Income from E-Stamping Ineligible for Section 80P(2) Deduction

Karnataka State Co-operative Agriculture and Rural Development Bank Ltd. Vs ITO (ITAT Bangalore)

The case of Karnataka State Co-operative Agriculture and Rural Development Bank Ltd. vs. ITO (ITAT Bangalore) revolves around the interpretation and application of Section 80P(2)(a)(i) of the Income Tax Act, 1961, specifically regarding the eligibility of income earned from e-stamping services for deduction under this provision.

Background and Facts

The appellant, Karnataka State Co-operative Agriculture and Rural Development Bank Ltd., engaged in various financial and cooperative activities, including providing e-stamping services. The issue at hand pertained to whether income generated from e-stamping services could be considered eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Arguments Presented

The appellant argued that since e-stamping services were part of its authorized business activities as per its bye-laws, the income derived from such activities should be eligible for deduction under Section 80P(2)(a)(i). It was contended that the primary business of the cooperative bank was to provide financial services to its members, which included non-banking activities like e-stamping, and therefore, the income from e-stamping should not be excluded from the ambit of Section 80P deductions.

Income Tax Department’s Position

The Income Tax Department (ITO) took the position that income earned from e-stamping services could not be considered as income derived from activities specified under Section 80P(2)(a)(i). According to the ITO, since e-stamping services were not directly related to the cooperative banking activities aimed at benefiting its members, they did not qualify for the deduction provided under Section 80P(2)(a)(i).

Tribunal’s Decision and Analysis

The Income Tax Appellate Tribunal (ITAT), Bangalore, deliberated on the matter and rendered its decision based on the arguments presented and the provisions of the Income Tax Act.

i. Interpretation of Section 80P(2)(a)(i)

Section 80P(2)(a)(i) of the Income Tax Act, 1961, is a provision aimed at incentivizing cooperative societies by allowing them deductions on income derived from specified activities. The primary objective is to promote and support cooperative societies engaged in activities that directly benefit their members. The Tribunal examined this provision closely to determine its scope and intent in the context of the case involving Karnataka State Co-operative Agriculture and Rural Development Bank Ltd. vs. ITO (ITAT Bangalore).

• Scope and Intent: The Tribunal recognized that Section 80P(2)(a)(i) provides for deductions specifically for income derived from activities that are integral to the cooperative society’s objectives of benefiting its members. These activities typically include banking, credit facilities, and other financial services directly linked to the cooperative’s members.
• Purpose: The overarching purpose of Section 80P(2)(a)(i) is to encourage cooperative societies to channel their efforts and resources into activities that enhance the economic well-being and development of their members. By granting deductions on income from such activities, the provision seeks to facilitate the growth and sustainability of cooperative institutions.
• Application to the Case: In the case at hand, the Tribunal assessed whether income generated from e-stamping services by the cooperative bank could be considered eligible for deduction under Section 80P(2)(a)(i). The key consideration was whether e-stamping services, though authorized by the bank’s bye-laws, aligned with the statutory intent of directly benefiting its members as stipulated under the provision.

ii. Nature of E-Stamping Income

The Tribunal analyzed the nature of income derived from e-stamping services in relation to the cooperative bank’s primary business activities.

• Primary Business Activities: It was established that the cooperative bank’s core operations primarily involved providing financial services such as banking facilities, credit, and other cooperative activities directly benefiting its members. These activities are central to the cooperative’s mandate and are eligible for deductions under Section 80P(2)(a)(i).
• E-Stamping as Non-Core Activity: E-stamping services, while authorized by the bank’s bye-laws, were categorized as non-core activities by the Tribunal. The income generated from e-stamping was deemed incidental and peripheral to the cooperative’s main objective of providing financial services to its members.
• Direct Benefit Criterion: The Tribunal emphasized that for income to qualify for deduction under Section 80P(2)(a)(i), it must directly benefit the members of the cooperative. E-stamping services, although generating income, were not considered as directly contributing to the economic well-being or financial advancement of the cooperative’s members.

iii. Bye-laws and Authorization

The Tribunal considered the argument regarding authorization under the bank’s bye-laws for conducting e-stamping services.

• Authorization vs. Qualification for Deduction: While the appellant bank contended that its bye-laws explicitly permitted the provision of e-stamping services, the Tribunal clarified that mere authorization under bye-laws does not automatically qualify income from such activities for deduction under Section 80P(2)(a)(i).
• Critical Criterion – Direct Benefit: The pivotal factor remained whether the income derived from e-stamping services directly benefited the members of the cooperative bank. Despite authorization, if the income did not fulfill this criterion of direct benefit, it would not be eligible for deduction under Section 80P(2)(a)(i).

iv. Precedent and Legal Interpretation

The Tribunal relied on previous decisions and legal precedents to support its interpretation of Section 80P(2)(a)(i).

• Judicial Interpretation: Referring to established legal principles and earlier decisions, the Tribunal underscored that income claimed for deduction under Section 80P(2)(a)(i) must be intrinsically linked to activities that directly benefit the cooperative’s members. This interpretation ensures that the provisions of the Income Tax Act are applied consistently and in accordance with legislative intent.
• Qualification Criteria: The Tribunal reiterated that income from peripheral or incidental activities, even if authorized, does not automatically qualify for deductions unless it meets the fundamental criterion of directly benefiting the members of the cooperative society.
• Case-Specific Application: In applying these principles to the case, the Tribunal concluded that income from e-stamping services, despite authorization under the bye-laws, did not meet the requisite standard of directly benefiting the cooperative’s members. Therefore, it upheld the decision that such income was not eligible for deduction under Section 80P(2)(a)(i).

Conclusion:  In conclusion, the ITAT Bangalore upheld the decision that income earned by the appellant from e-stamping services cannot be considered for the purpose of deduction under Section 80P(2)(a)(i) of the Income Tax Act. This decision underscores the importance of ensuring that income claimed for deduction under Section 80P(2)(a)(i) must stem directly from activities aimed at benefiting the members of cooperative societies. Activities like e-stamping, though authorized, were deemed peripheral and did not satisfy this criterion.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Present appeals arise out of the following orders of the L.CIT(A) passed independently for Assessment Years 2012-13 to 2018-19 & 2020-21. The details of the impugned orders are as under:

Appeal No.	Assessment Year	Impugned order dated
ITA No.1052/Bang/2023	2012-13	29/05/2023
ITA No.1053/Bang/2023	2013-14	11/05/2023
ITA No.1054/Bang/2023	2013-14	11/05/2023
ITA No.1055/Bang/2023	2014-15	11/05/2023
ITA No.1056/Bang/2023	2015-16	16/05/2023
ITA No.1057/Bang/2023	2016-17	16/05/2023
ITA No.1058/Bang/2023	2017-18	29/05/2023
ITA No.1059/Bang/2023	2018-19	29/05/2023
ITA No.1060/Bang/2023	2020-21	29/05/2023

2. Brief facts of the case are as under:

2.1 The Ld.AR at the outset submitted that the facts and circumstances of the appeals under consideration are based on identical facts and on the disallowance of assessee’s claim under section 80P (2) (a)(i)/(d) of the Act. Therefore all the appeals are considered in a consolidated manner on the principle issue.

2.2 It is submitted that the assessee is a state-level non-banking co-operative credit society established in the year 1929, well before the enactment of the Karnataka Co-operative Societies Act, 1959 (“KCS Act”), the Reserve Bank of India Act, 1934, or the Banking Regulation Act, 1949 (BRA). It is thus, submitted that the assessee though has the word “bank” in its name, it is not a bank, . It is further submitted that the assessee is not licensed to carry on the operations of banking as per the Banking Regulation Act. Reliance is placed on the response to a query dated 07/09/2018, under the Right to Information Act, 2005 filed by the assessee to the Reserve Bank of India (RBI) placed at page 88 of PB Vol 1.

2.3 It is submitted that, In the state of Karnataka, 178 Primary Co-operative Agriculture and Rural Development (PCARD) banks function at the taluk and sub-taluk levels(details of which are placed at page 312- 317 of the PB Vol. 1. These are referred to as primaries and are members of the assessee. It is submitted that the assessee lends to the primaries under various schemes including those promulgated by the National Bank of Agriculture and Rural Development and the primaries, in turn, lend loans to the agriculturists. These loans are for various purposes such as minor irrigation, land development, horticulture and plantation, animal husbandry, farm mechanisation, etc. Copy of the the bye-laws of the assessee and a detailed note on its operations is placed on record at page 86- 87 of the PB vol.1. It is further submitted that, The Government of Karnataka who is also a shareholder of the assessee.

2.4 The Ld.AR submitted that the lending of the of the assessee is thus to:

(a) PCARD banks who are assessee’s members (A Class Members),

(b) Nominal members who are also the assessee’s members (D Class Members) and which membership is expressly permitted by sections 18(1)(a) and 18(2) read with section 2(f) of the KCS Act, and

(c) its employees (of some small amounts as staff loans), advanced in the ordinary course, as any business would do as a staff welfare measure.

2.5 During the assessment proceedings, the Ld.AO did not consider the submissions of the assessee and disallowed the claim under section 80P (2) (a) (i) of the act on the interest income earned by the assessee on the loans and credits extended by the assessee.

2.6 The Ld.AO held that the assessee was not a primary agricultural credit society nor a primary co­operative agricultural or a rural development bank. It was held that, the assessee was hit by section 80P(4) of the Act. The Ld.AO thus denied the contention of the assessee that, the interest earned from investment made may be considered under section 80P(2)(a)/(d) of the Act.

2.7 The Ld.AO was thus of the opinion that assessee is into Banking business and principle of Mutuality did not satisfy. He placed reliance on the decision of Hon’ble Supreme Court in case of Citizens Cooperative Society Ltd., reported in (2017) 397 ITR 1.

2.8 Aggrieved by the orders of the Ld.AO, the assessee preferred appeals before the Ld.CIT(A).

3. The Ld.AR submitted that for assessment years 2012-13, 2018-19 and 2020-21, the orders of the Ld.CIT(A) were passed ex-parte.

3.1 For AY 2013-14, assessment order was passed on 26.02.2016. In first appeal, an order was passed by the Ld.CIT(A) on 14.02.2017, against which the assessee preferred appeal before this Tribunal who passed order dated 06.04.2018 remanding the matter to the file of the CIT(A). Thereafter, the Ld.CIT(A) passed two orders, both on 11.05.2023 at different time with different DIN.

In both these orders passed by the Ld.CIT(A) on merits, the disallowance by the Ld.AO was upheld.

For remaining assessment years, orders were passed upholding the disallowance by the Ld.AO.

3.2 The primary observation of the Ld.CIT(A) for disallowing the claim u/s. 80P(2)(a)(i) was that assessee was dealing with the members of different classes such as regular / nominal / associate members. In respect of the nominal members / associate members who did not have certain rights in the society, the principle of mutuality did not exist.

3.3 In respect of the disallowance u/s. 80P(2)(d) of the act, the Ld.CIT(A) relied on the decision of Hon’ble Karnataka High Court in case of Totagars Co-operative Sales Society vs. ACIT reported in (2017) 395 ITR 611.

3.4 Aggrieved by all the orders of the Ld.CIT(A) the assessee preferred appeal before this Tribunal.

4. At the outset, the Ld.AR submitted that, there is delay in filing present appeals before this Tribunal. The details of delay in present appeals are as under:

Appeal No.	Asst Year	Days of Delay
ITA No. 1052/Bang/2023	2012-13	138 days
ITA No. 1053/Bang/2023	2013-14	156 days
ITA No. 1054/Bang/2023	2013-14	156 days
ITA No. 1055/Bang/2023	2014-15	156 days
ITA No. 1056/Bang/2023	2015-16	151 days
ITA No. 1057/Bang/2023	2016-17	151 days
ITA No. 1058/Bang/2023	2017-18	138 days
ITA No. 1059/Bang/2023	2018-19	138 days
ITA No. 1060/Bang/2023	2020-21	138 days

4.1 For the delay in filing the appeals before this Tribunal, the Ld.AR has filed applications for condonation of delay with the affidavits. The affidavit filed by the assessee for all the years are identical and therefore the affidavit for condonation of delay for A.Y. 2012-13 dated 14.12.2023 in ITA No. 1052/Bang/2023 is reproduced under:

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He submitted that in the interest of justice, the condonation may be granted to assessee for the issues in the present appeals to be considered on merits.

The Ld.AR submitted that all the affidavits in the appeals are identical and the same may be considered.

The Ld.DR strongly opposed the condonation petition along with the affidavit filed by the assessee, however could not controvert the circumstances that led to the delay as mentioned in the affidavit.

We have perused the submissions advanced by both sides in the light of records placed before us.

4.2 The assessee is a State level Federal Agri and Rural Development Credit Co-op. Society. The reason cited by the assessee in the affidavits that caused delay is bonafide and sufficient to explain the same.

4.3 It is noted that there is no malafide intention on behalf of assessee in not filing the present appeals within time. In our opinion there is a sufficient cause for condoning the delay as observed by Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Ors., reported in (1987) 167 ITR 471 in support of his contentions, wherein, Hon’ble Court observed as under:-

“The Legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits “. The expression “sufficient cause” employed by the Legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice that being the life-purpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message does not appear to have percolated down to all the other courts in the hierarchy.

And such a liberal approach is adopted on principle as it is realized that :

1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late.

2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties.

…………………….. 1.Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.”

4.4 Considering the above observation by Hon’ble Supreme Court, we find it fit to condone the delay caused in filing the present appeals as it is not attributable to the assessee.

In the interest of justice, we deem it appropriate to condone the delay in filing the present appeals before this Tribunal.

We respectfully following the above, condone the delay caused in filing the present appeals before this Tribunal in all the appeals under consideration. Accordingly, the applications for condonation of delay stands allowed.

Accordingly, the delay in filing the above appeals before this Tribunal stands condoned.

5. The Ld.AR submitted that the order of the Ld.CIT(A) dated 11.05.2023 impugned in ITA No.1054/Bang/2023 was signed at 17.28 hours, while the order impugned in ITA No. 1053/Bang/2023 was signed at 17.38 hours on the same day. It is submitted that both the orders are identical (except for two lines not material to the present appeals) passed for same assessment year being 2013-14. It is submitted that, both the orders have two different DIN. The Ld.AR thus submitted that, since the order in ITA No.1053/Bang/2023 was passed after the order in 1054/Bang/2023.He thus submitted that ITA No.1053/Bang/2023 may be treated in limine, and ITA No.1054/Bang/2023 may be considered and may be adjudicated on merits.

6. The Ld.DR did not object for the submissions of the Ld.AR in respect of appeal filed by the assessee in ITA No.1053/Bang/2023 for assessment year 2013-14.

We have considered the submissions of both sides in the light of the records placed before us.

7. The issue is same in both the appeals filed by the assessee for assessment year 2013-14, and that, the Ld.CIT(A) took identical view in both the orders. We are of the opinion that, two appeals need not be adjudicated on the same issue filed for AY 2013-14. Accordingly we dismiss ITA No.1053/Bang/2023 in limine containing the impugned order passed by the Ld.CIT(A) subsequently for AY 2013-14.

DISALLOWANCE OF CLAIM U/S. 80P(2)(a)(i)

8. The Ld.AR submitted that, the claim of deduction disallowed under section 80P(2)(a)(i) in the pending appeals has been challenged by the assessee for the years under consideration in following grounds:

Appeal No.	Assessment Year	Ground Number
ITA No. 1052/Bang/2023	2012-13	2, 5, 6
ITA No. 1054/Bang/2023	2013-14	1, 6, 7
ITA No. 1055/Bang/2023	2014-15	2, 5, 6, 7
ITA No. 1056/Bang/2023	2015-16	2
ITA No. 1057/Bang/2023	2016-17	2
ITA No. 1058/Bang/2023	2017-18	2
ITA No. 1059/Bang/2023	2018-19	2
ITA No. 1060/Bang/2023	2020-21	2

9. The Ld.AR submitted as under:

9.1 The assessee is a State Level Federal Agriculture and Rural Development Credit Society registered under the provision of the Karnataka Co-op Societies Act, 1959. It is submitted that the assessee is not governed by the provisions of the Banking Regulation Act, 1949 (Central Act), and is a non-banking Co-op Society. The word “Bank” is used in its registered name as the same is allowed in the provisions of the Karnataka Co-op Societies Act, 1959 and the Rules, 1960 framed there under. He submitted that moreover the present State Co-op. Agriculture and Rural Development (Federal) and the Primary Co-op Agriculture and Rural Development (Primaries) were established throughout the country with the name Co-op Land Mortgage Banks much earlier to the Banking Regulation Act which came into force w.e.f. 1949 only. He further submitted that the assessee is not licensed by the R.B.I to carry on the normal Banking business like other Public, Private and Co-op Sector Banks, and therefore the assessee do not provide normal Banking service either to its member or to the general public.

9.2 The Ld.AR submitted that 178 Primary Co-op Agriculture and Rural Development which are functioning at the Taluk and Sub-Taluk levels also are Non-Banking Primary Co-op. Agriculture and Rural Development Credit Societies having individual farmers as their members. These PCARD Bank are members of the Bank i.e. KSCARD Bank. In other words the PCARD Banks are federated to the KSCARD Bank as its Core-Members. He submitted that the members (farmers) of the PCARD Banks submit their applications to the respective PCARD Bank seeking Long Term Agricultural and Allied loans. The PCARD Banks process the loan applications under NABARD Schemes. The major heads of the schemes are Minor Irrigation, Land Development, Horticultural and Plantation, Animal Husbandry, Farm Mechanization, Farm forestry, Fisheries and Aquaculture, Rural housing etc. The Ld.AR submitted that the PCARD Banks are forwarding such loan applications along with technical and financial appraisal reports to the district officer of the assessee.

The amount required for the PCARD Banks for sanction of loans involved in such loan application is provided by the assessee to the concerned PCARD Banks in the form of loans. The PCARD Banks then disburse the loans to their farmer members who have applied for the loans. Thus, the Co-op Institutional Long Term Agriculture and Allied Loan delivery system in the state is in Two Tier System.

9.3 The assessee also borrows long term refinance from NABARD and the State Govt provides its guarantee to NABARD for repayment of such refinance in half yearly instalment along with interest. The assessee is permitted by RBI and NABARD to mobilize termed deposits of not less than one year and to the extent of its financial net worth only. He further submitted that the assessee is not in a position to mobilize termed deposits of considerable amount because firstly the assessee is not allowed to collect deposits from the individuals and institutions that are not enrolled as its members and secondly the deposit insurance and guarantee scheme is not applicable to the deposit collected by the assessee. The assessee is also not sound financially due to poor recovery of Agriculture Loans from the farmers to the PCARD Bank resulting in poor recovery from the PCARD Banks to the bank also. Hence, assessee cannot attract the depositors in the competitive financial market. The Ld.AR thus submitted that, the core function of the Bank is as follows:

a. Collection of share capital from its members that is the PCARD Banks.

b. Availing refinance assistance from NABARD subject to the NABARD’s refinances norms.

c. Disbursement of Long Term agriculture and Allied loans to the farmers through its member’s constituent’s viz, the PCARD Banks.

d. Management of recoveries at village levels.

e. Over all supervision of functioning of the PCARD Banks.

10. It is submitted that the assessee lends to its members and to its staff in the ordinary course of business. The Ld.AR submitted that, except for staff loans in the ordinary course, the assessee only lends to primaries and nominal members, both of which are members of the assessee. There is no evidence on the record whatsoever to support the allegations of the Ld.AO/CIT(A) that the assessee lends to non-members. The Ld.AR submitted that:

♦ On the assessee’s balance sheet, under the heading property and assets, under loans and advances, there are two categories – “loans to primaries under different schemes fully secured,” and “advances.” The first line item clearly relates only to primaries.

♦ So far as ‘advances’ are concerned, their breakup on the balance sheet read with schedule VII and schedule LIII to the financial statements shows that they are only to nominal members and to the staff of the assessee.

♦ On the assessee’s balance sheet, from the break-up of paid up share capital in the audited balance sheet, it is clear that PCARD Banks/ primaries are members of the assessee. This is also clear from clause 2(n) of chapter II of the bye laws and section 2(a-1-2) and 2(j-4) of the KCS Act. In fact the first listed object of the assessee is to advance loans to PCARD Banks.

♦ Interest income is also only from these loans, as is evidenced by the breakup of interest income in the audited financial statements which show that they are only from schemes under which loans were lent to primaries, staff loans, and loans to nominal members.

The assessee is not a bank within the meaning of section 80P(4).

11. Ld.AR placed reliance on the reply dated 07/09/2018, by the RBI issued in response to the RTI application filed by the assessee. He submitted that the RBI specifically stated that the assessee does not come within the purview of Banking Regulation Act. He also submitted that, for the assessment year 2020-21, the Ld.AO himself has not held that section 80P(4) would apply to the assessee. He thus submitted that section 80P(4) will not apply to the assessee’s case. The Ld.AR submitted that, in view of the decision of Hon’ble Supreme Court in Kerala State Co­operative Agricultural & Rural Development Bank, an entity which is, in all material respects, identical to the assessee, the assessee cannot be considered a bank. This view is also supported by the reasoning of this Tribunal in the assessee’s own case for AY 2012-

13. The decision of Hon’ble Supreme Court in Mavilayi which specifically holds that co-operative societies not licensed by the RBI cannot be regarded as banks within the meaning of section 80P(4). Reliance was also placed on the decision of Hon’ble jurisdictional High Court in case of, Shree Mahila Credit reported in (2017) 88 com 712 and Sri Biluru Gurubasava reported in (2014) 369 ITR 86.

12. The Ld.AR submitted that the assessee claimed 80P(2)(a)(i) in respect of the interest income earned by it by providing credit facilities to its members which has been disallowed by the authorities below relying on the ratio of Hon’ble Supreme Court in case of Citizen Co-operative Society Ltd. (supra). The Ld.AR submitted that assessee is a co-operative society registered under Karnataka Co-operative Societies Act whereas Citizen Co- operative Society has been observed to be a mutually aided co­operative society and was functioning as a bank that had a RBI approval. He thus submitted that the ratio laid down therein is not applicable to assessee as assessee does not have a RBI approval to function like a bank.

13. The Ld.AR submitted that insofar as the associate and nominal members are concerned, the ratio of Hon’ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT (supra) would be applicable to the facts of the case. He referred to the relevant observations by Hon’ble Supreme Court that reads as under:

“45. To sum up, therefore, the ratio decidendi of Citizen Co-operative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.

46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287 referred to section 80P of the IT Act and then held:

“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under:

“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;””

Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).

47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows:

“59. Restrictions on loans.— (1) A society shall not make a loan to any person or a society other than a member:

Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank.

Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society.

(2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit.

(3) Granting of loans to members or to non-members under sub-section (2) and recovery thereof shall be in the manner as may be specified by the Registrar.”

Thus, the giving of loans by a primary agricultural credit society to non-members is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra).”

He thus submitted that in respect of the interest earned by the assessee on credit facility extended to its members cannot be denied u/s. 80P(2)(a)(i).

14. DISALLOWANCE U/S.80P(2)(a)(i) OF INTEREST EARNED ON STAFF LOANS

This issue has been raised in the following grounds.

I.T.A. No.	AY	Ground Number
1052/Bang/2023	2012-13	3
1053/Bang/2023	2013-14	4
1054/Bang/2023	2013-14	4
1055/Bang/2023	2014-15	3 (wrongly not numbered)
1056/Bang/2023	2015-16	6
1057/Bang/2023	2016-17	3
1058/Bang/2023	2017-18	8
1059/Bang/2023	2018-19	6
1060/Bang/2023	2020-21	2

14.1 It is submitted that In ITA Nos. 1056, 1058 and 1059/Bang/2023, the Ld.AO recorded findings on disallowance under section 80P in respect of interest earned by the assessee on staff loans. In the other appeals, the Ld.AO referred to interest on staff loans to hold that the assessee was transacting with non­member.

14.2 The Ld.AR submitted that interest earned from loans to staff are attributable to its activities of lending monies to its members. He submitted that, staff loans are lent by all kinds of organizations in all sectors. He submitted that staff loans are attributable to the main activities of the assessee in question.

14.3 He submitted that the staff loans could not have been extended but for the principal business of the assessee. The interest from the staff loans would therefore be covered by sub-clause (i) of section 80P(2)(a). The Ld.AR submitted that Hon’ble Supreme Court in case of Mavilayi(supra), noted that the “distinction between eligibility of deduction and attributability of amount of profits and gains to an activity is a real one.” He submitted that the Hon’ble Court made this observation after noting that “once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction.” The Ld.AR thus submitted that the assessee would be eligible to the deduction, as it is engaged in providing credit facilities to its members, and thereafter, the interest from staff loans would be attributable to this business of providing credit facilities to its members.

15. DISALLOWANCE OF INTEREST EARNED FROM INVESTMENT u/s. 80P(2)(a)(i)/(d)

15.1 In respect of the investments made by assessee from which interest / dividend has been earned, assessee submitted that deduction u/s. 80P(2)(a)(i)/(d) is available to assessee.

This issue arises in the following manner.

I.T.A. No.	AY	Ground
1052/Bang/2023	2012-13	N/A
1053/Bang/2023	2013-14	8
1054/Bang/2023	2013-14	8
1055/Bang/2023	2014-15	8
1056/Bang/2023	2015-16	3
1057/Bang/2023	2016-17	3
1058/Bang/2023	2017-18	3
1059/Bang/2023	2018-19	N/A
1060/Bang/2023	2020-21	3

15.2 The assessee earned interest form investments in co­operative banks and co-operative societies. These investments are of two kinds.

(d) Investments in the nature of statutory reserves or funds which the assessee is mandated by law (either under the Act or under its bye-laws registered under the Act) to invest. These include the reserve fund, the co-operative education fund, the dividend equalisation fund, the building fund and the common good fund.

(e) Besides this, the assessee has other investments with co­operative banks and co-operative societies.

The authorities below did not consider the interest earned by the assessee under section 80P(2) (d) of the Act. Rather disallowed the entire claim under section 80P(2)(a)(i) of the Act. The Ld.AR placed reliance on following decisions in support of the claim to be considered u/s.8-P(2)(d) of the Act:

a) Hon’ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs. The Assessing Officer, Trivandrum & Ors. in Civil Appeal Nos. 10069 of 2016 dated 09.2023.

b) M/s. Mangalore Yanthrika Meenugarara Prathamika Sahakari Sangha vs. ITA Nos. 1096 to 1098/Bang/2023 vide order dated 01.04.2024

c) M/s. Mudur Vyavasaya Seva Sahakari Sangha Ltd., Mudur vs. ITO

15.3 On the contrary, the Ld.DR vehemently opposed the arguments of the assessee by submitting that principle of mutuality is not satisfied as assessee extends credit facilities to nominal / associate members who do not have any right in the assessee society. In respect of 80P(2)(d) deduction, the Ld.DR submitted that interest / dividend income earned by assessee by making investments which has been simply accrued falls out the ambit of 80P and therefore the Ld.AO has rightly treated the entire interest as income from other sources. He thus vehemently supported the orders passed by the authorities below on both these accounts for the years under consideration.

We have perused the submissions advanced by both sides in light of records placed before us.

15.4 We note that the disallowance can be categorized under following categories:

i) Disallowance of interest under section 80P(2)(a)(i) earned by the assessee from the credit facilities;

ii) Disallowance of interest under section 80P(2)(a)(i) earned by the assessee from staff loans

iii) Disallowance of interest under section 80P(2)(a)(i)/(d) earned by the assessee from investments made.

Admittedly, the assessee is not a bank as per the definition of Section 5(c) of the Banking Regulation Act. We infer this view from the reply to the RTI application issued by RBI vide its letter dated 07/09/2018. Thus in our considered view, the assessee do not fall under the exception as per section 80P(4).

16. In respect of the observation of the authorities below regarding the violation of Principle of Mutuality since the facilities are extended to associate members and nominal members are concerned, the ratio by Hon’ble Supreme Court in case of Mavilayi (supra) read with section 2(f) of Karnataka Co-operative Act 1959 covers the issue.

16.1 We note that, Karnataka Co-operative Societies Act, 1959 defines Members to include nominal / associate members u/s. 2(f). Considering the definition of “Member” under the Karnataka Co-operative Societies Act, the present assessee qualifies for deduction u/s. 80P(2)(a)(i). At the cost of repetition, we draw reference from following observations of Hon’ble Supreme Court in case of Mavilayi Service Co- operative Bank Ltd. v. CIT (supra):-

“46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287 referred to section 80P of the IT Act and then held:

“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80- P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under:

“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;””

Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).”

16. 2 Accordingly, respectfully following the above ratio, we allow the claim of the assessee u/s. 80P(2)(a)(i) of the act in respect of the interest earned by the assessee from credit facilities extended to members that includes nominal / associate members.

16.3 In so far as interest earned from the loan extended to the employees of the assessee are concerned, the arguments advanced by the Ld.AR do not support the scheme of the Act under section 80P(2)(a). What is allowable under the section has been expressly provided for therein. As per section 80P, an income which is attributable to any of the specified activities in Section 80P(2) of the Act could be only eligible for deduction. Providing loan to the employees cannot be considered as, “attributable” to the business of the assessee, as the term “attributable to the business” is much narrow term, which is directly connected to the objects of the assessee for which it has been established. We therefore hold that, the interest earned by the assessee from loan give to its employees cannot be considered for deduction under section 80P(2)(a) (i) of the Act. It has to be treated as income form other sources.

Accordingly we hold that the interest earned from the credit activities of the assessee to its members including nominal / associate is allowable under section 80P(2)(a)(i ) of the act.

We also hold that the interest earned by the assessee from loan to its employees are to be treated as Income from other sources, not eligible for deduction under the provisions of Section 80P.

17. In respect of deduction available to the assessee on interest earned from investments, Hon’ble Supreme Court in case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB vs. The Assessing Officer, Trivandrum & Ors. (supra), Hon’ble Supreme Court analysed applicability of section 80P(2)(d) deduction to an assessee in great detail.

17.1 At the outset, assessee has invested to meet the statutory requirement as provided u/s. 58 of the Karnataka Co-operative Societies Act, 1959 as it is imperative to carry on the business of providing banking or credit facilities to the members. It is submitted that, the investments are made out of Reserve funds of the society. It was thus submitted that the case law relied on by the Ld.CIT(A) is M/s. Totgars Co­operative Sales Society reported in 322 ITR 283 (SC) which are distinguishable on facts being:

• It is primarily engaged in the business of providing credit facilities to its members and marketing their agricultural produce.
• At the time of marketing the produce, the sale proceeds are retained, and as the funds are not immediately required, the same was deposited and interest is earned. The funds used for investment are out of amount payables to the members retained by them.
• As interest was earned on money due to the members, that was deposited with the Bank, the same was held to be taxed as ‘IFOS’ u/s 56 of the Act (emphasis drawn from paras 10-11 of the judgment).

17.2 Now coming to the merits of the disallowance made u/s. 80P(2)(d) by the authorities below, the word ‘attributable’ used in the said Section is of great importance. Hon’ble Supreme Court considered the meaning of the word ‘attributable’ as supposed to derive from its use in various other provisions of the statute, in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (at page 93) as under:—

“As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of” the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to” and not the expression “derived from”. It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor- General, it has used the expression “derived from”, as, for instance, in section 80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.”

(emphasis supplied)

17.3 Therefore, the word “attributable to” is certainly wider in import than the expression “derived from”. Whenever the legislature wanted to give a restricted meaning, they have used the expression “derived from”. The expression “attributable to” being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Co­operative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, the society cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.

17.4 In this context when we look at the decision of Hon’ble Supreme Court in case of Totgars Co-operative Sale Society’s case reported in (2010) 188 Taxman 282, relied by the Ld.DR. Hon’ble Supreme Court was dealing with a case where the assessee therein, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such amount retained by the assessee therein 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 Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. On these facts Hon’ble Supreme Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Hon’ble Supreme Court, also clarified that, they are confining the said judgment to the facts of that case.

17.5 In the instant case, there is nothing on record to come to the conclusion that the amount which was invested in banks to earn interest was amount due to its members, and that, it was a liability. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for objects of the society, but was required to be invested as required by the Karnataka Co-operative Societies Act, 1959. Therefore they had deposited the money out of which interest was earned. The said interest is thus attributable to carrying on the business of the assessee and therefore it is liable to be deducted in terms of Section 80P(2)(d) of the Act. In fact similar view is taken by the Hon’ble Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State Co-operative Bank Ltd. reported in [2011] 12 taxmann.com 66.

17.6 We note that recently Hon’ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. vs. AO reported in (2023) 154 taxmann.com 305 has in detail analysed the allowability of deduction u/s. 80P(2)(d) of the Act. Hon’ble Court observed and held as under:

“15.8 Since the words ‘bank’ and ‘banking company’ are not defined in the NABARD Act, 1981, the definition in sub-clause (i) of clause (a) of section 56 of the BR Act, 1949 has to be relied upon. It states that a co-operative society in the context of a co-operative bank is in relation to or as a banking company. Thus, co-operative bank shall be construed as references to a banking company and when the definition of banking company in clause (c) of section 5 of the BR Act, 1949 is seen, it means any company which transacts the business of banking in India and as already noted banking business is defined in clause (b) of section 5 to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. Thus, it is only when a co-operative society is conducting banking business in terms of the definition referred to above that it becomes a co-operative bank and in such a case, section 22 of the BR Act, 1949 would apply wherein it would require a licence to run a co-operative bank. In other words, if a cooperative society is not conducting the business of banking as defined in clause (b) of section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co- operative bank or a primary co-operative bank in terms of section 56(c)(i)(cci). Whereas a co-operative bank is in the nature of a banking company which transacts the business of banking as defined in clause (b) of section 5 of the BR Act, 1949. But if a co-operative society does not transact the business of banking as defined in clause (b) of section 5 of the BR Act, 1949, it would not be a co­operative bank. Then the definitions under the NABARD Act, 1981 would not apply. If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction under sub-section (4) of section 80P of the Act.

15.9 section 56 of the BR Act, 1949 begins with a non-obstante clause which states that notwithstanding anything contained in any other law for the time being in force, the provisions of the said Act, shall apply to, or in relation to, co-operative societies as they apply to, or in relation to, banking companies subject to certain modifications. The object of section 56 is to provide a deeming fiction by equating a co-operative society to a banking company if it is a co-operative bank within the meaning of the said provision. This is because Chapter V of the BR Act, 1949, deals with application of the Chapter to co-operative societies which are co-operative banks within the meaning of the said chapter. For the purpose of these cases, what is relevant is that throughout the BR Act, 1949, unless the context otherwise requires, – references to a “banking company” or “the company” or “such company” shall be construed as references to a co­operative bank. Therefore, while considering the meaning of a co-operative bank inherently, such a co-operative society must be a banking company then only it would be construed as a co-operative bank requiring a licence under section 22 of BR Act, 1949 in order to function as such a bank.

15.10 Further, while considering the definition of a co­operative bank under section 56(cci) of the BR Act, 1949, to mean a state co-operative bank, a central co-operative bank and a primary co-operative bank which is defined in (ccviii) thereof, to have meanings respectively assigned to them in the NABARD Act, 1981 would imply that if a state co-operative bank is within the meaning of NABARD Act, 1981 then it would be excluded from the benefit under section 80P of the Act. Conversely, if a co-operative society is not a cooperative bank within the meaning of section 56 of the BR Act, 1949, it would be entitled to the benefit of deduction under section 80P of the Act.”

17.7 We therefore direct the A.O. to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, as observed by Hon’ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. Cited (supra), the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act.

17.8 Without prejudice to the above, we make it clear that if the interest earned by assessee from the banks, the same be considered under the head “Income from other sources” and necessary relief to be granted to the assessee u/s 57 of the Act in respect of cost of funds and proportionate administrative and other expenses in accordance with law. Accordingly, the issue is restored to the file of Ld.AO for denovo consideration with the above observations.

We direct the Ld.AO to carry out necessary verification based on the evidences filed by the assessee and to compute the deduction under section 80P(2)(a)(i)/(d) in accordance with law. Needless to say the proper opportunity of being heard must be granted to the assessee.

Accordingly grounds raised on this issue for all the assessment years under consideration in grounds mentioned herein above stands allowed for statistical purposes.

18. DISALLOWANCE OF GUARANTEE COMMISSION UNDER SECTION 43B

This issue has been raised in the following grounds.

I.T.A. No.	AY	Ground Number
1052/Bang/2023	2012-13	Issue does not arise.
1053/Bang/2023	2013-14	Issue does not arise.
1054/Bang/2023	2013-14	Issue does not arise.
1055/Bang/2023	2014-15	Issue does not arise.
1056/Bang/2023	2015-16	7
1057/Bang/2023	2016-17	5
1058/Bang/2023	2017-18	6 & 7
1059/Bang/2023	2018-19	Issue does not arise.
1060/Bang/2023	2020-21	Issue does not arise.

18.1 The assessee incurred Guarantee Commissions in favour of Government of Karnataka and debited the same to its Profit & Loss Account. The Government of Karnataka guarantees long term borrowings made by the assessee. The Ld.AO treated the Guarantee Commission as Income from other sources. The Ld.AO also disallowed the claim under section 43 B, by invoking clause (a) covering “tax, duty, cess or fee, by whatever name called, under any law for the time being in force.”

18.2 The Ld.AR submitted that, the guarantees in the present case were extended by the Government to the assessee as a part of the executive power of the state under article 293(1) of the Constitution. It is submitted that, section 43B contemplates that, a law must levy a tax, duty, cess or fee, and that there is no such levy in the case of a guarantee commission. The Ld.AR thus submitted that Section 43B does not cover guarantee commission.

18.3 The Ld.AR submitted that the commission is paid as consideration/ recompense for a promise to repay in the event of default. It is to compensate the guarantor for the risk undertaken in extending the guarantee. He submitted that this is also demonstrated by the Central Government’s guarantee policy and Rule 246 of the General Financial Rules, 2005 of the Government of India, both of which contemplates risk profiling and prioritisation and estimation of the credit-worthiness of the principal debtor before extending guarantees.

18.4 The Ld.AR further submitted that, if the primary claim of the assessee for the deduction in respect of the assessee’s income from extending credit facilities under section 80P(2)(a)(i) is allowed, this disallowance will only go to increase the income for which deduction should be allowed under section 80P(2)(a)(i), resulting in no variation to the assessee’s income.

The Ld.AR placed reliance on the decision of the coordinate bench of this Tribunal in case of State Financial Corporation v. ACIT reported in (2021) 133 taxmann.com 394, wherein it has been held that:

“15. We are also of the view that Guarantee Commission is not in the nature of a “levy” on a state Government undertaking by the State Government. It is purely a contractual payment. According to Black’s Law Dictionary Fifth Edition, the word “levy” means:- “To assess; raise; execute; exact: tax; collect: gather; take”. To qualify as a “levy” within the meaning of sec.40(a)(iib) of the Act, the payment to the State Government by a State Government undertaking should be based on a power on the part of the State Government to impose a levy. It should be a compulsory exaction by the State Government from the State Government Undertaking. Guarantee Commission is paid in consideration for the State Government agreeing to suffer a detriment in the event of the Assessee not repaying the value of the bonds on its maturity. Guarantee Commission does not fall within the ambit of the mischief that was sought to be remedied by the legislature by inserting sec.40(a)(iib) of the Act.”

18.5 The Ld.AR also relied on following decisions in support of the claim that the guarantee fees paid by the assessee is not in the nature of cess, levy etc but is to be considered as an expenditure in the hands of the assessee:

(f) The decision of Hon’ble Supreme Court in McDowell’s reported in (2009) 314 ITR 167, where it was held that ‘bottling fees’ paid by the assessee to government would not come within the scope of section 43B(a). He submitted that the Court observed regarding the ‘bottling fees’ to be:

“neither fee nor tax but the consideration for grant of approval by the Government as terms of contract in exercise of its right to enter a contract.”

It observed that, the items enumerated in clause (a) constitute species of the same genus and the expression “by whatever name called” was used ejusdem generis to confine their application to;

“compulsory exaction in the exercise of the State’s power of taxation where levy and collection is duly authorised by law as distinct from an amount chargeable on principle as consideration payable under contract.”

(g) The decision of Hon’ble Madras High Court in Tamil Nadu Minerals Lts. Vs.CIT reported in (2019) 107 com 214, wherein the issue was one in which the amount paid was of ‘nomination charges’ by means of a Government order under some rules promulgated by the state Government. Hon’ble Madras High Court observed that, despite this, the payment actually arose out of a lease agreement entered into by the assessee with the state and that the payment was therefore contractual.

Hon’ble Court held held that;

“‘other levies’ made by the State Government in the realm of contractual laws”

Hon’ble Court thus held that other levies, cannot come within the scope of section 43B(a) and that the the provision was to be interpreted literally, and not liberally, so that the scope of the provision was not widened. Hon’ble Court was of the opinion that the application of section 43B would depend on, whether the payment involved was ‘statutory’ or ‘contractual (non-statutory).’

18.6 The Ld.AR also relied on a circular of CBDT Circular No.372 dated 08/12/1983 explains why the terms ‘cess’ and ‘fees’ were added to clause (a) of section 43B with effect from 01.04.1989 in the following terms:

“Modification of the provisions relating to deduction in respect of certain liabilities

………..

21.2 The words tax and duty have been the subject-matter of judicial interpretation and there is controversy as to whether they cover statutory levies like cess, fees, etc. Some appellate authorities have held that such cess or fees cannot be covered by the expressions tax or duty. Such an interpretation is against the legislative intent and, therefore, by way of clarification, an amendment has been carried out to provide that cess or fees by whatever name called, which have been imposed by any statutory authority, including a local authority, will be allowed as a deduction only if these are actually paid.”

18.7 He thus submitted that the circular is clear, that the words cess and fee connote only cesses and fees imposed by statutory authorities. The Ld.AR submitted that in the present facts of the case, the State Government is not a statutory authority, and the guarantee commission is not an imposition. The Ld.AR submitted that the State Government is acting as a contracting party and receiving the payments voluntarily for services rendered by it by means of extending the guarantee.

18.8 The Ld.AR submitted that the assessing officer assessed the guarantee commission under the head income from other sources. The Ld.AR submitted that section 43B says that deductions disallowed by it “shall be allowed… only in computing the income referred to in section 28”. It is thus clear that the provision only applies to computation of income under the heard, “income form business and Profession”. He submitted that this is made even clearer by section 29 which reads: “The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D.” Thus, all the provisions in sections 30 to 43D govern only income chargeable under section 28, viz., income chargeable under the head profits and gains from business or profession.

18.9 The Ld.AR thus argued that the provisions of section 43B are not applicable to the guarantee commission paid by the assessee as a contractual obligation to the State Government, bit has to be treated as an expenditure in the hands of the assessee.

18.10 On the contrary, the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions advanced by both sides in light of records placed before us.

18.11 The issue before this Tribunal is, whether Guarantee commission paid by the Assessee to State Government can be said to fall within the ambit of sec.43B of the Act. We have perused the decisions relied on by the Ld.AR. To consider the submissions of the Ld.AR it is necessary to analyse section 43B that reads as under:

“43B. [Certain deductions to be only on actual payment. [Inserted by Act 11 of 1983, Section 18 (w.e.f. 1.4.1984).]

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) [any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, [or] [ Inserted by Act 4 of 1988, Section 15 (w.e.f. 1.4.1989).]

(c) any sum referred to in clause (ii) of sub-section (1) of section 36,

(d) any sum payable by the assessee an interest on any loan or borrowing from any public financial institution or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing; or

(da)[ any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, [or]

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,] shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:

……………………………”

………………………………..

18.12 From the above it is deducible that deduction in respect of following expenses are allowed only if payment is made on or before the due date for furnishing return of income u/s 139(1)1 of the previous year in which such liability is incurred:

1. any sum payable by way of tax, duty, cess, fee, by whatever name called, under any law for the time being in force.

2. Any sum payable as bonus or commission to employees for services rendered.

3. Any sum payable as interest on loan or borrowing from any

• • public financial institutions (i.e., IFCI, LIC, etc.);
  • a State financial corporation; or
  • State industrial investment corporation.

4. Any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing:

> Systemically important non-deposit taking non-banking financial company means a non-banking financial company which is not accepting or holding public deposits and having total assets of not less than 500 crore as per the last audited balance sheet and is registered with the RBI.

> Deposit taking non-banking financial company means a non-banking financial company which is accepting or holding public deposits and is registered with the RBI.

5. Any sum payable as interest on any loans and advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances.

18.13 Section 43B falls in Part-V of the Act. What is apparent is that the scheme of the Act is such that Sections 28 to 38 deal with different kinds of deductions, whereas Sections 40 to 43B spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme, Section 40 (which too starts with a non obstante clause overriding Sections 30-38), deals with what cannot be deducted in computing income under the head “Profits and Gains of Business and Profession”

18.14 Each of these deductions, has its contours, depending on the expressions used, and the conditions that are to be met. It is therefore necessary to bear in mind that, specific enumeration of deductions, dependent upon fulfilment of certain conditions, that would qualify as allowable deductions, and failure by the assessee to comply with those conditions, would render the claim to be rejected.

18.15 In the present case, it is apparent that, the guarantee-commission paid of Rs. 13,80,10,000/- has been debited to the Assessee’s P&L account, This Tribunal in case of State Financial Corporation v. ACIT(supra) has analysed relevant provisions of “Karnataka Ceiling on Government Guarantees Act, 1999 and has observed as under:

“13. It is thus abundantly clear that the Guarantee is not exclusively given by the State Government only to the Assessee which is a State Government undertaking but to various Government Departments, Public Sector undertakings, Local Authorities, Statutory Boards and Corporations and Co operative Institutions etc., and also to for loans granted by the Karnataka State Co- operative Apex Bank Limited and Karnataka State Co­operative Agriculture and Rural Land Development Bank Limited for the purpose of Agriculture and in turn to require them to reduce one percent interest in their lending rate in respect of the agricultural loans disbursed by them. The decision of the Hon’ble Kerala High Court in the case of Kerala State Beverages Corporation Ltd. (supra) clearly supports the plea of the Assessee that there is no “exclusivity” in terms of charging of “Guarantee Commission”. We quote the relevant observations of the Hon’ble Kerala High Court in this regard :

……. Therefore the question is whether the ‘exclusivity’ will be lost if it is levied from more than one State Government I.T. Appeal Nos. 135, 146 & 313/2019 -22- undertaking. Sub-clause (iib) of clause (a) of section 40 provides that, any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge, or any other fee or charge “which is levied exclusively on” a state government undertaking by the State Government (emphasis supplied) alone will satisfy the ingredients for disallowance. The statute has not used the word; levied exclusively on the state government undertakings by the State Government. Instead, the word used is “exclusively on” “a state government undertaking”. Therefore, in order to bring the disallowance within the ambit and scope of section 40 (a) (iib), it should be an exclusive levy on the assessee, which should be a state government undertaking. Since the licence fee and shop rental (kist) are also levied from the Consumer Federation with respect to the FL-1 licence granted, it becomes out of the purview of the term ‘levied exclusively on a state government undertaking, contained in 40 (a) (iib). Therefore we are persuaded to hold that the disallowance made with respect to the licence fee and shop rental (kist) paid with respect to the FL1 licences granted to the appellant for retail trade in foreign liquor, cannot be sustained.”

14. We therefore accept the argument of the Assessee that for applying the provisions of sec.40(a)(iib) of the Act there should be a levy of “royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called”, which is levied exclusively on State Government undertaking by the State Government. Guarantee commission is not paid directly to the State Government and they are not levies imposed exclusively on the Assessee. The State Government issues Guarantees on behalf of the Government Departments, Public Sector Undertakings, Local Authorities, statutory Boards and Corporations and Co-operative Institutions.

Consequently, we hold that the disallowance made u/s.4-(a)(iib) of the Act cannot be sustained.

15. We are also of the view that Guarantee Commission is not in the nature of a “levy” on a state Government undertaking by the State Government. It is purely a contractual payment. According to Black’s Law Dictionary Fifth Edition, the word “levy” means:- “To assess; raise; execute; exact: tax; collect: gather; take”. To qualify as a “levy” within the meaning of sec.40(a)(iib) of the Act, the payment to the State Government by a State Government undertaking should be based on a power on the part of the State Government to impose a levy. It should be a compulsory exaction by the State Government from the State Government Undertaking. Guarantee Commission is paid in consideration for the State Government agreeing to suffer a detriment in the event of the Assessee not repaying the value of the bonds on its maturity.

Guarantee Commission does not fall within the ambit of the mischief that was sought to be remedied by the legislature by inserting sec.40(a)(iib) of the Act.”

18.16 From the above it is apparent that Guarantee commission cannot be considered to be in the nature of any levy, cess of such type. In fact the provisions of section 43B would not be admissible to the payment Guarantee commission by the assessee to the State Government under an agreement as it does not qualify for any of the types mentioned therein.

We therefore remand this issue to the Ld.AO to carry out necessary verification, based on the agreement entered into by the assessee with the state Government and to analyse if the payment of guarantee Commission is an admissible deduction under section 37(1) of the Act.

Accordingly grounds raised on this issue for AY:2015-16,2016-17 & 2017-18 in grounds mentioned herein above stands allowed for statistical purposes.

19. DISALLOWANCE OF BUSINESS LOSS

This issue arises only in ITA No.1058/Bang/2023 for AY 2017-18 in ground no. 10.

19.1 The Ld.AR submitted that the assessing officer ought not to have disallowed business loss of ₹ 29,48,007.

19.2 The Ld.AR submitted that the assessee returned loss under the head profits and gains from business or profession of ₹ 29,48,007. It is submitted that, on account of the income from other heads exceeding the loss declared, the gross total income as declared became positive.

19.3 The Ld.AR submitted that the Ld.AO, in determining the gross total income, has taken income under the head profits and gains from business and profession as nil and, he has ignored the loss of ₹ 29,48,007.

In our opinion this issue needs to be verified by the Ld.AO while giving effect to the order of this Tribunal.

Accordingly this issue in ITA No.1058/Bang/2023 for AY 2017-18 in ground no. 10 stands remanded for necessary verification.

20. ADDITION OF E-STAMPING INCOME

This issue has been raised in the following grounds.

I.T.A. No.	AY	Ground Number
1052/Bang/2023	2012-13	Issue does not arise.
1053/Bang/2023	2013-14	Issue does not arise.
1054/Bang/2023	2013-14	Issue does not arise.
1055/Bang/2023	2014-15	Issue does not arise.
1056/Bang/2023	2015-16	5
1057/Bang/2023	2016-17	Issue does not arise, but see below.
1058/Bang/2023	2017-18	9
1059/Bang/2023	2018-19	5
1060/Bang/2023	2020-21	5

20.1 The Ld.AR submitted that the Ld.AO observed that since the Appellant renders e-stamping services and receives income from non-members, the deduction under section 80P(2)(a)(i) will not be allowable. However, no disallowance of the deduction under section 80P was made specifically as it relates to e-stamping income.

20.2 The income from e-stamp vending does not alter the position with respect to the deduction under section 80P.

(h) The revenue from e-stamping is ₹ 2,11,580 as opposed to the Appellant’s total revenue of ₹ 171,68,04,506. Thus, the e-stamping revenue constitutes a measly 0.01% of the Appellant’s total revenue. Thus, being inconsequential and immaterial, these activities cannot recharacterize the operations of the Appellant and deprive the Appellant of the deduction.

The Ld.AR submitted that the bye-laws of assessee expressly authorize the assessee to carryon such activities. The activities thus are to be construed as being part of the business activities of the assessee.

20.3 Without prejudice to the above, submission, the Ld.AR submitted that the disallowance of the deduction in this respect is upheld, credit must be given for the expenditure incurred on e-stamping. This plea has been accepted by Coordinate Bench of this Tribunal in Sri Udaya Ravi Souharda Pattina Sahakari Niyamitha’s Vs. ITO in ITA No. 2018/Bang/2016 vide order dated 28/02/2017.

We have perused the submissions advanced by both sides in light of records placed before us.

20.4 Identical issue has been analysed hereinabove while considering the interest earned by the assessee from staff loan. We rely on the observations made in para 16.3 and hold that the income earned by the assessee from E stamping cannot be considered for the purpose of deduction under section 80P(2) of the act.

However we direct the Ld.AO to consider the alternate claim of the assessee in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee. Accordingly grounds raised on this issue for AY 2015-­16,2017-18 , 2018-19 & 2020-21 stands allowed for statistical purposes.

21. INCORRECT QUANTIFICATION OF TOTAL INCOME (GROUND 5)

This issue arises only in ITA No.1058/Bang/2023 for AY 2017-18 as ground no. 5.

We direct the Ld.AO to quantify total income if the assessee, in accordance with law in the light of evidences filed by the assessee. Needless to say that proper opportunity of being heard must be granted to the assessee.

Accordingly grounds raised on this issue for ITA No.1058/Bang/2023 for AY 2017-18 as ground no. 5 stands allowed for statistical purposes.

22. The Ld.AR submitted that ITA No.1052, 1059 and 1060 pertaining to AY 2012-13, 2018-19 and 2020-21 are exparte orders by the Ld.CIT(A). He also submitted that the disallowance are identically made by the Ld.AO in these assessment years also.

It is submitted that nothing has been decided by the Ld.CIT(A) on merits in these appeals.

As we have principally considered the issue regarding the eligibility of the assessee to claim deduction under section 80P(2)(a)(i )/(d) of the Act, these appeals are also to be analysed by the Ld.AO on similar basis.

In the result, the appeals filed by the assessee stands partly allowed as indicated her in above.

Order pronounced in the open court on 29^th April, 2024.