K.628, Keeranatham Primaryagricultrual Cooperative Credit Society Ltd.,Rep. By Its Secretary,V.soundararajan v. The Income Tax Officer,Non Corp Watd - 2 (5), Cbe

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 03.03.2020 CORAM THE HONOURABLE DR. JUSTICE ANITA SUMANTH Writ Petition No.5552 of 2020andWMP. Nos.6500 & 6502 of 2020 K.628, Keeranatham PrimaryAgricultrual Cooperative Credit Society Ltd.,Rep. by its Secretary,V.Soundararajan. .... Petitioner Vs The Income Tax Officer,Non Corp Watd - 2 (5), CBE,No.63, Race Course Road,Coimbatore - 641 018. .... Respondent PETITIONs filed under Article 226 of The Constitution ofIndia praying for the issuance of Writ of Certiorari, callingfor the entire records relating to the impugned order passed bythe respondent in No.Nil, dated 17.12.2019 and quash the same. For Petitioner : Mrs.R.Hemalatha, for C.Prakasam For Respondent : Mr.A.P.Srinivas, Senior Standing Counsel O R D E R Mr.A.P.Srinivas, learned Senior Standing Counsel acceptsnotice for the respondent. 2. By consent expressed by both learned counsel, the WritPetition is finally disposed even at the stage of admission. https://hcservices.ecourts.gov.in/hcservices/ 3. Since the issue arising out of impugned assessment dated17.12.2019 for AY 2012-13 in terms of the Income Tax Act, 1961('Act') has been considered and decided by me in a batch of writpetitions filed by several Primary Agricultural Co-operativeSocieties, in K.2058, Saravanmpatti Primary Agricultural Co-operative Credit Society Ltd., Vs. The Income Tax Officer(W.P.Nos.17 of 2020 etc. batch dated 31.01.2020) and bothlearned counsel concur on the position that the aforesaid orderis directly applicable to the present case, the said order isapplied in the present case as well. Relevant portions of theorder in the aforesaid batch of Writ Petitions are extractedbelow: '3. The petitioners responded to the queries raisedby the Officer. One of the issues that arose forconsideration was the eligibility to exemption claimedon the interest income received by the petitioner fromdeposits/investment of funds in banks. Such income,according to the Officer, was ineligible for deductionunder Section 80P, since it did not form part of theoperational income of the petitioner/assessee and wasliable to be taxed in terms of Section 56 of the I.T.Act. The Officer relied on the judgment of the SupremeCourt in the case of Totgars' Cooperative Sale SocietyLimited V. ITO, Karnataka (322 ITR 283). 4. The petitioners were put to notice of theproposal to bring to tax the interest receipts under thehead 'other sources'. The petitioners sought todistinguish the judgment in the case of Totgars (supra)on the grounds that Totgars was a Society engaged insales, whereas, the petitioner was a PrimaryAgricultural Cooperative Credit Society. That apart, thefunds that were deposited giving rise to the interestincome did not constitute a surplus, but a mandatorystatutory reserve. 5. Reliance was placed on a judgment of the SupremeCourt in Commissioner of Income Tax, Jalandhar V.Nawanshahar Central Cooperative Bank Limited ((2007) 15SCC 611) wherein the Bench has observed that the depositeffected was in the nature of a statutory reserve.According to the petitioners, such statutory reservewould not fall within the ambit of ‘surplus funds’ andthe judgment in the case of Totgars (supra) wasinapplicable to their cases. 5. Reliance was placed on a judgment of the SupremeCourt in Commissioner of Income Tax, Jalandhar V.Nawanshahar Central Cooperative Bank Limited ((2007) 15SCC 611) wherein the Bench has observed that the depositeffected was in the nature of a statutory reserve.According to the petitioners, such statutory reservewould not fall within the ambit of ‘surplus funds’ andthe judgment in the case of Totgars (supra) wasinapplicable to their cases. 6. In addition, the petitioner also stated that thetotal amount invested, Rs.15,51,18,027/- in the case ofK.2058 Saravanampatti Primary Agricultural CooperativeCredit Society Limited, petitioner in W.P.No.17 of 2020,(whose facts are taken to be illustrative of the factsin other Writ Petitions as well on the basis of thesubmissions of both learned counsel to the effect thatthe facts and legalities in all writ petitions aresimilar excepting for the figures involved), comprisedsignificantly of external borrowings. In this case, asum of Rs.12,57,23,490/- had been borrowed from theCoimbatore District Central Cooperative Bank. It is notelaborated as to why this borrowal was effected.Perhaps, it was the mandate of the statutory reservethat compelled the petitioner to effect the borrowing tomaintain such reserve. 7. It was also the contention of the petitionersbefore the Assessing Officer that if at all interestearned was to be brought to tax, then, alternatively,interest paid on the loan should be deducted frominterest received or in other words, there should be anetting of the interest paid and received and only theresultant figure be brought to tax. 8. The Assessing Authority however rejected thesubmissions cursorily stating in a single line that‘statutory reserve can also be considered as surplusfunds of the assessee’. The judgement of the SupremeCourt in the case of Nawanshahar (supra) has not beenconsidered or discussed and neither has the plea of thepetitioner for netting of interest paid and earned. 9. In Nawanshahar (supra), the Supreme Courtconsidered the question of whether investments made by abanking concern are part of the business of banking. Theconclusion was that the income arising from investmentswould be attributable to the business of the bank andfall under the head 'profits and gains of business',deductible under Section 80P(2)(a)(i) of the I.T. Act.The earlier view in Bihar Coop. BankLtd. V. CIT ((1960)39 ITR 114, CIT V. Karnataka State Coop. Apex Bank((2001) 7 SCC 654) and CIT V. Ramanathapuram Distt.Coop.Central Bank Ltd. ((2009) 17 SCC 620) was followed. 10. At paragraph 4 of the short judgment, the Benchhas stated that the principle in those cases would covera situation where a Co-operative Bank carrying on thebusiness of banking is statutorily required to place apart of its funds in approved securities. 11. The distinction I note, at first blush, is thatthis judgment has been rendered in the case of a Co-operative Bank, whereas, the petitioners before me areCo-operative Societies. The Supreme Court in Citizen Co-operative Society Limited V. Assistant Commissioner ofIncome-Tax, Circle -9(1), Hyderabad (397 ITR 1) hasnoted the distinction between a Co-operative Bank thatwould be governed by the provisions of the BankingRegulation Act, 1949, where its operations would includeengagement of the members of the general public, and aco-operative Society, whose operations would be confinedto its members. 12. This is the distinction between the two kindsof co-operative societies as set out under Section 80P(2)(a)(i), that is, those carrying on the business ofbanking and those providing credit facilities to itsmembers. However, a common mandate in both cases, thougharising under different enactments, is for such entityto place a part of its funds in/with specificfacilities/entities. 12. This is the distinction between the two kindsof co-operative societies as set out under Section 80P(2)(a)(i), that is, those carrying on the business ofbanking and those providing credit facilities to itsmembers. However, a common mandate in both cases, thougharising under different enactments, is for such entityto place a part of its funds in/with specificfacilities/entities. 13. One of the petitioners before me(Kalikkanaickenpalayam Primary Agricultural CooperativeCredit Society Ltd.in W.P.No.29 of 2020) hasspecifically raised before the Assessing Authority theargument that the Tamil Nadu Co-operative Societies Act,1983 (in short 'TNCS Act') mandates Co-operativeSocieties to place a portion of their funds as astatutory reserve with a District Co-operative Bank. Theargument appears to be that the statutory reserve formspart of and is an essential feature of the operationsand any interest generated therefrom would beoperational income entitled to deduction under Section80P of the I.T.Act. 14. The respondent officer has relied on a morerecent judgment of the Supreme Court in Totgars'(supra), where the Bench was concerned with surplus funds which the assessee had invested in short termdeposits with banks and Government facilities. Thequestion referred for decision was as follows: 'Whether, on the facts and in the circumstancesof the case, the Tribunal was right in law inholding that the income by way of interest ondeposits held with scheduled banks, bonds andother securities was chargeable to taxunder section 56 under the head `Income fromother sources' without allowing any deductionin respect of cost of funds and proportionateadministrative and other expenses under section57?' 15. Thus the issue before the Court in Totgars(supra) was on the classification of interest generatedby deposits held with scheduled banks, bonds and othersecurities without providing for a deduction in respectof cost of funds and proportionate administrative andother expenses under Section 57. The question ofinterest generated from deposits made by reason of astatutory mandate was raised and finds reference in thenarration of the petitioners' submissions, the Courthas, at para 8 of the report (ITR) stated that 'At the outset, an important circumstance needsto be highlighted. In the present case, theinterest held not eligible for deduction underSection 80P(2)(a)(i) of the Act is not theinterest received from the members forproviding credit facilities to them. What issought to be taxed under Section 56 of the Actis the interest income arising on the surplusinvested in short-term deposits and securitieswhich surplus was not required for businesspurposes. Assessee(s) markets the produce ofits members whose sale proceeds at times wereretained by it. In this case, we are concernedwith the tax treatment of such amount. Sincethe fund created by such retention was notrequired immediately for business purposes, itwas invested in specified securities. Thequestion, before us, is - whether interest onsuch deposits/securities, which strictlyspeaking accrues to the members' account, couldbe taxed as business income under Section 28 ofthe Act? In our view, such interest incomewould come in the category of "Income fromother sources",....' 16. The revenue has filed counters in a few writpetitions objecting to the maintainability of writssought and again relying on the judgement of the SupremeCourt in the case of Totgars (supra). Additionally,Mr.Jayapratap points out that the issue in regard to theclassification and taxability of interest income has notbeen specifically raised in the affidavit filed insupport of the Writ Petitions. Upon perusal, theaffidavits appear to be a cut and paste exercise fromWrit Petitions filed by other Co-operative Societieschallenging orders of assessment rejecting claims forexemption on the ground of mutuality. Though there isonegeneralgroundraisedinregardtoavailability/entitlement to deduction under Section 80Pitself, 'The respondent failed to consider that thecooperative societies are entitled to seeking deductionu/s.80(P) of Income Tax Act, but the same was notconsidered by the respondent’, all other grounds revolveonly around the aspect of mutuality and are entirelyirrelevant to the issue arising from the presentimpugned order. No specific ground has been raised onthe classification of interest income and whether thesame would fall within the ambit of income from businessor other sources. 17. However, the petitioners have responded to theshow cause notice issued by the officer raising thisissue and their response has been extracted in theorders of assessment, as follows: W.P.No.17 of 2020: 'The Supreme Court judgment in TogarsCooperative Sale Society Ltd no applicable toour society as the above society is a salesociety and ours is Primary Agricultural Co-operative Credit Society. The former is dealingsale of goods and ours is dealing in creditfacility extended to the members. Also, as per section 80P2a, profits and gainsattributable to the business of the society andthe word attributable is having elaboratemeaning as derived in Commissioner of Income-tax vs. Nawanshahar Central Co-operative bankLtd. Civil Appeal Nos.2499, 2500 of 2005 8thApril 2005. So, the funds deposited is not a surplus fundas decided in Totgars Co-operative Sale SocietyLtd., but a statutory reserve maintained asdecided in Commissioner of Income tax Vs.Nanshahar Central Cooperative Bank Ltd. The amount in investments is Rs.15,51,18,027/-out of this Rs.12,57,23,490/0 was borrowed fromCoimbatore District Central Co-operative Bank.if interest earned is taxed the interest paidto such loans are deducted form the interest onother sources. So, kindly drop the proceeding by taxing theinterest income and accept the returned income'W.P.No.29 of 2020: ‘Received you show cause notice and noted thecontents. In this regard we wish to submit thefollowing for your consideration.The Supreme Court judgement in TotgarsCooperative Sale Society Ltd., not applicableto our society as the above society is a salesociety and ours is Primary AgriculturalCooperative Credit Society. The former isdealing sale of goods and ours is dealing incredit facility extended to the members. Majordifference in both former is dealing sale ofsomething and ours is dealing in money, whenmoney involved in the bank or credit society,definitely a reserve must be maintained foreasy liquidation purpose in case of emergency.Also, as per section 80P2A, profits and gainsattributable to the business of the society andthe word attributable is having elaboratemeaning as derived in the COMMISSIONER OFINCOME TAX vs. NAWANSHAHAR CENTRAL COOPERATIVEBANK LTD Civil Appeal Nos.2499 2500 of 2005 8[th]April, 2005, 2007 208 CTR SC 438:2007 289 ITR 6SC:2007 160 TAXMAN 48 Also it is to be noted that every CooperativeSociety is to be maintained a statutory reserveof 25 percent of the total deposits includingsavings bank account and current accountbalances with District Central Cooperativebanks to provide proper liquidity to thesocieties. Also it is to be noted that every CooperativeSociety is to be maintained a statutory reserveof 25 percent of the total deposits includingsavings bank account and current accountbalances with District Central Cooperativebanks to provide proper liquidity to thesocieties. So, the funds deposited is not a surplus fundas decided in Totgars Cooperative Sale SocietyLtd., but a statutory reserve maintained asdecided in COMMISSIONER OF INCOME TAX vs.NAWANSHAHAR CENTRAL COOPERATIVE BANK LTD.The following cases are also to be consideredby the Honorable Supreme Court of India in thecase of interest received on deposits etc., Supreme Court of India Commissioner Of Income-Tax vs RamanathapuramDistt. Co-Op. ... on 30 October, 2001 Equivalent citations: 2002 255 ITR 423 SCBench: S Bharucha, Y Sabharwal, B Kumar ORDER 1. The High Court has answered against theRevenue, the following question :"Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was correctin law in holding that the interest onsecurities, subsidies received from theGovernment and dividend business income of theassesse entitled to deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961 ?" 2. The very question was considered by thiscourt in CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 and theconclusion was reiterated in Mehsana DistrictCentral Co-operative Bank Ltd. v. ITO . 3. It is now contended on behalf of the Revenuethat the decision of this court in UnitedCommercial Bank Ltd. v. CIT [1957] 32 ITR 688was not considered. 4. We do not think that it is open to theRevenue to urge, through different counsel, thesame thing again and again. We are satisfiedthat the answer to the question has beencorrectly given in the decisions aforementionedand in the order under appeal. 5. The civil appeals are dismissed with costs.Also the jurisdictional Madras High Court alsolooking into the Totgars case and allowed the interest received is allowed under section 80Pin case of Madras High CourtThe Commissioner Of Income Tax vs M/S.Veerakeralam Primary ... on 5 July, 2016IN THE HIGH COURT OF JUDICATURE AT MADRASDated: 05.07.2016CORAM :THE HONOURABLE MR. JUSTICE S.MANIKUMARandTHE HONOURABLE MR. JUSTICE D.KRISHNAKUMARTax Case Appeal Nos.735, 755 of 2014 and 460 of2015The Commissioner of Income Tax,63, Race Course RoadCoimbatore. .. Appellant inall the above appeals Vs M/s. Veerakeralam Primary AgriculturalCo-operative Credit SocietyNo.17, Peria Thottam ColonyVeerakeralamCoimbatore 641 007. So, on the basis of the above kindly drop theproceedings by taxing the interest income andaccept the returned income.’ 18. Though all petitioners have not repliedidentically to the notices issued by the officer, theabove replies are illustrative of the stands adopted bythe petitioners at the time of assessment andcrystallize the arguments of the petitioners’ to theeffect that (i) the investments in question do notcomprise surplus funds (ii) that the investmentsconstitute a statutory reserve as mandated by the TNCSAct (iii) the interest generated therefrom was eligiblefor deduction in the light of Nawanshahar (supra) (iv)at worst the interest received should be netted withinterest paid. These arguments ought to have been atleast, considered, by the Assessing Authority indeciding the issue but have unfortunately been brushedaside despite being noted in the order itself. 19. In my considered view, this amounts to a fatalflaw as it renders the impugned order entirely non-speaking and passed without application of mind. If theaffidavits of the petitioners’ are looked upon as 19. In my considered view, this amounts to a fatalflaw as it renders the impugned order entirely non-speaking and passed without application of mind. If theaffidavits of the petitioners’ are looked upon as mechanical and filed in haste and without application ofmind, equally so are the impugned orders of assessmentthat simply rely on Totgars (supra) without discussingthe arguments put forth by the petitioners. For thisreason the arguments of the revenue based on the lack ofpleadings in the affidavit is rejected. I am of theconsidered view that in a case such as the present, thepetitioners should not suffer for lacunae in draftingparticularly when the stand of the petitioners is veryclear from the materials on record. Thus, to balance theconvenience of both parties and in the interests ofjustice, this issue is set aside for denovo and freshexamination and conclusion by the respondent. 20. I make it clear that I have expressed noopinion on the merits of the matter and all that isstated above is only to crystallize the arguments ofboth sides, as available on record. The officers are atliberty to decide and conclude the issue on merits inany manner as they may think fit, but only after properdiscussion. An order of assessment passed by a quasijudicial officer that decides an important question oflaw, raises a significant demand and has far reachingconsequences has to speak for itself and take intoaccount, and meet, the arguments raised by an assessee.Mere reliance on a judgement without reference to thefacts involved in both cases, those in the case reliedupon and those in the case of the assessee in question,would not justify the conclusion arrived at. 21. For these reasons, the assessments impugned inW.P.Nos.17, 20, 22, 23, 26, 29, 1150, 1155 and 1161 of2020 are set aside and the matter is remanded to thefile of the Assessing Officer for de novo consideration.The petitioners are directed to appear before theirrespective Assessing Officer on 14.02.2020 at 10.30 a.m.without expecting any further notice in this regard. Thepetitioners will be heard specifically on the questionof classification of interest generated by investmentsmade for the purpose of statutory reserve and thejudgments of the Supreme Court in Nawanshahar andTotgars' (supra) as well as other relevant case lawshall be taken into account by the Assessing Officer inframing assessments by way of speaking and detailedorders. This exercise shall be completed within a periodof six (6) weeks from date of conclusion of personalhearing ' 3. In the light of the aforesaid, the impugned order whichrelates to this issue is set aside. The petitioner is permittedto appear before the Assessing Officer on Friday the 20[th] ofMarch, 2020 at 10.30. a.m. without expecting any further noticein this regard. My direction as set out in paragraph No.21extracted above will apply equally in this case as well . 4. The Writ Petition is allowed in the aforesaid terms. Nocosts. Connected Miscellaneous Petitions are closed. Sd/- Assistant Registrar //True Copy// Sub Assistant RegistrarrkpToThe Income Tax Officer,Non Corp Watd - 2 (5), CBE,No.63, Race Course Road,Coimbatore - 641 018.+1 cc to Mr.A.P.Srinivas ,Advocate Sr.No.19351Writ Petition No.5552 of 2020andWMP. Nos.6500 & 6502 of 2020SR(CO)KKV/22/05/2020