TaxTMI 
TaxTMI 
2024 (11) TMI 850
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....s in allowing the assessee's sec.80P(2)(d) deduction of Rs. 4,17,47,645/- and Rs. 6,70,18,749/-, assessment year-wise, respectively, representing interest income from investments made in cooperative bank(s) reading as under : "6.3. I have perused facts of the case and the case laws cited by the appellant and the AO. The first issue is of allowability of deduction u/s. 80P(2)(a)(i) After the decision of Hon'ble Apex Court in the case of the Mavilayi Service Cooperative Bank Ltd. & Ors Vs. Commissioner of Income Tax, Calicut & Anr. (supra), the AO's case does not stand. For the sake of clarity, the relevant observations made by the Hon'ble Apex Court in the case of the Mavilayt Service Cooperative Bank Ltd. & Ors (supra) are reproduced as under : "Section 80P being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or imitation cannot be restricted or limited by implication, as is sought to be done by the revenue in the present ca....
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.... section 80P, Before placing reliance upon the judgment of the Hon'ble Apex Court in the case of the Mavilayi Service Cooperative Bank Ltd., the Hon'ble Bombay High Court has discussed the facts and legal position which were discussed by the Hon'ble Apex Court in the case of the Mavilayi Service Co-operative Bank Ltd to reach final conclusion. Here, it is imperative to reproduce the relevant paras from the said order of the Hon'ble Bombay High Court as under :- "Mavilayi Service Co-operative Bank Ltd: 24. In Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 123 taxmann.com 161/279 Taxman 75 (SC), the question concerns the deductions a primary agricultural credit society can claim under section 80P(2)(a) (i) of the Income-tax Act, 1961 ("IT Act") after the introduction of section 80P(4) of that Act. 25. To provide the background for Mavilayi (SC), we may examine how the dispute reached the Supreme Court. To begin with, a Division Bench of the Kerala High Court has answered the above issue in Chirakkal Service Co-operative Bank Ltd. v. CIT [2016] 68 taxmann.com 298/239 Taxman 417/384 ITR 490 (Ker.). It has held that once a Co-operative S....
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....ond, and include banking operations as per rules prevailing from time to time'. Then, Mavilayi Service Co-operative Bank Ltd.'s case (supra) SC has examined the case holding of Citizen Co-operative Society case (supra). In fact, Mavilayi SC underlines the fact that even Citizen Cooperative Society case (supra) acknowledges that section 80-P of the IT Act is a benevolent provision; it was enacted by Parliament to encourage and promote growth of cooperative sector in the country. Citizen Co-operative Society case (supra), as noticed by Mavilayi SC, has further accepted that once the assessee is entitled to avail itself of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub-section (2) of section 80P must be given by way of deduction. Further, Citizen Cooperative Society case (supra) also accepts that section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks which are co-operative societies that must possess a licence from the RBI to do banking business. In this backdrop, on facts, Citizen Cooper....
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.... stand excluded from the ambit of Section 80P of the Act. 33. On the facts, Mavilayi Service Co-operative Bank Ltd.'s case (supra) (SC) has noted that the appellant cannot be termed a cooperative bank. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative for that bank to have a licence from Reserve Bank of India. And, admittedly, the appellant does not have it. In Mavilayi Service Co-operative Bank Ltd.'s case (supra) (SC), as is the case here, the main reason for the Revenue to disentitle the appellant from getting the deduction under section 80P of the Act is not subsection (4). It is the appellant's alleged activities in violation of the Cooperative Societies Act, under which it is formed. The AO has pointed out that the appellant has been catering to two distinct categories of people: the first category is the resident members or ordinary members; the second category is the "nominal members. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. And, in fact, they are not members in real sense. 34. As Mavilayi Service Co-operative Bank Lt....
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..... (Emphasis supplied) 37. Section 80P being a beneficial provision, according to Mavilayi Service Co-operative Bank Ltd.'s case (supra) (SC), must be construed with the object of furthering the co-operative movement generally. And section 80P(2)(a) (i) must be contrasted with section 80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a "primary" society engaged in supplying milk etc. thereby defining which kind of society is entitled to deduction, unlike the provisions contained in section 80P(2)(a) (i). Also, the proviso to section 80P(2), when it speaks of sub-clauses (vi) and (vii). further restricts the type of society which can get the deductions contained in those two sub-clauses, unlike any such restrictive language in Section 80P(2)(a)(i). 38. Mavilayi Service Co-operative Bank Ltd.'s case (supra) (SC) emphasises that once a co-operative society is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society from availing itself of the deduction. The distinction between eligib....
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....hat it is not a primary agricultural credit society, doing banking business and it is not covered by amended provisions of sec. 80P(4) of the Act. Since the appellant society is a primary credit co-operative society registered and operating under the provisions of Co-operative Societies Act and is eligible for deduction u/s 80P(2)(a)(i) of the Act. 6.6. Accordingly, the appellant is hereby held to be eligible for deduction u/s 80P(2)(a)(i) of the I.T. Act, 1961 and the AO is directed to allow the claim for the same made by the appellant during assessment proceedings in respect of the amounts of profits and gains attributable to the activities of the appellant of carrying on the business of banking or providing credit facilities to its members. 7. Now another issue also needs to be addressed is that whether Interest on Investments derived by the Appellant is chargeable under Business Income or under the head income from other sources and whether it is eligible for deduction u/s 80P(2)(d) of the Act is discussed in paras below. 7.1. Coming to issue of allowability of deduction u/s 80P(2)(d), The Identical issue has been decided by the Hon'ble High Court....
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.... income earned from investments would qualify for deduction as business income under Section 80P(2)(a)(i) of the Act. The Supreme Court, in paragraph 10, has further noted that "at the outset an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 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 Section 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. The assessee markets the produce of its members whose sales proceeds, at times, are 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 (Supreme Court) is whether interest on such deposits/securities which, strictly speaking, accrues to the members account could be taxed as business income under Section 28 of the Act? It was further held that an income which is attributa....
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....ve Sale Society Limited is that the investment made by the assessee of surplus funds whether to be treated as forming part of regular business activity of assessee/Society or not. The Supreme Court, no doubt, has considered that the assessee in the reported case was also retaining the sales proceeds of its members and was investing in the bank accounts and was showing the amount payable to the members on the liability side of the balance sheet. In our consideration, M/s. The Totgar's Co-operative Sale Society Limited deals with what constitutes business income of the Society and what does not constitute business income of the Society. Interest earned from investments is not straight profits or gains from business, but a return by way of interest from investments in Bank etc. The emphasis in Section 80P(2)(a) (i) is that in a case of a Cooperative Society engaged in carrying on the business of banking or providing credit facilities to its members for deduction of such income from computation. Mavilayi Service Co- operative Bank Ltd. has differentiated between interest earned from members of the Society and non-members and held that the interest income from later portion i.e., no....
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.... would, therefore, be attributable to the business of bank falling under the head 'profits and gains of business and thus deductible under Section 80P(2)(a)(i) of the Income Tax Act, 1961. This has been so held in Bihar State Co-operative Bank Ltd v. CIT [1960] 39 ITR 114 (SC); CIT v. Karnataka State Co-operative Apex Bank [2001].... ITR 194 (SC) and CIT v. Ramanandapuram District Co-operative Central Bank Ltd [2002] 255 ITR 423 (SC). The principle in these cases would also cover a situation where a Co- operative bank carrying on the business of banking is statutorily required to place a part of its funds in approved securities. The appeals are accordingly dismissed without costs." 12.1. The decisions relied on by the Supreme Court refer to Co-operative Banks but not Cooperative Societies. The issue on hand is about the interest income earned by way of investments made with institutions other than Co-operative Societies. We are of the view that by referring to the order in Nawanshahar Central Co-operative Bank Ltd case it cannot be held that the income has to be brought under Section 80P(2)(a)(i) of the Act. 12.2. Section 80P deals with Co-operative Societies&....
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....ts has held interest earned from treasury/commercial banks to be not eligible for deduction under section 80P as it is neither covered under section 80P(2)(a)(i) nor under section 80P(2)(d). 7.3 To sum up, even though such interest and dividends as received from entities registered with Cooperative Societies Act is income from other sources, it is eligible for deduction u/s 80P(2)(d) of the Act. Therefore, Interest and dividends which is received from entities registered with Cooperative Societies Act will be allowed by the AO as eligible for deduction u/s 80P(2)(d) of the Act. However, interest & dividend income from other entities (viz. Government treasury /commercial banks etc.) which are not registered under the state Co-operative Societies Act is not eligible for deduction u/s 80P(2)(d). In view of above the appellant is eligible for deduction u/s 80P(2)(d) on interest/dividend receipts from entities provided appellant produces the copy of registration documents of entities under Co-operative Societies Act, before the AO and the said registration was valid at the time of making such deposits and receipt of interest/dividend. 7.4. However, as....