TaxTMI 
TaxTMI 
2025 (9) TMI 710
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....43(1) was also passed. Thereafter the case was selected for scrutiny under CASS as complete Scrutiny. The AO completed the assessment proceedings vide order dated 27/12/2019 passed u/s 143(3) of the Act with the following observations/ additions/disallowances- i) The entity has been in the business of banking or a financial institution and not a society under Cooperative Societies Act 1959 and accordingly deduction claimed u/s 80P on the profits of the entity is disallowed and the entire profits shown in its P&L Account is required to be taxed as if any other person (AOP) in the Act. Hence, a sum of Rs. 34,79,909/- is brought to the tax by denying deduction u/s 80P of the Act. ii) Further, on verification of P&L A/c of the entity, it is noticed by the AO that the entity has shown Interest Income of Rs. 8,47,69,566/- for the F.Y 2016-17. Out of this Rs. 5,04,69,984/- is on account of interest on various loans availed by members. The balance of Rs. 3,42,99,582/- is income earned as interest on FDs made with other Bank. iii) The AO observed that the interest earned from FDs made with other banks are only the surplus money which was not in need of the society....
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....NFAC is of the view that the assessee has not complied with the provisions of the section 194J & 194H of the Act respectively & therefore the disallowance u/s 40(a)(ia) of the Act amounting to Rs. 5,62,299/- was confirmed by the ld. CIT(A)/NFAC. iv) Lastly, with regard to the disallowance of the deduction u/s 80P(2)(d) of the Act amounting to Rs. 3,42,99,582/-, the ld. CIT(A)/NFAC relying on the Judgment of Hon'ble Karnataka High Court in the case of Guttigedarara Credit Co-operative Society Ltd. (337 ITR 464) as well as judgment of the Apex Court in the case of Totgars Co-operative Sale Society Ltd. ( 322 ITR 283) held that the assessee being a co-operative society even though not eligible for deduction u/s 80P(2)(d) of the Act on the investments made in banks/co-operative banks but indirectly becomes eligible for deduction u/s 80P(2)(a)(i) of the Act to the extent of investment of business funds but not surplus funds. Hence above ratio clearly implies that any income generated out of surplus funds which were invested other than cooperative societies would become ineligible for deduction u/s 80P(2)(d) r.w.s. 80P(2)(a)(i) of the Act. The ld. CIT(A)/NFAC finally worked out ....
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....rs. It is also well settled by the jurisdictional Karnataka High Court in the case of Swabhimani Souharda Credit Co-operative Ltd vs. Govt. of India reported in 421 ITR 670 as well as Sri Mata Vividodesha Pathina Souhardi Sahakari Niyamitha vs. Union of India reported in 134 taxmann.com 62 that entities registered under the Karnataka Souharda Sahakari Act,1997 fit into the definition of "Co-operative" as enacted in Sec. 2(19) of the Income- Tax Act,1961 and therefore subject to all just exceptions, the assessee are entitled to stake their claim for the benefit of section 80P of the Act. We also take a note of the fact that the Revenue has also neither raised any grounds on this issue as well as issue of deletion of an addition made u/s 40(a)(ia) of the Act in the present appeal. 9.1 The Revenue in the present appeal has raised 3 grounds which all are related to the sole issue of allowing the deduction u/s 80P(2)(a)(i) /80P(2)(d) of the Act on Interest income earned from FDs with Co-operative Bank/ Other Bank amounting to Rs. 3,42,99,582/-. On going through the order of the ld. CIT(A)/NFAC, we also could not understand the workings of the ld. CIT(A)/NFAC in deriving interest inco....
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....t in the case of Totagar Sales Society Vs. ITO (2010) 322 ITR 283 and contended that the interest earned out of surplus funds kept by co-operative societies with banks are not eligible for deduction u/s 80P(2)(d) of the Act and the same are taxable as Income from Other sources u/s 56 of the Act. When we look at the decision of Hon'ble Supreme Court in case of Totgars Co- operative Sale Society's case (Supra), relied by the Ld. DR, Hon'ble Supreme Court was dealing with a case where the assessee therein, 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 payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein 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 A....
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....nataka Co-operative Societies Rules, 1960, every Co-operative Society accepting deposits and granting cash credits shall maintain fluid resources in such form and according to such standards as may be fixed by the Registrar, from time to time, by general or special order. As per section 58 of the Karnataka State Co-operative Society Act, 1959, such reserve funds must be mandatorily invested in specified institutions including co-operative banks. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the Registrar of Co-operative Societies. We also take note of the fact that if the Statutory funds are not invested in the prescribed fund, the business of the assessee may get hampered/affected due to the violation of these statutory provisions. 9.8 Given this statutory compulsion, we find that interest income is attributable to the profits and gains of business and therefore, the interest income derived from the statutory deposits made with the banks are entitled for deductions u/s 80P(2)(a)(i) of....
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.... Bench that decided the case of M.P. Co-operative Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital." 9.10 Further, the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. v. Income-tax Officer Reported in (SC) :(2001) 251 ITR 522 had again reiterated by relying on its own judgment delivered in the case of Karnataka State Co-operative Apex Bank's case (supra) as under- "Insofar as the interest income upon statutory reserves is concerned, the question must be answered in favour of the assessee, in the light of the judgment delivered by us in Karnataka State Co-operative Apex Bank's case (supra)." In view of the above principles laid down by Hon'ble Supreme Court if the income is attributable to the profits & gains of business of the society, then the assessee society is entitled for deduction u/s 80P(2)(a)(i) of the Act. 9.11 Further, In the case of ClT Vs Nawanshahar Central Cooperative Bank Ltd. [2007] 160 TAXMAN 48(SC), the Apex Court held t....
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....l conduct of the business of generation and distribution of electricity.' 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 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 t....
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....preme Court considered the above issue in case of an assessee who is a state level Agricultural and Rural Development Bank, governed as a cooperative society, under the relevant state cooperative societies Act, and was engaged in providing credit facilities to its members who were cooperative societies only. On facts, the assessee therein claimed deduction under Section 80P(2)(a)(i) of the Act. The Ld.AO disallowed the deduction under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Ld.AO therein held that the appellant/assessee is a "co-operative bank" and thus, was hit by the provisions of Section 80(P)(4) and was not entitled to the benefit of Section 80(P)(2) of the Act. This was upheld by the Ld. CIT(A) and the Tribunal. The decision of the Tribunal was confirmed by Hon'ble Kerala High Court. 9.15.2 The Apex Court analyzed the legal framework, relevant provisions under the co-operative societies Act, NABARD Act, provisions of sec. 80P under the Income Tax Act, 1961, RBI Act, the Banking Regulation Act and the various judicial precedents on similar....
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.... (a) of Section 56 of the BR Act, 1949 has to be relied upon. It states that a cooperative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co- operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of Section 5 of the BR Act, 1949 is seen, it means any company which transacts the business of banking in India and as already noted banking business is defined in clause (b) of Section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank and in such a case, Section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a co- operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state c....
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.... 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 deduct....
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...., the Interest income earned out of the Statutory deposits/maintain fluid resources are attributable to the business activity of the co-operative society & hence also eligible for deduction u/s 80P(2)(a)(i) of the Act irrespective of the fact that the interest is earned from the co-operative bank and/or scheduled bank. iii) For an amount of interest earned on investment over and above the required statutory limits from such scheduled/cooperative banks that fall within the definition of "banking company' as per section 2(c), Section 5(b) and holds license under section 22 of the Banking regulation Act 1949, such interest are to be considered under the head 'income from other sources' & the deduction under section 80P(2)(d) is not available on such Interest on investment. However the cost of fund and related administrative expenses in respect of earning such interest income should also be allowed as deduction u/s 57 of the Act. iv) 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 is eligible for deduction u/s 80P(2)(d) of the Act. v....