Primary Agricultural Credit Co-operative Society Limited Nidle, Belthangady V. Income-Tax Officer, Ward-1, Puttur

ITA 659/BANG/2023

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 4960 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 27-11-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 05-09-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARITHIVEL
• Assessee Lawyers: C.A INSTRUCTED BY SRIHARI
• Keywords: Business income; Opportunity of being heard; Co-operative Credit Society; CHAPTER IV
• Section: 56; 234B; 80P; 250; 48; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No.659/Bang/2023 Assessment Year : 2017-18 Primary Agricultural Credit Co- operative Society Ltd., Nidle 1, Nidle, Belthangady-574216. PAN : AAAAN 3309 E Vs. 1. The Income Tax Officer, Ward-1, Puttur. APPELLANT RESPONDENT Assessee by : Ms. Harsha J, C.A [Instructed by Sri Srihari Kutsa, Advocate] Revenue by : Shri Parithivel, JCIT (DR) Date of hearing : 28.11.2023 Date of Pronouncement : 30.11.2023 O R D E R Per Laxmi Prasad Sahu, Accountant Member :- This appeal filed by the assessee is against the order passed by the NFAC, Delhi dated 24/08/2023 vide DIN No.ITBA/NFAC/S/250/2023- 24/1055376297(1) u/s 250 of the Act on the following grounds of appeal:- ITA No.659/Bang/2023 Page 2 of 19 “1. The Order of the learned Commissioner passed under section 250 of the Act is opposed to law, equity, weight of evidence, probabilities and the facts and circumstances in the Appellant's case. 2. The Appellant denies to be assessed to tax on total income as determined by the learned AO of Rs. 86,31,770/- as against the total income reported by the Appellant of Rs. NIL on the facts and circumstances of the case. 3. The learned Commissioner of Income-tax (Appeals) erred in applying the ratio of judgment of Supreme Court in the case of M/s Totgars Co- operative Sales Society reported in 322 ITR 283 (SC) which are distinguishable on facts of the Appellant' case: a. the Appellant is a primary agricultural credit co-operative society and not engaged in marketing of agricultural produce; and b. The Appellant has earned interest from investment of its operational funds used in business of investing and lending to members and not by investing surplus funds in short term deposits. 4. The learned Commissioner of Income-tax (Appeals) erred in not considering the principles laid down by the judgement of the Hon'ble Supreme Court in the case of The Mavilayi Service Cooperative Bank Ltd., & Ors. Vs. Commissioner of Income Tax, Calicut & Anr. [2021] 123 taxmann.com 1 where the primary agricultural credit societies are entitled to the benefit of the deduction contained in section 80P(2)(a)(i) of the Act on interest income earned from lending to members including nominal members. 5. The learned Commissioner of Income-tax (Appeals) erred in considering interest income earned by the Appellant from investment into other co-operative societies as taxable under the head "Other sources" and not "Business income" ; thus rendering deduction u/s 80P(2)(d) not applicable 6. The learned Commissioner of Income-tax (Appeals) erred in not considering Karnataka High Count in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. income tax officer Ward-V, Tumkur reported in 120151 55 taxmann.com 447 and Bangalore ITAT decisions in the case of Totagars Co-op Sale Society, Sirsi Vs The Asst. Commissioner of Income tax, Circle-1(1) &TPS, Hubli in ITA No. 376 to 379/Bang/2023 where interest income earned from investment in co-operative Bank by a primary agricultural credit co-operative society is eligible for deduction u/s 80P(2)(d) of the Act. 7. The Learned Commissioner of Income-tax (Appeals) has erred in upholding the addition of Rs.21,34,129/- being provisions made towards NPA, staff leave encashment and reversal of interest subsidy receivable from the Government. 8. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 9. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.” ITA No.659/Bang/2023 Page 3 of 19 2. The assessee also raised additional grounds of appeal on 01/09/2023, which is as under:- “1. The assessment order passed by the learned AO is bad in law for want of requisite jurisdiction on the facts and circumstances of the case. 2. Without prejudice to the right to seek waiver with the Hon'ble Chief Commissioner of Income Tax/Director General of Income Tax, the Appellant denies itself liable to be charged to interest under section 234B of the Act which under the facts and circumstances of the case deserves to be cancelled. The calculation of interest under section 234B of the Act is not in accordance with law as the rate, amount and method for calculating interest is not discernible from the order of assessment. 3. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.” 3. The brief facts of the case are that the assessee is a primary agricultural cooperative society engaged in the business of acceptance of deposits from members, lending loans to members and providing public distribution services. The assessee filed return of income on 24/10/2017 declaring total nil income after claiming deduction of Rs.64,97,640/- u/s 80P(2)(a)(i) of the Income-tax Act, 1961. The case was selected for scrutiny under CASS and other statutory notices were issued to the assessee. In response, the ld.AR submitted the details as called for. From the documents submitted by the ld.AR, the AO observed that the assessee has claimed deduction u/s 80P(2)(a)(i) of the Act in respect of the income of cooperative society engaged in carrying on the business of banking and providing credit facilities to its members, which was required to be examined. Accordingly, the AO from the documents submitted by the assessee observed that there are ITA No.659/Bang/2023 Page 4 of 19 four classes of members viz., A Class, B Class, C Class and D class members. The AO further observed that the A class members who were regular members having voting right and entitled to receive divided and B class members are from Government Organization. C class members are nominal members and D class members are associated members. Both C and D class members are those who can take loans and make deposits but did not have voting right and not entitled to receive dividends. The AO relied on various judgments and observed that the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act. The AO further noted that the assessee has received interest/dividend from its investments in scheduled banks and cooperative banks other than cooperative societies of Rs.24,47,530/-. The assessee society had included the above interest/dividend for the purpose of deduction claimed u/s 80P(2)(a)(i) of the Act. The AO was not satisfied that the interest/dividend received by the assessee should be taxed under the head ‘income from other sources’. The AO further noted that the assessee has claimed deduction u/s 80P(2)(a)(i) of the Act on the interest income received, since in the opinion of the AO, the interest income should be taxed as ‘income from other sources’. In the instant case, the assessee is also not eligible for claim of deduction u/s 80P(2)(d) of the Act on the interest received by the assessee from the deposits with cooperative banks and scheduled banks. He also noted that the assessee has invested its funds, which are immediately not required for lending to its members in cooperative banks and scheduled banks and earned interest on such investment, which is not ITA No.659/Bang/2023 Page 5 of 19 eligible for deduction. The assessee is not suppose to get deduction u/s 80P(2)(d) of the Act relying on the judgment of the Hon’ble Karnataka High Court in the case of Totagars Cooperative Sales Society reported in 395 ITR 611 vide order dated 16/06/2017. In this regard, the show cause notice was issued to the assessee on 24/10/2019. In response to this show cause notice, the assessee filed reply dated 25/11/2019, which has been incorporated by the AO at para No.7.4 of his order. The AO after analyzing the submissions made observed that the assessee has invested its surplus/idle funds to earn interest income relying on the judgment of Hon’ble Supreme Court in the case of Totagars Sales Society Ltd Vs. ITO [2010] 322 ITR 282 (SC). He further noted that the interest income arise on the surplus invested in short term deposits and securities with scheduled/cooperative banks which was not required immediately for business purpose is require to be taxed under the head ‘income from other sources’. He did not allow deduction u/s 80P(2)(d) of the Act on the interest/dividend income received by the assessee of Rs.24,47,530/- and added back into the total income of the assessee. 4. The AO further noted that from the profit and loss account, the assessee provided the following provisions;- 1. Reserve for NPA Rs. 1,06,167/- 2. Staff Leave Encashment Rs. 1,15,466/- 3. State Govt. Interest Rs.1,96,376/- 4. Central Govt. Interest Rs.17,16,120/- Total Rs.21,34,129/ ITA No.659/Bang/2023 Page 6 of 19 Since the above provisions are merely provisions and neither expenditure incurred by the assessee nor an ascertained liability, the same is not admissible as allowable expenditure and added back into the income of the assessee. Accordingly, the AO completed the assessment and assessed the total income at Rs.86,31,769/-. 5. Aggrieved from the above order, the assessee filed appeal before the CIT(A). The CIT(A) after discussing in details and relying on various judgments allowed deduction u/s 80P(2)(a)(i) of the Act of Rs.40,50,110/- and sustained the amount of Rs.24,47,530/-. On this amount the CIT(A) neither granted deduction u/s 80P(2)(a)(i) of the Act nor u/s 80P(2)(d) of the Act and confirmed the order of the AO on this issue. The CIT(A) also confirmed the order of the AO on the provisions provided into the profit and loss account of Rs.21,34,129/-. Accordingly, he partly allowed the appeal of the assessee. 6. Aggrieved from the above order, the assessee filed appeal before the Income-tax Appellate Tribunal. 7. The ld.AR reiterated the submissions made before the lower authorities and submitted that the issue is squarely covered in favour of the assessee on the judgment of the co-ordinate bench of this Tribunal in the case of Totagars Co-operative Sales Society, Sirsi Vs. ACIT Circle 1(1) & TPS, Hubli in ITA No.376 to 379 /Bang/2023 and for the assessment year 2015-16-2018-19 order dated 18/07/2023 in respect ITA No.659/Bang/2023 Page 7 of 19 of the interest/dividend received by the assessee from the cooperative bank. 8. Further in respect of provisions made, it is also covered by the Circular & Notification No.37/2016 dated 02/11/2016. Since the provisions made were part of the profit of the cooperative society and the assessee is eligible to get deduction u/s 80P2(a)(i) of the Act, therefore, provisions disallowed by the AO is also covered by the above Circular. Accordingly, the disallowance made by the AO on the provisions are also to be allowed as per sec. 80P(2)(a)(i) of the Act. She has also filed a paper book including written submissions containing page No. 01 to 103 which is placed on record. 9. On the other hand, the ld.DR relied on the order of the CIT(A) and submitted that the CIT(A) has rightly considered the latest decision of the jurisdictional High Court reported in 395 ITR 611 order dated 16/06/2017 of the jurisdictional High Court, which is in favour of the revenue. The para No.23 is very much clear, the case law relied by the ld.AR is of Division Bench of the ITAT but the decision rendered by the Hon’ble jurisdictional High Court of Karnataka on disallowance of deduction of interest earned by the cooperative society on the investment made in the cooperative bank which is a higher court decision, therefore the Hon’ble High Court’s decision should be followed. He further submitted that the decision of the jurisdictional High Court is not distinguished on the Division Bench case law as relied ITA No.659/Bang/2023 Page 8 of 19 by the ld.AR. Accordingly, he requested that the order of the CIT(A) should be upheld. 10. The ld.DR further submitted that in respect of disallowance of provisions of Rs.21,34,129/-, it is merely provision but not an expenditures. The provisions are not allowed as per sec.37 of the Act, therefore, he requested that order of the CIT(A) should be upheld. 11. After hearing both sides and perusing the entire material on record and orders of the authorities below, we note that the assessee is primary agricultural cooperative society and has claimed deduction u/s 80P(2)(a)(i) of the Act of Rs.64,97,640/- to which, the AO has not allowed. Further on appeal, the CIT(A) allowed deduction u/s 80P(2)(a)(i) of Act of Rs.40,50,110/- and no deduction has been allowed u/s 80P(2)(d) of the Act on the interest/dividend income earned by the assessee on the investments made with the cooperative banks/scheduled banks. Therefore, we have to decide first whether the assessee is eligible for deduction u/s 80P(2)(d) of the Act on the Rs.24,47,530/-. On going through the statement of facts submitted before the CIT(A), we note that the assessee has received interest/dividend from cooperative societies of Rs.36,446/- and interest and dividend from cooperative banks of Rs. 24,11,084/-. As per sec. 80P(2)(d) of the Act, if the assessee has received interest/dividends from the cooperative society from its investments with any other cooperative society, the assessee is eligible for ITA No.659/Bang/2023 Page 9 of 19 deduction, since, in this case the assessee had submitted statement of facts before the CIT(A) but the interest/dividend from cooperative society received by the assessee of Rs.36,446/- was not considered and examined. During the course of assessment proceedings, the assessee has also not brought into notice of the AO, therefore, for the limited purpose for determining the source of Rs.36,446/-, issue is remitted back to the AO and if it is found that these income satisfies the requirement of sec. 80P(2)(d) of the Act, then it has to be allowed. accordingly, this issue of Rs.36,446 is remitted back for the verification to the AO and the assessee has to show the necessary proof of evidence for substantiating its case. We further note from the statement of facts that the assessee has received interest and dividend, from the cooperative banks of Rs.24,11,084/-. The assessee has raised grounds that the assessee is eligible for deduction as per sec. 80P(2)(d) of the Act and he has also relied on the latest judgment of the coordinate bench of the Tribunal noted supra. We further note that the ld. DR relied on the recent judgment of the Hon’ble Apex Court judgement in the case of Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer reported in [2023] 154 taxmann.com 305 (SC) order dated 14.09.2023, however this judgment is directly not in the issue of deduction u/s 80P(2)(d) of the Act. but the distinction between the Co-operative Scociety & Co-operative Bank for the benefit of deduction u/s 80P has been examined in details, for the sake of convenience we are reproducing the relevant parts of the judgment which is as under:- ITA No.659/Bang/2023 Page 10 of 19 14. We shall now analyse the aforesaid judgments in a common conspectus. 14.1 In Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd., (supra) it was categorically held that under section 56 of the BR Act, 1949 only three co-operative banks have been defined, namely, state co-operative bank, central co-operative bank and primary co-operative bank which are covered under section 56(cci) read with (ccvii) read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence under the BR Act, 1949 to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, 1981, it would not be a co-operative bank within the meaning of section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act. It was further stated that if a bank has to be a state co-operative bank, there has to be a declaration made by the State Government in terms of section 2(u) of NABARD Act, 1981. Hence, it is necessary to go into the question as to, whether, the appellant herein has been so declared as a state co-operative bank. This question would need not detain us for long as the Kerala High Court in A.P. Varghese case (supra) had categorically stated that the "Kerala State Co-operative Bank" is a "state co-operative bank" as defined under the NABARD Act, 1981. Therefore, the appellant bank has not been declared as a state co-operative bank under the provisions of NABARD Act, 1981. Further, in the case of Mavilayi Service Co- operative Bank Ltd., case (supra) this Court observed that a co-operative bank would engage in banking business on obtaining a licence under section 22(1b) of the BR Act, 1949. In the instant case, the appellant herein is not a co-operative bank having regard to the aforesaid conspectus of the provisions so as to require a licence under the aforesaid provision for carrying on banking business. In the circumstances, the question could still arise as to whether the appellant herein is entitled to benefit of deduction under section 80P of the Act. 14.2 In Mavilayi Service Co-operative Bank Ltd., (supra) it has been observed that section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee. That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub-section (2) of section 80P must be given by way of deduction vide Citizen Co-operative Society Ltd. (supra). This is because sub-section (4) of section 80P is in the nature of a proviso to the main provision contained in sub- sections (1) and (2) of section 80P. The proviso excludes co-operative banks, which are co-operative societies which must possess a licence from the Reserve Bank of India to do banking business. In other words, if an entity does not require a licence to do banking business within the definition of banking under section 5(b) of the BR Act, 1949, then it would not fall within the scope of sub-section (4) of section 80P. ITA No.659/Bang/2023 Page 11 of 19 14.3 While analysing section 80P of the Act in depth, the following points were noted by this Court: (i ) Firstly, the marginal note to section 80P which reads "Deduction in respect of income of co-operative societies" is significant as it indicates the general "drift" of the provision. (ii) Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". (iii ) Thirdly, the gross total income must include income that is referred to in sub- section (2). (iv ) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being "engaged in", inter alia, carrying on the business of banking or providing credit facilities to its members. (v ) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under section 80P. (vi) Sixthly, the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. (vii) Seventhly, under section 80P(1)(c), the co-operative societies must be registered either under Co-operative Societies Act, 1912, or a State Act and may be engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). (viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other co-operative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole. 14.4 In paragraph 42 of Mavilayi Service Co-operative Bank Ltd.'s, (supra) this Court observed that the object and purpose of sub-section (4) of section 80P is to exclude only co-operative banks that function on par with other commercial banks i.e. which lend money to members of the public. That on a reading of section 3 read with section 56 of the BR Act, 1949, the primary co-operative bank cannot be a primary agricultural credit society. As such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the BR Act, 1949, which means accepting, for the purpose of lending or investment, of deposits of money from the public. Also under section 22(1)(b) of the BR Act, 1949, no co-operative ITA No.659/Bang/2023 Page 12 of 19 society can carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by Reserve Bank of India. It was pointed out that as opposed to the above, a primary agricultural credit society is a co- operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. 14.5 It was further observed in the said case that some primary agricultural credit societies had sought for banking licence from Reserve Bank of India but the same was turned down by observing that such a society was not carrying on the business of banking and that it did not come under the purview of Reserve Bank of India requiring a licence for its business. 14.6 Thereafter in paragraph 48 of the judgment, it was observed that a deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. That sub-section (4) of section 80P which is in the nature of a proviso specifically excludes co-operative banks which are co- operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from Reserve Bank of India. 15. It is on the aforesaid touchstone that these appeals must now be further considered from the point of view of the applicable provisions of law. 15.1 section 80P speaks about deduction in respect of income of co-operative societies from the gross total income referred to in sub-section (2) of the said section. From the said income, there shall be deducted, in accordance with the provisions of section 80P, sums specified in sub-section (2), in computing the total income of the assessee for the purpose of payment of income tax. Sub-section (2) of section 80P enumerates various kinds of co-operative societies. Sub-section (2)(a)(i) states that if a co-operative society is engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be deducted. The sub-section makes a clear distinction between business of banking on the one hand and providing credit facilities to its members by co- operative society on the other. Thus, the definition of banking under section 5(b) of the BR Act must be borne in mind as opposed to providing credit facilities to its members. 15.2 section 80P was inserted to the Act with effect from 1-4-1968, however, sub- section (4) was reinserted with effect from 1-4-2007, in the present form. Earlier sub-section (4) was omitted with effect from 1-4-1970. Sub-section (4) of section 80P in the present form is in the nature of an exception which states that the provisions of section 80P shall apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions co-operative bank and primary ITA No.659/Bang/2023 Page 13 of 19 agricultural credit society as well as primary co-operative agricultural and rural development bank are defined in the Explanation as co-operative bank and primary agricultural credit society having the meanings respectively assigned to them in Part V of the BR Act, 1949. 15.3 The controversy in this case is, whether, the appellant entity is a co-operative bank and if so, it would be covered within the scope and meaning of sub-section (4) of section 80P and therefore, would not be eligible to the benefit of deduction as provided therein. 15.4 Having regard to the Explanation to sub-section (4) of section 80P, it is necessary to consider Chapter V of the BR Act, 1949 which states that the said Act shall apply to co-operative societies subject to modifications made thereunder. section 56 begins with a non-obstante clause and states that notwithstanding anything contained in any other law for the time being in force, the provisions of the said Act shall apply to, or in relation to, co-operative societies as they apply to, or in relation to banking companies subject to the following modifications, namely, • in clause (a) throughout the said Act, unless the context otherwise requires,- (i) references to a "banking company" or "the company" or "such company" shall be construed as references to a co-operative bank. • in clause (c), it is stated that in section 5 as per clause (cci), "co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank. • clause (ccv) defines "primary co-operative bank" while clause (ccvii) defines "central co-operative bank" and "state co-operative bank" to have the meanings assigned to them in the NABARD Act, 1981. Since the expression 'banking company' is defined under the BR Act, 1949, it would be useful to consider the definition of banking company in section 5(c) thereof which means any company which transacts the business of banking in India. "Banking" is defined in section 5(b) of the said Act to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Therefore, a banking company must transact banking business vis-à-vis the public. Thus, in the first place a co-operative society must be engaged in banking business as defined in section 5(b) of the said Act. For that, section 22 of the BR Act, 1949, speaks about licence to be obtained by a bank to do banking business which is modified as per clause (o) of section 56 thereof which states that no co-operative society shall carry on banking business in India unless it is a co-operative bank and holds a licence issued in that behalf by the Reserve Bank, subject to such conditions, if any, as the Reserve Bank may deem fit to impose. Secondly, a co-operative society must obtain a licence under section 22 of the BR Act, 1949, only if it functions as a co-operative bank and not otherwise. Thus, a co-operative society ITA No.659/Bang/2023 Page 14 of 19 including a co-operative credit society which is not a co-operative bank does not require a licence to function as such. 15.5 Further, section 2(d) of NABARD Act, 1981 defines central co-operative bank while section 2(u) defines a state co-operative bank to mean the principal co- operative society in a State, the primary object of which is financing of other co- operative societies in the State which means, it is in the nature of an apex co- operative bank having regard to the definition under section 56 of the BR Act, 1949, in relation to co-operative bank. The proviso states that in addition to such principal society in a State, or where there is no such principal society in a State, the State Government may declare any one or more co-operative societies carrying on business of banking in that State to be also or to be a state co-operative bank or state co-operative banks within the meaning of the definition. section 2(v) of NABARD Act, 1981 defines state land development bank to mean the co-operative society which is the principal land development bank (by whatever name called) in a State and which has as its primary object the providing of long-term finance for agricultural development. 15.6 section 2(w) states that words and expressions used in the NABARD Act, 1981 which are not defined therein but defined in the RBI Act, shall have the meanings respectively assigned to them in that Act. section 2(x) of the said Act states that words and expressions used in the NABARD Act, 1981 and not defined either in the said Act or in the RBI Act, but defined in the BR Act, 1949, shall have the meanings respectively assigned to them in the BR Act, 1949. Therefore, we revert back to BR Act, 1949. 15.7 What is central to the controversy in this batch of cases is, whether, the appellant bank is a co-operative bank. What is of significance to know is, a state co-operative bank or central co-operative bank under the NABARD Act, 1981 is essentially a principal co-operative society either in a district or in a State, respectively, the primary object of which is the financing of other co-operative societies in the district or the State respectively. Further, NABARD Act, 1981 does not define banking business. Hence, reliance is to be placed, on the definition of banking business in terms of clause (w) of section 2 of NABARD Act, 1981 which means the RBI Act has to be seen. When the RBI Act is perused, it is noted that clause (i) of section 2 defines "co-operative bank", "co-operative credit society", "director", "primary agricultural credit society", "primary co-operative bank" and "primary credit society" to have the meanings respectively assigned to them in Part V of the BR Act, 1949. Therefore, we have to again fall back on Part V of the BR Act, 1949 which has defined a co-operative bank in section 56 (c)(i)(cci) to be a state co-operative bank, a central co-operative bank and a primary co-operative bank and central co-operative bank and state co-operative bank to have the same meanings as NABARD Act, 1981. 15.8 Since the words 'bank' and 'banking company' are not defined in the NABARD Act, 1981, the definition in sub-clause (i) of clause (a) of section 56 of the BR Act, ITA No.659/Bang/2023 Page 15 of 19 1949 has to be relied upon. It states that a co-operative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co-operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of section 5 of the BR Act, 1949 is seen, it means any company which transacts the business of banking in India and as already noted banking business is defined in clause (b) of section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank and in such a case, section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co- operative society is not conducting the business of banking as defined in clause (b) of section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of section 56(c)(i)(cci). Whereas a co- operative bank is in the nature of a banking company which transacts the business of banking as defined in clause (b) of section 5 of the BR Act, 1949. But if a co- operative society does not transact the business of banking as defined in clause (b) of section 5 of the BR Act, 1949, it would not be a co-operative bank. Then the definitions under the NABARD Act, 1981 would not apply. If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction under sub-section (4) of section 80P of the Act. 11.1 We further noted that the coordinate bench has decided the issue in ITA NO. 640/Bang/2023 in the case of M/s Vittal Vyavasaya Seva Sahakari Bank Niyamith vs. ITO Ward- 2(5) considering the relevant part of the above judgment of Hon’ble Apex Court cited supra which is as under :- 5.7. In any event Hon’ble Supreme Court in the decision relied by the Ld.DR has elaborately analysed the requirement of a cooperative bank that could fall within the exception of section 80 P(4) of the Act. Based on such principle analysed by Hon’ble Supreme Court and respectfully following the view taken by the Hon'ble Karnataka High Court in the case of PCIT & Anr. Vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and Hon’ble Gujarat High Court in the case ITA No.659/Bang/2023 Page 16 of 19 of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, we hold that, the interest income earned by a cooperative society on its investments held with a cooperative bank that do not have licence under section 22 of the Banking Regulation Act 1949, falls outside the definition the term, ‘Banking Company” as per section 2(c ) of the Banking Regulations Act, 1949, would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. The Ld.AO is thus directed to carry out necessary verification in respect of the that same to consider the claim of deduction u/s.80 P(2)(d) of the Act. 5.8 It is directed that in the event it is found that the interest is earned by the assessee from such commercial/cooperative banks that fall within the definition of “banking company’ as per section 2(c ), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head ‘income from other sources’ however, relief may be granted as available to the assessee u/s 57 of the Act in accordance with law.With the above directions, we remit this issue to the Ld.AO 11.2 Respectfully following the above judgment we direct the AO to carry out the necessary verification in the light of the above noted judgements and allow the deduction u/s. 80P(2)(d) on the interest income of Rs.24,11,084. If the AO finds otherwise, the AO shall follow the judgment of the jurisdictional High Court of Karnataka reported in PCIT vs Totgars Co-operative Sales Society reported in (2017)395 ITR 611 as per para No. 23, accordingly the assessee will not be eligible for deduction u/s 80P(2)(d) on such interest income received after giving necessary cost for earning interest income. The AO is directed to give reasonable opportunity of being heard to the assessee. The assessee is also directed to produce necessary documents for sustaining its case and avoid to unnecessary adjournments for early disposal of the case. ITA No.659/Bang/2023 Page 17 of 19 11.3 We further noted that during the course of assessment proceedings, the assessee has submitted detailed written submissions vide letter dated 25/11/2019, which has been incorporated by the AO at para No.7.4, in which it has been stated that as per Karnataka Cooperative Society Rules 1960 and the orders passed by the Registrar of Co-operative Society it is mandatory for cooperative societies to maintain as specified percentage of deposits received from the members in savings bank account and also to maintain specified percentage of such deposits as investments/deposits in banks and he has also relied on other rules, therefore, the amount has been deposited in the bank account in view of the interest received on such deposits should be treated as attributable to the business income of the assessee and allowed deduction on such interest u/s 80P(2)(a)(i). This argument of the ld. AR of the assessee is not acceptable because the interest income received by the assessee is not from the activity of carrying on the business of banking or providing credit facilities to its members as per section 80P(2)(a)(i) of the Act.. 12. In respect of ground No.7, the assessee has challenged the disallowance of Rs.21,34,129/- under various heads towards provisions made in the profit and loss account. Since, we have noted that the assessee has been allowed deduction by the CIT(A) u/s 80P(2)(a)(i) of the Act on the profits earned from the business of the assessee. The ld.AR of the assessee relied on Circular/notification No.37/2016 dated 02/11/2016 for any disallowance made under the ITA No.659/Bang/2023 Page 18 of 19 profit and loss account of business or profession and if the assessee is eligible for deduction under Chapter IVA, then the deduction should be allowable as per the eligibility of the Chapter VIA of the I. T. Act. However, the ld.AR of the assessee could not establish before us that these provisions made were out of the business profit earned by the assessee during the year, therefore, this issue is also remitted back to the AO for verification that the provisions made by the assessee are part of the business profit of the current year or not. If it is found in order then the assessee is to be given benefit of the Circular cited supra. Accordingly this issue is allowed for statistical purpose. 13. In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in court on 30 th day of November, 2023 Sd/- Sd/- (BEENA PILLAI) (LAXMI PRASAD SAHU) Judicial Member Accountant Member Bangalore, Dated, 30 th November, 2023 / vms / ITA No.659/Bang/2023 Page 19 of 19 Copy to: The 1.Applicant The 2. Respondent The 3. CIT The 4. CIT(A) The 5. DR, ITAT, Bangalore. Gua6. Guard file By order Asst. Registrar, ITAT, Bangalore