Shree Siddeshwar Souhardhana Sahakari Niyamit V. The Income Tax Officer, Ward-1, Bagalkot

ITA/5019/2012

AI Insights

The case involves Shree Siddeshwar Souhardhana Sahakari Niyamit, the appellant, contesting the disallowance of interest income from investments made with surplus funds, which was deemed not relatable to the business of the society and thus ineligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The initial assessments and subsequent appeals by the Income Tax Officer and the Commissioner of Income Tax (Appeals) upheld the disallowance. However, the Appellate Tribunal's decision, influenced by a Supreme Court judgment, was contested in this appeal. The High Court of Karnataka, referencing a similar case, ruled in favor of the appellant, allowing the exemption.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 794032 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 13-07-2015
• Assessment Year: misc
• Other Referred Cases: Totgarh Co-operative Sale Society Ltd. Vs. ITO Ward 1, Sirsi, Commissioner of Income Tax III, Hyderabad Vs. Andhra Pradesh State Co-operative Bank Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: Y V RAVIRAJ
• Assessee Lawyers: H R KAMBIYAVAR
• Keywords: Deduction; Income Tax; Interest income; Investment; Mutuality
• Section: 260A; 80P(2)(a)(i); 80P(1)

Judgement Text

": 1 : IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH ON THE 13TH DAY OF JULY, 2015 BEFORE THE HON’BLE MR.JUSTICE RAVI MALIMATH AND THE HON’BLE MR.JUSTICE G.NARENDAR I.T.A.No.5019/2012 BETWEEN: SHREE SIDDESHWAR SOUHARDHANA SAHAKARI NIYAMIT, TQ: BILAGI, DIST: BAGALKOT - 587 116, PA NO. AACAS9345R. … APPELLANT (BY SRI.H.R.KAMBIYAVAR FOR M/S.K.R.PRASAD, ADV.) AND: THE INCOME TAX OFFICER, WARD-1, BAGALKOT. … RESPONDENT (BY SRI Y.V.RAVIRAJ, ADV.) THIS ITA IS FILED U/SEC.260A OF THE INCOME-TAX ACT, 1961 AGAINST ORDER PASSED IN ITA.NO.48/BGK/2009-10 DT:29.03.2011 ON THE FILE OF THE INCOME TAX (APPEALS), BELGAUM, DISMISSING THE APPEAL FILED BY AN ASSESSEE. THIS APPEAL COMING ON FOR FINAL HEARING, THIS DAY, RAVI MALIMATH J., DELIVERED THE FOLLOWING: : 2 : JUDGMENT The appellant filed return of income for the assessment year 2007-2008 declaring yearly income after claiming deduction under the 80P(2)(a)(i) of the Income Tax Act, 1961 (for short ‘the Act’). During the assessment proceedings, it was noticed that the appellant had invested its surplus in Bilagi Sugar Mills Ltd., Badagandi and Bilagi Pattana Sahakari Bank, Bilagi. The interest earned on these investments was disallowed by the Assessing Officer. He held that the assessee had invested its surplus as deposit in a private limited company and therefore income received is not relatable to the business of the assessee company and therefore such income is not eligible for deduction. The Assessing Officer placed reliance on the judgment in I.T.A.No.1568/2005 dated 30.09.2008 in the case of Totgarh Co- operative Sale Society Ltd., Vs. ITO Ward 1, Sirsi. The appellant carried the said order in appeal before the Commissioner of Income Tax (Appeals). The appeal was dismissed. The matter was taken to the Appellate Tribunal. By then, the Hon’ble Supreme Court had passed the judgment in the case of Totgarh : 3 : Co-operative Sale Society Ltd., Vs. Income Tax Officer which was reported in (2010) 322 ITR 283. The judgment of the division bench of this Court was confirmed. Thereafter, the Appellate Tribunal relying on the said judgment, dismissed the appeal. Hence, the present appeal. 2. By order dated 22.11.2012, the appeal was admitted to consider the following two substantial questions of law: “i) Whether on the facts and in the circumstances of the case the appellant was entitled to exemption under Section 80P(2)(a)(i) of the Act, in respect of interest received from investments of its surplus funds made with the members of the Society? ii) Whether on the facts and in the circumstances of the case, the interest income received by the appellant from investments/deposits of its surplus fund with the Member Company is exempt from tax on the Principle of Mutuality?” 3. On hearing learned counsels, we are of the view that second substantial questions of law does not arise for consideration and the appeal is restricted only to the first substantial question of law. : 4 : 4. After arguing the matter for sometime, it is brought to our notice that the division bench of this Court in its judgment dated 28.10.2014 passed in ITA No.307/2014 while considering the judgment of the Hon’ble Supreme Court in Totgarh case held that the Supreme Court was dealing with a case where the assessee- Co-operative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee – Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Further, referring to the judgment of the Hon’ble Supreme Court it was held that the judgment is applicable to the facts of that case alone and that the : 5 : Hon’ble Supreme Court was not laying down any law. The division bench further held that the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. Therefore, the amount was deposited in the bank so as to earn interest. The interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In so holding, the division bench placed reliance on the judgment of the Andhra Pradesh High Court in the case of Commissioner of Income Tax III, Hyderabad Vs. Andhra Pradesh State Co-operative Bank Ltd., reported in (2011) 200 Taxman 220/12. 5. It is submitted that the facts as narrated in the aforesaid judgment are in identical terms to the facts of the present Co- operative Society. There is no difference so far as the facts are concerned. In view of the submission made and the question of law having been answered in the aforesaid judgment of the division bench of this Court, we are of the view that the said decision requires to be followed in this case also. Hence, the : 6 : substantial question of law is accordingly answered in favour of the assessee and against the revenue. SD/- JUDGE SD/- JUDGE Jm/- "