2021 (11) TMI 1008 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) denied - interest from investment in Co-operative banks, nationalised banks - whether, interest income earned by assessee is eligible for deduction u/s 80P(2)(d) of the Act, whereas the deduction is one claimed u/s 80P(2)(a)(i) ? - HELD THAT - As relying on M/S POTTERS COTTAGE INDUSTIRAL CO-OPERATIVE SOCIETY LTD. 2021 (9) TMI 137 - ITAT BANGALORE we direct the Ld.AO to verify the interest earned on investment earned from co-operative societies and to consider the claim of assessee in accordance with law under section 80P(2)(d) Benefit of exemption u/s. 80P for transactions done with nominal or associate member - Whether transactions with nominal or associate members can not in anyway forbid the appellant from claiming the benefit of exemption u/s. 80P? - HELD THAT - In respect of associate/nominal members, Hon ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT has held that the expression Members is not defined in the Income-tax Act. Hence, it is necessary to construe the expression Members in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. In view of this, the facts are to be examined in the light of principles laid down by the Hon ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (supra). Accordingly, we remit this issue of deduction u/s.80P(2)(a)(i) of the Act to the file of Ld.AO to examine the same de novo in the light of the above judgment.

Issues Involved:

1. Validity of the impugned orders.
2. Bifurcation of 'Interest on Investments' under Section 56.
3. Segregation of 'Godown rental income' under Section 22.
4. Disallowance of deduction under Section 80P.
5. Applicability of Section 80P(4) to the appellant.
6. Misinterpretation of Totagars' Co-operative Sale Society Ltd. case.
7. Transactions with nominal and associate members.
8. Definition of 'Member' under the Income Tax Act.
9. Concept of mutuality for deduction under Section 80P.
10. Additional grounds for appeal.

Detailed Analysis:

1. Validity of the Impugned Orders:
The appellant argued that the orders from the lower authorities were not speaking orders and were passed mechanically without considering the appellant's submissions. The orders lacked application of mind and were therefore unsustainable in law and on facts.

2. Bifurcation of 'Interest on Investments' under Section 56:
The appellant contended that the lower authorities erred in bifurcating 'Interest on Investments' from Business Income and considering it separately under Section 56 of the Act. The appellant argued that this interest was incidental to its business of providing credit facilities to its members and should be considered as Business Income under Section 28, qualifying for deduction under Section 80P(2)(a)(i). The appellant cited the decision in Totagars' Co-operative Sale Society Ltd., which was deemed distinguishable from their case.

3. Segregation of 'Godown Rental Income' under Section 22:
The appellant argued that the lower authorities incorrectly segregated the 'Godown rental income' received, considering it under Section 22 as 'Income from House Property'. The appellant claimed that this income was part of its Business Income and should be exempt under Section 80P(2)(e).

4. Disallowance of Deduction under Section 80P:
The appellant claimed that the lower authorities misinterpreted the statute and extended tax by implication, disallowing the deduction under Section 80P. The appellant asserted that only co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks lost exemption under Section 80P(4). The appellant, being a primary agricultural credit society, should be entitled to the deduction under Section 80P(2)(a)(i).

5. Applicability of Section 80P(4) to the Appellant:
The appellant argued that Section 80P(4) did not disqualify it from claiming the benefit of deduction under Section 80P, as its area of operation was less than a taluk. The appellant cited the Karnataka High Court decision in Venugram M.P.C.C.S. Ltd. Belgaum vs. ITO to support this claim.

6. Misinterpretation of Totagars' Co-operative Sale Society Ltd. Case:
The appellant contended that the lower authorities wrongly applied the Totagars' Co-operative Sale Society Ltd. case to their situation. The appellant argued that the interest income in the Totagars' case was from investments of debts owed to its members, which was not the case for the appellant.

7. Transactions with Nominal and Associate Members:
The appellant argued that the lower authorities erred in taxing it based on the decision in Citizen Co-operative Society Ltd. The appellant claimed it was in compliance with applicable laws, unlike Citizen Co-operative Society, and that transactions with nominal and associate members should not preclude it from claiming the benefit under Section 80P.

8. Definition of 'Member' under the Income Tax Act:
The appellant argued that the definition of 'Member' in the Karnataka Co-operative Societies Act, 1959, which includes nominal and associate members, should prevail. The appellant cited decisions from the Karnataka High Court and the Madras High Court to support that transactions with nominal or associate members should not deprive it of the exemption under Section 80P.

9. Concept of Mutuality for Deduction under Section 80P:
The appellant contended that there is no condition precedent as to the fulfillment of 'concept of mutuality' for allowing deduction under Section 80P. The appellant argued that the lower authorities misinterpreted the Supreme Court's judgment in Citizen Co-operative Society Ltd. and wrongly denied the deduction.

10. Additional Grounds for Appeal:
The appellant reserved the right to add, amend, alter, edit, delete, modify, or change any grounds of appeal at the time of or before the hearing.

Judgment:

Interest on Investments:
The Tribunal directed the AO to verify the interest earned from investments made in co-operative societies and consider the claim under Section 80P(2)(d) accordingly.

Transactions with Nominal and Associate Members:
The Tribunal remitted the issue to the AO to examine in light of the Supreme Court's judgment in Mavilayi Service Cooperative Bank Ltd. v. CIT.

Rental Income:
The Tribunal upheld the lower authorities' decision to consider rental income as 'Income from House Property' under Section 22, dismissing the appellant's ground.

Conclusion:
The appeal was allowed for statistical purposes, with directions for further verification and examination by the AO.

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