TaxTMI 
TaxTMI 
2022 (1) TMI 153
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....l on merits. 3. The grounds raised read as follows: "1. The impugned order u/s 263, dated 13.03.2019 is opposed to the facts of the case and the law, as it is passed in haste violating the principles of natural justice and ignoring the submissions / the material on record and therefore, it is liable to be set-aside. Revision u/s 263 2.1 The learned CIT failed to appreciate that the learned AO allowed the deduction u/s 80P(2)(a)(i) based on the decision of the Hon'ble jurisdictional High Court in respect of interest income from the Co-operative Bank and as such, the order was not `erroneous' for the purpose of section 263 of the Act. 2.2 The learned CIT failed to appreciate that it is incumbent on his part to point out a specific `error' in the assessment order to assume jurisdiction u/s 263 and it cannot be exercised to direct the AO to conduct enquiry, that too on issues which stood clarified. 2.3 The learned CIT failed to appreciate that the assessment order is neither erroneous not prejudicial to the interest of the Revenue to justify the revision u/s 263 of the Act. 3. The grounds are taken without prejudice to one anothe....
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....ther the funds placed with banks/societies are surplus funds or not and the banks or societies with which the investments made are eligible to be called as co-op banks/Banks,. so as to decide the eligibility for said deduction u/s 80P(2)(d), In light of the Judicial issues on the subject matter. Thus, the order passed by the AO [ITO, Ward-2, Hospet], u/s 143(3) dated: 30.11.2016, had rendered the assessment order as erroneous in as much as prejudicial to the interest of the revenue. Accordingly, the assessment order is hereby set-aside with a direction to the AO, to pass a fresh assessment order in accordance with law and after giving necessary opportunity of being heard to the assessee in order to examine the following issues, for allowing deduction u/s 80P(2)(a)(i) and 80P(2)(d). (a) Whether the banks/co-op banks with which deposits kept are the members of the assessee society or not for examining the concept of mutuality. (b) Whether is there any obligation on assessee to invest its surplus funds with the banks (c) Whether the interest earned from deposits/investments in to other societies/bar had constituted to be business income. (d) Whether....
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....ed in para 5.0 of page 5 of his order u/s 263 - The said provisions of the Societies Act are enclosed herewith for ready reference) (b) Whether is there any obligation on assessee to invest its surplus funds with the banks. Yes, as above submitted. (c) Whether the interest earned from deposits / investments in to other societies / banks had constituted to be business income. The issue is settled by the Hon'ble Supreme Court in the above mentioned case holding that the interest income is entitled to the deduction u/s 80P(2)(a)(i) itself as it forms part of the business income in the case of a co-operative society extending credit facilities to its members. (d) Whether the FDs made with the banks / co-op banks are out of reserve and surplus fund available with the co- operative society. This issue becomes mere academic as the assessee-society is entitled to the deduction u/s 80P(2)(a)(i) itself. The investment is mandatory in view of the statutory provisions mentioned above. (e) Whether the banks are cooperative societies or banks in nature, for allowing deduction u/s 80P(2)(d). As the deduction is available in the main clause itself, i.e., 8....
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.... 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 ....
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.... 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(....
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....overned 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 Cooperative 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 subsection (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 used in Section 80P(4) are significant. They are: "The provisions of this section shall not apply in relation to any cooperative 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 agric....
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....d that it would not make a difference, whether the interest income is earned from investments/deposits made in a Scheduled Bank or in a Cooperative Bank. Therefore, the said decision of the Coordinate 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 Ho....
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.... 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 cooperative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a cooperative 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 cooperative 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.26....
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....d 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 r....