2020 (2) TMI 1150 - HC - Income Tax

Deduction u/s 80P - exemption claimed on interest income received by the petitioner from deposits/investments of funds in Banks - Such income, according to the Officer, was ineligible for deduction under Section 80P, since it did not form part of the operational income of the petitioner/assessee and was liable to be taxed in terms of Section 56 - HELD THAT - W.P. set aside to this extent and the matter are remanded to the file of the Assessing Officer for denovo consideration. For this purpose, the petitioner shall appear before the Assessing Officer on 26.02.2020 at 10.30. a.m. without expecting any further notice. The petitioner will be heard specifically on the question of classification of interest generated by investments made for the purpose of statutory reserve and the judgments of the Supreme Court in Nawanshahar 2005 (8) TMI 28 - SC ORDER and Totgars' 2010 (2) TMI 3 - SUPREME COURT as well as other relevant case law shall be taken into account by the Assessing Officer in framing assessment by way of a speaking and detailed order. This exercise shall be completed within a period of six (6) weeks from date of conclusion of personal hearing.

Issues Involved:
1. Entitlement to deduction under Section 80P of the Income Tax Act for Primary Agricultural Co-operative Credit Societies.
2. Eligibility for exemption on interest income received from deposits/investments of funds in Banks.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80P:

3. The writ petitions challenge orders of assessment passed in terms of the Income Tax Act, 1961 for AY 2017-2018. The petitioners, Primary Agricultural Co-operative Credit Societies, claimed deduction under Section 80P of the Income Tax Act. The Assessing Authority questioned whether the societies had associate/nominal members and if they conducted business with them, referencing the Supreme Court decision in Citizen Co-operative Society Ltd Vs. Assistant Commissioner of Income-tax, which denied deduction under Section 80P.

24. The petitioners argued that their income should be exempt based on the principle of mutuality, as the transactions involved a common group of members. However, the officer distinguished between A class (shareholding) members and B class (non-shareholding) members, noting that B class members did not have voting rights, participate in elections, or share in the profits, unlike A class members.

26. The officer rejected the petitioners' claim, citing the Supreme Court's judgment in Citizen Co-operative Society Ltd, which differentiated between nominal and ordinary members.

28. A Division Bench of the Madras High Court in The Principal Commissioner of Income Tax, Salem V. M/s.S-1303 Ammapet Primary Agricultural Cooperative Bank Ltd. held that under the TNCS Act, both members and associate members are considered the same, thus entitling the assessee to deduction under Section 80P. The Supreme Court's distinction was deemed inapplicable in Tamil Nadu.

30. The Department withdrew its Special Leave Petition challenging the Division Bench's order due to low tax effect, keeping the question of law open. Consequently, the Division Bench's order remains effective until modified or reversed.

32. The petitioners were directed to file a statutory appeal before the Commissioner of Income Tax (Appeals) within three weeks, with an interim stay on recovery until the appeal's disposal.

2. Eligibility for Exemption on Interest Income:

6. In W.P. No.3767 of 2020, the additional issue concerned the eligibility for exemption on interest income from deposits/investments of funds in Banks. The Officer deemed such income ineligible for deduction under Section 80P, relying on the Supreme Court's judgment in Totgars' Cooperative Sale Society Limited V. ITO.

7. The petitioners argued that the interest income arose from mandatory statutory reserves, not surplus funds, distinguishing their case from Totgars'. They cited the Supreme Court's judgment in Commissioner of Income Tax, Jalandhar V. Nawanshahar Central Cooperative Bank Limited, which held that income from statutory reserves is attributable to the business of banking and deductible under Section 80P.

8. The Assessing Authority rejected the petitioners' submissions without considering the Nawanshahar judgment or the plea for netting interest paid against interest received.

9. The Supreme Court in Nawanshahar held that income from investments made by a banking concern is attributable to the business of banking and deductible under Section 80P. The distinction between a Co-operative Bank and a Co-operative Society was noted, but both are mandated to place a part of their funds in approved securities.

13. The petitioners argued that the TNCS Act mandates Cooperative Societies to maintain a statutory reserve with a District Co-operative Bank, making the interest generated from such reserves operational income entitled to deduction under Section 80P.

14. The officer relied on Totgars', where the Supreme Court held that interest on surplus funds invested in short-term deposits and securities is taxable under Section 56 as "Income from other sources".

19. The impugned order was deemed non-speaking and passed without application of mind, as it relied solely on Totgars' without discussing the petitioners' arguments. The matter was remanded to the Assessing Officer for de novo consideration, specifically on the classification of interest generated by statutory reserves, considering the judgments in Nawanshahar and Totgars'.

20. The officer was directed to pass a speaking and detailed order after proper discussion, completing the exercise within six weeks from the date of the personal hearing.

8. The assessment in W.P.No.3767 of 2020 was set aside to the extent of the interest income issue, and the matter was remanded for fresh examination. The petitioner was directed to appear before the Assessing Officer on 26.02.2020 at 10.30 a.m. for a hearing.

Conclusion:
The writ petitions were disposed of with directions for the petitioners to file statutory appeals within three weeks and an interim stay on recovery until the appeal's disposal. The assessment in W.P.No.3767 of 2020 was set aside for fresh examination on the interest income issue.

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