FARMERS AGRICULTURE CREDIT CO OPERATIVE SOCIETY LTD KOPPA, PERIAPATNA V. INCOME TAX OFFICER, MYSURU

ITA 71/BANG/2024

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 7381 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2024
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 26-02-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 11-01-2024
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SRIRAM V. RAO
• Keywords: Business income; Depreciation; Rule of consistency; Proportionate interest; Question of law; Bad and doubtful debts; Condonation of delay; Set aside
• Section: 147; 56; 143(1); 80P; 139(1); 72; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA Nos. 65 & 71/Bang/2024 Assessment years : 2016-17 & 2018-19 Farmers Agriculture Credit Co-operative Society Ltd., FACCS, Koppa – 571 104. Periapatna Tq. Mysore Dist. PAN : AAEAS 1912N Vs. The Income Tax Officer, Ward 1(4), Mysuru. APPELLANT RESPONDENT Appellant by : Shri Sriram V. Rao, CA Respondent by : Shri Ganesh R. Ghale, Standing Counsel. Date of hearing : 27.02.2024 Date of Pronouncement : 07.05.2024 O R D E R Per Laxmi Prasad Sahu, Accountant Member These two appeals are filed by the assessee against the separate orders dated 02.11.2023 & 06.12.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the assessment years 2016-17 & 2018-19 respectively. 2. There is a delay of 10 days in filing appeal for AY 2016-17. The assessee filed application for condonation of delay and affidavit stating that the order of CIT(A) was received by email. The office of the ITA Nos. 65 & 71/Bang/2024 Page 2 of 18 assessee is in a remote area and there was delay in verification of email communications and it was passed to CA for filing appeal during December, 2023 end. The CA could not act upon as he was preoccupied with time barring professional commitments of GST & audits and later intimated that he was not handing appeals before ITAT. Later the assessee was forced to consult new counsel for filing appeal which led to delay of 10 days. It is submitted that the delay is due to sufficient and reasonable cause and requested for condonation of delay. 3. After hearing both the parties, it is observed that there are sufficient reasons for the delay and following the judgment of the Hon'ble Apex Court in the case of Collector, Land Acquisition Vs. MST. Katiji and Others (1987) 167 ITR 471, delay in filing the appeal before the Tribunal is condoned. 4. The sole common issue arising in both the appeals is denial of deduction u/s. 80P(2)(a)(i) of the Act and without prejudice to the same, allowing the proportionate interest paid to the members of the society as well as administrative expenses u/s. 57(iii) of the Act. We first take up AY 2016-17 and the decision shall apply mutatis mutandis for AY 2018-19. 5. The brief facts of the case for AY 2016-17 are that the assessee is registered under Karnataka Co-operative Societies Act, 1959. The case was reopened u/s. 147/148. The assessee requested to treat the return u/s. 139(1) declaring Rs.2,91,030 as a return in response to ITA Nos. 65 & 71/Bang/2024 Page 3 of 18 notice u/s. 148. Copy of reasons recorded were provided and statutory notices issued to the assessee. From the financial statements it was noticed that assessee has shown gross income of Rs.51,66,055 and deduction of Rs.48,75,024 was claimed under Chapter VIA of the Act including deduction of interest income earned on deposits of Rs.23,14,626. The AO relying on judgment of Karnataka High Court in the case of Totgars Co-operative Sale Society, 395 ITR 611 held that interest received on deposits with banks is not eligible for deduction u/s. 80P of the Act and treated it as income from other sources and taxed Rs.23,14,626 u/s. 56 of the Act. 6. Aggrieved from the above order, the assessee filed appeal before the First Appellate Authority (FAA) and also relying on various judgments partly allowed the appeal of the assessee and held as under:- “ 5.10 It’s also further pointed out that the Hon’ble Supreme Court in the aforesaid case of Mavilayi Service Co-operative Bank; has held that profits attributable to the non-member are not eligible for deduction u/s 80P(2)(a). In this context its hereby held that the Interest Income earned from Scheduled Banks & Cooperative banks are also from non-member category and hence cannot be considered for deduction u/s 80P(2)(a) nor u/s 80P(2)(d), and would be appropriate to be annexed u/s 56 only. 5.11 Thus, under these circumstances as discussed from the Supreme Court decision in the case of Totagars Co-operative Sale Society and Mavilayi Service Cooperative Bank; it is hereby held that the interest income from deposits kept with Schedule Banks and Cooperative Banks are to be taxed under the head income from other sources and their nature of income cannot be changed to business income and interest income earned from members (such as regular, associate and nominal members) and non- members (excluding Regular, Associate and nominal members) would be eligible for deduction. ITA Nos. 65 & 71/Bang/2024 Page 4 of 18 5.12 Following the principle of consistency, it is hereby held that assessee is not entitled the benefit of deduction u/s 80P(2)(d) of the IT Act in respect of interest income earned out of investments made with Nationalised and cooperative Banks. AO is hereby directed to allow the deduction u/s 80P(2)(d) and 80P(2)(a)(i) on the interest earned from cooperative societies only (not co- operative banks as clarified above) and the interest earned from members and non-members respectively. Hence, the relevant grounds of appeal raised in this regard are hereby Partly allowed.” 7. Aggrieved from the above order, the assessee filed appeal before the ITAT. 8. The ld. AR reiterated the submissions made before the lower authorities and filed written submissions as under:- 1.0 In respect of denial of 80P(2)(a)(i) deduction, the appellant would like raise the following grounds, 1.1 That the learned CIT(A) has erred on facts and in circumstances of the case and in law by confirming the assessment order passed by the learned Assessing Officer who has held that the interest received by the appellant on deposits with State Bank of India is taxable under the head ‘Income from Other Sources’ and is not eligible for deduction u/s 80P(2)(a)(i) of the Act. [Ground No. 2.1] 1.2 Without prejudice to the above, 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)(a)(i) of The Act on the interest income earned from deposits with State Bank of India as rule 23(2) of the Karnataka Co-operative Societies Rules, 1960 requires co-operative societies to invest the Reserve Fund in any scheduled bank and interest received by the appellant on deposits with State Bank of India made out of Reserve Fund constituted its income from the business of providing credit facilities to the members eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 . [Ground No. 2.2] ITA Nos. 65 & 71/Bang/2024 Page 5 of 18 1.3 The appellant society would like to state that, the appellant has earned interest income from its investments with State Bank of India, out of its own funds i.e. share capital, reserves & surplus, profits of the current and previous years and various funds, which are attributable to business income earned by the society by providing credit facility to its members and thereby, as it is not funds which are not immediately required by the society attributable to a liability payable by the society. Hence, interest income from State Bank of India earned during the relevant years would be attributable to business income earned by the society by providing credit facility to its members and thereby eligible for deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961. 1.4 The appellant society would like provide the following details which are extracted from the audited balance sheet of the society Own Funds Particulars Amount in ₹ F.Y. 2015-16 F.Y. 2017-18 Share Capital 2,28,82,490 2,87,44,485 Reserve Fund 1,08,78,579 1,35,89,476 Building fund 18,73,033 19,73,033 Common good fund 9,227 9,526 Bad debts fund 14,09,632 16,20,766 Co.op.education fund 89,728 1,19,514 Fund for Bonus for B. Chandrashekaraiah 93,000 - Fund for Yasashiwini Arogya Vima Yojane 49,232 1,30,191 Price Fluctuation fund 30,650 50,650 Depreciation fund 54,48,433 61,27,434 Members Death fund 43,73,735 51,73,810 Net Profit for the year 46,34,330 63,17,716 Own Funds (Total) 5,17,72,069 6,38,56,600 ITA Nos. 65 & 71/Bang/2024 Page 6 of 18 Deposits in State Bank of India Particulars Amount in ₹ F.Y. 2015-16 F.Y. 2017-18 F.D. in SBI 4,36,32,811 3,14,65,880 Total 4,36,32,811 3,14,65,880 Copy of the extracts of audited balance sheet and translation of the same to English has been enclosed herewith as ANNEXURE 1. 1.5 From the above table, it can clearly be seen that the appellant has invested funds which are their own funds and not the liability payable to members or any outsiders, which they do not want immediately for the purpose of carrying out their business operations of providing credit facility to its members. 1.6 At this juncture, the appellant would like to bring to your kind notice that the provisions of section 80P(2)(a)(i) of The Income Tax Act which states as follows: “Section 80P - Deduction in respect of income of co-operative societies. (2) The sums referred to in sub-section (1) shall be the following, namely :— (a) in the case of a co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business ITA Nos. 65 & 71/Bang/2024 Page 7 of 18 attributable to any one or more of such activities: Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:— (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government; 1.7 The appellant would like to state that, the funds which were invested in State Bank of India are funds which were part of the its activity of providing credit facility to its members. It is very much undisputed fact that the appellant is a co-operative society carrying on activity of providing credit facility to its members. 1.8 It can be clearly seen from the provisions of section 80P(2)(a)(i) that, the whole of the amount which is attributable to the carrying on activity of providing credit facility to its members will be eligible for deduction. Further, the words ‘attributable’ has been interpreted categorically by the Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. cited in 55 taxmann.com 447. 1.9 The Hon’ble Karnataka High Court in the in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. cited in 55 taxmann.com 447, while deciding the above rationale, has considered the decision of Hon’ble Supreme Court in the case of Totagar’s Co-operative Sale Society cited in 322 ITR 283 and distinguished the facts of the cases and thereafter rendered its judgement. Relevant extracts of the said decision is provided here below “9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society ......... ITA Nos. 65 & 71/Bang/2024 Page 8 of 18 10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. ...............” Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue.” Copy of this decision is enclosed as ANNEXURE 2 herewith. 1.10 The above decision has been further followed by Karnataka High Court in the case of Guttigedarara Credit Co- operative Society Ltd. vs ITO, cited in 60 taxmann.com 215 / 234 Taxman 476 / 377 ITR 476 it has been held that “interest on deposits in bank was amount of profits and gains attributable to activity of carrying on business of providing credit facilities to its members by assessee-society, it was liable to be deducted from gross total income under section 80P” (para 10). The copy of this decision has been enclosed as ANNEXURE 3. 1.11 The Co-ordinate bench of this Hon’ble Income Tax Appellate Tribunal, Bengaluru, in appellant’s own case for the AY 2009-10, in ITA No. 727(B)/2015 dt. 26.08.2015, has held that the interest earned by the society from deposits with banks is eligible for deduction u/s 80P(2)(a)(i) as the said interest is attributable to the business of providing credit facility to its members. Relevant extracts in para 7 & 8 of the said decision is provided herewith for your ready reference and also copy of the decision is enclosed as ANNEXURE 4 herewith. “7. The learned AR on the other hand, produced copy of the decision of the Co-ordinate Bench of the Bangalore Bench Tribunal. The relevant portion of the order has been extracted herein below; **** ***** **** **** 1.12 Further, co-ordinate bench of this tribunal in the case of Kammavari Credit Co-operative Society in ITA No. 493/BANG/2023 and ITA No. 775/BANG/2023 dt. 08.09.2023 and 14-12-2023, had upheld the decision of the Hon’ble CIT(A), ITA Nos. 65 & 71/Bang/2024 Page 9 of 18 wherein CIT(A) has allowed the interest earned from own funds which were not liability as deduction u/s 80P(2)(a)(i) by following the decision of Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra). Copy of these two decisions has been enclosed herewith as ANNEXURE 5 & 6 for your ready reference. 1.13 Considering the above, the appellant prays that, the interest income earned from State Bank of India are sourced out of funds which are attributable to business of the society of providing credit facility to its members and it is not sourced out of liability to be paid to members. Hence, the said interest would be chargeable to tax under the head “Income from business or profession” and thereby it is eligible for deduction u/s 80P(2)(a)(i) as decided in the above decisions. 2.0 Without prejudice to the above grounds, the learned CIT(A) has erred on facts and in circumstances of the case and in law by not allowing deduction of the proportionate interest paid by the appellant to the members on deposits received from them as well as proportionate administrative expenses, under section 57(iii) of the Act, on interest earned from deposits with State Bank of India. [Ground Number 3.0] 2.1 Without prejudice to the ground no. 2.0 (2.1 & 2.2) above, if in case the hon’ble tribunal does not allow the above grounds and hold that the interest earned is taxable under the head ‘Income from other sources’, then, it is also to be brought to the Hon’ble Tribunal’s notice that, the appellant has not been allowed the deduction towards the cost & expenditure incurred and administrative expenditure incurred towards earning the interest income from co-operative banks & co-operative societies under section 57(iii) while arriving at the income chargeable under the head Income from other sources. At this juncture, the appellant would like to rely on the decision of Hon’ble Karnataka High Court in the case of Totagar’s Co-operative Sale Society Ltd cited in 58 Taxmann.com 35 dt. 15th March 2015 in which it has been held that eligible deduction towards of cost of earning interest income must be allowed u/s 57. The extract of the relevant para is provided below for ready reference ITA Nos. 65 & 71/Bang/2024 Page 10 of 18 In Totagar’s... cited in 58 Taxmann.com 35 in para 12 & 13 are herebelow, ‘12. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as "other income" falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from "other sources", the appellant shall be entitled for proportionate expenditure cost incurred 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. 13. 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.’ 2.2 Considering the above, the appellant earnestly request the Hon’ble Tribunal to pass such an order allowing us with eligible deductions u/s 57(iii) of proportionate cost of funds and administrative expenditure from the interest earned from State Bank of India. In view of the above and in the interest of justice and fairness, we most humbly and respectfully request your honours to consider our above submission positively and allow the deduction claimed u/s 80P and oblige.” ITA Nos. 65 & 71/Bang/2024 Page 11 of 18 9. The Ld.DR relied on the order of the Ld.CIT(A) and he submitted that the interest income received by the assessee is not to be considered as a operational income since the Hon’ble Jurisdictional High Court of Karnataka has settled this issue in the case of Totgars’ Co-operative Sales Society Ltd. reported in (2017) 395 ITR 611 (Karnataka) dated 16.06.2017 which is latest judgement of the jurisdictional Hon’ble High Court. He also submitted that the Hon’ble Gujarat High Court in Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. reported in (2022) 140 taxmann.com 602 (Gujarat) dated 04.01.2022 on similar facts had decided the issue in favour of the revenue. He further submitted that Hon’ble Apex Court has settled that if internal funds are more than the investments made then it shall be presumed that the assessee has not utilised external funds ( Loans & Liabilities) for investments purpose. 10. Considering the rival submissions, we note that here the issue is that whether the assessee is eligible to claim of deduction u/s. 80P(2)(a)(i) on the interest income earned on its investments amount made with SBI out of internal fund (Share Capital plus other Funds) of Rs. 5,17,72,069/- constituting its income from the business of providing credit facilities to the members. The Ld.CIT(A) has not accepted the claim of the assessee by relying on the judgment of Hon’ble Karnataka High Court in case of Totgars’ Co-operative Sales Society Ltd. 395 ITR 611. The ld. DR also relied on the judgment of Hon’ble Gujarat High Court in case of Katlary Kariyana Merchant ITA Nos. 65 & 71/Bang/2024 Page 12 of 18 Sahkari Sarafi Mandali Ltd. (2022) 140 taxmann.com 602 (Gujarat) dated 04.01.2022. He further submitted that interest received from scheduled bank out of surplus fund should be treated as income from other sources and not eligible for deduction u/s 80P(2)(a)(i) / 80P(2)(d) of the Act. We note from the grounds of appeal that Rule 23(2) of the Karnataka Cooperative Society Rules, 1960 requires co-operative society to use the reserve fund in any scheduled bank as under:- “23. Object and investment of Reserve Fund.-(1) A reserve fund maintained by a Co-operative Society shall belong to the society and is intended to meet unforeseen losses. It shall be indivisible and no member shall have any claim to a share in it. (2) A Co-operative Society shall not invest or deposit its reserve fund except in one or more of the modes mentioned in clauses (a) to (d) of Section 58 of the Act: Provided that the Registrar may, by general or special order, permit any Co-operative Society or any class of Co-operative Societies to invest the reserve fund or a portion thereof on its own business, or in the construction or purchase of buildings or lands required for carrying on the objects of the society. (3) No Co-operative Society whose reserve fund has been separately invested or deposited shall draw upon, pledge or otherwise employ such fund, except with the sanction of the Registrar previously obtained in writing.” As per the above section it is clear that the reserve fund created by the assessee shall be utilized only for intended unforeseen losses. The ld. AR of the assessee also unable to demonstrate that the Registrar has granted by any general or special order to invest for its own business purpose. ITA Nos. 65 & 71/Bang/2024 Page 13 of 18 11. From the above facts and submissions, we note that assessee has received interest from scheduled commercial bank (SBI) on the surplus funds. The Hon’ble jurisdictional Hight court had decided this issue as under:- “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, whereas in the present case, it is under Section 80P(2)(d) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under Section 80P of the Act, as held by the Hon'ble Supreme Court.” 12. Further in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Ltd. reported in (2022) 140 taxmann.com 602 (Gujarat) the Hon’ble Gujarat High Court has held as under:- 12. It is in light of this limited details furnished during original assessment, the AO while processing return under section 143(1) of the IT act, found interest income of Rs. 87.41 lacs and interest expense of Rs. 54.11 lac acceptable for deductions in terms of section 80P(2)(a)(i) of Chapter VI-A the Income-tax act. Now, it is worth to note that the assessee for reasons best known has not truly explained the interest derived from the investment of surplus funds in other cooperative banks, which otherwise falls under the ITA Nos. 65 & 71/Bang/2024 Page 14 of 18 head of "income from other sources" and in no manner can be related to 'attributable to the activities of the society', and therefore, this Court finds that it will in no manner falls under the category to be qualified for deductions under section 80P(2)(a)(i) of the act. 13. Similar issue arose for consideration before the Hon'ble High court of Karnataka (Dharwad Bench) in the case of Pr. CIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140/395 ITR 611. The substantial questions of law which arose for consideration as recorded in Para 1 are reproduced as under : "(I) Whether the assessee, Totagar Co-operative Sale Society, Sirsi, is entitled to 100% deduction under section 80P(2)(d) of the Income- tax Act, 1961 (for short 'the Act') in respect of whole of its income by way of interest earned by it during the relevant Assessment Years from 2007-2008 to 2011-2012 on the deposits or investments made by it during these years with a Co-operative Bank, M/s. Kanara District Central Co-operative Bank Limited? (II) Whether the Supreme Court decision in the case of the present respondent assessee, Totgar Co-operative Sale Society Limited itself rendered on 08th February 2010, in Tot-gar's Co-operative Sale Society Limited v. ITO, reported in MANU/SC/0095/2010: (2010) 322 ITR 283 SC : (2010) 3 SCC 223 for the preceding years, namely Assessment Years 1991-1992 to 1999-2000 (except Assessment Year 1995-1996) holding that such interest income earned by the assessee was taxable under the head 'Income from Other Sources' under section 56 of the Act and was not 100% deductible from the Gross Total Income under section 80P of the Act, is not applicable to the present Assessment Years 2007-2008 to 2011-2012 involved in the present appeals and therefore, whether the Income-tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100 percent deductible under section 80P(2)(d) of the Act?" That while holding the aforesaid issues in favour of the revenue department, the Court followed the decision of the Hon'ble Supreme Court in the case of same assessee which was later on followed by this Court in the case of State Bank of India v. CIT [2016] 72 taxmann.com 64/241 Taxman 163/389 ITR 578, relevant paras are reproduced as under : "16. In case where the co-operative society is a bank, one of its objects would be to carry on the general business of banking. Like other banks, money would be its stock-in-trade or circulating ITA Nos. 65 & 71/Bang/2024 Page 15 of 18 capital and its normal business is to deal in money and credit. The business of such a bank does not consist only of receiving deposits and lending money to its members or such other societies as are mentioned in the objects. When such a society lends out its monies so that they may be readily available to meet the demands of its depositors if and when they arise, it is a legitimate mode of carrying on its banking business. In case of a credit society like the present one, the business of the society is limited to providing credit to its members and the income that is earned from providing such credit facilities to its members is deductible under section 80P(2)(a)(i) of the Act. However, investing its surplus funds with the State Bank of India is no part of the business of the appellant of providing credit to its members and hence, it cannot be said that the interest income derived from depositing surplus funds with the State Bank of India is profits and gains of business attributable to the activities of the appellant society. The character of the interest is different from the income attributable to the business of the society of providing credit facilities to its members. The interest income derived from investing surplus funds with the State Bank of India must be closely linked with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. Therefore, the profits and gains can be said to be directly attributable to the business of providing credit facilities to its members if there is a direct and proximate connection between the profits gains and the business of the appellant. In the present case there is no obligation upon the appellant to invest its surplus funds with the State Bank of India. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India not being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a)(i) of the Act. If the appellant wants to avail of the benefit of deduction of such interest income, it is always open for it to deposit the surplus funds with a co-operative bank and avail of deduction under section 80P(2)(d) of the Act. 17. Section 71 of the Gujarat Co-operative Societies Act, 1961 permits a society to invest or deposit its fund in the State Bank of India. Therefore, while investment in the State Bank of India is permissible under section 71 of that Act, there is no statutory obligation cast upon the appellant to deposit funds as a part of its ITA Nos. 65 & 71/Bang/2024 Page 16 of 18 business. The said provision also permits investment of funds in any co-operative bank or any banking company approved for this purpose by the Registrar on such conditions as the Registrar may from time to time impose. However, insofar as the provisions of the Income-tax Act are concerned, under section 80P(2)(d) thereof, it is only the income by way of interest or dividends derived by a cooperative society from its investments with any other cooperative society which is required to be deducted while computing the total income of the assessee." Thus, following the decision of the Hon'ble Supreme Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283 it was held that interest earned from investments made in any bank, not being co-operative society, is not deductible under section 80P(2)(d) of the act. 14. This Court further finds that by virtue of amendment in section 194A(3)(v) of the Income-tax act, it has also excluded the co-operative banks from the definition of "co-operative society" by the Finance act, 2015. The High Court of Karnataka has taken note of this amendment in the case of Totagars Co-op/sale society (supra) thereby holding that the effect of the aforesaid amendment explicitly makes clear intention of legislation that co- operative banks are not specie of genus co-operative society, which would entitled to exemption or deduction under the special provisions of Chapter VI-A in the form of section 80P of the Act. 15. In view of aforesaid settled legal position, and having held that the allowance of deduction of the income derived by way of interest from the investment in the form of FDR's with other banks was incorrect, the only question which arises for our consideration is whether wrong claim made by the assessee on which no opinion is formed by the Assessing Officer could be considered valid ground for the Assessing Officer to assume jurisdiction in reopening the case for reassessment proceedings under section 147 of the Income-tax Act?” 12. From the above judgments, it is clear that the interest received on such investments by assessee is not eligible for deduction u/s. 80P(2)(a)(i)/80P(2)(d) on such interest received from State Bank of India (SBI). Since the interest income received on such investments ITA Nos. 65 & 71/Bang/2024 Page 17 of 18 from State Bank of India is not attributable to main business of the appellant, hence needs to be assessed as “income from other sources”. The issue regarding the word “attributable” has been discussed elaborately by the Hon’ble Apex Court in the case of M/s Totagar’s Co-operative Sales Society (2010) reported in [2010] 188 Taxman 282 (SC) where it is held by the Hon’ble Supreme Court that the deduction u/s 80P is available only to the income which is attributable to the business operation. Since the interest income received by the appellant was not attributable to the main business of the appellant the same should not be allowed as deduction u/s 80P of the Act. We further note that the revenue authorities have treated the entire income as income from other sources. The entire interest income cannot be taxed if the assessee has incurred expenses towards earning of such income. We further note from the financial statement as on 31.03.2016 that FD with SBI is Rs.4,36,328,811, however the internal fund is Rs. 5,17,72,069/- which is more than investments made with SBI, it shows that the assessee has not utilized external funds for investment with SBI. Therefore, relying on the judgment of Hon’ble Jurisdictional High Court in case of Totgars’ Co-operative Sales Society Ltd. vs ITO Sirsi, reported in (2015) 58 taxmann.com 35 (Karnataka), the assessee is eligible for claim of its expenditure towards earning of such interest income. Accordingly, the assessee is directed to provide the details of expenditure for earning interest income before the assessing officer. Therefore for allowing expenditure, we are remitting this issue to the ITA Nos. 65 & 71/Bang/2024 Page 18 of 18 assessing officer for determining the cost of funds for earning interest income. 13. In the result, both the appeals of the assessee are partly allowed for statistical purposes. Pronounced in the open court on this 7 th day of May, 2024, as per Rule 34 of the Income Tax (Appellate Tribunal) Rule 1963. Sd/- Sd/- (NARENDER KUMAR CHOUDHRY) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 07 th May, 2024. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.