2023 (12) TMI 1025 - AT - Income Tax

Disallowance of claim u/s. 80P(2)(a)(i)/80P(2)(d) - assessee received interest from co-operative banks and other cooperative societies - AR submitted that the cooperative societies /cooperative banks with which assessee had made investments, are registered with the Karnataka Cooperative Societies Act and, therefore, the interest/dividend earned by the assessee from such investments, made with such cooperative banks are eligible for deduction u/s 80P(2)(d) - HELD THAT - When we look at the decision of Hon ble Supreme Court in case of Totgars Co-operative Sale Society's case 2010 (2) TMI 3 - SUPREME COURT relied by the DR, SC 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. Further the adjudication by the Hon ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. vs. ITO(supra) was in context of Sec. 80P(2)(a)(i), and not on the entitlement of a cooperative society towards deduction 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. In the instant case, the amount which was invested with other co-operative societies and SCDCC bank to earn interest was not any amount due to its members. This is very clear from the submissions reproduced in the assessment order wherein the assessee has submitted that it is due to the statutory obligation to keep the reserve fund of the society in SCDCC Bank that such deposits are made, and therefore, such fixed deposit has to be maintained. Claim of the assessee in u/s 80P(2)(d) was not any liability due to its members. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to its members, as there were no takers. Therefore they had deposited the money in a co-operative bank/other co-operative societies against which interest/dividend was earned. At this juncture, we refer to subsequent decision PCIT Vs. Totagars cooperative Sale Society 2017 (7) TMI 1049 - KARNATAKA HIGH COURT wherein 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 in the case of PCIT Anr. vs. Totagars Cooperative Sale Society 2017 (1) TMI 1100 - KARNATAKA HIGH COURT and State Bank Of India 2016 (7) TMI 516 - GUJARAT HIGH COURT , 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. Hon ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd., KSCARDB 2023 (9) TMI 761 - SUPREME COURT 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 in the case of PCIT Anr. Vs. Totagars Cooperative Sale Society 2017 (1) TMI 1100 - KARNATAKA HIGH COURT and State Bank Of India 2016 (7) TMI 516 - GUJARAT HIGH COURT 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. 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. As 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.

Summary

Issues Involved:
1. Disallowance of deductions claimed under section 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act, 1961.
2. Interpretation and application of provisions of section 80P(2).
3. Initiation of penalty under section 270A.
4. Levy of interest under section 234B.

Summary:

1. Disallowance of Deductions under Section 80P(2)(a)(i) and 80P(2)(d):
The assessee, a co-operative society engaged in banking and providing credit facilities, filed a return declaring Nil income after claiming exemptions under section 80P(2). The Assessing Officer (AO) denied these deductions, citing the Supreme Court's decision in Citizen Co-operative Society Ltd. and the Karnataka High Court's decision in Totagars Co-operative Sale Society. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's view on section 80P(2)(d) but allowed the deduction under section 80P(2)(a)(i). The Tribunal, however, found that the interest income earned from investments in other co-operative societies and banks is eligible for deduction under section 80P(2)(d) if the banks do not hold a license under section 22 of the Banking Regulation Act, 1949. The issue was remitted to the AO for verification.

2. Interpretation and Application of Section 80P(2):
The Tribunal distinguished the Supreme Court's decision in Totgars Co-operative Sale Society, which dealt with section 80P(2)(a)(i), from the current case involving section 80P(2)(d). It noted that the interest income in question was not a liability to the members but profits and gains not immediately required for lending. The Tribunal referred to various High Court decisions supporting the eligibility of such interest income for deduction under section 80P(2)(d).

3. Initiation of Penalty under Section 270A:
The Tribunal did not specifically address the initiation of penalty under section 270A, as the main issues were remitted for further verification.

4. Levy of Interest under Section 234B:
The Tribunal did not specifically address the levy of interest under section 234B, as the main issues were remitted for further verification.

General and Consequential Grounds:
Grounds 1, 2, 6, 7, 10, and 11 were deemed general and did not require adjudication. Grounds 8 and 9 were considered consequential and did not require adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with the AO directed to verify the eligibility of the interest income for deduction under section 80P(2)(d). The Tribunal's decision emphasized the need for a detailed examination of whether the interest income was earned from co-operative banks holding a license under section 22 of the Banking Regulation Act, 1949.