Income Tax Appellate Tribunal - Bangalore
M/S Honnali Credit Co-Operative ... vs Income Tax Officer Ward-2 , Shimoga on 31 January, 2018
ITA.2752 & 2753/Bang/2017 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BENGALURU BENCH 'B', BENGALURU
BEFORE SHRI. JASON P. BOAZ, ACCOUNTANT MEMBER
AND
SHRI. LALIT KUMAR, JUDICIAL MEMBER
I.T.A Nos.2752 & 2753/Bang/2017)
(Assessment Years : 2011-12 & 2012-13)
M/s. Honnali Credit Co-op Society Ltd,
T. M. Road, Honnali .. Applicant
PAN : AAATH4527L
v.
Income-tax Officer,,
Ward -2, Shivamoga .. Respondent
Assessee by : Shri. Nayaz Pasha, CA
Revenue by : Smt. Padmameenakshi, JCIT
Heard on : 24.01.2018
Pronounced on : 31.01.2018
ORDER
PER LALIET KUMAR, JUDICIAL MEMBER :
These are two appeals filed by the assessee against the order of the CIT (A), Davangere, dt.26.06.2017 and 19.07.2017, for the assessment years 2011-12 and 2012-13 respectively. Both the appeals involve a common question of law, whether the assessee-society is entitled to the benefit of Section 80P(2) on the interest earned on the ITA.2752 & 2753/Bang/2017 Page - 2 deposits made by it to other cooperative banks and societies, be treated as business income or income from other sources.
ITA.2752/Bang/2017 -A. Y.2011-12 :
02. The AO had reopened the assessment of the assessee for AY 2011-12 on the ground that the assessee on the ground that the assessee is not entitled to the benefit of section 80P(2) as the assessee is a cooperative society registered under the Cooperative Societies Act. Further as per the financial statements filed, the assessee is carrying on the activity of accepting the deposits and lending whereby it has income from both lending money and income from deposits.
Assessee has shown the expenditure on payment of interest. The AO has wrongly held that the assessee was carrying on the banking activity and is therefore not entitled to the benefit of Section 80P(2) and therefore as held that the assessee is not eligible for deduction u/s.80P(2)(a)(i) and has also held that the assessee is not eligible for the interest earned on the deposits made with other cooperative societies /banks.
03. The assessee filed appeal before the CIT (A) who, in para 4c of his order has held that the society is eligible for the benefit u/s.80P(2)(a) and deleted the addition of Rs.5,65,666/-.
04. On the other ground of disallowance of Rs.6,72,805/- in respect of AY 2011-12, the CIT (A) relying upon the order of the Hon'ble Supreme Court in the matter of Totgars Cooperative Sale Society Ltd ITA.2752 & 2753/Bang/2017 Page - 3 v. ITO [(2010) 188 Taxman 0282] and the recent judgment of the Hon'ble High Court in Totgars Cooperative Sale Society Ltd v. ITO [(2017) 83 taxmann.com 140] had disallowed the claim of deduction for the amount of Rs.6,72,804/-. Now the assessee is in appeal before us challenging the order of the CIT (A) disallowing the amount of Rs.6,72,804/- being the interest earned on the investment.
05. The Ld. AR had submitted that the aims and objects of the assessee as recorded by the AO is to provide credit facilities to the members and it was also recorded by the AO that assessee is into giving loans and accepting deposits from its members. The AO in page 6 had recorded the financials of the assessee which is as under :
Surety loan 1976129
Business loan 12065034
Mortgage loan 8219233
Vehicle loan 834217
Salary loan 231500
Jewellery loan 8334408
NSC loan 188011
Employee salary loan 215250
Suvarna nidhi deposit loan 552442
Pigmy deposit loan 867567
Building construction 2737605
OD loan 2220000
Total 38441396
ITA.2752 & 2753/Bang/2017 Page - 4
The corresponding funds directly available from members' deposits are:
Pigmy deposits 1802225
Fixed deposit 13903927
Savings deposit 8557518
Current deposit 84291
OD deposit 1155728
Total 35503689
Thus it is clear that the assessee is carrying on the activities only with the members and the loan disbursed by the assessee from the deposits accepted from the members of the assessee society.
06. It was submitted by the Ld. AR that once the CIT (A) held that if the assessee is carrying out the activities envisaged u/s.80P(2)(a)(i) as under :
(i) Carrying on the business of banking or providing credit facilities to its members, or
(ii) A cottage industry, or
(iii) The marketing of agricultural produce grown by its members, or
(iv) The purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or
(v) The processing, without the aid of power, of the agricultural produce of its members, or
(vi) The collective disposal of the labour of its members, or
(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities:
ITA.2752 & 2753/Bang/2017 Page - 5 Then the interest income earned by the assessee by making the deposits in cooperative society / banks would be an activity relatable to the business of the assessee and is therefore eligible for deduction u/s.80P(2)(a) and 80P(2)(d). If the restrictive meaning as sought to be given by the authorities below is given to the interplay of sections 80P(2)(a) and 80P(2)d), in that eventuality then 80P(2)(d) would become redundant and would not have any consequence. The Ld. AR relied upon the judgment of the Hon'ble Karnataka High Court in the matter of ITO v. Tumkur Merchants Souharda Credit Cooperative Ltd [55 taxmann.com 447] and has submitted that the ratio of the Hon'ble Supreme Court has been distinguished by the Hon'ble jurisdictional High Court on the basis of the facts as the aims and objects and activities of the assessee society in that case i.e, Tumkur Merchants Souharda (supra) were found to be distinguishable from Totgars Cooperative Sale Society Ltd. Our attention was drawn to para 9 and 10 to the following effect :
9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, 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 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 ITA.2752 & 2753/Bang/2017 Page - 6 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. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order:
07. On the other hand the Ld DR had ably submitted that the authorities below were right in disallowing the claim of the assessee-
society on the basis of its reliance on the recent judgment of the Hon'ble jurisdictional High Court in the matter of Pr. CIT v. Totgars Cooperative Sale Society [83 Taxmann.com 140]. Our attention was drawn to para 22 and 23 which read as under :
22. Again, the Division Bench of Punjab and Haryan High Court in still a later decision reported in the same volume of ITR in the case of CIT v. Punjab State Co-operative Agricultural Development Bank Ltd. [2016] 389 ITR 607/76 taxmann.com 307 (Punj. & ITA.2752 & 2753/Bang/2017 Page - 7 Har.) concurred with the aforesaid view of the Gujarat High Court, distinguishing the view taken by the Andhra Pradesh High Court and Karnataka High Court, held in the following terms:
'30. We are entirely in agreement with the judgment of the Gujarat High Court especially the observation that the judgment of the Supreme Court is not restricted only to the investments made by the assessee from the amounts retained by it which were payable to its members and that the judgment also applies in respect of other funds not immediately required for business purposes.
We reproduced paragraph 15 of the judgment only to indicate that we uphold the appellant's case only on the ground that the assessee is not entitled to the said deduction on the basis that it is engaged in carrying on the business of providing credit facilities to its members. We do not express any opinion as to whether the appellant would be entitled to the said benefit in the event of it being held that the assessee is also engaged in carrying on the business of banking. That is an issue that the Tribunal would decide upon remand pursuant to this order.
31. Mr. Bansal relied upon the judgment of the Andhra Pradesh High Court in CIT v. A. P. State Co-operative Bank Ltd. [2011] 336 ITR 516 (AP). The judgment is distinguishable. In that case, the respondent-assessee was a co-operative society engaged in the business of banking and it was held that the assessees were subject to the regulations of the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. The Division Bench distinguished the judgment of the Supreme Court in Totgar's case (supra) on the ground that the Supreme Court was not dealing with the case relating to co-operative banks. The present appeal is not being considered on the basis that banking is the assessee's business either.
32. Mr. Bansal relied upon the judgment of the Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO [2015] 55 taxmann.com 447 (Karn). In that case, the assessee-co-operative society provided credit facilities to its members and earned interest from short- term deposits with banks and from savings bank accounts. The interest income earned by the assessee by providing credit facilities to its members was deposited in banks for a short duration which earned interest. The question was whether this interest was attributable to the business of ITA.2752 & 2753/Bang/2017 Page - 8 providing credit facilities to the members. The Division Bench held as follows :
"8. Therefore, the word 'attributable to' is certainly wider in import than the expression 'derived from'. Whenever the Legislature wanted to give a restricted meaning, they have used the expression 'derived from'. The expression 'attributable to' being of wider import, the said expression is used by the Legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A co-operative 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.
9. In this context when we look at the judgment of the apex court in the case of Totgar's Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-co-operative 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 brought, 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 can not 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. Further they ITA.2752 & 2753/Bang/2017 Page - 9 made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
10. In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. A. P. State Co-operative Bank Ltd. reported in [2011] 336 ITR 516 (AP) ; [2011] 200 Taxman 220/12 taxmann.com 66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the Revenue. Hence, we pass the following order. Appeal is allowed."
(The reproduction is from the original website of the Karnataka High Court).
There is an important distinction. The Division Bench expressly held in paragraph 10 that interest income was attributable to the business of banking and, therefore, liable to be deducted under section 80P(2)(a)(i) of the Act. At the cost of repetition, we have not considered whether the assessee carries on the business of banking. If it is established upon remand that the assessee carries on the business of banking the result may be different. In any event assuming that the judgment is not distinguishable on this ground, we would with respect disagree with the same in view of the judgments that we have already referred to and on the basis of our interpretation of Totgar's case. In any event, we are with respect unable to agree with the observations that the Supreme Court in Totgar's case (supra) did not lay down any law.
33. For the same reason, the judgment of the Karnataka High Court in Guttigedarara Credit Co-operative Society Ltd. v. ITO [2015] 377 ITA.2752 & 2753/Bang/2017 Page - 10 ITR 464 (Karn); [2015] 60 taxmann.com 215 (Karn) is of no assistance to the respondent-assessee.'
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, but on a deeper analysis of the facts, it may become ineligible for deduction under Section 80P(2) of the Act. The case in Udaipur Sahakari Upbhokta Thok Bhandar Ltd.(supra) was that of Section 80P(2)(e) of the Act, whereas in the present case, it is under Section 80P(2)(d) of the Act. Hence, the income by way of interest earned by deposit or investment of idle or surplus funds does not change its character irrespective of the fact whether such income of interest is earned from a schedule bank or a co-operative bank and thus, clause (d) of Section 80P(2) of the Act would not apply in the facts and circumstances of the present case. The person or body corporate from which such interest income is received will not change its character, viz. interest income not arising from its business operations, which made it ineligible for deduction under Section 80P of the Act, as held by the Hon'ble Supreme Court.
08. We have heard the rival contention of the parties and perused the record. Admitted facts of both the parties are that the assessee is a society carrying on the business of banking which was providing credit facilities to its members. It is also an admitted fact that an amount of Rs.6,72,804/- was disallowed on the basis of the interest earned on the investment. It is also not disputed that the said interest was earned by the assessee society by making deposits in other cooperative societies / banks. What is disputed before us is that the issue is covered by the judgment of the Hon'ble Supreme Court in Totgars Cooperative Sale Society (supra). In this regard it will be relevant to note that the Hon'ble Supreme Court in the matter of ITA.2752 & 2753/Bang/2017 Page - 11 Totgars ______ [(2010) 188 taxmann.182], at para 10 had recorded as under :
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From a perusal of the above, it is clear that the case before the Hon'ble Supreme Court was in respect to the activities of the assessee which the assessee claims to be falling under 80P(2)(a)(i). Further the Hon'ble Supreme Court in para 8 of the said judgment recorded that the assessee is a cooperative society and is providing credit facilities to its members, agricultural produce grown by its members and thereafter the Hon'ble Supreme Court in para 10 had held that the interest income earned by the assessee society is not attributable to the activities mentioned in 80P(2)(a)(i) or 80P(2)(a)(iii). Whereas in the present case the core activities of the assessee is as rightly mentioned by the Ld. AR, is to provide credit facilities and to accept deposits to and from the members of the society. Therefore there is a difference between the activities of the assessee before us as well as the assessee before the Hon'ble Supreme Court in the matter of Totgars Cooperative Sale Society, as well as before _______. Therefore in our considered opinion the reliance of the CIT (A) on the judgment of the Hon'ble jurisdictional High Court in the matter of Totgars Cooperative Sale Society [2017] 83 taxmann.com 140 is not correct though in our humble understanding of the legal provision as laid down by the Hon'ble jurisdictional High Court in the matter of Totgars Cooperative Sale Society [ ITA 100066 of 2016, dt.16.06.2017] that the ground raised in the appeal before the Hon'ble ITA.2752 & 2753/Bang/2017 Page - 12 jurisdictional High Court pertaining to 80P(2)(d) of the Act, but nonetheless the activities of Totgars Cooperative Sale Society was not falling within the realm of banking and activities as falling under 80P(2)(a)(i). Therefore this judgment will not be of any help to the Revenue. In our view the reasoning given by the Hon'ble jurisdictional High Court in the matter of Tumkur Merchants (supra) in para 9 and 10 (supra) are clearly applicable to the facts and circumstances of the case. In our view therefore the assessee is entitled to deduction u/s.80P(2)(a)(i) r.w.s. 80P(2)(d) of the Act. In view of the above, appeal of the assessee is allowed. ITA.2753/Bang/2017 - AY 2012-13 :
09. The facts and circumstances as existing in ITA.2752/Bang/2017 for AY 2011-12, are similar to the facts of the present case. Therefore following the reasoning given therein, we allow the appeal of the assessee in ITA.2753/Bang/2017.
10. In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on 31st day of January, 2018.
Sd/- Sd/-
(JASON P. BOAZ) (LALIET KUMAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bengaluru
Dated : 31 January, 2018
MCN*
ITA.2752 & 2753/Bang/2017 Page - 13
Copy to:
1. The assessee
2. The Assessing Officer
3. The Commissioner of Income-tax
4. Commissioner of Income-tax(A)
5. DR
6. GF, ITAT, Bangalore
By Order
SENIOR PRIVATE SECRETARY