Income Tax Appellate Tribunal - Bangalore
M/S Tumkur Merchants Souharda Credit ... vs Assessee on 19 February, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
ITA Nos.1622/Bang/2012
Assessment year : 2009-10
M/s. Tumkur Merchants Souharda Vs. The Income Tax Officer,
Credit Co-operative Ltd., Ward 1,
1st Floor, Veerashaiva Kalyana Tumkur.
Mantap Building, J.C. Road,
Tumkur. PAN : AABAT 3140N
APPELLANT RESPONDENT
ITA Nos.1674/Bang/2012
Assessment year : 2009-10
The Income Tax Officer, Vs. M/s. Tumkur Merchants Souharda
Ward 1, Credit Co-operative Ltd.,
Tumkur. Tumkur. PAN : AABAT 3140N
APPELLANT RESPONDENT
Appellant by : Shri S. Ramasubramanian, C.A.
Respondent by : Shri Bijoy Kumar Panda, Addl.CIT(DR)
Date of hearing : 19.02.2014
Date of Pronouncement : 21.02.2014
ORDER
Per Bench ITA No.1674/B/12 is an appeal by the revenue and ITA No.1672/B/12 is an appeal by the assessee. Both these appeals are directed against the order dated 11.10.2012 of the CIT(Appeals)-II, Bangalore relating to assessment year 2009-10.
ITA Nos. 1672 & 1674/Bang/2012 Page 2 of 17
2. The grounds raised by the revenue in its appeal is with regard to the action of the CIT(Appeals) in allowing deduction u/s. 80P(2)(a)(i) of the Act in respect of profits derived by it from the business of providing credit facilities to its members. The contention of the revenue is that the assessee is a cooperative bank. By virtue of section 80P(4) of the Act, the assessee's income claimed as exempt u/s. 80P(2)(a)(i) of the Act has to be rejected.
3. By the Finance Act, 2006 w.e.f. 1-4-2007, Sub-section (4) was inserted in Sec.80-P which provides as follows:
"(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
Explanation : For the purposes of this sub-section,--
(a) "co-operative bank" and "primary agricultural credit society"
shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities."
4. The AO was of the view that after amended by the Finance Act, 2006 w.e.f. 1.4.2007 by which sub-section (4) was inserted, the Assessee which was a co-operative society carrying on banking business was not entitled to deduction u/s.80P(2)(i) of the Act. According to the AO, the ITA Nos. 1672 & 1674/Bang/2012 Page 3 of 17 assessee was a co-operative bank and therefore the deduction u/s. 80P(2)(a)(i) cannot be allowed. In coming to the above conclusion, the AO noticed that the nature of the activity of the assessee, though registered as a credit co-operative society, is that of a banking institution notwithstanding the fact that receipt of and lending money is limited to its members. The AO further noticed that clause (viia) in section 2(24) of the Act was inserted by the Finance Act 2006 effective from 1/4/2007, which provides that profits and gains of any business (including providing credit facilities) carried on by a co-operative society with its members the assessee's activity was also "Income". That the deduction from gross total income of certain receipts is available only to primary agricultural credit societies or primary co-operative agricultural and rural development banks; and that the benefit of such deduction is not available to institutions like the assessee society. The AO also referred to section 5(b) of the Banking Regulation Act to hold that, if one of the two conditions of the appellant i.e. its primary object should be banking or its principal business must be transaction in banking business, is sufficient to bring the appellant into the concept of a banking institution. The AO referred to the objects of the assessee society in its bye laws that the activities of the assessee fall within the provisions of sections 5(b), 6(1)(a), 6(1)(g), 6(1)(k) and 6(1)(n) of the Banking Regulations Act and held that, broadly, they are in the nature of banking activity. According to the AO, the following features make the assessee ineligible to exemption contemplated in section 80P of the Act:
ITA Nos. 1672 & 1674/Bang/2012 Page 4 of 17
i) Since membership is open to anyone paying a sum of Rs.10/- to Rs.100/- for membership and no other condition is imposed. In other words, membership as is available in any banking institution is available in the case of the appellant society.
ii) The purpose of accepting deposits from the public is for making investments and for lending to members.
Confining the lending only to members makes no difference.
iii) Deposits collected from the depositors are repayable on demand and do not go into the corpus of the appellant.
iv) Though withdrawal of money is not done by cheques, drafts or pay-out slips, pay orders are issued in favour of a person on behalf of the depositor.
v) The assessee society came within the Explanation to sub-
section (4) of section 80P of the Act as a banking institution.
5. In the light of the above-mentioned observations, the AO held that the appellant was not entitled to exemption u/s 80P(2)(a)(i) of the Act and brought the same to tax.
6. On appeal by the assessee, the CIT(Appeals) allowed the claim of the assessee for deduction u/s. 80P(2)(a)(ii) of the Act by following the decision of ITAT in the following cases:-
i) ACIT, Circle-3(1), Bangalore v. M/s Bangalore Commercial Transport Credit Co-operative Society Ltd. -
ITA.No.1069/Bang/2010 dated 8/4/2011 [ITAT, Bangalore Bench 'B', Bangalore] ITA Nos. 1672 & 1674/Bang/2012 Page 5 of 17
ii) ITO, Ward-1(4) v. Jankalyan Nagri Sahakari Pat Sanstha Ltd. [(2012) 24 taxmann.com 127 (Pune-Trib) dated 26/6/2012]
iii) DCIT, Central Circle, Panaji v. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. ITA Nos. 1 to 3 (PNJ)/1012 dated 30/3/2012.
7. Aggrieved by the order of the CIT(Appeals), the revenue has filed the present appeal before the Tribunal.
8. At the time of hearing, it was seen that the issue raised by the revenue has already been considered and decided by this Tribunal in the case of ACIT, Circle 3(1), Bangalore v. M/s. Bangalore Commercial Transport Credit Co-operative Society Ltd. in ITA No.1069/Bang/2010, wherein this Tribunal held that section 80P(4) is applicable only to cooperative banks and not to credit cooperative societies. The intention of the legislature of bringing in cooperative banks into the taxation structure was mainly to bring in par with commercial banks. Since the assessee is a cooperative society and not a cooperative bank, the provisions of section 80P(4) will not have application in the assessee's case and therefore, it is entitled to deduction u/s 80P(2)(a)(i) of the Act. The following were the relevant observations of the Tribunal:-
"9. We have heard the rival submissions and perused the material on record. The assessee was denied the deduction u/s 80-P(2)(a)(i) of the Act for the reason of introduction of sub section 4 to section 80P. Section 80P(4) reads as follows:-
ITA Nos. 1672 & 1674/Bang/2012 Page 6 of 17 "(4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank.
Explanation: For the purposes of this sub-section,
(a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(b) "primary cooperative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long term credit for agricultural and rural development activities".
9.1 The above sub-section 4 of section 80P provides that deduction under the said section shall not be available to any cooperative bank other than a primary agricultural credit society or rural development bank. For the purpose of the said sub section, cooperative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949. In Part V of the Banking Regulation Act, "cooperative bank" means a State Cooperative Bank, a Central Cooperative Bank and a Primate Cooperative Bank.
9.2 From the above section, it is clear that the provisions of section 80P(4) has got its application only to cooperative banks. Section 80P(4) does not define the word "cooperative society". The existing sub-section 80P(2)(a)(i) shall be applicable to a cooperative society carrying on credit facility to its members. This view is clarified by Central Board of Direct Tax vide its clarification No.133/06/2007-TPL dated 9th May, 2007. The difference between a cooperative bank and a cooperative society are as follows:-
ITA Nos. 1672 & 1674/Bang/2012 Page 7 of 17 Cooperative society registered under Cooperative society registered Nature Banking Regulation Act, 1949 under Karnataka Cooperative Society Act, 1959.
Registra Under the Banking Regulation Act, Cooperative Societies Act,
-tion 1949 and Cooperative Societies Act, 1959.
1959.
Nature 1. As defined in section 6 of Banking 1. As per the bye laws of the of Regulation Act. cooperative society. business 2. Can open savings bank account, 2. Society cannot open savings current account, overdraft account, bank account, current account, cash credit account, issue letter of issue letter of credit, credit, discounting bills of exchange, discounting bills of exchange, issue cheques, demand drafts (DD), issue cheques, demand drafts, Pay Orders, Gift cheques, lockers, pay orders, gift cheques, bank guarantees etc. lockers, bank guarantees etc. 3. Cooperative Banks can act as 3. Society cannot act as clearing agent for cheques, DDs, pay clearing agent, for cheques, orders and other forms. DDs, pay orders and other 4. Banks are bound to follow the forms.
rules, regulations and directions 4. Society are bound by rules issued by Reserve Bank of India and regulations as specified by (RBI). in the cooperative societies act.
Filing of Cooperative banks have to submit Society has to submit the returns annual return to RBI every year. annual return to Registrar of Societies.
Inspec- RBI has the power to inspect Registrar has the power to
tion accounts and overall functioning of inspect accounts and overall
the bank. functioning of the bank.
Part V Part V of the Banking Regulation Act Part V of the Banking
is applicable to cooperative banks. Regulation Act is not applicable
to cooperative banks.
Use of The word 'bank', banker', 'banking' can The word 'bank', banker',
words be used by a cooperative bank. 'banking' cannot be used by a
cooperative society.
9.3 If the intention of the legislature was not to grant
deduction u/s 80P(2)(a)(i) to cooperative societies carrying on the business of providing credit facilities to its members, then this section would have been deleted. The new proviso to section 80P(4) which is brought into statute is applicable only to cooperative banks and not to credit cooperative societies. The intention of the legislature of bringing in cooperative banks into the taxation structure was mainly to bring in par with commercial banks. Since the assessee is a cooperative society and not a cooperative bank, the provisions of section 80P(4) will not have application in the assessee's case and therefore, it is entitled to deduction u/s 80P(2)(a)(i) of the Act. Hence, ITA Nos. 1672 & 1674/Bang/2012 Page 8 of 17 we are of the view that the order of the CIT(A) is correct and in accordance with law and no interference is called for."
9. The Hon'ble Gujarat High Court in the case of Tax appeal No.442 of 2013 with Tax appeal No.443 of 2013 with Tax appeal No.863 of 2013 in the case of CIT Vs. Jafari Momin Vikas Co-op Credit Society Ltd. by judgment dated 15.1.2014 had to deal with the following question of law:
"Whether the Hon'ble Tribunal is correct in allowing deduction under section 80P(2)(a)(i) to assessee's society even though same is covered under section 80P(4) rws 2(24) (viia) being income from providing credit facilities carried on by a co-operative society with its member?"
The Hon'ble Court held as follows:
"4. As per section 80P(4), the provisions of section 80P would not apply in relation to any co-operative bank other than primary agricultural credit society or primary co-operative agricultural and rural development bank. As per the explanation, the terms "co- operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949.
5. Assessing Officer held that by virtue of section 80P(4), the respondent assessee would not be entitled to benefits of deduction under section 80P. CIT(Appeals) as well as the Tribunal reversed the decision of the Assessing Officer on the premise that the respondent assessee not being a bank, exclusion provided in sub-section(4) of section 80P would not apply. This, irrespective of the fact that the respondent would not fall within the expression "primary agricultural credit society".
6. Had this been the plain statutory provisions under consideration in isolation, in our opinion, the question of law could be stated to have arisen. When, as contended by the assessee, by virtue ITA Nos. 1672 & 1674/Bang/2012 Page 9 of 17 of subsection(4) only co-operative banks other than those mentioned therein were meant to be excluded for the purpose of deduction under section 80P, a question would arise why then Legislature specified primary agricultural credit societies along with primary cooperative agricultural and rural development banks for exclusion from such exclusion and in other words, continued to hold such entity as eligible for deduction. However, the issue has been considerably simplified by virtue of CBDT circular No.133 of 2007 dated 9.5.2007. Circular provides as under:-
"Subject: Clarification regarding admissibly of deduction under section 80P of the Income-Tax Act, 1961.
1. Please refer to your letter no.DCUS/30688/2007, dated 28.03.2007 addressed to Chairman, Central Board of Direct Taxes, on the above given subject.
2. In this regard, I have been directed to state that sub-section(4) of section 80P provides that deduction under the said section shall not be allowable to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co-operative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949.
3. In part V of the Banking Regulation Act,"Co- operative Bank" means a State Co-operative bank, a Central Co-operative Bank and a primary Co-operative bank.
4. Thus, if the Delhi Co op Urban T & C Society Ltd. does not fall within the meaning of "Co-operative Bank" as defined in part V of the Banking Regulation Act, 1949, subsection(4) of section 80P will not apply in this case.
5. The issues with the approval of Chairman,Central Board of Direct Taxes."
7. From the above clarification, it can be gathered that sub- section(4) of section 80P will not apply to an assessee which is not a co-operative bank. In the case clarified by CBDT, Delhi Coop Urban Thrift & Credit Society Ltd. was under
consideration. Circular clarified that the said entity not being a ITA Nos. 1672 & 1674/Bang/2012 Page 10 of 17 cooperative bank, section 80P(4) of the Act would not apply to it. In view of such clarification, we cannot entertain the Revenue's contention that section 80P(4) would exclude not only the co- operative banks other than those fulfilling the description contained therein but also credit societies, which are not cooperative banks. In the present case, respondent assessee is admittedly not a credit co-operative bank but a credit co- operative society. Exclusion clause of sub-section(4) of section 80P, therefore, would not apply. In the result, Tax Appeals are dismissed."
10. In view of the aforesaid decisions, we are of the view that there is no merit in this appeal by the revenue. Consequently, the same is dismissed.
11. As far as the appeal by the assessee is concerned, the issue raised by the assessee in the grounds of appeal reads thus:-
"2. The learned Commissioner of Income Tax (A) erred in law and on facts in holding that the sum of Rs.1,77,305/- being the interest on deposits with banks is not entitled to deduction u/s. 80P(2)(a)(i) of the Act.
3. Without prejudice to ground No.2, the learned Commissioner of Income Tax (A) erred in law and on facts in holding entire income of Rs.1,77,305/- is taxable without allowing the permissible deduction towards expenses."
12. As we have already seen, the assessee is a cooperative society. The assessee earned interest income on deposit of surplus funds, which it had deposited in banks. The assessee claimed deduction u/s. 80P(2)(a)(i) of the Act in respect of interest earned on such deposits. The AO as well as the CIT(Appeals) held that the interest income in question cannot be ITA Nos. 1672 & 1674/Bang/2012 Page 11 of 17 treated as income earned on the business of providing credit facilities to its members and would therefore not fall within section 80P(2)(a)(i) of the Act to claim exemption. In coming to the aforesaid conclusion, the CIT(Appeals) placed reliance on the decision of the Hon'ble Supreme Court in the case of The Totgars Co-operative Sale Society Ltd. Vs. ITO, 322 ITR 283 (SC).
13. The ld. counsel for the assessee submitted that in the case of The Totgars Co-operative Sale Society Ltd. (supra), the Assessee received Interest from bank deposits and Government securities. The Assessee was a co-operative society which markets the produce of its members and at times retained the sale proceeds. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The Hon'ble Supreme Court held that Interest on such deposits/securities fell under the head "Income from other sources" and hence it is taxable under s. 56 and cannot fall within the expression "profits and gains of business". It was held that such interest income cannot be said to be attributable to the activities of the society namely, business of providing credit facilities to its members or marketing of agricultural produce of its members. The learned counsel for the Assessee sought to distinguish the aforesaid decision by laying emphasis on the fact that the Assessee in the present case was a co-operative credit society engaged in providing credit facility to its members. It was submitted ITA Nos. 1672 & 1674/Bang/2012 Page 12 of 17 by him that the Assessee collects deposits from its members and invests the funds not required for immediate use in other banks to ensure that the money is readily available to meet the demands of the depositors. According to him, the earning of interest on deposits with banks was attributable to the activity of providing credit facilities to its members and therefore deduction u/s.80P(2)(a)(i) of the Act has to be allowed to the Assessee. It was submitted that the view taken by the revenue in not allowing deduction u/s.80P(2)(a)(i) of the Act was not correct.
14. The learned DR reiterated the stand of the revenue as reflected in the order of the CIT(A).
15. We have given a very careful consideration to the rival contentions. The Assessee is a Society registered under the Co-operative Societies Act providing credit facilities to its members. The Assessee accepts deposits from members and lends money only to members. The income of the society is in the form of the interest that it earns on credit facilities extended to its members. Under Section 80P(2)(a)(i) of the Act, the profits and gains of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is exempt. What is exempt is the business income attributable to the activities of banking or providing credit facilities to the members which is included in the gross total income of the society. Deduction will be allowed only when there is direct or proximate connection with or nexus to the income and the business carried ITA Nos. 1672 & 1674/Bang/2012 Page 13 of 17 on by the Society. As we have already seen, in the present case, the interest income which is in dispute in the present appeal arises out of fixed deposit with banks. The claim of the Assessee is that the fixed deposits in banks were made to repay fixed deposits to the members and also to ensure that funds are not kept idle and they earn some interest income. As we have already seen that there should be nexus between the earning of interest and business of the Assessee. The interest income earned on extending credit facilities will be business income as there exists nexus between the income and the business of the society which is extending credit facility to its members. One cannot say that there is such nexus between the interest earned on deposits made with the banks. It may be true that deposits are made in banks so that the funds are not kept idle and also to ensure that deposits are repaid on maturity. Whatever may be the motive for making deposits with banks that cannot change the character of interest income earned on deposit made in banks as one arising from business of providing credit facility to its member. In fact the issue has been dealt with threadbare by the Hon'ble Supreme Court in the case of Totgars CCS Ltd. (supra). In para-10 of its order, the Hon'ble Supreme Court has held that interest income earned by investing funds not immediately required for business purposes, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its ITA Nos. 1672 & 1674/Bang/2012 Page 14 of 17 members or marketing of the agricultural produce of its members. The following were the relevant observations of the Hon'ble Supreme Court:
"10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under s. 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under s. 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is -- whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under s. 28 of the Act ? In our view, such interest income would come in the category of "income from other sources", hence, such interest income would be taxable under s. 56 of the Act, as rightly held by the AO. In this connection, we may analyze s. 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The headnote to s. 80P indicates that the said section deals with deductions in respect of income of co-operative societies. Sec. 80P(1), inter alia, states that where the gross total income of a co-operative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities in s. 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under s. 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income".
Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in s. 80P(2) of the Act. In the present case, as stated above, assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall ITA Nos. 1672 & 1674/Bang/2012 Page 15 of 17 within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under s. 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. 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 s. 80P(2)(a)(i) of the Act or in s. 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the AO was right in taxing the interest income, indicated above, under s. 56 of the Act."
16. The attempt made by the learned counsel for the Assessee to distinguish the aforesaid decision of the Hon'ble Supreme Court on the ground that the issue before the Court was regarding sale proceeds retained by a marketing co-operative society which sells produce of its members cannot be accepted because the principle laid down by the Hon'ble Supreme Court was regarding nexus between business and the interest income. The observations of the Hon'ble Supreme Court, even if it is to be consider as an obiter, is still binding and have to be followed. We ITA Nos. 1672 & 1674/Bang/2012 Page 16 of 17 are therefore of the view that the interest income in question cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members. In coming to the above conclusion, we have assumed that the Assessee would be otherwise entitled to the benefits of Sec.80P(2)(a)(i) of the Act. In fact, this aspect has not been doubted by the CIT(A) in the impugned order or the AO in his assessment order.
17. For the reasons given above, the order of the CIT(Appeals) has to be upheld. We do not find any merit in the appeal by the assessee and the same is dismissed.
18. In the result, the appeals by the assessee as well as by the revenue are dismissed.
Pronounced in the open court on this 21st day of February, 2014.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN )
Accountant Member Judicial Member
Bangalore,
Dated, the 21st February, 2014.
/D S/
ITA Nos. 1672 & 1674/Bang/2012
Page 17 of 17
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.