITA No.453/Bang/2020 (order dated 13.08.2021) had stated that if the investments made with the Central Co-operative Bank is out of compulsions under Karnataka State Co-operative Societies Act, 1959 and Rules, the income received from such investments would be entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Tribunal in the case of Bharat Cooperative Credit Society Vs. ITO (supra) reads as follows: "7.1 In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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