SIDDAKATTE SAHAKARI VYAVASAYIKA SANGHA LTD., ,BANTWAL V. INCOME TAX OFFICER, WARD-2(1), MANGALORE

ITA 1336/BANG/2024

AI Insights

The case involves Siddakatte Sahakari Vyavasayika Sangha Ltd., a cooperative society, appealing against the order of the CIT(Appeals), which partially allowed their appeal but restricted the deduction under section 80P(2)(d) for interest received from cooperative banks. The society argued that all interest income from cooperative banks should be eligible for deduction under section 80P(2)(d), citing the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd. The ITAT referred to a similar case involving Primary Agricultural Credit Cooperative Society Ltd. and directed the AO to follow the precedent set in that case, which involved a detailed examination of the rights and classifications of members within the cooperative society and the nature of the income received.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 473988 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-09-2024
• Assessment Year: 2017-2018
• Appeal Filed On: 15-07-2024
• Other Referred Cases: Mavilayi Service Co-operative Bank Ltd (2021) 113 taxmann.com 161 (SC), Citizen Co-operative Society Ltd., Totgars' Co-operative Sales Society Ltd., Kerala State Co-operative Agricultural & Rural Development Bank Ltd., Saptagiri Pattina Souharda Sahakari Sangha Niyamitha v. ITO [2024] 162 taxmann.com 855/207 ITD 41 (Bangalore - Trib.)
• Laws Referred To: Income Tax Act, Karnataka Cooperative Societies Act, 1959
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: GANESH R. GHALE; STANDING COUNSEL
• Assessee Lawyers: A. SHIVA RAO
• Keywords: Business income
• Section: 142(1); 56; 80P; 28

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No.1336/Bang/2024 Assessment year : 2017-18 Siddakatte Sahakari Vyavasayika Sangha Ltd., Siddakatte, Bantwal – 574 237. PAN : AABAS 2750F Vs. The Income Tax Officer, Ward 2(1), Mangaluru. APPELLANT RESPONDENT Appellant by : Shri A. Shiva Rao, CA Respondent by : Shri Ganesh R. Ghale, Standing Counsel Date of hearing : 23.09.2024 Date of Pronouncement : 13.11.2024 O R D E R Per Laxmi Prasad Sahu, Accountant Member This appeal is filed by the assessee against the order dated 15.05.2024 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the AY 2017-18. “1. The learned assessing officer has erred in treating the interest received from SDCC Bank and Co-operative societies as income from other sources, (considering the fact that the investment has been made during the course of business and also to maintain statutory liquidity ratio) which the appellant had included under income from business. ITA No.1336/Bang/2024 Page 2 of 9 2. During the year the appellant has received the sum of Rs.60,64,828/- being the interest and dividend from SCDCC Bank. The assessing officer has erred in not granting the benefit of deduction u/s 80P(2)(d) for the interest received from co- operative banks. 3. The learned First Appellate Authority has allowed the appeal but erred in directing the assessing officer to grant deduction u/s 80P(2)(d) on the interest/dividend received from deposits/savings account kept only with other cooperative societies/ banks which are not governed by RBI Banking Regulation Act. As per Section 80P(2)(d) of Income Tax Act, deduction shall be allowed in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society. It is nowhere mentioned in the Act that deduction is allowable only if the cooperative societies/ banks are not governed by RBI Banking Regulation Act. 4. The direction of the learned First Appellate authority is against the provision of the law. In the case of Mavilayi Service Co-operative Bank Ltd (2021) 113 taxmann.com 161 (SC) The Hon'ble Supreme Court has observed that interest or dividend income derived by a co- operative society from investments with other co-operative banks are also entitled to deduct the whole of such income. the object of the provision being furtherance of the co-operative movement as a whole. 5. The appellant has been assessed as a co-operative society and such being the ease. all benefits available to a co-operative society as per the provisions of section SOP of the Income Tax Act cannot be denied to the appellant without a legal provision to do so. The learned First Appellate Authority has erred in not considering this ground correctly while disposing of the appeal. 6. The appellant craves leave to add, to amend and/or alter any of the foregoing grounds and such other grounds as may he urged at the time of hearing, the Appellant prays for allowing the deduction u/s 80P(2)(d).” ITA No.1336/Bang/2024 Page 3 of 9 2. Briefly stated the facts of the case are that the assessee filed return of income on 27.10.2017 declaring return of income on Rs.10,500 after claiming deduction u/s. 80P of Rs.25,84,814. The case was selected for scrutiny and statutory notices issued to the assessee. During the assessment proceedings, the AO noted that assessee has different class of members and there were no equal rights among them and C & D class members had no voting rights, right of becoming office bearers, have no share in the profits of the society and are only entitled to take loan and allowed to make deposits. The AO noted that the assessee violated the principle of mutuality and relying on the judgment of Hon’ble Apex Court in the case of Citizen Co-operative Society and also referring to Karnataka Cooperative Societies Act, 1959 section 4, disallowed deduction u/s. 80P(2)(a)(i) of the Act and arrived at the total income of the assessee. 3. Aggrieved from the above order, the assessee filed appeal before the First Appellate Authority (FAA). The ld. FAA relying on the judgment of the Hon’ble Apex Court in the case of Mavilayi Service Coop. Bank reported in 123 taxmann.com 161 partly allowed the appeal of the assessee. Aggrieved from the above order, the assessee filed appeal before the ITAT. 4. During the course of hearing it was brought to the notice of both the parties that the decision of this coordinate Bench of ITAT in case of Primary Agricultural Credit Co-operative Society Ltd. in ITA No.947/Bang/2024 for the AY 2017-18 reported in [2024] 164 ITA No.1336/Bang/2024 Page 4 of 9 taxmann.com 327 (Bangalore - Trib.) is squarely applicable and both the parties agreed that the above decision may be followed. For the sake of the convenience we are reproducing the decision as under:- “9. Considering the rival submissions, we note that the assessee is registered under Karnataka Co-operative Society Act 1959. During the course of assessment proceedings, the AO asked to submit details as per notice u/s 142(1) and the AO noted as per Bye-laws that there are regular/normal members and nominal members. The regular members participate in day to day affairs, and nominal members have no role in the management of society, have no voting rights & no entitlement for share in the assets or profits. The sec. 20(2)(a) of the Karnataka Cooperative Society Act denies any right to vote to a nominal or associate members. Further the Nominal/Associate members are not entitled to attend the general meetings of the society, not eligible to contest on election. The assessee is doing business with non-members and the profit from such business is divided among the regular members of the society. The ld. DR submitted that as per the Karnataka Co-operative Society Act sec. 18 amended by the Act 2014, the associated/nominal members should not exceed 15% of the regular members, if it exceeds, then it has to be regularized within the period of six months. We note that the lower authorities have disallowed deduction on interest income received from providing credit facilities from all the members by following the judgment of Hon'ble Apex Court in the case of Citizen Co-operative Society Ltd. (supra). The decision relied on by the ld. AR in the case of Mavilayi Service Co- operative Bank Ltd., (supra) is under Kerala Co-operative Societies Act in which it has been held that proportionate deduction u/s. 80P(2)(a)(i) should be granted to the assessee from the interest income received from providing credit facilities to its members but not from the non-members. The Para 33 of the said judgement says as under:- \".................Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. 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.\" ITA No.1336/Bang/2024 Page 5 of 9 The ratio of Hon'ble Apex Court in the case of Mavilayi Service Cooperative Bank Ltd., (supra) is very much applicable for computing the income attributable to the business of the assessee among the members and non-members. The assessee is governed by Karnataka Co-operative Societies Act, 1959 and assessee has to follow section 18 (amended) Act of 2014 and bye-laws of the society. We note that AO in para 5 has observed that nominal members do not have a right in share of profits of the assessee. The AO has to examine with the bylaws of the Society in regard to classification of members, their rights, sharing of profits of the society among the members (Regular/Nominal). In the event it is found that thee nominal/associate members are not members and they are not entitled from share of profits earned by the assessee, then the proportionate deduction u/s 80P(2)(a)(i) to be granted in terms of the judgment of Hon'ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., (supra) on such income. The assessee is directed to produce the quantum of interest income received from all the categories of members for AO to carry out necessary verification. Accordingly we remit this issue to the AO for afresh consideration and determination of the interest received from members and non-members from providing credit facilities and decide the issue as per law. The AO shall grant deduction on such interest income u/s 80P(2)(a)(i) of the Act that satisfies principle of mutuality as per bye-laws. Accordingly this issue is partly allowed for statistical purpose. 10. Further in respect of deduction u/s 80P(2)(d), 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) and/or 80P(2)(d) on the interest income earned on its investments amount made with District co-operative banks. 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. (supra) and Hon'ble Apex Court in the case of Citizens Co-operative Society Ltd. noted (supra). During the course of hearing, the Ld.AR of the assessee relied on the Circular No. 18/2015 dated 02.11.2015 and submitted that as per the provisions of the Karnataka Co-operative Societies Act, the assessee is required to maintain SLR from the deposits received from the members and has to invest 100% from the general reserve and 25% from the deposits collected from members. Accordingly, assessee has invested in the fixed deposits. As per the circular, the income received from the investments should be treated as business income u/s. 28 of the Income Tax Act and assessee is eligible to make a claim of deduction u/s. 80P(2)(a)(i) as business income. Further, the assessee also submitted that the investments were made in co-operative banks which are co-operative society. It is ITA No.1336/Bang/2024 Page 6 of 9 submitted by the ld. AR that interest received on such investments are to be allowed for deduction u/s. 80P(2). In support of his argument, the assessee relied on the following decisions: (i) Mavilayi Service Co-op. Bank Ltd. (supra). ii) Tumkur Merchants Souharda Credit Co-op. Ltd. (supra). (iii)ITAT decision in ITO v. Irula Snake Catchers Industrial Co- operative Society Ltd. [2022] 140 taxmann.com 494 (Chennai - Trib.). (iv) M/S Kerala State Co-operative Agricultural & Rural Development Bank Ltd. (supra). (v) Saptagiri Pattina Souharda Sahakari Sangha Niyamitha v. ITO [2024] 162 taxmann.com 855/207 ITD 41 (Bangalore - Trib.). 11. We note from plain reading of Circular No. 18/2015 dated 02.11.2015 it is applicable to those co-operative societies / cooperative banks in which the Banking Regulation Act, 1949 applies. During the course of hearing the assessee was asked to submit the requirement of SLR as per Karnataka Cooperative Societies Act and the quantum and period for calculating SLR, the assessee was unable to give reply. Rule 23 of the Karnataka Co-operative Societies Rules states that reserve fund belongs to the society and is intended to meet the unforeseen losses. Further if the cooperative society wants to invest reserve fund or any portion thereof for any other purpose as prescribed under section 58 (a) to (d) of the Karnataka Co-operative Societies Act permission is to be taken from the Registrar of Co-operative Societies. Therefore the argument of the assessee that interest income on such investment is operational income is rejected. Even if the maintainability of SLR requirement is out of internal fund/external funds then no deduction shall be allowed u/s. 80P(2)(a)(i), since the interest income received on such investments from co-operative banks is not attributable to main business of the appellant. The issue regarding the word \"attributable\" has been discussed elaborately by the Hon'ble Apex Court in the case of M/s Totgars, Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283 (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. 11.1 Admittedly, it is a matter of fact borne from the record that the legislature in all its wisdom had inserted the provisions of Section ITA No.1336/Bang/2024 Page 7 of 9 80P(2)(a)(i) of the Act as a part of deductions from carrying on the business of banking or providing credit facilities to its members by a Co-operative Society. Although the contention of the Ld. AR that interest received from deposit under compulsion is to be considered u/s 80P(1)(a)(i), the AO considered it as income u/s 56 of the Act. As per our considered opinion, going by the rule of literal interpretation that has to be adopted while construing the scope and gamut of a statutory provision, the same does not merit acceptance. As Section 80P(2)(a)(i) does not carve out any exception as regards the applicability of the same in a case where the investments are made under compulsion or as per any direction from Registrar of co-operative society, the aforesaid contention of the Ld. AR that the same could be considered for deduction u/s. 80P(2)(a)(i) cannot be accepted. This view of ours that statutory provision has to be construed as per the rule of literal interpretation is supported by the judgment of the Hon'ble Supreme Court in the case of New Noble Educational Society v. Chief CIT [2022] 143 taxmann.com 276/290 Taxman 206/448 ITR 594 (SC)/[CA No. 3793 to 3795 of 2014 dated 19-10-2022]. The Hon'ble Apex Court observed that if the language is unambiguous and capable of only one meaning, that alone should be applied and not any other, based on the surmise that the legislature intended it to be so. In other words, it is only in case of ambiguity that the court can use other aids to discern the true meaning, but where the statute is clear and the words are plain, the legislation has to be given effect in its own terms. Since, in the case of the assessee interest income received is from investments from Banks which cannot be attributed to the main business of providing credit facilities to its members, same cannot be held to be allowable as deduction u/s 80P(2)(a)(i) of the Act. 12. We note from the submissions of the ld. AR that the assessee has invested its fund in commercial bank as well as in co-operative banks and earned interest thereon. Section 80P(2)(d) describes that if the assessee has received interest from the co-operative society, then the assessee is eligible for claim of deduction on such interest received. In the judgment of Hon'ble Apex Court in the case of Kerala State Cooperative Agricultural and Rural Development Bank Ltd. (KSCARDB) (supra) it has been discussed in detail the definition of co- operative banks and co-operative society. If the payer bank falls under the definition of co-operative bank/ bank in the light of the judgment of Hon'ble Apex Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income received from co-operative banks. We note that the assessee has also received interest from co- operative banks which is governed by the Banking Regulation Act of 1949 and this argument of the ld. DR has not been denied by the ld. AR of the assessee. The Section 80P(2)(d) describes that if the assessee ITA No.1336/Bang/2024 Page 8 of 9 has received interest/dividend from the co-operative society, then the assessee is eligible for claim of deduction on such interest/dividend, however we note that the assessee has received interest from co- operative bank but it is not clear whether the interest payer (co- operative bank) is a bank and registered with Reserve Bank of India and holding licence from RBI for carrying out banking business as per RBI Act. In addition, the judgment of Hon'ble Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB (supra) in which it has been discussed in detail the definition of co-operative banks and co-operative society. If the payer bank falls under the definition of co-operative bank in the light of the judgment of Hon'ble Apex Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income received from cooperative banks, therefore this issue is also remitted back to the AO for verification of interest received from co-operative bank in above terms. If AO finds that the co-operative bank is carrying its banking business activities in the light of the above judgment, the deduction u/s. 80P(2)(d) on such interest income should not be granted. 13. We further note that the assessee has received interest from other co-operative banks/commercial banks on its investments. The revenue authorities have considered the entire interest as income from other sources u/s. 56 including the interest received from co-operative bank and no expenses u/s. 57(iii) has been allowed to the assessee for earning of such income. While calculating the income, the net income should be considered as taxable income after reducing the expenditure incurred towards earning of such income. Therefore relying on the judgment of Hon'ble Jurisdictional High Court in case of Totgars Co- operative Sale Society Ltd. v. ITO [2015] 58 taxmann.com 35/231 Taxman 794 (Karnataka), the assessee is eligible for claim of its cost of funds on the interest income received from banks. Reliance is also placed on the judgment of Co-ordinate Bench of the Tribunal in case of The West Coast Paper Mill Employees Souharda Credit Co-op. Ltd. Accordingly, the assessee is directed to provide the details of cost of funds before the assessing officer. Therefore for allowing cost of funds, we are remitting this issue to the assessing officer for determining the cost of funds for earning entire interest income from bank (co-operative bank and scheduled bank).” 5. Respectfully following the above judgment, we direct the AO to decide the issue in above terms. ITA No.1336/Bang/2024 Page 9 of 9 6. In the result, the appeal is allowed for statistical purposes. Pronounced in the open court on this 13th day of November, 2024. Sd/- Sd/- ( KESHAV DUBEY) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 13th November, 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. "