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TMI Blog2018 (6) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised in these appeals and Cross Objections, they were heard together and are being disposed off by this consolidated order. 2. The solitary issue that is raised in these appeals is whether the CIT(A) is justified in directing the Assessing Officer to grant deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income received by the assessee on investments made with Sub-Treasuries. 3. Brief facts of the case are as follows:- The assessee is a primary agricultural credit society, registered under the Kerala Co-operative Societies Act, 1969. It is carrying on the business of banking / providing credit facilities to its members. For the assessment years 2009-2010 to 2012-2013, the assessments were completed by denying the claim of deduction u/s 80P(2) of the I.T.Act. The Assessing Officer in the impugned orders had disallowed the claim stating that the assessee could not be treated as a primary agricultural credit society as it is engaged in the business of banking and in view of insertion of section 80P(4) with effect from 01.04.2007, the assessee was not entitled to deduction u/s 80P(2) of the I.T.Act. 4. Aggrieved by the assessment orders completed for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore does not form the business income of the assessee? 4. Is the Commissioner of Income Tax(Appeals) right in law in relying on the decision of the Hon'ble Supreme Court in the case of Karnataka State Co- Operative Apex Bank where it is held that the assessee being a Co-Operative Bank is required to place part of its funds with State Bank or RBI to enable it to carry its banking business when the facts in the instant case are distinguishable? In this case the assessee is a Co-Operative society classified as PACS by the competent authority and not a Co- Operative Bank, and hence the reliance on the above decision seems erroneous. Even going by the reliance placed on the decision of Hon'ble Supreme Court in the case of Karnataka State Co-Operative Apex Bank, our assessee has maintained part of its funds with District Co-Operative Bank. 5. Is not the reliance placed on the decision of ITAT, Cochin Bench on M/s Muttom Service Co- Operative Bank Ltd by the Commissioner of Income Tax(appeals) against law, facts and circumstances of the case? The said decision discusses that the decision of Hon'ble Supreme Court on MIs Totgars Co-Operative Sale Society is not applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee by the following judicial pronouncements :- (i) CIT v. Karnataka State Co-operative Bank [251 ITR 194 (SC)] (ii) Vaveru Co-operative Rural Bank Ltd. v CIT [(2017) 396 ITR 371 (The Telungana And Andhra Pradesh High Court) (iii) Muttom Service Co-operative Bank Ltd. (ITA No.372/Coch/2010) (iv) Mundakkayam Service Co-operative Bank Ltd. (ITA No.106/Coch/2016). (v) The Mangalam Service Co-operative Bank Ltd. v. ITO (ITA No.495/Coch/2017 - order dated 17.10.2017) 7. We have heard the rival submissions and perused the material on record. The solitary issue for our consideration is whether interest income received by the assessee on investments with sub-treasuries was liable to be assessed under the head "income from other sources" or "income from business". If the same is to be assessed under the head "income from business", the assessee would be entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act. We noticed that an identical issue was considered by the Cochin Bench of the Tribunal in the case of The Azhikode Service Co-operative Bank Ltd. & Others (ITA No.261/Coch/2017 & others - order dated 12th July, 2017. The Tribunal after considering the judicial pronounc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive society which also carries on the business of lending money to its members which is covered under Section 80P(2)(a)(i) i.e. carrying on the business of banking for providing credit facilities to its members. The object of the aforesaid amendment is not to exclude the benefit extended under Section 80P(1) to such society, Therefore, there was no error committed by the Assessing Authority. The said order was not prejudicial to the interest of the Revenue. The condition precedent for the commissioner to invoke the power under Section 263 is that the twin condition should be satisfied. The order should be erroneous and it should be prejudicial to the interest of the revenue." 7.1 From the above judgment of the Hon'ble Karnataka High Court, it is quite clear that a primary agricultural credit society or a primary cooperative agricultural and rural development bank who do not have license from Reserve Bank of India to carry on the business of banking, is not a cooperative bank, hit by the provisions of section 80P(4) of the Act. The judgment of the Hon'ble jurisdictional High Court in the case of Chirakkal Service Co-op Bank Ltd (supra), is also in support of the assessee as rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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, deposit/ security. was invested In a short-term 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. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law. 10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was net the liability. 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 mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking. Therefore, this Tribunal is of the opinion that the judgment of the Apex court in Totgar's Co-operative Sale Society Ltd (supra) is not applicable in respect of the co-operative society whose business is banking. Admittedly, the assessee has invested funds in state promoted treasury small savings fixed deposit scheme. Since Government of India has withdrawn India Vikas Patra, as a small savings instrument, funds invested at the discretion of the bank is one of the activities of the banking as per the Banking Regulation Act. Since the assessee cooperative society is in the 4 ITA No.372/Coch/ 2010 business of banking the investment in the state promoted treasury small savings fixed deposit certificate scheme is a banking activity, therefore, the interest accrued on such investment has to be treated as business income in the course of its banking activity. Once it is a business income, the assessee is entitled for deduction u/s 80P(2)((a)(i). therefore, this Tribunal is of the opinion that the judgment of the Larger Bench of the apex Court in Karnataka State Cooperative Apex Bank (supra) is applicable to the facts of this case. By respectfully following the judgment of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for de novo consideration. Subsequent to the remand, the Tribunal vide its order dated 23.03.2017 decided the issue in favour of the assessee by holding that interest income received on investments with sub-treasuries and cooperative banks was entitled to the benefit of deduction u/s 80P(2)(a)(i) of the I.T.Act. The relevant finding of the Tribunal subsequent to the remand by the Hon'ble High Court (order dated 23.03.2017) reads as follows:- "4. We have considered the rival contentions and perused the orders of the authorities below. Hon'ble Jurisdictional High Court had remitted the appeal back to us with a clear direction to consider circular No.l8/2015, dated 02.11.2015 and judgment of their lordship in the case of Chirakkal Service Co-operative Bank Ltd. vs. CIT 384 ITR 490. Circular No.18/2015, dated 02.11.2015 is reproduced hereunder:- "Subject Interest from Non-SLR securities of Banksreg. It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, "expenses relatable to investment in non- SLR securities need to be disallowed under section 57(i) of the Act as interest on non-SLR securities is income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances, we are of the opinion that assessee has to succeed in this appeal. Interest earned by the assessee from its deposits placed in Sub-Treasury and banks are eligible for deduction u/s. 80P(2)(a)(i) of the Act. Ordered accordingly. 5. In the result, the appeal of the assessee stands allowed. Order pronounced in the open court on 23-03-2017." 7.3 The latest judgment of the Hon'ble Telangana & Andhra Pradesh High Court in the case of Vaveru Co-operative Rural Bank Ltd. v CIT (supra) had also held that the co-operative societies engaged in providing credit facilities to its members / business of banking had made investments with subtreasuries, co-operative banks and other nationalized banks, was entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act in respect of interest income received on such investments. The relevant finding of the Hon'ble High Court reads as follows:- "32. In simple terms, the position can be summarized like this. If there is a Co-operative Society, which is carrying on several activities including those activities listed in sub- Clauses (i) to (vii) of Clause (a), the benefit under Clause (a) will be limited only to the profits and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agricultural produce actually resulted in net loss to the Society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in Clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgars struck a different note. 35. But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other Co-operative Societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under Clause (d) or (e), as the case may be." 7.4 In the instant case the assessee had made investments with sub-treasuries in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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