Kaipunjal Meenugarara Prathamika Vividhoddesha Sahakara Sangha Ltd, Udupi V. Income-Tax Officer, Ward-3, Udupi

ITA 803/BANG/2023

• Counselvise Citation: [2023] 101 COUNSELVISE.COM (IT) 9986 (ITAT-BANGALORE)
• Duration Of Justice: 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 14-11-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 19-10-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income
• Section: 56; 80P; 250; 22

Judgement Text

ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA No.803/Bang/2023 Assessment Year: 2017-18 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd. Uliyargoli Village Kaup Post Udupi District 574 106 PAN NO : AADAK5151E Vs. ITO Ward-3 Udupi APPELLANT RESPONDENT Appellant by : Shri Mahesh R. Uppin, A.R. Respondent by : Shri Ganesh R. Ghale, A.R., Standing Counsel for Revenue Date of Hearing : 15.11.2023 Date of Pronouncement : 15.11.2023 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order passed by NFAC u/s 250 of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2017-18 dated 22.8.2023. The assessee has raised following grounds of appeal: 1. “Was C.I. T. (A) justified in sustaining addition of Interest on Investments of Rs.9,70,830/- to the returned income u/s. 56 of the Act by ignoring the submission dated 10.08.2023 that interest of Rs. 8,55,968/- derived from investments with Co-op. Societies and Rs.1,03,214/- earned from SCDCC Bank aggregating Rs. 9,59,182/- is liable for deduction u/s. 80P of the Act. 2, Whether in law and on facts does the action of both the below authorities sustainable in holding that Interest on S.B. A/cs of Rs. 11,649/- derived by the appellant from short term investments with Commercial Banks (Vijaya Bank Rs. 1,289/- & IDBI Bank Rs. 10,360/- ) is taxable in view of the law laid down by — (a) Hon. High Court of Karnataka in ITA307/2014 - Tumkur Grain Merchants Souharda Co-operative Ltd. vs. I.T.O. ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 2 of 8 and ITA 29/2015 - Guttigedarara Credit Co-op. Society Ltd. Mysore Vs. ITO. and (b) Hon. High Court of Judicature at Hyderabad in w.p. No. 12727 and 12767/2016 The Vavveru Co-op. Rural Bank Ltd. and Anr. Vs. The Chief C.I.T. & anr. vis-a-vis the judgement in Totgars Co-operative Sale Society Ltd. 3. It is submitted, the issue stands covered by the judgement of this Hon. Tribunal dated 18-07-2023 in ITA No. 376-379/Bang/2023 in The Totgars' Co-operative Sale Society Ltd. Sirsi vs. ACIT, Hubli. 4. The appellant craves leave to add, to amend, modify and / or to alter any of the foregoing grounds and also urge such other grounds at the time of hearing”. 2. Facts of the case are that the assessee is a Credit Society registered under the provisions of Karnataka Co-operative Societies Act, 1959. The assessee is in the business of providing credit facilities to its members for their various financial needs as permitted under its Bye-laws duly approved-by the Registrar of Co-operative Societies. The assessee is carrying on its business well within the frame work of law and exclusively with its members and it is not doing any business with non-members. The assessee had filed its Return of income declaring a GTI of Rs.10,90,344/- and claiming full deduction u/s. 80P of the Act. In the assessment proceedings, the declared Business Income of the assessee was held to be ineligible for deduction u/s. 80P of the Act on the ground that the assessee had transacted with nominal members and further the A. O. even did not consider the submission made by the assessee for allowing deduction in respect of the Interest on Investment Income derived from Co-operative Societies u/s. 80 P (2) (d) of the Act which the assessee had erroneously claimed while filing the ITR by showing Interest on Investment under the head Income from Other Sources even-though the said income being its Business Income qualifies for deduction u/s. 80P(2)(a)(i) of the Act. The assessment was concluded ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 3 of 8 holding that no deduction was allowable in respect of the Business Income and that the Interest Income was chargeable under sec. 56 of the Act under Income from other sources, further making addition of Interest Payable provision of Rs.1,07,269/on the ground that the assessee was following hybrid system of accounting. Similarly, the provision for Employees Provident Fund of Rs.50,000/- also came to be added back to the profits as unascertained liabilities. Thus, the GTI of the assessee came to be determined at Rs. 12,47,613/- against which no deduction was given under Sec. 80P of the Act and the entire Total Income of Rs. 12,47,613/- was brought under tax levying tax plus interest of Rs.5,38, 938/-. 3. Against this assessee went in appeal before NFAC. NFAC observed that assessee is not entitled for deduction u/s 80P(2)(d) & 80P(2)(a)(i) of the Act. Against this assessee is in appeal before us. 4. I have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in ITA Nos.667 & 668/Bang/2023 for the assessment years 2017-18 & 2018-19 in the case of Kedambady Keyyur Primary Agricultural Co-operative Society Ltd. wherein held as under: “6.3. We have perused the submissions advanced by both the sides in the light of the records placed. When we look at the decision of Hon’ble Supreme Court in case of Totgars Co-operative Sale Society's case reported in (2010) 322 ITR 283, relied by the Ld.DR, Hon’ble Supreme Court was dealing with a case where the assessee therein, 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 payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein 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. On these facts Hon’ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 as income from other sources of the Act. Hon’ble Supreme Court, also clarified that, they are confining the said judgment to the facts of that case alone. 6.4 Further the adjudication by the Hon’ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. vs. ITO (322 ITR 283) (SC) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 4 of 8 under Sec.80P(2)(d) on the interest income on the investments/deposits parked with a cooperative bank. Therefore, reliance was placed by the Ld. DR on the decision of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. vs. ITO (supra) is distinguishable on facts. 6.5 At this juncture, we refer to subsequent decision of Hon'ble Karnataka High Court in the case of PCIT Vs. Totagars cooperative Sale Society reported in (2017) 395 ITR 611, wherein Hon’ble Court held that, a co-operative society would not be entitled to claim of deduction under Sec. 80P(2)(d). At the same time, we find, that 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 of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, held, that the interest income earned by a co-operative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act. 6.6 The Ld.D R relied on a recent decision of Hon’ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd., KSCARDB Vs. AO & Ors (Supra), in support of the disallowance of interest claimed by the assessee before us from the investments made in other Co-operative Banks/Sahakari Sangha etc. We have gone through this decision of Hon’ble Supreme Court. In para 3 of the decision, the issue that was under consideration before the Hon’ble Court reads as under:- “The issue involved in these cases is, whether, the appellant/assessee, a co-operative society, is entitled to claim deduction of the whole of its profits and gains of business attributable to the business of banking or providing credit facilities to its members who are all co-operative societies under Section 80P of the Income Tax Act, 1961 (hereinafter referred to as "the Act", for the sake of brevity).” 6.7 In other words Hon’ble Supreme Court in the said decision analyzed, whether the assessee therein could be treated as a “co-operative Bank” within the meaning of sec. 80P(4) of the Act. The Hon’ble Supreme Court considered the above issue in case of an assessee who is a state level Agricultural and Rural Development Bank, governed as a cooperative society, under the relevant state cooperative societies Act, and was engaged in providing credit facilities to its members who were cooperative societies only. On facts, the assessee therein claimed deduction under Section 80P (2)(a)(i) of the Act. The Ld.AO disallowed the deduction under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Ld.AO therein held that the appellant/assessee is a "co-operative bank" and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. This was upheld by the Ld.CIT(A) and the Tribunal. The decision of the Tribunal was confirmed by Hon’ble Kerala High Court. 6.8 The Hon’ble Supreme Court analyzed the legal framework, relevant provisions under relevant co-operative societies Act, NABARD Act, provisions of sec. 80P under the Income Tax Act, 1961, RBI Act, the Banking Regulation Act and ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 5 of 8 the various judicial precedents on similar issues. The observations of Hon’ble Supreme Court in para 14.3 and 15.8 are of relevant that reads as under:- “14.3. While analysing Section 80P of the Act in depth, the following points are 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. ............... 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, 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. ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 6 of 8 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) or Section 80P of the Act.” 6.9. In any event Hon’ble Supreme Court in the decision relied by the Ld. DR has elaborately analyzed the requirement of a cooperative bank that could fall within the exception of section 80 P(4) of the Act. Based on such principle analyzed 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 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 license 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. Further, we make it clear that the assessee is not entitled for deduction u/s 80P(2)(a)(i) of the Act in view of judgement of Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (322 ITR 283) (SC), wherein held as follows: “The words “the whole of the amount of profits and gains of business” in section 80P(2) of the Income-tax Act, 1961, emphasise that the income in respect of which deduction is sought by a co-operative society must constitute the operational income and not the other income which accrues to the society. The interest income arising to a co-operative society carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members, on the surplus, which is not ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 7 of 8 required immediately for business purposes, from investment in short- term deposits and securities, has to be taxed as income from other sources under section 56 of the Income-tax Act, 1961. Such interest cannot be said to be attributable to the activities of the society, viz., carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. Interest income of such society from amounts retained by it cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) or section 80P(2)(a)(iii) of the Act.” 6.10 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.” 4.1 In view of the above order of the Tribunal, the issue in dispute herein is remitted to the file of ld. AO on similar directions. 5. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 15 th Nov, 2023 Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 15 th Nov, 2023. VG/SPS ITA No.803/Bang/2023 Kaipunjal Meenugarara Prathamika Vivdhoddesha Sahakara Sangha Ltd., Udupi Page 8 of 8 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order Asst. Registrar, ITAT, Bangalore.