Guttigedarara Credit Co-operative Society Limited V. The Income Tax Officer Ward-2(2)

ITA/29/2015

AI Insights

The case involves M/s. Guttigedarara Credit Co-operative Society Limited, which appealed against the decision of the Income Tax Appellate Tribunal that denied them deduction under Section 80P(2)(a)(i) for interest income earned from short-term bank deposits. The Tribunal had earlier held that the society's activities did not qualify for the deduction as they were not in the nature of banking. The High Court examined whether the interest income was part of the profits and gains of the business of providing credit facilities to its members, which would make it deductible under the specified section of the Income Tax Act. The court found that the interest income was indeed attributable to the society's primary business and thus should be deducted from the gross total income.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 794039 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 09-06-2015
• Assessment Year: misc
• Other Referred Cases: M/s. Totgars Co-operative Sale Society Limited Vs. Income Tax Officer, Commissioner of Income Tax-III, Hyderabad Vs. Andhra Pradesh State Co-operative Bank Ltd.
• Laws Referred To: Income Tax Act 1961, Karnataka Co-operative Societies Act, 1959, Karnataka Co-operative Societies Rules, 1960
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: A SHANKAR; M LAVA
• Keywords: Co-operative Society; Credit Facilities; Deduction; Income Tax; Interest income; Section 80P
• Section: 143(2); 139(1); 80P(2)(a)(i); 80P(4); 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 9th DAY OF JUNE, 2015 PRESENT THE HON’BLE MR.JUSTICE MOHAN M. SHANTANAGOUDAR AND THE HON’BLE MR.JUSTICE ARAVIND KUMAR I.T.A. NO.29/2015 BETWEEN : M/s. Guttigedarara Credit Co-operative Society Limited Rep. by its Secretary Shri K.L. Mohan Mysore MUDA Office Premises JLB Road Mysore-570005 ..Appellant (By Sri A. Shankar and Sri M. Lava, Advs.,) AND : The Income Tax Officer Ward-2(2) No.55/1, Shilpashree Vidyaranya Complex Vishweswaranagar Mysore-570008 ..Respondent (By Sri K.V. Aravind, Standing Counsel.,) - 2 - This appeal is filed under Section 260-A of Income Tax Act 1961, arising out of order dated 19.09.2014 passed in ITA No.1526/Bang/2013, for the assessment year 2010-2011, praying to formulate the substantial question of law as stated above and answer the same in favor of the appellant to allow the appeal land set aside the findings to the extent against the appellant in the order passed by the Income Tax Appellate Tribunal, Bangalore ‘C’ Bench, Bangalore. This appeal coming on for admission, this day, MOHAN M. SHANTANAGOUDAR, J., delivered the following:- J U D G M E N T The assessee has filed this appeal questioning the order dated 19.9.2014 passed by the Income Tax Appellate Tribunal in ITA.No.1526/Bang/2013. 2. This appeal is admitted to consider the following substantial questions of law:- i) Whether the Tribunal failed in law to appreciate that the interest earned on short-term deposits in banks were - 3 - only investment in the course of activity of providing credit facilities to members and that the same cannot be considered as investment made for the purpose of earning interest income and consequently passed a perverse order? ii) Whether the Tribunal is correct in law in holding that the interest earned on the deposits in banks by the appellant/co-operative society does not qualify for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961 on the facts and circumstances of the case? iii) Without prejudice, whether the tribunal is justified in not holding that if at all the interest earned from deposits with scheduled banks is held to be not attributable to the activity of providing credit to members, then the whole of such income is not liable to tax but only the net income after - 4 - reducing the expenditure incurred to earn such interest income would be liable to tax on the facts and circumstances of the case? 3. The assessee is a Cooperative Society registered under the provisions of Section 7 of the Karnataka Co- operative Societies Act, 1959. It is engaged in the activity of carrying on the business of providing credit facilities to its members. It is governed by the provisions of the Karnataka Co-operative Societies Act, 1959, and the Karnataka Co-operative Societies Rules, 1960. 4. The assessee filed its return of income for the assessment year 2010-11 on 15.10.2010 under the provisions of Section 139(1) of the Act, declaring a total income of Rs. NIL after claiming a deduction of Rs.85,67,640/- under the provisions of Section 80P(2)(a)(i) of the Act. The assessee’s case was selected for scrutiny and statutory notice under the provisions of Section 143(2) was issued. The assessee - 5 - produced all the information to substantiate its claim. The Assessing Officer, taking note of the insertion of Section 80P(4) of the Act, declined to extend the benefit of deduction under Section 80P(2)(i) and passed an order of assessment, determining a total income of Rs.,85,95,028/-, as against the declared income of Rs.NIL. Aggrieved by the said order, assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The appellate authority held that assessee’s activity is not in the nature of banking and consequently it is entitled to deduction under Section 80P(2)(a)(i) of the Act. However, insofar as the amount of interest is concerned, it is held that assessee is liable to income tax in view of the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Limited Vs. Income Tax Officer, reported in 322 ITR 283 (SC). Aggrieved by that portion of the order, assessee preferred an appeal to the Commissioner of Income Tax (Appeals) which has dismissed the appeal following the - 6 - judgment of the Apex Court in the aforesaid case. Aggrieved by the said order, this appeal is preferred by the assessee. 5. Learned counsel for the assessee assailing the impugned order contended that the interest accrued from the deposits made by the assessee in a nationalized bank out of the amounts which was used by the assessee for providing credit facilities to its members and therefore the said interest amount is attributable to the credit facilities provided by the assessee and forms part of profits and gains of business and therefore he submits that the appellate authorities were not justified in denying the said benefit in terms of sub-Section(2) of Section 80P of the Act. In support of his contentions, he relied on several judgments and pointed out that the Apex Court in the aforesaid judgment has not laid down any law. - 7 - Per contra, learned counsel for the Revenue strongly relied on the said judgment of the Supreme Court and submitted that the case is covered by that judgment of the Apex Court and no case for interference is made out. 7. From the aforesaid facts and rival contentions, the undisputed facts which emerge are, certain sums of interest were earned from short-term deposits and from savings bank account. The assessee is a Co-operative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. 8. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i):- - 8 - “Deduction in respect of income of co- operative societies: 80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub- section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: (a) in the case of co-operative society engaged in – (i) carrying on the business of banking or providing credit facilities to its members, or (ii) xxx (iii) xxx (iv) xxx (v) xxx (vi) xxx (vii) xxx - 9 - the whole of the amount of profits and gains of business attributable to any one or more of such activities.” 9. The word ‘attributable’ used in the said Section is of great importance. The Apex Court had an occasion to consider the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd., Vs. Commissioner of Income Tax, Gujarat-II, reported in ITR VOL. 113 (1978) 84 (at page 93) as under:- “As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of” the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to” and not the - 10 - expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor- General, it has used the expression “derived from”, as, for instance, in section 80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.” - 11 - 10. Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Co-operative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, the society 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 - 12 - 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. 11. In this context when we look at the judgment of the Apex Court in M/s. Totgars Co-operative Sale Society’s Case (cited supra), 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 retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. - 13 - 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. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law. 12. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money - 14 - to its members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of Commissioner of Income Tax-III, Hyderabad Vs. Andhra Pradesh State Co- operative Bank Ltd., reported in (2011) 200 Taxman 220/12. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial questions of law are answered in favour of the assessee and against the revenue. Hence, we pass the following order:- - 15 - Appeal is allowed. The impugned order dated 19.9.2014 is set aside. Parties to bear their own costs. Sd/- JUDGE Sd/- JUDGE *ck/- "