IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES BENCH: BANGALORE BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No. & A.Y. Appellant Respondent 707/Bang/2019 M/s. Kodavoor Vyavasaya Seva Income Tax Officer, 2016-17 Sahakari Sangha Niyamitha, Ward-1 & TPS, Udupi. 16-62, Kodavoor, Udupi-576 106 PAN AACAK 6235E 762/Bang/2019 Shri Mallikarjuna Credit Co-op. Income Tax Officer, 2016-17 Society Ltd., Ward-2, Shiroor, Vandaru Post, Udupi. Udupi-576 223 PAN AAIAS 2725B 765/Bang/2019 M/s. Ganapathi Agricultural Co-op. -do- 2016-17 Society Ltd., Sahakari Sadana, Main Road, Kemmannu, Udupi-576 115 PAN AACAG 0236F 942/Bang/2019 Shri Mangalajyothi Vividhoddesha Income Tax Officer, 2015-16 Sahakara Sangha Ltd., Ward 1(3), Mangaluru. No.W 3310/3, Eden Paradise, Battagudda, Bejai, Mangaluru-575 004 1190/Bang/2019 M/s. Varanga Sahakari Vyavasayika Income Tax Officer, 2015-16 Sangha Ltd., Varanga, Karkala-576 Ward-3, 144 Udupi-576 103 PAN : AABAV1321R 1191/Bang/2019 -do- -do- 2016-17 Assessee By: Shri Mahesh R Uppin, Advocate. Revenue By: Shri Vikas Suryavamshi, Addl. CIT. Date of Hearing : 30.07.2019 Date of Pronouncement : 26.08.2019 ORDER PER SHRI PAVAN KUMAR GADALE, JM : assessees have filed appeals against different orders of CIT (Appeals). We find issues in appeals are similar and 2 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 identical, hence they are clubbed and heard and consolidated order is passed. For sake of convenience, we shall take up concised grounds of appeals and facts narrated in ITA 707/Bang/2019, M/s. Kodavoor Vyavasaya Seva Sahakari Sangha Niyamitha for Asst. Year 2016-17. assessee in course of hearing has filed concise grounds of appeal which read as under : 2. assessee is Association of Persons (AOP) Registered as Primary Agriculture Credit Co-operative Society under provisions of Karnataka Co-operative Societies Act, 1959 and engaged in business of providing credit facilities to its Members for Agriculture related allied activities, selling of feritlisers, PDF Distribution and allied activities as per bye- laws approved by Registrar for Co-operative Societies. 3 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 assessee has filed Return of Income on 29.09.2016 with gross total income of Rs.54,07,562 after claiming deduction under Section 80P(2) of Act of Rs.53,38,391 and disclosed total income of Rs.72,171. Subsequently, case was selected for limited scrutiny through CASS and Notice under Section 143(2) & 142(1) of Income Tax Act, 1961 (the Act) were issued calling for details of list of Members, loans and deposits and evidences in support of claim. Assessing Officer found various discrepancies in claims and dealt on three disputed issues being interest on deposits with Nationalised Banks, rental income and loss from PD System. In course of hearing, assessee society produced certificate issued by Asst. Registrar of Co- operative Socities, Kundapura. assessee claimed deduction under Section 80P(2)(a)(i) of Act in respect of income from co-operative society engaged in carrying on business of banking of providing credit facilities to its Members. Whereas Assessing Officer observed that interest income of assessee has to be assessed under income from other sources and not under Business income and show cause notice was issued. In response, 4 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 assessee filed reply on 14.12.2008 referred at para 6.4.1 of order. Similarly, Assessing Officer dealt on definition of Members as defined in Chapter 5 of bye-laws of society and clarification sought on issues referred at paras 8.3 to 8.12. Whereas assessee subsequently has filed detailed information on 14.12.2018 with supporting judicial decisions referred at para 8.13 of order. But Assessing Officer was not satisfied with explanations and relied on judicial decisions and finally computed income of society in status of AOP declining claim of deduction under 80P(2)(a)(i) and assessed total income of Rs.65,63,380 and passed order under section 143(3) of Act Dt.22.12.2018. Aggrieved by order, assessee has filed appeal in Form 35 with CIT (Appeals). In appellate proceedings, assessee has filed submissions on disputed issues supported with judicial decisions whereas CIT (Appeals) found that Assessing Officer was correct in his action in disallowing claims and confirmed additions and dismissed assessee's appeal. Aggrieved by CIT (Appeals) order, assessee has filed appeal with Tribunal. 5 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 3. At time of hearing, learned Authorised Representative submitted that CIT (Appeals) has erred in confirming denial of deduction of claim under Section 80P(2) of Act to assessee and decisions relied by CIT (Appeals) are distinguishable and further submitted that assessee society is providing credit facilities to its Members which include nominal members and relied on judicial decisions of Tribunal and jurisdictional High Court and prayed for allowing appeal. Contra learned Departmental Representative supported orders of CIT (Appeals). 4. We heard rival submissions and perused material on record. Prima facie, sole disputed issue being denial of claim of deduction under Section 80P(2)(a)(ii) of Act. Assessing Officer has dealt on interest income from investment / deposits in Banks, whereas assessee society is engaged in business of carrying on banking and providing credit facilities. In present assessment year, assessee has made fixed deposits with Karnataka DCC Bank and received interest income and assessee has claimed deduction under Section 6 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 80P(2)(a)(i) of Act further Assessing Officer found that assessee has provided Banking facilities to nominal members. Whereas ld. AR has restricted his arguments to extent of denial of deduction under Section 80P(2) of Act and further submitted that nominal members has been categorized as members and are eligible for benefits. Whereas CIT (Appeals) has relied on judicial decisions, which shall apply to society which is engaged in numerous activities but in present case assessee society is engaged in providing facilities of Banking business or credit facilities to its members. We found issue of denial of deduction under Section 80P(2) and treatment of interest on deposits and also nominal members are treated as members for purpose of benefit of section 80P(2) was dealt by judicial forums. We consider it proper to refer to decision of co-ordinate Bench of Tribunal in case of Jayanagar Co-operative Society Vs. ITO in ITA No.3254/Bang/2018 in respect of interest income earned by society were Assessing Officer denied claim of assessee observing that interest income earned on investment of 7 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 surplus funds has to be assessed as income from other sources and not from business at Page No.3 paras 4 & 5 held which read as under : 4. issues that arise for consideration in this appeal by assessee are as to whether Revenue authorities were justified in holding that assessee was not entitled to benefit of deduction under section 80P(2)(a)(i) of Income Tax Act, 1961 (in short Act ) on interest income earned and under section 80P(2)(d) of Act in respect of interest received from Co-operative institutions. Assessing Officer (AO) denied claim of assessee on ground that interest income earned by making investment of surplus funds has to be assessed under head Income from Other Sources and not income from business and since interest income is not assessed as business income, claim for deduction under section 57 of Act cannot be allowed. In upholding above conclusions, CIT(A), inter alia, relied on decision of Hon ble Supreme Court in case of Totgar s Co-operative Sales Society Ltd., Vs. ITO 322 ITR 283 (SC) wherein Hon ble Supreme Court held that benefit of deduction under section 80P(2)(a)(i) of Act is only on income which is assessable under head Income from Business . Interest earned on investment of surplus funds not immediately required in short term deposits and securities by Co-operative Society providing credit facilities to members or marketing agricultural produce to members is not business income but income from other sources and society is not entitled to special deduction. 5. While learned AR relied on decision of Hon ble Karnataka High Court in case of Tumukur Merchants Souharda Credit Co-operative Ltd., 230 taxman 309 (Karn), DR relied on subsequent decision of Hon ble Karnataka High Court in case of PCIT Vs. Totgars Co-operative Sale Society Ltd., 395 ITR 611 (Karn.). We have carefully gone through said judgment. facts of case before Hon ble Karnataka High Court was that Hon ble Court was considering case relating to Assessment Years 2007-08 to 2011-12. In case decided by Hon ble Supreme Court in case of very same assessee, Assessment Years involved was Assessment Years 1991-92 to 1999-2000. nature of interest income for all Assessment Years was identical. bone of contention of Assessee in AY 2007-08 to 2011-12 was that deduction under Section 80P(2) of Act is claimed by respondent assessee under Section 80P(2)(d) of Act and not under Section 80P(2)(a) of Act which was claim in AY 1991-92 to 1999- 2000. reason given by Assessee was that in AY 2007-08 to 2011-12 investments and deposits after Supreme Court's decision against assessee Totgar's Co-operative Sale Society Ltd. (supra), were shifted from Schedule Banks to Cooperative Bank. U/s.80P(2)(d) of Act, income by way of interest or dividends derived by Co-operative Society from its investments with any other Co-operative Society is entitled to deduction of whole of such interest or dividend income. claim of Assessee was that 8 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 Co-operative Bank is essentially Co-operative Society and therefore deduction has to be allowed under Clause (d) of Sec.80P(2) of Act. Hon'ble Karnataka High Court followed decision of supreme Court in Totgars Co-operative Sales Society Ltd. (supra) and held that interest earned from Schedule bank or cooperative bank is assessable under head income from other sources and therefore provisions of Sec.80P(2)(d)of Act was not applicable to such interest income. It is thus clear that source of funds out of which investments were made remained same in AY 2007-08 to 2011-12 and in AY 1991-92 to 1999-2000 decided by Hon'ble Supreme Court. Therefore whether source of funds were Assessee's own funds or out of liability was not subject matter of decision of Hon'ble Karnataka High Court in decision cited by learned DR. To this extent decision of Hon'ble Karnataka High Court in case of Tumukur Merchants Souharda Co-operative Ltd. (supra) still holds good. Hence, on this aspect, issue should be restored back to AO for fresh decision after examining facts in light of these judgment of Hon'ble Apex Court rendered in case of Totgars Co-operative Sale Society Ltd. (supra) and of Hon'ble Karnataka high Court rendered in case of Tumukur Merchants Souharda Co-operative Ltd. (supra). 5. Similarly, on issue of definition of Member where Nominal Members are also eligible for benefits. Member defined under co-operative society Act bye-laws includes Nominal Member. We found Ahmedabad Bench of ITAT in ITA No.1328/Ahmd/2018 for Asst. Year 2015-16 in case of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT (supra) at para 7 has held as under : 7. We have heard ld.DR and gone through record. We have also gone through case laws cited both sides before ld.CIT(A). We find that fundamental facts which are not disputed by Revenue authorities are that assessee is primary agricultural credit society registered under Gujarat Cooperative Societies Act, 1961. It is engaged in providing credit facilities to farmers in region of Bhavnagar district. As per AO, members of assessee-society consisted of two types viz. regular member and nominal members. It is case of Revenue that assessee is doing more business with nominal members than regular member in order to earn more profit, which is against law, and therefore, there is break-down of principle of mutuality resulting disentitlement 9 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 of exemption under section 80P. ld.AO relied upon judgment of Hon ble Supreme Court in case of Citizens Cooperative Society Ltd. (supra) to support his view. While case of assessee is that being primary agriculture credit society, it is entitled for exemption under sub-section (4) of section 80P. Judgment of Hon ble Apex Court relied upon by Revenue is distinguishable on facts. In that case assessee was cooperative society registered under Multi State Cooperative Societies Act, 2002, while in present case, assessee is primary agriculture credit society registered under Gujarat State Cooperative Societies Act. Hon ble Supreme Court disentitled assessee from claiming exemption under section 80P due to violation of provisions of MACSA, under which it was formed, and most of business of assessee was with carved out category of persons without approval of Registrar of Societies. Weighing point of view of both sides, we find that balance tilt in favour of assessee. We find that by virtue of sub-section (4) of section 80P, assessee is entitled for deduction under section 80P(2). Further, Income Tax Act does not define member , nor has provided distinction between regular member and nominal member and therefore, its meaning and objects has to be understood in context of definition given in State Act. Revenue authorities are trying to extrapolate meaning of expression Member contrary to spirit of Act. It is evident from definition of member provided in section 2(13) of Gujarat Cooperative Societies Act that Member includes nominal, associate or sympathizer member. Therefore, in present case, nominal members are members as provided in Act and that deposits received and loan advanced to nominal cannot be treated as from non-members or from public and in nature of banking business. That being so, then, assessee engaged in primary agriculture activities and providing credit facilities and agriculture facilities to farmer-members of particular region, claim of deduction under section 80P(2) cannot be denied. It is not denied by Revenue that activities of assessee society are of primary agriculture activities. Competent authority has also recognized assessee as primary agriculture credit society. In earlier assessment year also, Revenue has accepted this fact and allowed claim of assessee. Judgment of Hon ble Supreme Court in case of Citizens Co-operative Society Ltd. (supra) is distinguishable on facts. In that case, status of assessee is that of co-operative bank, whereas assessee in present case is primary agriculture credit society and applicability of section 80P(2)(4) of Act. Considering all these facts, we are not convinced with reasoning and finding given by Revenue authority in denying claim of assessee under section 80P(2). We allow claim of assessee and direct ld.AO to re-compute income of assessee by allowing claim under section 80P(2)(4) of Act. Also in Tax Case Appeal No.882 and 891 of 2018 of Hon'ble Madras High Court in case of Prin. Commissioner of Income Tax Vs. S-1308 Ammapet Primary Agricultural Co- operative Bank Ltd. held in paras 11 to 18 as under : 10 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 11 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 We found facts of present case are similar to decision rendered by co-ordinate Bench and jurisdictional High Court in respect of Members definition and chargeability of interest income under income from other sources . We follow judicial precedence and restore entire disputed issue to file of Assessing Officer to adjudicate afresh in light of decision of chargeability of interest income under head income from other sources and observations of Hon'ble Supreme Court in case of Totgar s Co-operative Sales Society Ltd. Vs. ITO 322 ITR 283 (SC) and Hon'ble Karnataka High Court decision in case of Tumkur Merchants Souharda Credit 12 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 Co-operative Ltd. 230 Taxman 309 (Kar) as discussed in above paras. Whereas in respect of claim of Nominal Members included in definition of Member we find support on our view rely on decision of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT (supra) and Prin. CIT Vs. S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd. (supra) which is covered in favour of assessee. Accordingly, we are of substantive opinion that nominal members are also eligible for Benefits of credit society. Accordingly we restore entire disputed issue to file of Assessing Officer to grant benefit to nominal members and assessee should be provided adequate opportunity of hearing and co-operate in submitting information for early disposal of case and allow grounds of appeal of assessee for statistical purposes. 6. Similarly appeals filed in ITA Nos.762, 765, 942, 1190 & 1191/Bang/2019 are similar and identical. Hence decision rendered in ITA No.707/Bang/2019 at paras 4 & 5 above shall apply mutadis mutandis. Accordingly disputed issue in these 13 ITA Nos.707, 762, 765,942, 1190 & 1191/Bang/2019 appeals are remitted to file of Assessing Officer as indicated and allow grounds of appeal of assessees. 7. In result, appeals of assessee in ITA Nos.707, 762, 765, 942, 1190 & 1191/Bang/2019 are treated as allowed for statistical purposes. Order pronounced in open court on 26th Aug., 2019. Sd/- Sd/- (A.K. GARODIA) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26.08.2019. *Reddy GP Copy to i)The Appellant ii)The Respondent iii)CIT (Appeals) iv) Pr. CIT v)DR, ITAT, Bangalore vi)Guard File By order Assistant Registrar Income-tax Appellate Tribunal Bangalore Kodavoor Vyavasaya Seva Sahakari Sangha Niyamitha v. Income-tax Officer, Ward-1 & TPS, Udupi