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TMI Blog2024 (6) TMI 1386X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee filed return of income claiming deduction under section 80P(2)(a)(i) of the Act. Assessments were completed under section 143(3) of the Act for Assessment Years 2017-18, 2018-19 and 2020-21 vide orders dated 26.12.2019, 17.03.2021 and 23.09.2022 respectively. In the said Assessment Orders, the claim of deduction under section 80P(2)(a)(i) of the Act was denied. The reason for the denial of claim of deduction under section 80P of the Act was that assessee had violated the principles of mutuality, since it was dealing with nominal / associate members and not regular members. Further, it was held by the AO that the interest income received from the co-operative banks / scheduled banks cannot be brought to tax under the head "Income from Business / Profession" and it should be treated as "Income from Other Sources". Therefore, the AO for the aforesaid Assessment Years denied the claim of deduction under section 80P of the Act. 4. Aggrieved by the Assessment Orders passed for Assessment Years 2017-18, 2018-19 and 2020-21, assessee filed appeals before the CIT(A). The CIT(A) dismissed the appeals of the assessee vide the impugned orders dated 24.01.2024 for the Assessment Years 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Citizen Co-operative Society Ltd., Vs. ACIT reported in (2017) 397 ITR 1. The Learned AR, by referring to the latest judgment of the Hon'ble Apex Court in the case of Mavilayi Service Cooperative Bank Ltd., & Ors. Vs. CIT reported in 431 ITR 1 submitted that there is no prohibition under the Karnataka Co-operative Societies Act, 1959, for admission of nominal / associate members. Hence, it was contended that assessee is entitled to deduction under section 80P(2)(a)(i) of the Act, in providing credit facilities to its associate / nominal members. 8. The learned DR supported the orders of the AO and the CIT(A). 9. We have heard the rival submissions and perused the material on record. In respect of associate / nominal members, the Hon'ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra) had held that the expression "members" is not defined under the Income Tax Act, 1961. Hence, it is necessary to construe the expression "members" in section 80P(2)(a)(i) of the Act light of the definition of the expression as contained in the concerned Co-operative Societies Act under which the assessee is constituted. Both the AO and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral co-operative bank and co-operative societies has been aggregated by the AO and has denied the benefit the deduction under section 80P of the Act. In light of the clear wording of section 80P(2)(d) of the Act, the issue raised in ground No. 4 needs to be re-examined by the AO. The assessee is directed to furnish the bifurcation of the interest receipts and necessary details before the AO. The AO shall examine the claim of the assessee and shall grant deduction under section 80P(2)(d) of the Act in respect of interest income received from co-operative societies. It is ordered accordingly. Ground No. 5 That the learned CIT(A) has erred on facts and in circumstances of the case and in law by confirming the disallowance of deduction u/s 80P(2)(d) of the Act on the interest income earned from other co-operative banks, as the definition co-operative society includes co-operative banks as well. 13. In the above ground, the learned AR submits that the interest received by the co-operative bank is also to be treated as receipts from co-operative society for the benefit of deduction under section 80P(2)(d) of the Act. In this context, the learned AR relied on the latest judgment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d DR was duly heard. 19. We have heard the rival submissions and perused the material on record. The contentions of the learned AR are that investments are made with Central Co-operative Bank and is in compulsion with the requirements under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was submitted that such interest income received on investments made under compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, is entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. We find that this issue was considered by the Bangalore Bench of the Tribunal in the case of M/s. Kachur Credit Co-operative Societies Ltd., Vs. ITO (supra). The Bangalore Bench of the Tribunal had followed its earlier orders. The relevant finding of the Bangalore 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 Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome" and entitled to deduction under section 80P(2)(a)(i) of the Act. In other words, if the assessee society does not comply with the relevant provisions of the Karnataka Co-operative Societies Act, 1959, and the relevant Rules, it cannot carry its co-operative activities viz., carrying on the business of banking of providing credit facilities to its members. Therefore, if the investments are out of compulsions under the relevant Rules, necessarily it forms part of assessee's business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. For the aforesaid examination of the matter, the issue raised in ground No. 6 is restored to the files of the AO. It is ordered accordingly. 21. In the result, ground 6 is allowed for statistical purposes. Ground No. 7 Alternatively, even in case the interest earned on deposits with cooperative banks is taxed u/s 56 of the Act under 'income from other sources', the Appellant must be eligible to claim deduction u/s 57(iii) of the Act in respect of cost of funds and proportionate administrative and other expenses. 22. In the above ground, assessee contends that it is entitled to cost of funds with respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. 12. 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. In the result, we pass the following: ORDER (i) Appeals are allowed in part. (ii) Order of the Tribunal in disallowing deduction in respect of cost of funds and proportionate administrative and other expenditure in respect of funds placed in deposit is set aside. (iii) All other contentions urged by the parties are kept open. (iv) Matter is remanded to the adjudicating authority for quantification of the cost incurred by the appellant and deduction thereof under Section 57(3) of the Act and to pass orders in accordance with law. (v)Ordered accordingly." 8. In view of the aforesaid judgment of the Hon'ble High Court, we restore the matter to t ..... 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