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TMI Blog2021 (12) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that interest arising from investments made in compliance with the statutory provisions is exempt u/s 80P(2)(a)(i) of the Act. From the records, we noticed that the assessee has received interest income even from other Scheduled Banks, such as, IDBI Bank, Yes Bank etc. Therefore, the reasoning of the CIT(A) that the investments are made in compliance with the statutory provision of the Karnataka State Co-operative Societies Act, 1959, may not be fully correct. Therefore, we are of the view that the matter has to be examined by the Assessing Officer. Deduction u/s 80P(2)(d) - We make it clear that the interest income received out of investments with co-operative societies alone is to be allowed as deduction. Deduction u/s 57 - alternate contention of the assessee that if interest income is to be assessed as income from other sources, necessarily, the cost incurred for earning such interest income should be allowed as deduction u/s 57 - The assessee has not raised the plea before the Income Tax Authorities that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities to its members. For the assessment year 2015-2016, the return of income was filed declaring `NIL income, after claiming deduction u/s 80P(2)(a)(i) of the I.T.Act. The assessment was completed vide order dated 27.12.2017 u/s 143(3) of the Act. In the said assessment order, the claim of deduction u/s 80P(2)(a)(i) of the Act was disallowed by the Assessing Officer. The Assessing Officer held that the assessee is primarily engaged in the business of banking and in view of the insertion of sub- section (4) to section 80P of the Act with effect from 001.04.2007, the assessee is not entitled to the benefit of deduction u/s 80P(2)(a)(i) of the Act. The A.O. also placed reliance on the judgment of the Hon ble Apex Court in the case of The Citizen Co-operative Society Ltd. v. ACIT reported in 397 ITR 1 (SC) had held that the assessee has violated the principle of mutuality. Further, the A.O. held that the amount of ₹ 64,90,752 being interest received from deposits with Scheduled Banks and Co-operative Banks was wrongly disclosed under the head `income from business in the return of income. The A.O. by placing reliance on the judgment of the Hon ble jurisdictional High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Society reported in (2017) 395 ITR 611( Kar). 5. For these and other grounds that may be urged upon at the time of hearing, it is prayed that the order of the Learned CIT(A) in so far as it relates to the above grounds, may be reversed and that of the Assessing Officer may be restored. 6. The appellant requests leave to alter, amend or delete any of the grounds mentioned above and/ or add new grounds on or before the hearing. 5. The learned Departmental Representative relied on the grounds raised. 6. The learned AR, on the other hand, has filed a paper book comprising of 244 pages, enclosing therein the written submissions, the statement of total income and financial statements for the year ending 31.03.2015, details of the interest income received during the relevant assessment year, case laws relied, etc. The learned AR strongly supported the order of the CIT(A). Further, it was alternatively submitted that if the portion of the interest income is assessed as income from other sources, necessarily, the cost incurred for earning such income ought to be allowed as a deduction u/s 57 of the Act. In this context, the learned AR relied on the judgment of the Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted as covering receipts from sources other than the actual conduct of business. The Court held a Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. The Hon ble Court also distinguished the decision of the Hon ble Supreme Court in the case of Totgars (supra) by observing that the Supreme Court was dealing with a case where the assessee- Cooperati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Court followed decision of Hon ble Gujarat High Court in the case of SBI Vs. CIT 389 ITR 578(Guj.) in which the Hon ble Gujarat High Court dissented from the view taken by the Hon ble Karnataka High Court in the case of Tumkur Merchants case (supra) The Hon ble Court had to deal with the following substantial question of law: (I)Whether the assessee, Totagar Co-operative Sale Society, Sirsi, is entitled to 100% deduction under Section 80P(2)(d) of the Income Tax Act, 1961 (for short 'the Act') in respect of whole of its income by way of interest earned by it during the relevant Assessment Years from 2007-2008 to 2011-2012 on the deposits or investments made by it during these years with a Co-operative Bank, M/s. Kanara District Central Co-operative Bank Limited? (II) Whether the Supreme Court decision in the case of the present respondent assessee, Totgar Co-operative Sale Society Limited itself rendered on 08th February 2010, in Totgar's Co-operative Sale Society Limited v. Income Tax Officer, reported in (2010) 322 ITR 283 SC : (2010) 3 SCC 223 for the preceding years, namely Assessment Years 1991-1992 to 1999-2000 (except Assessment Year 1995- 1996) hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds in relation to can include within its ambit and scope even the interest income earned by the respondent-assessee, a co-operative Society from a Co-operative Bank. This exclusion by Section 80P(4) of the Act even though without any amendment in Section 80P(2)(d) of the Act is sufficient to deny the claim of the respondent assessee for deduction under Section 80P(2)(d) of the Act. The only exception is that of a primary agricultural credit society. (Paragraph-14 of the judgment) 3. The amendment of Section 194A(3)(v) of the Act excluding the Co-operative Banks from the definition of Cooperative Society by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A of the Act also makes the legislative intent clear that the Cooperative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act. (Paragarph 15 of the Judgment) 4. If the legislative intent is so clear, then it cannot contended that the omission to amend Clause (d) of Section 80P(2) of the Act at the same time is fatal to the contention raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) is restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. The Hon ble Gujarat High Court held that in the case of Totgars Co-operative Sale Society (supra) decided by Hon ble Supreme Court, the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short-term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. The Hon ble Gujarat High Court in this regard referred to the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in question as it is neither of the nature specified in Sec.80P(2)(a)(i) or 80P(2)(d) of the Act. 15. The argument of the learned counsel for the Assessee has been that the AO has applied his mind and allowed the deduction and therefore the jurisdiction u/s.263 of the Act cannot be exercised. On this argument, the learned DR pointed out that the jurisdiction u/s.263 of the Act was exercised by the CIT not for the reason that the AO failed to make proper enquiries before concluding the Assessment but on the ground that his decision was contrary to decision of Hon ble Jurisdictional High Court and therefore this argument of the learned counsel for the Assessee cannot be accepted. The argument that the view taken by the AO was a possible view and hence revision u/s.263 of the Act is bad is again not acceptable because, the view that ought to have been adopted was the later binding decision of the High Court in the case of Totagar co-opeartive sales society 395 ITR 611 (Karn.). 16. The argument that co-operative Banks are also co-operative societies is again without any basis in the light of the law explained in the case of Totagar co-opeartive sales society 395 ITR 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised in ground No.5 to 7 alone to the AO for examination afresh. In other respects we confirm the order of the CIT. 7.1 In the instant case, it was contended that majority of the interest income is earned out of investments with central cooperative banks and it is in compliance with the requirements under the Karnataka Co-operative Societies Acts and Rules. If the amounts are invested in compliance with the Karnataka State Co-operative Societies Act, necessarily, the same is to be assessed as `income from business which entails the benefit of deduction u/s 80P(2)(a)(i) of the Act. The CIT(A) had allowed the deduction u/s 80P(2)(a)(i) of the Act by holding that interest arising from inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee under Section 56 by treating the income earned by interest as income from other sources , the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the next income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. 13. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits. 7.3 The assessee has not raised the plea before the Income Tax Authorities that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised before the lower authorities, we are of the view that since the fundamental principle under Income-tax Act being that only net income has to be taxed (i.e., gross receipt minus allowable expenditure), this plea of the assessee has to be necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perative society from investments with other co-operative society is also eligible for the deduction whole of such income. (Para 35 of the Judgment) (iv) The restrictive clause in sub-section (4) of section 80P applies only a co-operative bank and not to cooperative societies or to co-operative societies extending credit facilities to its members. Further, only a bank having obtained the license under the Banking Regulation Act, 1949, shall be covered under the said restrictive clause u/s 80P(4). The Hon'ble Court has also elaborately explained the correct meaning scope of the Proviso under the said sub-section (4) of section 80P declaring that the proviso carves out an exception to the exclusion in sub-section (4). 7.5 Taking into consideration the above factual issues, we are of the view that the matter needs to be considered afresh by the Assessing Officer. Accordingly, we set aside the order of the CIT(A) and direct the A.O. to verify the claim made by the assessee u/s 80P(2)(a)(i) and 80P(2)(d) of the Act, keeping in view the dictum laid down in the judicial pronouncements referred supra. It is ordered accordingly. 8. In the result, the appeal filed by the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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