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Sant Motiram Maharaj... v. Income-tax Officer, ...

Income Tax Appellate Tribunal

Sep 23, 2020

Judgment

Subsequent
References

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Bench: ITAT Pune — Summary of Opinion (R.S. Syal, VP)

Factual and Procedural Background

This appeal by the assessee arises from the order dated 28-03-2019 passed by the Pr. Commissioner of Income-tax-1, Aurangabad under section 263 of the Income-tax Act, 1961, in relation to assessment year 2014-15. The assessee is a credit co-operative society providing credit facilities to its members. The assessee filed a return (declaring nil income) and an assessment under section 143(3) was completed determining total income at Rs.89,700.

The Pr. CIT observed that the assessee had earned interest income of Rs.22,34,270 from investments made with co-operative banks and had claimed deduction under section 80P(2). The Pr. CIT took the view that deduction under section 80P(2)(d) was not available for interest received from investments in co-operative banks (viewing co-operative banks as akin to commercial banks and therefore not falling under "co-operative society"). The Pr. CIT also noted interest of Rs.2,334 received under section 244A (interest on income-tax refund) which was not disclosed in the return.

The Assessing Officer had earlier examined interest on FDRs with State Bank of India (SBI) and held interest of Rs.1,39,695 on SBI FDRs not eligible for deduction under section 80P; the assessee accepted that disallowance. The Pr. CIT invoked revisional jurisdiction under section 263, held the assessment order to be erroneous and prejudicial to the revenue in respect of the two items (interest from co-operative banks and interest under section 244A), and revised the assessment. The assessee challenged that order before the Tribunal.

Legal Issues Presented

Whether interest income earned by a co-operative society from investments made with co-operative banks is eligible for deduction under section 80P(2) — specifically whether it falls under section 80P(2)(a)(i) (profits and gains of business of providing credit facilities) or under section 80P(2)(d) (income from investments with "any other co-operative society").
Whether interest received under section 244A (interest on income-tax refund) is includible in total income and/or deductible under section 80P(2)(a)(i) — i.e., whether it is covered by "profits and gains of business" for the purposes of section 80P(2)(a).
Whether the Pr. CIT was justified in exercising revisional powers under section 263 of the Act in respect of the assessment on these two points (i.e., whether the assessment order was erroneous and prejudicial to the interest of the Revenue given the existence of alternative, debatable views).

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee contended that deduction was available under section 80P(2)(a)(i) because it is engaged in providing credit facilities to its members and the interest earned on short-term deposits (including those with co-operative banks) represented income attributable to that business.
Specifically, the assessee's position was that the deposits with co-operative banks were short-term surplus funds not required for lending at the time and that income from investing such surplus funds nonetheless had a live link to the business of providing credit facilities and therefore should be treated as "profits and gains of business" deductible under section 80P(2)(a)(i).

Revenue's Arguments (Pr. CIT / Assessing Authorities)

The Pr. CIT took the position that deduction under section 80P(2)(d) could not be allowed on interest from investments made with co-operative banks because clause (d) permits deduction only where the payer is "any other co-operative society" and a co-operative bank is treated akin to a commercial bank for this purpose.
The Pr. CIT held the assessment order to be erroneous and prejudicial to the revenue for not taxing interest under section 244A (Rs.2,334) which was not offered in the return and therefore invoked revisional power under section 263.
The AO had earlier taken a position disallowing interest on FDRs with State Bank of India (Rs.1,39,695), a view accepted by the assessee; the Revenue maintained that similar logic applied to interest from banks.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in this Opinion
Sureshdada Jain Nagari Sahakari Patsanstha Maryadit vs. The Pr. CIT (ITA No.713/PUN/2016)	Availability of deduction under section 80P on interest income (Tribunal Pune decision considering earlier tribunal authorities).	The Bench noted this decision as part of Pune-Bench precedent line supporting deduction; it showed that the Tribunal had previously examined and allowed similar deductions by preferring views favourable to the assessee.
Shri Laxmi Narayan Nagari Sahakari Pat Sanstha Maryadit vs. ITO (ITA No.604/PN/2014)	Tribunal decision allowing deduction under section 80P on interest income in a prior case.	The Bench observed that this earlier Tribunal decision allowed deduction and that Sureshdada Jain relied on it; the present Tribunal treated such decisions as supporting the assessee's position that the AO's contrary view was a possible view.
Tumkur Merchants Souharda Credit Cooperative Ltd. vs. ITO (2015) 230 Taxman 309 (Kar.)	Karnataka High Court decision allowing deduction under section 80P on interest income.	The Tribunal noted the Karnataka High Court's pro-assessee view and identified it as one of the higher-court authorities favouring deduction; the Bench preferred this line of authority where applicable.
Mantola Cooperative Thrift Credit Society Ltd. vs. CIT (2014) 110 DTR 89 (Delhi)	Delhi High Court decision not allowing deduction under section 80P on interest income earned from banks.	Noted by the Tribunal as contrary authority. The Bench acknowledged conflicting High Court decisions, which demonstrated that two views existed on the issue.
Totgars Cooperative Sale Society Ltd. (2010) 322 ITR 283 (SC)	Ratio considered by High Courts in their competing decisions on the availability of section 80P deduction.	The Tribunal observed that both High Courts had taken the ratio of Totgars into consideration. The presence of divergent High Court interpretations based on Totgars indicated the existence of debatable points.
Pr. CIT and Another vs. Totagars Cooperative Sales Society (2017) 395 ITR 611 (Kar.)	Karnataka High Court decision on eligibility of deduction under section 80P(2)(d) for interest earned on investments made in co-operative banks.	The Tribunal acknowledged that this decision held the assessee could not claim deduction under section 80P(2)(d) where investments were with co-operative banks; however, the Bench distinguished it because the present assessee primarily claimed deduction under section 80P(2)(a)(i), not under clause (d).
Maharashtra State Cooperative Bank Ltd. vs. ACIT (2010) 129 TTJ 521 (SB) (Mumbai)	Special Bench holding that interest on income-tax refund under section 244A is covered by "profits and gains of business" in section 80P(2)(a) and deductible under section 80P(2)(a)(i).	The Tribunal relied directly on this Special Bench decision to hold that the interest of Rs.2,334 received under section 244A was deductible under section 80P(2)(a)(i), making the income tax-neutral for the assessee and not prejudicial to the revenue.

Court's Reasoning and Analysis

The Tribunal proceeded by examining the statutory language and the factual matrix:

Statutory construction: The Bench quoted section 80P(1) and section 80P(2) and focused on the distinct wording of clauses (d) and (a)(i). Clause (d) permits deduction "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," which the Tribunal read strictly to mean that clause (d) applies only where the payer is another co-operative society. Accordingly, interest from a co-operative bank cannot qualify under clause (d).
Clause (a)(i) interpretation: Clause (a)(i) allows deduction of the whole of the amount of profits and gains of business attributable to carrying on the business of banking or providing credit facilities to members. The Tribunal adopted a purposive and expansive interpretation of "profits and gains of business attributable to providing credit facilities", observing that it encompasses income beyond that derived strictly from lending — it includes income generated by utilising surplus funds that arise from deposits by members and that have a live link (not necessarily direct) to the business of providing credit facilities.
Factual application: The assessee had placed short-term deposits with co-operative banks and earned interest thereon. The assessee's consistent case was that these deposits were short-term surplus funds not immediately required to be advanced as loans. The Tribunal noted there was no contrary finding by the Pr. CIT on that factual stance. On that basis, the Tribunal concluded that the interest earned on such surplus funds had a live link to the business of providing credit facilities and therefore constituted "profits and gains of business" attributable to that activity and deductible under section 80P(2)(a)(i).
Revisional power under section 263: The Tribunal reiterated the settled principle that the Pr. CIT's power under section 263 cannot be exercised where the issue is debatable and two reasonable views are available. If the Assessing Officer adopted one of two possible legally sustainable views, the assessment is outside the scope of revision. Given the existence of precedent and the availability of a reasonable view favouring the assessee (including Tribunal and High Court decisions cited), the Tribunal held that the Pr. CIT was not justified in invoking section 263 in respect of the interest of Rs.22,34,270.
Interest under section 244A: For the interest of Rs.2,334 received on income-tax refund, the Tribunal relied on the Special Bench decision in Maharashtra State Cooperative Bank Ltd. vs. ACIT (129 TTJ 521 (SB)) which held that such interest falls within "profits and gains of business" under section 80P(2)(a) and is therefore deductible under section 80P(2)(a)(i). As a result, although the refund interest is chargeable to tax, it is simultaneously deductible under section 80P(2)(a)(i), rendering it tax-neutral for the assessee. Consequently, failure to add it in the assessment could not be deemed prejudicial to the interest of the revenue.

Holding and Implications

Core Ruling: The Tribunal set aside the revisional order of the Pr. CIT and allowed the appeal. The impugned order was quashed and the appeal was allowed (order pronounced on 23rd September, 2020).

Implications:

Direct effect on the parties: The Pr. CIT's exercise of revisional power under section 263 was held unjustified on both counts (interest of Rs.22,34,270 from investments in co-operative banks and interest of Rs.2,334 under section 244A). The assessment order is therefore not to be revised on those grounds as per this decision.
On the issue of interest from co-operative banks, the Tribunal's analysis rests on treating such interest as falling within "profits and gains of business" attributable to providing credit facilities (section 80P(2)(a)(i)), subject to the factual circumstance that the deposits were short-term surplus funds linked to the business; and it rejected the Pr. CIT's reliance on clause (d) as inapplicable because clause (d) requires the payer to be another co-operative society.
On the interest under section 244A, the Tribunal followed the Special Bench authority to hold such interest deductible under section 80P(2)(a)(i), making it tax-neutral for the assessee.
Broader precedent: The Tribunal applied existing authorities and distinctions among them to the facts; the decision resolves the revisional challenge in this appeal but does not purport to lay down a novel principle beyond applying the cited authorities to the facts of this case.

Disposition: Appeal allowed; impugned revisional order set aside. Order pronounced in open court on 23rd September, 2020.

Show all summary ...

PER R.S.SYAL, VP : This appeal by the assessee emanates from the order dated 28-03-2019 passed by the Pr. Commissioner of Income-tax-1, Aurangabad u/s.263 of the Income-tax Act, 1961 (hereinafter also called the Act) in relation to the assessment year 2014-15.

2. Succinctly, the facts of the case are that the assessee is a Credit co-operative society providing credit facility to its members. A return was filed declaring Nil income. Assessment u/s 143(3) of Assessee by Smt. Deepa Khare Revenue by Shri Deepak Garg Date of hearing 16-09-2020 Date of pronouncement 23-09-2020 ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., the Act was completed determining total income at Rs.89,700/-. The ld. Pr CIT observed from the records that the assessee society earned a sum of Rs.22,34,270/- as interest on investments made with co-operative banks and claimed deduction u/s.80P(2) of the Act on the same. It was opined that such deduction was not available in respect of interest received from investments made with co-operative banks. In addition, the ld. Pr.CIT also noted that the assessee received a sum of Rs.2,334/- as interest on income-tax refund u/s.244A of the Act, which was not disclosed in the return. When confronted, the assessee submitted on the first issue that it had claimed deduction u/s.80P(2)(a)(i) of the Act and no claim was made u/s.80P(2)(d). Detailed submissions were filed. After considering such submissions, the ld. Pr.CIT held the assessment order to be erroneous and prejudicial to the interest of the Revenue by observing that deduction u/s.80P(2)(d) could not be allowed on interest on investments made by a co-operative society with co- operative banks. As a co-operative bank is akin to a commercial bank, it does not fall under the purview of co-operative society. Interest income earned from it was held to be not eligible for deduction u/s.80P(2)(d). As regards interest u/s.244A of the Act, ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., the ld. Pr.CIT held the assessment order to be amenable to revision inasmuch as such interest was not offered for taxation. Aggrieved thereby, the assessee is in appeal before the Tribunal.

3. We have heard the rival submissions through virtual court and gone through the relevant material on record. The assessee is admittedly a credit co-operative society providing credit facility to its members. The assessee earned interest income, inter alia, on FDRs with State Bank of India and co-operative banks. The Assessing Officer (AO) examined this issue and came to hold that interest of Rs.1,39,695/- on FDRs made with State Bank of India was not eligible for deduction u/s 80P. The assessee accepted that aspect and did not dispute it further. Now the ld. Pr. CIT has taken a view that interest income of Rs.22,34,270/- earned from investments made with co-operative banks also does not qualify for deduction. This evidences that the availability of deduction u/s 80P(2) on the remaining amount of interest earned from the members etc., has also been accepted by the ld. Pr.CIT.

4. The short point of view of the ld. Pr.CIT is that interest earned from co-operative banks cannot be covered under clause (d) of ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., sub-clause (2) of section 80P. Section 80P(1) provides that: `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. Sub-section (2) opening with: `The sums referred to in sub-section (1) shall be the following, has clauses (a) to (f). Clause (d), which has been invoked by the ld. Pr. CIT reads: `(d) 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. It is axiomatic that only interest derived by a co- operative society from its investments with any other co-operative society is eligible for deduction under clause (d). Conversely, if the payer of the interest is not a co-operative society, its payee, a co- operative society cannot claim deduction thereon under this clause. Admittedly, the assessee received interest from a co-operative bank and not a co-operative society. A fortiori, such an amount is not eligible for deduction u/s 80P(2)(d) of the Act. ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd.,

5. However, the case of the assessee before the authorities below ab initio has been that it was eligible for deduction on such interest u/s.80P(2)(a)(i) of the Act inasmuch as the assessee was engaged in providing credit facility to its members. At this juncture, it may be apposite to consider the mandate of clause (a)(i) of section 80P(2), which provides that: `(a) in the case of a co-operative society engaged in (i) carrying on the business of banking or providing credit facilities to its members ., the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be allowed as deduction. The assessee is admittedly a co-operative society engaged in carrying on the business of providing credit facilities to its members. In such a situation, the whole of the amount of profits and gains of business attributable to providing credit facilities to its members becomes deductible u/s 80P(2) of the Act.

6. The term profits and gains of business attributable to providing credit facilities has a wider connotation. It encompasses not only the income derived strictly from providing credit facilities to its members but also any other income which is attributable to ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., such business. So long as there exists a live link, not necessarily direct, between the income and carrying on of the business of providing credit facilities, the resultant income qualifies for deduction. If a particular amount is received by a co-operative society from its members as deposits and a part of the same has been provided as a credit facility to its members, the unspent amount for the time being not required by the members as loan, if utilised elsewhere, will nonetheless lead to generation of profits and gains of business of providing credit facilities to its members. The thread of link between income and business of providing credit facilities to the members will be broken if despite there being the members wanting to avail credit facilities, the co- operative society chooses to prefer making deposits with banks etc. rather than advancing sums to its members.

7. Right now we are confronted with a situation in which the assessee co-operative society has made deposits with co-operative banks and earned interest income, which is extantly the bone of contention. The stand of the assessee is that these are short term deposits of the money not required for the time being. The ld. Pr. CIT has not returned any contrary finding. In such a scenario, the ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., entire interest income - not only the one derived from its members by providing credit facilities but also that earned by utilizing the surplus available funds for the time being at some places like investment in FDR etc. - also falls within the ambit of profits and gains of business attributable to providing credit facilities to its members.

8. At this juncture, it is relevant to note that we are dealing with a case in which the ld. Pr. CIT has invoked his power u/s.263 of the Act. It is trite that the exercise of such a power is ousted in case of a debatable issue. An assessment order can be termed as erroneous and prejudicial to the interest of the Revenue if the AO has taken a view which is not legally sustainable. Per contra, if two views are available on a particular issue and the AO adopts one of such possible views, the case goes outside the purview of revisional power to be exercised by the Pr.CIT u/s.263 of the Act.

9. The Pune Benches of the Tribunal in Sureshdada Jain Nagari Sahakari Patsanstha Maryadit Vs. The Pr.CIT (ITA No.713/PUN/2016) decided the question of availability of deduction u/s 80P on interest income by noticing that the Pune ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., Bench in an earlier case of Shri Laxmi Narayan Nagari Sahakari Pat Sanstha Maryadit Vs. ITO (ITA No.604/PN/2014) has allowed similar deduction. In the said case, the Tribunal discussed the contrary views expressed by the Honble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. Vs. ITO (2015) 230 Taxman 309 (Kar.) allowing deduction u/s. 80P on interest income and that of the Honble Delhi High Court in Mantola Cooperative Thrift Credit Society Ltd. Vs. CIT (2014) 110 DTR 89 (Delhi) not allowing deduction u/s.80P on interest income earned from banks. Both the Honble High Courts took into consideration the ratio laid down in the case of Totgars Cooperative Sale Society Ltd. (2010) 322 ITR 283 (SC). There being no direct judgment from the Honble jurisdictional High Court on the point, the Tribunal in Shri Laxmi Narayan Nagari Sahakari Pat Sanstha Maryadit (supra) preferred to go with the view in favour of the assessee by the Honble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra).

10. Insofar as the reliance of the ld. DR on the case of Pr. CIT and Another Vs. Totagars Cooperative Sales Society (2017) 395 ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., ITR 611 (Kar.) is concerned, we find that the issue in that case was the eligibility of deduction u/s.80P(2)(d) of the Act on interest earned by the assessee co-operative society on investments made in co-operative banks. In that case, the assessee was engaged in the activity of marketing agricultural produce by its members; accepting deposits from its members and providing credit facility to its members; running stores, rice mills, live stocks, van section, medical shops, lodging, plying and hiring of goods and carriage etc. It was in that background of the facts that the Honble High Court held that the assessee could not claim deduction u/s.80P(2)(d) of the Act. When we consider the impact of this decision, it turns out that the same is not germane to case under consideration in view of the position that the claim of the instant assessee is directly about the eligibility of deduction u/s.80P(2)(a)(i) of the Act and not u/s.80P(2)(d). Moreover, so many decisions relied on by the ld. AR amply go to prove that the view taken by the AO, cannot by any standard, be construed as not a possible view. We, therefore, hold that the ld. Pr. CIT was not justified in exercising the revisional power anent to interest income ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., of Rs.22,34,270/- earned on investments made with co-operative banks.

11. Now we advert to the second issue espoused by the ld. Pr. CIT about the interest income of Rs.2,334/- received by the assessee on refunds u/s.244A of the Act. We find that this issue is fully and directly covered by the Special Bench order passed by the Mumbai benches of the Tribunal in the case of Maharashtra State Cooperative Bank Ltd. Vs. ACIT (2010) 129 TTJ 521 (SB) (Mumbai) holding that interest on income-tax refund u/s.244A is covered within the expression profits and gains of business occurring in section 80P(2)(a) and ergo eligible for deduction u/s.80P(2)(a)(i) of the Act. Albeit interest amounting to Rs.2,334/- received u/s.244A of the Act is chargeable to tax but at the same time the same is also deductible in full u/s.80P(2)(a)(i) of the Act. The assessment order in not adding such interest to the total income, cannot be construed as prejudicial to the interest of revenue because such interest income is tax-neutral in the context of the assessee due to the simultaneous availability of deduction u/s.80P(2)(a)(i) on such amount. ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd.,

12. We, therefore, hold that the ld. Pr.CIT was not justified in revising the assessment order on both the counts. The impugned order is set-aside.

13. In the result, the appeal is allowed. Order pronounced in the Open Court on 23rd September, 2020. Sd/- Sd/- (S.S. VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT Pune; Dated : 23rd September, 2020 Satish /Copy of the Order is forwarded to:

1. / The Appellant;

2. / The Respondent;

3. The Pr.CIT-2, Kolhapur The ACIT, Range-2, Kolhapur , , / DR B, ITAT, Pune

6. / Guard file / BY ORDER, // True Copy // Senior Private Secretary , / ITAT, Pune ITA No.826/PUN/2019 Sant Motiram Maharaj Sah. Pat Sanstha Ltd., Date

1. Draft dictated on 16-09-2020 Sr.PS

2. Draft placed before author 16-09-2020 Sr.PS

3. Draft proposed & placed before the second member

4. Draft discussed/approved by Second Member.

5. Approved Draft comes to the Sr.PS/PS Sr.PS

6. Kept for pronouncement on Sr.PS

7. Date of uploading order Sr.PS

8. File sent to the Bench Clerk Sr.PS

9. Date on which file goes to the Head Clerk

10. Date on which file goes to the A.R.

11. Date of dispatch of Order.