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TMI Blog2024 (7) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... y co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. 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 [ 2017 (7) TMI 1049 - KARNATAKA HIGH COURT] - The reliance placed by Assessee on the earlier decisions of Tumkur Merchants Souharda Credit Cooperative Ltd. [ 2015 (2) TMI 995 - KARNATAKA HIGH COURT] that the decision in Totgars Cooperative Sale Society [ 2015 (4) TMI 829 - KARNATAKA HIGH COURT] stands explained by the later decision in the case of Totagar co-opeartive sales society [ 2017 (7) TMI 1049 - KARNATAKA HIGH COURT] Thus, we hold that CIT(A) is not justified in granting deduction under section 80P(2)(d) of the Act for the Assessment Years 2017-18, 2018-19 and 2020-21. Deduction u/s 80P(2)(d) concerning interest income from cooperative banks - claim of deduction u/s 57 in respect of the cost of funds for earning such i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Act, 1961 in respect of whole of its income by way of interest earned by it on the deposits or investments made by it during the concerned years with a Co-operative Banks which are not co- operative societies? 4. The CIT(A) has erred in not considering the fact that the interest income received from the co-op. banks has to be disallowed in view of the binding decisions of the Karnataka High Court in the case of M/s. Totagars Co-operative Sale Society reported in 395 ITR 611 and the Hon'ble Apex Court in 322 ITR 283. The Hon'ble Karnataka High Court in the case of M/s Totagars Co-operative Sale Society (supra) categorically held that the income by way of interest earned by the deposit of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a scheduled bank or a co-operative bank and that clause (d) of section 80P(2) of the Act would not apply? 5. For these and other grounds that may be urged upon, the order of CIT(A) may be reversed and that assessment order to be restored. 6. The appellant craves to amend or alter any grounds of appeal or add the same, if deemed necessary. 4. Brief facts of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) held by placing reliance on the judgment of the Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., Ors. Vs. CIT reported in 431 ITR 1 that assessee is entitled to deduction under section 80P(2)(a)(i) of the Act, as there is no prohibition under the Karnataka Co-operative Societies Act, 1959, for admission of nominal members. Further, as regards the interest income received from Co-operative Societies, the CIT(A) held that the same is to be assessed as Income from Other Sources and not entitled to deduction under section 80P(2)(a)(i) of the Act. However, the CIT(A) held that assessee is entitled to deduction under section 80P(2)(d) of the Act since co-operative banks are essentially also a co-operative society. As regards the interest income for Assessment Years 2018-19 and 2020-21, the CIT(A) held that the same is assessed as Income from Other Sources . In holding so, the CIT(A) relied on the judgment of the Hon ble Gujarat High Court in the case of State Bank of India Vs. CIT reported in [2016] 389 ITR 578 and judgment of the Hon ble Kerala High Court in the case of PCIT Vs. M/s. Peroorkada Service Co-operative Bank Ltd., reported in [2022] 442 ITR 141 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Karnataka High 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-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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). The Hon ble Karnataka High Court in the case of Principal Commissioner of Income Tax and Another Vs. Totagars Co-operative Sale Society (supra) 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 Cooperative 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 Cooperative 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to can include within its ambit and scope even the interest income earned by the respondent-assessee, a cooperative 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) iii. The amendment of Section 194A(3)(v) of the Act excluding the Cooperative Banks from the definition of Co- operative 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 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) iv. 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icted 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 Hon ble 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Totagar co-opeartive sales society 395 ITR 611 (Karn.). The reliance placed by the learned counsel for the Assessee on the earlier decisions of the Hon ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) that the decision in Totgars Cooperative Sale Society (supra) stands explained by the later decision in the case of Totagar co-opeartive sales society 395 ITR 611 (Karn.). 16. In light of the aforesaid reasoning and judgment of the Hon ble jurisdictional High Court in the case of PCIT Vs. Totagars Co-operative Sales Society reported in 395 ITR 611 (Karnataka), we hold that CIT(A) is not justified in granting deduction under section 80P(2)(d) of the Act for the Assessment Years 2017-18, 2018-19 and 2020-21. 17. We shall now take up for adjudication the grounds raised in assessee s cross objections. C.O. Nos.10, 11, 12/Bang/2024 18. The grounds raised by the assessee in the CO for the Assessment Years 2017-18, 2018-19 and 2020-21 are identical. They read as follows: 1. Relating to the claim of Interest from cooperative banks under Section 80P(2)(d) 1.1 The respondent cooperative society asserts that the order passed by the Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and taxed as Income from Other Sources, then such interest income must be computed after duly determining and deducting the expenses debited to the income and expenditure account, which are directly related to the generation of this income. 4. Relating to set off of Business loss with Income from other sources before considering deductions under Section 80P(2)(a) 4.1. Without prejudice to the above grounds of cross objection, the respondent prays before this honourable Tribunal that if the interest received from cooperative banks is to be classified and taxed as Income from Other Sources, then any resultant business loss should be first offset against the Income from other sources in accordance with Section 71 of the Income Tax Act, before considering the Deduction available to the respondent under Section 80P(2)(a). 5. The respondent craves leave to add, amend, alter, omit or substitute any of the grounds of appeal at any stage before the appeal is finally heard or adjudicated upon. 19. Assessee has filed a Paper Book enclosing therein the breakup of investment as on the end of Financial Years for the relevant Assessment Years, circular issued by the Deputy Registrar of the Co-ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the relevant Rules. It was further held by the Tribunal that if the investments are out of compulsion under the Act and the relevant Rules, the interest income received out of the investment made under such compulsion would be liable to be taxed as income from business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. The relevant finding of the Bangalore Bench of the Tribunal reads as follows: 7. I have heard the rival submissions and perused the material on record. The interest income is received out of investments made with Apex Co-operative Bank. It is the case of the assessee that the investments are made out of compulsions as per the Karnataka Cooperative Societies Act, 1959, and the relevant Rules. The Hon ble Apex Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank (supra) had held that when amounts are invested by the Cooperative Societies as per the statutory requirements, the same would be entitled to deduction under section 80P(2)(a)(i) of the Act. The Hon ble Apex Court considered the following question of law: Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income derived from working or circulating capital. 7. In the premises, we take the view that the decision of this Court in the case of M.P. Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee. 9. A similar view that has been held by the Hon ble Andhra Pradesh High Court in the case of CIT-II, Hyderabad Vs. Andhra Pradesh State Cooperative Bank Ltd., reported in 336 ITR 516 (AP). 10. The Bangalore Bench of the Tribunal in the case of M/s. The Bharathi Co-operative Credit Society Vs. ITO in ITA No.793/Bang/2022 (order dated 28.11.2022) for Assessment Year 2015-16, following its earlier order in the case of M/s. Vasavamba Co-operative Society Ltd., Vs. The PCIT in ITA No.453/Bang/2020 (Order dated 13.08.2021), had rendered a similar finding which reads as follows: 7.1 In the instant case, it was contended that majority of the interest income is earned out of investments made with Cooperative Banks and is in compliance with the requirement under the Karnataka Co-operative Societies Act and Rules. If the amounts are invested in compliance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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