IT APPEAL NO. 524 (BANG.) OF 2012
[ASSESSMENT YEAR 2006-07]

N.V. VASUDEVAN, JUDICIAL MEMBER AND JASON P. BOAZ, ACCOUNTANT MEMBER

Smt. Jyoti M. Maradi for the Appellant.
 Etwa Munda for the Respondent.

ORDER

N.V. Vasudevan, Judicial Member - This is an appeal by the assessee against the order dated 19.01.2013 of the Commissioner of Income-tax (CIT), Davangere passed u/s. 263 of the Act.

2. There is a delay of 14 days in filing the appeal by the assessee. The Chairman of the assessee-society has filed an affidavit in which he has affirmed that he was looking after the income-tax matters of the assessee and had gone to Chennai to attend family matters and his son's Visa work. His son had to leave to London for higher studies. The appeal ought to have been filed on or before 02.04.2012, but had been filed after a delay of 14 days due to circumstances stated above viz., non-availability of the Chairman of the assessee during February & March, 2012, due to reasons given above.

3. We have considered the reasons given in the affidavit filed by the Chairman of the assessee society and are of the view that the delay in filing the appeal was owing to reasonable cause. The delay is accordingly condoned.

4. The circumstances under which the CIT passed the impugned order are as follows. The assessee is a credit co-operative society, providing credit facilities to its members. For the A.Y. 2006-07, it filed a return of income declaring a total income of Rs.Nil after claiming deduction of Rs.5,94,879 u/s. 80P of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"]. Out of the sum of Rs.5,94,879, a sum of Rs.2,43,342 was interest earned from deposits made with the banks. The Assessing Officer was of the view that the assessee was not entitled to deduction of interest earned on deposits with banks u/s. 80P(2)(d) of the Act. Accordingly the aforesaid amount was brought to tax after allowing deduction of Rs.50,000 u/s. 80P(2)(c)(ii) of the Act. The order of the AO was passed on 17.12.2008, after directions from the Addl. CIT, Range Davangere u/s. 144 of the Act.

5. The assessee filed an application on 10.01.2009 to the CIT u/s. 264 of the Act. In the said application, the assessee pointed out that the AO was not justified in denying the deduction claimed by the assessee on interest received on deposits with the banks. It was pointed out that the assessee had made a claim for deduction u/s. 80P(2)(a)(i) of the Act and not u/s. 80P(2)(d) of the Act, as has been presumed by the AO. The assessee pointed out that the money was collected by the society by way of deposits from members for providing credit facilities to its members and part of it is invested with the banks. The assessee submitted that such deposits are made with a view to meet the demands of the depositors for withdrawal and also to ensure that interest income is earned. The assessee thus submitted that deposits were made in the normal course of business of the society and therefore interest earned should be held to be income derived by the co-operative society engaged in the business of carrying on banking or providing credit facilities to its members, falling within the ambit of section 80P(2)(a)(i) of the Act.

6. The CIT(Appeals), Davangere by his order dated 20.01.2010 was of the view that the assessee should be given reasonable opportunity to present its case. He did not decide on the merits of the claim made by the assessee, but directed the AO to redo the assessment afresh, after allowing the assessee reasonable opportunity of being heard.
7. Pursuant to the order passed u/s. 264 of the Act, the AO considered the claim of the assessee. In such assessment, the AO allowed the claim of the assessee for deduction u/s. 80P(2)(a)(i) in respect of interest received on bank deposits by his order dated 30.12.2010. The following were the observations of the AO:—

"3.0 The assessee was represented by the Manager of the society. The assessee filed copy of the byelaws. Registers of loans examined. It is noticed that the transactions are only between the members only. The society is engaged in the extending the credit facility to its members only and governed by the Co-op. Act. The society has not been controlled by the Reserve Bank of India. Considering all the above points, the claim of the society for the deductions u/s. 80P is correct. Hence, the deductions allowed u/s. 80P from the total income of the assessee society. Therefore, the returned income accepted."

8. The CIT, in exercise of his powers u/s. 263 of the Act was of the view that the order dated 30.12.2010 passed by the AO u/s. 143(3) of the Act r.w.s. 264 of the Act was erroneous and prejudicial to the interests of the revenue and observed as under:—

"3.0. The assessee was represented by the Manager of the Society. The Assessee filed copy of the byelaws. Register of loans examined. It is noticed that the transactions are between the members only. The Society is engaged in extending the credit facility to its members only and governed by the Co-op. Act. The Society has not been controlled by the Reserve Bank of India. Considering all above points, the claim of the society for the deduction u/s.80P is correct. Hence, the deductions allowed u/s.80P from the total income of the Assessee society. Therefore, the returned income accepted."

9. The CIT in exercise of his powers u/s.263 of the Act was of the view that the aforesaid order passed by the AO was erroneous and prejudicial to the interests of the revenue. He accordingly issued a show cause notice dated 23.11.2011, the operative portion of which reads thus:
'2. On a perusal of the records for the asst. year 2006-07, it is seen that a claim of deduction u/.s 80P(2)(d) to the extent of Rs.2,43,342/- being interest on deposits with Banks other than Co-operative Banks, is made. The Assessing Officer in his order referred to above, allowed the claim, holding that such a claim for deduction is correct on consideration of the following points:

3. It is pertinent to note that Section 80P(2)(d) says where in the case of an assessee being a Co-operative Society the gross total income includes any income referred to in Sub Section (2), there shall be deducted in accordance with and subject to provisions of this section, the sum specified in Sub Section (2) [refers to business income], in computing, the total income of the assessee. However, the Assessing Officer failed to apply the decision of the Hon'ble Supreme Court in the case of Totgars Co-Operative Sale Society Ltd. v. ITO (2010) 188 Taxman 282 wherein it is affirmed that interest earned on deposits with other Banks would fall under the head "Income from Other Sources" under section 56 and not under section 28 of the Income Tax Act, 1961 and, consequently, the assessee-society would not be entitled to deduction under section 80P of the Act.'

10. In response to the show cause notice issued by the CIT, the assessee did not file any submissions nor appeared in person. In view of the above, the CIT after discussing the contents of the show cause notice, finally concluded as follows:—

'4. In view of the discussions made in Paras 2 & 3 above, the action of the AO in so far as allowing the deduction claim under section 80(P)(2)(d) of the Act, is erroneous and his failure to apply the decision of the Hon'ble Supreme Court mentioned supra renders the assessment prejudicial to the interest of revenue.

5. The AO is therefore, directed to disallow the claim for deduction under section 80P(2)(d) of the Act and bring to tax the sum of Rs.2,43,342/- under the head "Income From Other Sources" under section 56 of the Act, as the same is earned from deposits made with Banks as under:-"

11. Aggrieved by the order of the CIT, the assessee has preferred the present appeal before the CIT(A).

12. We have heard the rival submissions. The learned counsel for the Assessee submitted that the order that was revised by the CIT in exercise of power u/s.263 of the Act, was an order which was passed after due application of mind by the AO after specific directions from the CIT in exercise of his powers of revision u/s.264 of the Act. It was submitted that the AO when he passed the original order of assessment dated 17.12.2008 taxed the interest received on deposits with Banks on the ground that the Assessee had claimed the said interest income as exempt u/s.80P(2)(d) of the Act. The AO denied exemption by holding that Sec.80P(2)(d) Act applies only to interest on deposits with other co-operative societies. The learned counsel for the Assessee brought to our notice that in the Assessee's application before CIT u/s.264 of the Act, the Assessee specifically pointed out that exemption on interest on deposits with banks was claimed u/s.80P(2)(a)(i) of the Act and not u/s.80P(2)(d) of the Act as wrongly assumed by the AO. The learned counsel for the Assessee pointed out that u/s.80P(1) of the Act, where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. Sec.80P(2) refers to the sum referred to in sub-section (1) 80P and in clause (a)(i) refers to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members and exempts the whole of the amount of profits and gains of business attributable to any one or more of such activities. The learned counsel brought to our notice that in the application u/s.264 it was highlighted that the Assessee was providing credit facility to its members and therefore the whole of its income was exempt. In this regard it was also highlighted that the Assessee also submitted that the funds invested in other banks to ensure that the money is readily available to meet the demands of the depositors. The learned counsel for the Assessee submitted that pursuant to the directions of the CIT u/s.264 dated 18.1.2010, the AO examined the claim of the Assessee for deduction of interest received on deposits with banks u/s.80P(2)(a)(i) of the Act. By his order dated 30.12.2010 passed pursuant to the order u/s.264 of the Act, the AO examined the register of loans, bye-laws of the Assessee and found that the transactions are only between members and that the society was engaged in extending credit facility to its members only. The AO also found that the Assessee was governed by the Co-operative societies Act and not controlled by the RBI. Considering all these aspects, the AO allowed deduction u/s.80P(2)(a)(i) of the Act.

13. The learned counsel for the Assessee submitted that in the show cause notice u/s.263 of the Act as well as in the order passed u/s.263 of the Act, the CIT has proceeded on the assumption that the Assessee had claimed deduction u/s.80P(2)(d) of the Act, which is not correct. The CIT also proceeded to apply the decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282. It was submitted that in the case of 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 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 AO in allowing deduction u/s.80P(2)(a)(i) of the Act was a plausible view. The CIT in exercise of powers cannot substitute his view with that of the AO, where the view taken by the AO was a plausible view.

14. Anticipating an argument that in view of Sec.80P(4) of the Act which provides that Sec.80P will not apply to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the learned counsel for the Assessee submitted that the Assessee is a co-operative society. the learned counsel for the Assessee relied on a decisions of the ITAT Bangalore Bench in the case of ACIT v. Bangalore Commercial Transport Credit Co-operative Society Ltd. [IT Appeal No.1069 (Bang.) of 2010, dated 8-4-2011]. In the aforesaid decision, the question was as to whether Sec.80P(4) of the Act applies to a co-operative society providing credit facilities to its members. The Tribunal after noticing the explanation below Sec.80P(4) of the Act which provides that for the purpose of Sec.80P(4) of the Act, (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 and the CBDT Clarification No.133/06/2007-TPL dated 9.5.2007, held that provisions of Sec.80P(4) has application to co-operative banks and not co-operative society. It was submitted that the Assessee was a co-operative society and therefore the provisions of Sec.80P(2)(a)(i) of the Act will apply to it and Sec.80P(4) of the Act will not be a bar.

15. Lastly it was submitted that in the event of the interest income on deposits with banks being considered as "Income from other sources" and therefore not entitled to deduction either u/s.80P(2)(a)(i) or deduction u/s.80P(2)(d) of the Act, then the interest paid on the deposits by the various members should be allowed as deduction and only the net interest income has to be brought to tax. In this regard it was pointed out that the deposits from the various members of the society which is not lent as credit to members are invested in banks and the interest paid on deposits should be considered as expenses incurred in earning the interest income.

16. The learned DR reiterated the stand of the revenue as reflected in the order of the CIT.

17. 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 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 Co-operative Sale Society 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 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 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.'

18. 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 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 in the order u/s.263 of the Act or the AO in his order passed u/s.143(3) r.w.s.264 of the Act.

19. For the reasons given above, the order of the AO which was revised by the CIT in his order u/s.263 was erroneous and therefore exercise of jurisdiction u/s.263 was justified. In this regard the submissions of the learned counsel for the Assessee that the view taken by the AO was a plausible view cannot be accepted in the light of the decision of the Hon'ble Supreme Court referred to above. The learned counsel for the Assessee has also relied on the decision of the Hon'ble Delhi High Court in the case ofCIT v. DLF Ltd. [2013] 350 ITR 555/214 Taxman 91/31 taxmann.com 158 for the proposition that for exercise of powers u/s.263, it is just not enough that the order sought to be revised is erroneous but that order should also be "unsustainable". Those observations of the Hon'ble Delhi High Court have to be read in the context of the decision of the Hon'ble Supreme Court in the case of CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 wherein it was held that if two possible views exist on an issue and the AO takes one view with which the CIT in exercise of powers u/s.263 of the Act does not agree, that may not give him right to exercise powers u/s.263, unless he shows that the view taken by the AO is unsustainable. In our view, the view taken by the AO in the present case is an unsustainable view in the light of the decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. (supra).

20. The next submission of the learned counsel for the Assessee which needs to be examined is the alternative claim of the Assessee that interest paid to depositors to the extent those deposits are utilised for making deposits in banks for earning interest should be allowed as deduction u/s.57(iii)of the Act as expenditure incurred in earning income brought to tax u/s.56 of the Act. Sec. 57(iii) reads thus:

"57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely....
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."

21. This section provides for deduction of any other expenditure not being in the nature of capital expenditure laid out or expended wholly or exclusively for the purpose of making or earning "income from other sources" of Chapter IV-F of the Act. The deposits collected from the members by the Assessee was for giving credit to its members and not for making investments in fixed deposits and earning interest from them. The interest income from such deposits was from such deposits only and was incidental to and was the result of the same. The interest income was totally independent of the deposits collected by the Assessee from its members. Therefore the alternate claim of the Assessee cannot also be accepted.

22. For the reasons given above, we are of the view that the order u/s.263 of the Act was just and proper and calls for no interference. Consequently, the appeal by the Assessee is dismissed.

23. In the result, appeal by the Assessee is dismissed.