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TMI Blog2024 (6) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... e is part of operating income, we are of the view that the order of the PCIT invoking his revisionary powers under section 263 of the Act, is not valid. In other words, there is no error much less an error prejudicial to the interest of the Revenue in the Assessment Order dated 02.12.2022 warranting revision u/s 263 of the Act. Therefore, we hold that the Assessment Order granting the benefit of deduction u/s 80P(2)(a)(i) of the Act with respect to the interest income of Rs.3,53,68,999/- is justified on facts of the instant case. Hence, we quash the order of PCIT passed under section 263 of the Act - Assessee appeal of assessee allowed. - SHRI GEORGE GEORGE K , VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER For the Assessee : Shri. V. Srinivasan , Advocate For the Revenue : Shri. D. K. Mishra , CIT ( DR ) ( ITAT ) , Bengaluru ORDER Per George George K , Vice President : This appeal at the instance of the assessee is directed against PCIT s order dated 03.11.2023, passed under section 263 of the Income Tax Act, 1961 (hereinafter called the Act ). The relevant Assessment Year is 2018-19. 2. The grounds raised read as follows: 1. The order of the learned P.C.I.T passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest income earned from co-operative banks which are nothing but co-operative societies in possession of a license from the RBI under the facts and in the circumstances of the appellant's case. 7. Without prejudice to the above, the learned PCIT ought to have directed the learned A.O. to allow the deduction u/s. 57 of the Act towards cost of funds should the interest income be assessed under the head other sources under the facts and in the circumstances of the appellant's case. 8. For the above and other grounds that may be urged at the time of hearing of the appeal. your appellant humbly prays that the appeal may be allowed and Justice rendered. 3. Brief facts of the case are as follows: Assessee is a co-operative society registered under the Karnataka Cooperative Societies Act, 1959. For the Assessment Year 2018-19, return of income was filed on 27.09.2018 declaring total income of Rs.3,54,560/-, after claiming deduction under section 80P of the Act, amounting to Rs.10,86,21,367/-. The assessment was selected for scrutiny and notice under section 143(2) of the Act was issued on 22.09.2019. During the course of assessment proceedings, it was noticed that assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the tune of Rs. 3,67,72,071/- (SCDCC Bank Rs. 3,53,68,999/- + Other Banks Rs. 14,03,072/-). . As per the provisions of section 80P[4] of the I T Act, 1961, deduction U/s 80P is not allowable on income received from banks including cooperative banks. The Hon'ble Supreme Court in the case of Totgar's Society (188 taxmann 282) has held that the interest earned on deposits with banks fall under the category of Income from Other Sources , which are not eligible for deduction U/s 80P of the 1 T Act, 1961. The AO in his assessment order has applied the above legal provisions only in respect of interest received from Savings Blank account only amounting to Rs. 14,03,072/-. The AO ought to have considered the interest received from SCDCC Bank of Rs. 3,53,68,999/- as income from other sources and disallowed the deduction U/s 80P in respect of income arising from this receipt also. 6. On receipt of the aforesaid notice, assessee filed objections vide its letter dated 26.10.2023 to the proposed revision proceedings under section 263 of the Act. Assessee submitted that there is no error prejudicial to the interest of the Revenue. It was contended that interest income received from ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment is not erroneous or prejudicial to the interest of the Revenue. It was submitted that the investment with SCDCC Bank Ltd., was made on account of compulsions as per the Karnataka Co-operative Societies Act, 1959, and the Rules. Therefore, it was submitted that receipt of the said interest income is very much part of the operational income which is to be assessed under the head profits and gains from business / profession which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. 8. The learned DR strongly supported the orders of the AO and the CIT(A). 9. We have heard the rival submissions and perused the material on record. Assessee had claimed deduction of Rs.10,89,75,925/- under section 80P of the Act. During the course of assessment proceedings, it was noticed that out of the above said amount, a sum of Rs.3,67,72,071/- was received as interest income on investments made by the assessee with SCDCC Bank Ltd., the jurisdictional nodal bank for the primary agricultural credit society in the district of Dakshina Kannada. The AO, during the course of assessment proceedings, had issued several notices under section 142(1) of the Act calling for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rict Central Co Operative Bank] is not the surplus funds available but are done only to be compliant of the statutory requirement as detailed below : a) It is mandatory for a Co Operative Society registered under the KCS Act 1959 to liquidity by investing a minimum of 25% of the Total Deposits accepted by it from Members as Fixed Deposit with District Central Co Operative Bank as SLR Investment and a min of 3% of the Total Deposits as Cash Reserve Ratio (CRR). Communication received in this regard from SCDCC Bank Limited, the jurisdictional nodal Bank for the Primary Agricultural Credit Co Operative Societies in the district of Dakshina Kannada was placed. b) Under Sec 57 (2) of the Karnataka Co Operative Societies Act 1959 , It is mandatory for a Co Operative Society registered under the KCS Act 1959 to set aside a minimum of 25% of its Net Profit and credit it to Reserve Fund Account every year . Sec 57 of the KCS Act 1959 is re-produced here below : 57. Net profits and their disposal.- (1) The net profits of co-operative societies shall be determined in accordance with such rules as may be prescribed and different rules may be made for different classes of cooperative societies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is out of statutory compulsions and is part of operational income entitled to deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the CIT(A) reads as follows: I have carefully considered the facts of the case, the assessment order, written submissions of the appellant, case laws, CBDT's Circular and provisions of Sec 28 of Karnataka Co-Operative Societies Act 1959 referred by the appellant during the appellate proceedings. It is an undisputed fact that the appellant filed the return of income for AY 2017-18 on 27.10.2017 with the claim of deduction u/s 80P(2)(a)(i) of the Act to the tune of Rs. 8,73,74,417/-, which has been denied by the AO on three counts. Firstly, the interest income on investment with District Central Co-operative Society is not a business income and has to be assessed under Income from other sources. Secondly, AO held that the appellant is engaged in credit facility not only with regular members but also with nominal members, which doesn't have the benefit of profit of the society. The contention of the AO is that any earning from non-regular member is distributed amongst regular member which does not fall within the ambit of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Apex Court in the case of Totagar Co-operative Sales Society Vs. ITO reported in 322 ITR 283 (SC) and the jurisdictional High Court s judgment in the case of PCIT Vs. Totagar Co-operative Sales Society reported in 395 TR 711 (Karnakata) had held that if the interest income is received out of investments on account of statutory compulsions, the same needs to be examined by the AO as to whether the aforesaid income is to be assessed as income from business/profession . The grounds raised before the Bangalore Bench of the Tribunal in the case of M/s. Vasavamba Co-operative Society Ltd., Vs. PCIT ( supra ) reads as follows : 5. Without prejudice to the above, the learned Principal Commissioner ought to have considered the submissions of the appellant to the effect that interest received by it amounting to Rs. 1,32,726 from deposits with Mysore Chamarajanagar District Central Co-operative Bank made out of Reserve Fund in compliance with rule 23(2) of the Karnataka Co-operative Societies Rules, 1960 constituted its income from the business of providing credit facilities to the members and accordingly, ought to have held that the Income Tax Officer rightly allowed deduction thereof un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociety Ltd., Vs. ITO in ITA No.478/Bang/2023 (order dated 26.09.2023) M/s. S. K. Goldsmiths Industrial Co-operative Society Ltd., Vs. ITO in ITA No.771/Bang/2023, (order dated 12.12.2023) Sri Jihveshwara Credit Co-op. Society Ltd., Vs. ITO in ITA Nos.547 to 551/Bang/2023 (order dated 29.09.2023). M/s. Deepa Credit Co-operative Society Ltd., Vs. ITO in ITA No.750/Bang/2023 (order dated 07.12.2023). 18. In the case of M/s. S. K. Goldsmiths Industrial Co-operative Society Ltd., Vs. ITO (supra), the relevant finding of the Tribunal reads as follows: 9. We have heard the rival submissions and perused the material on record. The first contention of the learned AR is that investments are made with the Central Co-operative Bank and is in compliance with the requirements under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. Therefore, it was contended that such interest income received on investments made under compulsion under the Karnataka Cooperative Societies Act, 1959, and the relevant Rules, is entitled to benefit of deduction under section 80P(2)(a)(i) of the Act. We find that this issue has been considered by the Bangalore Bench of the Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income from business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observation, I restore the matter to the AO. It is ordered accordingly. 10. In light of the above orders of the Tribunal, we direct the AO to examine whether the interest income received on investment with Central Co-operative Bank is out of compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If it is so, the same may be considered as business income and entitled to deduction under section 80P(2)(a)(i) of the Act. In other words, if assessee society does not comply with the relevant provisions of the Act, and the Rules of Karnataka Cooperative Societies Act, 1959, it cannot carry on its co-operative activities, namely carry on the business of banking or providing credit facilities to its members. Therefore, if the investments are out of compulsion under the Act and relevant Rules, necessarily it is part of assessee s business activity entailing the benefit of section 80P(2)(a)(i) of the Act. 19. In light of the aforesaid reasonings and judicial pronouncements cited supra, since there was factual finding in the instant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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