CIT and Another vs Mawana Co-Operative Cane Development Union

We have heard Shri Shambhu Chopra, learned counsel for the IT Department. Shri R.R. Agrawal appears for the respondent. This income tax appeal was admitted on the following questions of law:

(1) Whether on the facts and in the circumstances of the case the learned Tribunal is legally justified in holding that the income from bank interest is exempt u/s 80P(2) and also relying on the decision of Commissioner of Income Tax, Karnataka-III Vs. Karnataka State Cooperative Apex Bank, ?

(2) Whether on the facts and in the circumstances of the case the learned Tribunal is legally justified in holding that the interest earned from post office is exempt and also relying on the decision of CIT vs. Karnataka State Co-operative Apex Bank ?

(3) Whether on the facts and in the circumstances of the case, the learned Tribunal is legally justified in holding that the interest earned on NSC is allowable.

The respondent-assessee is a society registered under the Co-operative Societies Act. Its object and activity involve carrying out of providing credit facilities to the members of the society, marketing the agricultural produce of its members, purchasing and selling agricultural implements and seeds for supplying to its members.

For the assessment year 1985-86, the respondent-assessee claimed deduction of income u/s 80P(2)(a)(i) on interest income earned from National Saving Certificate as well as the income from the interests on deposits in the post office. The AO did not allow the exemption of income from interest on such deposits. The appellate authority partly allowed the appeal. On the question of income of interest the appellate authority found that section 80P(2)(c) specifies the deductions to the co-operative society on activities other than those specified in clause (a) and clause (b), independently of, or in addition to all or any of the activities specified. The expression attributable to, is much wider than the expression derived from and covers receipts from sources, other than the actual conduct of business.

The Tribunal dealt with interest from NSC and post office separately. It held in paras 11, 12, 13 and 20 as follows and allowed the appeal in part:

On carefully consideration of submissions from both sides, we find that the investment is in NSC which is a Government security. The income earned thereon can very well be eligible for exemption for the obvious reason that it has been done in compliance of Government direction and further that when the interest income earned in the deposits of the bank is allowed, on same analogy this interest income earned on NSCs can also be allowed as exemption. In the recent decision the Supreme Court in the case of CIT v. Karnataka State Cooperative Apex Bank (Supra), has made it clear that interest derived by a co-operative bank from investment of funds with RBI or SBI is exempt u/s 80P(a)(i) irrespective of the fact that investment is made out of the reserve funds or working capital. In view of the above decision of Apex Court, the assessee is entitled for exemption of the interest earned on NSCs.

The next dispute relates to interest earned from post office. This issue has come for consideration in all the six assessment years under consideration.

For the same reason that section 80P does not make any provision for exemption of the interest earned on deposits in post office, the AO denied the claim of the assessee. The CIT(A) also upheld the same. Sh. Anil Sharma the learned Authorised Representative of the assessee submitted that interest on deposit with post office was exempt u/s 10(15) of the IT Act. He also said that the CBDT by its Circular No. 410, dated 12-2-1985 ((1986) 50 CTR (St) 53)) made it clear that the interest earned on saving account or CTD (cumulative time deposit), the same would exempt from the income. The learned Authorised Representative of the assessee referred the circular compiled at p. 29 of the paper book.

On careful considerations of submissions from both sides and the material available in the appeal records, we find that the orders of the CIT(A) for respective assessment years on this issue are not justified. The income earned on the leftover balances in the bank accounts of the society has a direct nexus with the main activity of the assessee for providing credit facilities to its member. The manner in which the assessee has earned the interest income as explained by the learned Authorised Representative of the assessee cannot be denied that it was not from main activities of the society. Even otherwise also, the matter in issue now is squarely covered by the decision of the Hon''ble Supreme Court in the case of CIT v. Karnataka State Cooperative Apex Bank (supra). It is a case of a co-operative bank which is required to place a part of its funds with the SBI or RBI to enable it to carry on its banking business. The bank has earned interest income on those funds.

The Hon''ble Supreme Court while confirming the decision of Karnataka High Court in the same case as well as following earlier decision in the case of COMMISSIONER OF INCOME TAX, BANGALORE Vs. BANGALORE DISTT. COOP. CENTRAL BANK LTD., has clarified that interest income derived by the cooperative bank from investment of the funds with RBI or SBI is exempt u/s 80P(2)(a)(i) of the IT Act irrespective of the fact that investment is made out of reserve funds or working capital. We, therefore, do not find merit in the order of the CIT(A) on this issue. So we reverse it.

Relying upon Commissioner of Income Tax, Karnataka-III Vs. Karnataka State Cooperative Apex Bank, , which was followed in CIT v. Bangalore Distt. Cooperative Central Bank Ltd. (Supra), the Tribunal held that the interest derived by the co-operative society from NSC is exempt u/s 80P(2)(a)(i) of the Act irrespective of the fact that investment is made out of reserve funds or working capital. So far as income from post office is concerned, it was held in para 13 that the interest from post office is exempt u/s 10(15) of the IT Act as also the CBDT Circular No. 410, dated 12-2-1985, which exempted the income on 7 accounts or CTD (cumulative time deposit).

Shri Sambhu Chopra, learned counsel for the Department submits that the legal position has now been settled in The Totgars'' Cooperative Sale Society Limited Vs. Income Tax Officer, Karnataka, . The Supreme Court held that the interest income arising to a co-operative society carrying on business of providing credit facilities to its members or marketing of agricultural produce of its members, on the surplus, which is not required immediately for business purposes, from investment in short-term deposits and securities, has to be taxed as income from other sources u/s 56 of the IT Act, 1961. Such interest cannot be said to be attributable to the activities of the society, viz., carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. Interest income of such society from amounts retained by it cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) or section 80P(2)(a)(iii) of the Act. It was further held that section 80(P)(2)(a)(i) cannot be placed on a par with Expln. (baa) to section 80HHC, section 80HHD(3) and section 80HHE(5).

This Court has followed the Supreme Court judgment in Totgar Co-operative Sale Society Ltd. case (supra) in CIT vs. United Mercantile Co-op. Bank Ltd. IT Appeal No. 396 of 2008, decided on 23-11-2011. In paras 7 and 8 the Court drew a distinction between the co-operative societies, which are doing banking business, and the co-operative societies, which are engaged in giving credit and agricultural implements to its members.

The questions raised of the present case are covered by the judgment in Totgar Co-operative Sale Society Ltd. (supra) insofar as interest on the surplus income deposited in NSC and SBI is concerned.

So far as interest on post office is concerned, the exemption is provided u/s 10(15) of the Act. The exemption has been notified by CBDT by Circular No. 410, dated 12-3-1985 on the interest earned from CTD. The income tax appeal is partly allowed. The interest income of the appellant-assessee from NSC will be treated as income from other sources, which is not exempt u/s 80P(2)(a)(i) of the Act. The interest income from post office, will be exempt u/s 10(15) of the Act. Consequential orders and the computation will be made by the assessing authority.