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TMI Blog2023 (5) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... ooperative society and try to correlate with the RBI norms for maintaining certain percentage of deposits in the form of investments which are applicable for the Banks, therefore, it qualifies for deduction u/s. 80P(2)(a)(i) of the Act., but in this regard the ld. AR of the assessee could not produce any single document for substantiating the claim. The interest received by the assessee cannot be treated as operational income of the assessee because the interest received was not from the credit facilities provided to its members as envisaged in section 80P(2)(a)(i) of the Income Tax Act. This issue has been settled by the Hon ble jurisdictional High Court in the case of PCIT v. Totagars Co-operative Sale Society [ 2017 (7) TMI 1049 - KARNATAKA HIGH COURT ] wherein it is held that the source of funds are irrelevant. Similar issue has been decided against the assessee by this Tribunal in the case of Krishanarajapet Taluk Agri Pro Co-op Marketing Society Ltd. [ 2022 (2) TMI 489 - ITAT BANGALORE ] held that interest income is not income from business but was income chargeable to tax under the head income from other sources and therefore there was no question of allowing deduction u/s.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty registered with Karnataka Co-operative Societies Act, 1959. It is engaged in providing credit facilities to the its members only. 4. The assessee filed its return for AY 2018-19 declaring gross total income of Rs.25,57,047 and claimed deduction u /s. 80P(2)(a)(i) on the entire gross total income being business income from providing credit facilities to its members, which includes interest on investments also. The case was selected for scrutiny and statutory notices were issued to the assessee. On perusal of financial statements, the AO noticed that assessee has shown investments of Rs.4,22,40,864 in fixed deposits with banks. The assessee has earned total interest income of Rs.36,85,296 on investments and the same is included in the profit claimed deduction u/s. 80P of the Act. The AO observed that interest on investments as deposits would fall in the category of income from other sources because the interest was not received from the cooperative society and it is also not business income. Therefore interest earned from surplus invested in FDRs is not attributable to the business of providing credit facilities to members and not business profits, but other income. For claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at co-operative bank where its entire income is earned from banking activities cannot be termed as co-operative society. He further submitted that it is settled by the Supreme Court judgment in the case of Totagars Co-operative Sale Society reported in 322 ITR 283 that interest received from surplus funds is to be taxed as income from other sources and therefore it is not eligible to claim deduction u/s. 80P & the assessee received interest is on Fixed Deposits which are surplus fund of the assessee. He further submitted that in the case of PCIT & Ors. v. Totagars Co-operative Sale Society reported in 395 ITR 611 (Karnataka), the Hon'ble Court had decided that deduction u/s. 80P(2)(d) is allowable on the interest income received from co-operative society but not from the Cooperative Bank. He submitted that the issue has been settled by the coordinate Bench of the Tribunal on similar facts and circumstances of the case in the following decisions:- (a) M/s. Vasavamba Co-operative Society Ltd. v. PCIT, ITA No.453/Bang/2020 dated 13.8.2021. (b) M/s. Manjunatheshwara Credit Co-op. Society Ltd. v. ITO, ITA No.2238/Bang/2019 dated 4.10.2021. (c) Krishnarajapet Taluk Agri Pro Co-op M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Co-op. Rules, 1960 which are mandatory for the cooperative society and try to correlate with the RBI norms for maintaining certain percentage of deposits in the form of investments which are applicable for the Banks, therefore, it qualifies for deduction u/s. 80P(2)(a)(i) of the Act., but in this regard the ld. AR of the assessee could not produce any single document for substantiating the claim. The interest received by the assessee cannot be treated as operational income of the assessee because the interest received was not from the credit facilities provided to its members as envisaged in section 80P(2)(a)(i) of the Income Tax Act. This issue has been settled by the Hon'ble jurisdictional High Court in the case of PCIT v. Totagars Co-operative Sale Society [2017] 83 taxmann.com 140 (Karnataka) wherein it is held that the source of funds are irrelevant. The relevant observations are as follows:- "23. Thus, the aforesaid judgments supports the view taken by this Court that character of income depends upon the nature of activity for earning that income and though on the face of it, the same may appear to be falling in any of the specified Clauses of Section 80P(2) of the Act, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act w.e.f. Assessment Year 2007-08 was only with a view deny the benefit of deduction under section 80P(2)(i) of the Act to Cooperative Banks and that it had nothing to do with deduction under section 80P(2)(d) of the Act. 9. The CIT, after considering submissions made by the assessee, came to the conclusion that the later decision of the Hon'ble Karnataka High Court in the case of Totagar's Co-operative Sale Society (supra), the Hon'ble Court has explained its earlier decision and held that interest received on deposits with Co-operative Bank is not eligible for deduction under section 80P(2)(d) of the Act. The CIT accordingly directed that the deduction allowed should be withdrawn. 10. An order passed contrary to a decision of the Hon'ble Jurisdiction High Court would be in the nature of an order prejudicial to the interest of the revenue being an order passed on an incorrect application of law. In the case of Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66/243 ITR 83, the Supreme Court held that there must be two conditions namely that the order of assessment is erroneous and that the order is prejudicial to the interests of the Revenue which mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits 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 Totagar's Co-operative Sale Society Ltd. (supra) by observing that the Supreme Court was dealing with a case where the assessee-Cooperative Society, 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 which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society was a liability and it was shown i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;) 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) holding that such interest income earned by the assessee was taxable under the head 'Income from Other Sources' under section 56 of the Act and was not 100% deductible from the Gross Total Income under section 80P(2)(a)(i) of the Act, is not applicable to the present Assessment Years 2007-2008 to 2011- 2012 involved in the present appeals and therefore, whether the Income-tax Appellate Tribunal as well as CIT (Appeals) were justified in holding that such interest income was 100% deductible under section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that the Co-operative 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 Revenue before this Court and sub silentio, the deduction should continue in respect of interest income earned from the co-operative bank, even though the Hon'ble Supreme Court's decision in the case of Respondent assessee itself is otherwise.(Paragraph 16 of the Judgment) 5. On the decision of the earlier decision of the Hon'ble Karnataka High Court referred to in the earlier part of this order, the Court held that it did not find any detailed discussion of the facts and law pronounced by the Hon'ble Supreme Court in the case of the respondent assessee (Totagars Sales Co-operative society) and hence unable to follow the same in the face of the binding precedent laid by the Hon'ble Supreme Court. The Hon'ble Court observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. The Hon'ble Gujarat High Court therefore held that decision in the case of Totagar Co-operative Sales Society rendered by the Hon'ble Supreme Court is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression "profits and gains of business" and that such interest income cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing were the relevant observations of the Tribunal : 6. The next issue relates to the deduction claimed by the assessee u/s 80P(2)(d) of the Act in respect of interest income. Identical issue has been considered by the co-ordinate bench in the case of Karkala Co-op S Bank Ltd. (supra). For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench :- "7. The next common issue relates to rejection of deduction claimed u/s 80P(2)(d) of the Act in respect of interest income earned from fixed deposits kept with bank. We noticed earlier that the A.O. has observed in Assessment Year 2015-16 that the interest income received by the assessee from deposits kept with banks is not eligible for deduction u/s 80P(2)(c) & 80P(2)(d) of the Act since the assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act. In AY 2016-17, the AO assessed the interest income received on bank deposits under the head "Income from other sources" and denied deduction claimed u/s 80P(2)(d) of the Act. The Ld CIT(A) confirmed the action of the AO on this issue. 8. The Ld. A.R. submitted that the assessee is entitled to claim deduction allowable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO will allow deduction on account of expenses on the lines indicated above. The AO will afford opportunity of being heard to the assessee and filing appropriate evidence, if desired, by the assessee to substantiate its case, before deciding the issue in the set aside proceedings. 12. After considering the submissions of both the parties, I note that in the case laws relied by the ld. DR the decisions cited by the ld. AR of the Hon'ble jurisdictional High Court have been already been considered and in view of the same, the assessee is not eligible for deduction u/s 80P(2)(a)(i) or 80P(2)(d) on the interest received. Accordingly grounds No. 2 & 3 raised by the assessee are dismissed. 13. The assessee has raised an alternate ground No. 04 stating that the net interest income should be taxed instead of entire gross interest income earned by the assessee on investments and further that assessee will suffer loss under the head 'business income' for which necessary set off has to be provided to the assessee. I am of the view that since the fundamental principle under Income-tax Act being that only net income has to be taxed and not the gross income, this plea of the assessee has to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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