Income Tax Appellate Tribunal – Bangalore
Income Tax Officer Ward-5(2)(3), … vs M/S The Karnataka State … on 10 December, 2021 IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES “A”, BANGALORE
Before Shri George George K, JM & Shri B.R.Baskaran, AM
ITA No.2874/Bang/2018 : Asst.Year 2015-2016
The Income Tax Officer M/s.The Karnataka State Co-
Ward 5(2)(3) v. operative Housing Federation
Bengaluru. Limited, No.3, Diwan Madhava
Road, Basavangudi
Bengaluru – 560 004.
PAN : AAAAT0299F.
(Appellant) (Respondent)
Appellant by : Sri.Sankar Ganesh K, JCIT-DR
Respondent by : Sri.Sandeep, CA & Sri.Vignesh, CA
Date of
Date of Hearing : 09.12.2021 Pronouncement : 10.12.2021
ORDER
Per George George K, JM:
This appeal at the instance of the Department is directed
against CIT(A)’s order dated 31.07.2018. The relevant
assessment year is 2015-2016.
2. The brief facts of the case are as follows:
The assessee is a co-operative society, constituted as per
the provisions of Karnataka Co-operative Societies Act, 1959.
It is engaged in providing credit facilities 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-
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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 Rs.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 the case of Pr.CIT & Anr.
v. Totagars Co-operative Sale Society reported in (2017) 395
ITR 611 (Kar.), held that the surplus funds invested with
Scheduled Banks and Co-operative Banks are not entitled to
deduction u/s 80P(2)(a)(i) nor u/s 80P(2)(d) of the Act.
3. Aggrieved by the order of the assessment, the
assessee preferred an appeal to the first appellate
authority. The CIT(A) held that the decision relied on
by the Assessing Officer in The Citizen Co-operative Society
Ltd. v. ACIT (supra) is not applicable since the assessee has
been entirely dealing with its members by providing credit
facilities for acquisition of residential sites / flats. The CIT(A)
by placing reliance on the judgment of the Hon’ble Apex Court
in the case of CIT v. Karnataka State Co-operative Apex Bank
reported in (2001) 251 ITR 194 (SC), held that interest arising
from investments made in compliance with the statutory
provision is exempt u/s 80P(2)(a)(i) of the Act. Accordingly,
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the claim of deduction u/s 80P(2)(a)(i) of the Act was allowed
by the CIT(A).
4. The Department being aggrieved by the order of the
CIT(A), has preferred this appeal before the Tribunal. The
grounds raised by the Department read as follows:
“1. The order of the Learned CIT(A) is opposed to law and
facts of the case.
2. Whether on facts and circumstances of the case, the
Learned CIT(A) was right in holding that the assessee was
having only one category of members who are entitled for all
the privileges without any kind of discrimination or distinction
despite the fact that as per Para 25 of the bye law amended
on 29.09.1999, the Society consists of membership of 4
categories viz ‘A’ class members, ‘B’ class members (nominal),
‘C’ class members(Associates) and ‘D’ class members (PSU &
Government) having different powers and privileges.
3. Whether in the facts and circumstances of the case, the
Learned CIT(A) was right in not following the decision of the
Honourable Supreme Court of India in the case of Citizen Co-
operative Society Ltd.(2017) 84 Taxman.com 114(SC).
4. Whether in the facts and circumstances of the case, the
Learned CIT(A) was right in allowing deduction u/s 80P(2)(d)
of interest earned by the assessee from another Co-op. Bank
and thus not following the decision of the Honourable
Karnataka High Court in the case of PCIT Vs Totgars Co-op
Sale 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.”
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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’ble jurisdictional High Court in the case of Totagars
Co-operative Sale Society Ltd. v. ITO reported in [2015] 58
Taxmann.com 35 (Karnataka) (judgment dated 25.03.2015).
The learned AR also relied on the judgment of the Hon’ble
Apex Court in the case of Mavilayi Service Co-operative Bank
Ltd. & Ors. v. CIT & Anr. Reported in (2021) 431 ITR 1 (SC), for
the proposition that the assessee is entitled to deduction u/s
80P(2)(a)(i) of the Act.
7. We have heard rival submissions and perused the
material on record. The recent order of the Tribunal in the
case of M/s.Vasavamba Co-operative Society Ltd. v. The
Pro.CIT in ITA No.453/Bang/2020 (order dated 13.08.2021)
by following the judgment of the Hon’ble jurisdictional High
Court in the case of Totagars Co-operative Sale Society v.ITO
reported in (2017) 395 ITR 611 (Kar.) held that interest income
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earned out of investments made from surplus funds would be
taxable under the head `income from other sources’ and
would not be eligible for deduction u/s 80P(2)(a)(i) of the Act.
It was further held by the Tribunal insofar as the deduction
u/s 80P(2)(d) of the Act is concerned, only those interest
received from investment with co-operative societies alone
would be entitled to deduction. The relevant funding of the
Tribunal reads as follows:-
“9. The Hon’ble Supreme Court in the case of the The Totgars
Co-operative Sale Society Ltd. Vs. ITO 322 ITR 283 (SC) held that
Income from utilisation of surplus funds was taxable under the head
income from other sources, and therefore not eligible for deduction
u/s 80P. The Hon’ble Karnataka High Court in case of Tumkur
Merchants Souharda Credit Cooperative Ltd. vs. ITO (230 Taxman
309), was dealing with a case where deduction u/s.80P(2)(a)(i) of
the Act was claimed on interest from the deposits made in a
nationalized bank out of the amounts which was used by the
assessee for providing credit facilities to its members. The
Assessee claimed that the said interest amount is attributable to the
business of providing credit facilities by the assessee and forms
part of profits and gains of business. The Hon’ble Karnataka High
Court after considering SC judgment in case of Totgars(supra)
held that since the word income is qualified by the expression
“attributable” to the business of Banking is used in Sec.80P(2)(a)(i)
of the Act, it has to receive a wider meaning and should be
interpreted 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-
Cooperative Society, apart from providing credit facilities to the
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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 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. The
Court also observed that even the Hon’ble Supreme made it clear
that they are confining the said judgment to the facts of that case.
The Court therefore concluded that Hon’ble Supreme Court was not
laying down any law. Similar view taken in Guttigedarara Credit Co-
operative Society Ltd. vs. ITO [2015] 377 ITR 464 (Karnataka). In
the case of PRINCIPAL COMMISSIONER OF INCOME TAX AND
ANOTHER vs. TOTAGARS CO-OPERATIVE SALE SOCIETY
392 ITR 0074 (Karn) in the context of deduction u/s.80P(2)(d) of the
Act, it was held that Sec.80P(2)(d) of the Act allows deduction in
respect of any income by way of interest or dividends derived by
the co-operative society from its investments with any other co-
operative society, the whole of such income. The Hon’ble Court
held that that the aforesaid Supreme Court’s decision in the case of
Totgars (supra), was not applicable to deduction u/s.80P(2)(d) of
the Act, because the said decision was rendered with regard to
deduction under Section 80P(2)(a)(i) of the Act and not under
Section 80P(2)(d) of the Act.
10. However, the Hon’ble Karnataka High Court in the case of
PRINCIPAL COMMISSIONER OF INCOME TAX AND ANOTHER
vs. TOTAGARS CO-OPERATIVE SALE SOCIETY 395 ITR 0611
(Karn) took a different view and held that interest income earned on
deposits whether with any other bank will be in the nature of
income from other sources and not income from business and
therefore the deduction u/s.80P(2)(d) of the Act cannot be allowed
to the Assessee. The Hon’ble 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
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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 80P(2)(d) of the Act?”
11. The Hon’ble Court held that such 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.80P(2)(d) of the Act. The
following points can be culled out from the aforesaid decision:
1. What Section 80P(2)(d) of the Act, which was though
not specifically argued and canvassed before the Hon’ble
Supreme Court, envisages is that such interest or dividend
earned by an assessee co-operative society should be out of
the investments with any other co-operative society. The
words ‘Co-operative Banks’ are missing in clause (d) of
subsection (2) of Section 80P of the Act. Even though a co-
operative bank may have the corporate body or skeleton of a
co-operative society but its business is entirely different and
that is the banking business, which is governed and
regulated by the provisions of the Banking Regulation Act,
1949. Only the Primary Agricultural Credit Societies with
their limited work of providing credit facility to its members
continued to be governed by the ambit and scope of
deduction under Section 80P of the Act. (Paragraph 13 of
the Judgment).
2. The banking business, even though run by a Co-
operative bank is sought to be excluded from the beneficial
provisions of exemption or deduction under Section 80P of
the Act. The purpose of bringing on the statute book sub-
section (4) in Section 80P of the Act was to exclude the
applicability of Section 80P of the Act altogether to any co-
operative bank and to exclude the normal banking business
income from such exemption/deduction category. The words
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used in Section 80P(4) are significant. They are: “The
provisions of this section shall not apply in relation to any co-
operative bank other than a primary agricultural credit
society …..”. The words “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 “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)
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
that in paragraph 8 of the said order passed by a co-
ordinate bench that the learned Judges have observed that
“the issue whether a co-operative bank is considered to be a
co- operative society is no longer res integra, for the said
issue has been decided by the Income Tax Appellate
Tribunal itself in different cases…………..”.
No other binding precedent was discussed in the said
judgment. Of course, the Bench has observed that a Co-
operative Bank is a specie of the genus co- operative
Society, with which we agree, but as far as applicability of
Section 80P(2) of the Act is concerned, the applicability of
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the Supreme Court’s decision cannot be restricted only if the
income was to fall under Section 80P(2)(a) of the Act and
not under Section 80P(2)(d) of the Act.(Paragraph-18 of the
Judgment)
6. The Court finally concluded that it would not make a
difference, whether the interest income is earned from
investments/deposits made in a Scheduled Bank or in a Co-
operative Bank. Therefore, the said decision of the Co-
ordinate Bench is distinguishable and cannot be applied in
the present appeals, in view of the binding precedent from
the Hon’ble Supreme Court.” (Paragraph 19 of the
Judgment)
12. The Hon’ble Karantaka High Court in the aforesaid decision
also placed reliance on a decision of the Hon’ble Gujarat High
Court in the case of STATE BANK OF INDIA (SBI) vs.
COMMISSIONER OF INCOME TAX 389 ITR 0578 (Guj) did not
agree with the view taken by the Karnataka High Court in Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) that the
decision of the Supreme Court in Totgars Co-operative Sale
Society (supra) 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 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 said to be attributable to the activities of the
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society, namely, carrying on the business of providing credit
facilities to its members or marketing of agricultural produce of its
members. The court has held that when the assessee society
provides credit facilities to its members, it earns interest income.
The interest which accrues on funds not immediately required by
the assessee for its business purposes and which has been
invested in specified securities as “investment” are ineligible for
deduction under section 80P(2)(a)(i) of the Act. (Paragraph-13 of
the Judgment)
13. It can thus be seen that the ratio laid down by the Hon’ble
Karnataka High Court in the case of Totalgars Cooperative Sales
Society in 395 ITR 611 (Karn) is that in the light of the principles
enunciated by the Supreme Court in Totgars Co-operative Sale
Society (supra), in case of a society engaged in providing credit
facilities to its members, income from investments made in banks
does not fall within any of the categories mentioned in section
80P(2)(a) of the Act. However, section 80P(2)(d) of the Act
specifically exempts interest earned from funds invested in co-
operative societies. Therefore, to the extent of the interest earned
from investments made by it with any 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.
14. The CIT was therefore justified in exercising his powers of
revision u/s.263 of the Act and directing the AO to tax interest
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 611
(Karn.). The reliance placed by the learned counsel for the
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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 Co-operative
Sale Society (supra) stands explained by the later decision in the
case of Totagar co-opeartive sales society 395 ITR 611 (Karn.).
17. We however find that the Assessee has raised the following
grounds of appeal in its appeal, viz.,
“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 under
section 80-P(2)(a)(i) of the Income Tax Act, 1961.
6. Without prejudice to the above, the learned Principal
Commissioner ought to have taken note of the submissions
made by the appellant that interest received by it amounting
to Rs. 1,32,726 from deposits with Mysore &Chamarajanagar
District Central Co-operative Bank made in compliance with
section 58 of the Karnataka Co-operative Societies Act, 1959
constituted its income from the business of providing credit
facilities to the members and accordingly, ought to have held
that the deduction under section 80-P(2)(a)(i) of the Income
Tax Act, 1961 in respect thereof was rightly allowed by the
Income Tax Officer.
7. Without prejudice to the above, the learned Principal
Commissioner ought to have considered the submissions of
the appellant to the effect that the interest received by it
amounting to Rs. 1,32,726 from deposits with Mysore &
Chamarajanagar District Central Co-operative Bank made in
compliance with rule 28 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 appellant was eligible
for deduction thereof under section 80-P(2)(a)(i) of the
Income Tax Act, 1961.”
18. The issue raised by the Assessee in the aforesaid 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
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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 co-
operative 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 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.
7.2 Insofar as the deduction u/s 80P(2)(d) of the Act is
concerned, we make it clear that the interest income received
out of investments with co-operative societies alone is to be
allowed as deduction. As regards the 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
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u/s 57 of the Act, we find an identical issue was considered
by the Hon’ble jurisdictional High Court in the case of
Totagars Co-operative Sale Society Ltd. v. ITO reported in
[2015] 58 Taxmann.com 35 (Karnataka) (judgment dated
25.03.2015). The relevant findings of the Hon’ble High Court,
read as follows:-
“11. Having heard the learned counsel for the parties and
perusing the records and in the light of the finding recorded by the
Hon’ble Supreme Court that the interest income earned by the
appellant falls within the category of “other income” what falls for
consideration is to answer the question as to whether the Tribunal
was right in law in holding that the income by way of interest was
chargeable to tax under Section 56 of the Income Tax Act without
allowing deduction in respect of proportionate costs incurred as
permissible under Section 57.
12. It is no doubt true that the appellant did initially claim
deduction under Section 80P(2). Upon the pronouncement of the
order by the Apex Court, in these appeals referred to supra, the
income earned on the interest is declared as “other income” falling
under Section 56 of the Income Tax Act. Then the next immediate
question that follows is as to whether the entire fund i.e., in deposit
with the Bank is taxable or the proportionate expenditure incurred
by the appellant requires deduction. It is logical that when the
Revenue is permitted to assess and recover taxes from assessee
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
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net income has to be taxed (i.e., gross receipt minus allowable
expenditure), this plea of the assessee has to be necessarily
entertained, especially in the light of the judgment of the
Hon’ble jurisdictional High Court in the case of Totagars Sale
Co-operative Society Limited v. ITO [2015] 58 taxmann.com
35 (Karnataka). Accordingly, the issue of deduction u/s 57 of
the I.T.Act is restored to the files of the A.O. The A.O. is
directed to examine whether assessee has incurred any
expenditure for earning interest income, which is assessed
under the head `income from other sources’. If so, the same
shall be allowed as deduction u/s 57 of the I.T.Act.
7.4 Moreover, the recent judgment of the Hon’ble Apex Court
in the case of The Mavilayi Service Co-operative Bank Ltd. &
Ors. v. CIT (supra) had held that the expression “members” is
not defined under the Income-tax Act. Hence, it is necessary
to construe the term “members” in section 80P(2)(a)(i) of the
I.T.Act as it is contained in the respective State Co-operative
Act. The Hon’ble Apex Court had held that providing credit
facilities to associate or nominal members would be entitled
to deduction u/s 80P(2)(a)(i) of the I.T.Act unless they are not
considered as “members” of the co-operative societies under
the respective State Act. The Hon’ble Apex Court has also
considered the judgment in case of Citizen Co-operative
Society Ltd. (supra). The Hon’ble Apex Court has settled many
issues. The gist of the judgment of the Hon’ble Apex Court,
are as follows:
(i) Section 80P is a benevolent provision enacted by
the Parliament to encourage and promote the credit of
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the co-operative sector in general must be read liberally
and reasonably, if there is ambiguity, in favour of the
assessee (para 45 of the judgment).
(ii) The co-operative societies extending credit facilities
are entitled to deduction u/s 80P(2)(a)(i) and if there are
loans to non-members, only profits attributable to the
transactions with the non-members alone is liable to be
excluded from the deduction. That is to say that the
transactions with non-members per se would not
disentitle a co-operative society from claiming the
deduction under the section. If the state Act (the Co-
operative Law) provides for enrollment of ‘nominal
members’, the loans given to such nominal members
would qualify for the purpose of deduction u/s
80P(2)(a)(i). (Para 30 to 46 of the Judgment)
(iii) Under clause (d) of section 80P(2), the interest or
dividend income derived by a co-operative 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 co-
operative 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
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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 Revenue is allowed
for statistical purposes.
Order pronounced on this 10th day of December, 2021.
Sd/- Sd/-
(B.R.Baskaran) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore; Dated : 10th December, 2021.
Devadas G*
Copy to :
1. The Appellant.
2. The Respondent.
3. The CIT(A)-5, Bengaluru.
4. The Pr.CIT, 5, Bengaluru.
5. The DR, ITAT, Bengaluru.
6. Guard File.
Asst.Registrar/ITAT, Bangalore
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