The Assessing Officer taxed our interest on deposits under s.56 by simply citing Totgars, without answering our case that the deposits are a statutory reserve we are obliged to maintain and that the interest we paid on borrowings should be netted against it. Is that order sustainable?
No. The Madras High Court set aside the assessments as non-speaking and passed without application of mind, holding it a fatal flaw that the Assessing Officer had brushed aside, in a single line, the society's arguments that the deposits were a statutory reserve and not surplus funds, that Nawanshahar Central Cooperative Bank applied, and that at worst the interest received should be netted against the interest paid. The Court expressed no opinion on the merits and remanded for a speaking order.
Decided by the High Court (Dr. Anita Sumanth J) on 2020-01-31, reported as W.P. Nos. 17, 20, 22, 23, 26, 29, 1107, 1118, 1121, 1123, 1124, 1125, 1127, 1129, 1131, 1133, 1136, 1138, 1139, 1141, 1143, 1145, 1146, 1149, 1150, 1152, 1155, 1161, 1166, 1169, 1171, 1293, 1299 and 1420 of 2020 (Madras High Court, common order). It bears on section 80P, section 80P(2)(a)(i), section 80P(4), section 56, section 57, section 143(3) of the Income Tax Act 1961, in Co-operative Societies, Deductions & Disallowances and Assessment & Scrutiny matters.
This is the practical answer to the assessment that consists of one citation and no reasoning, which is how most co-operative society interest additions are made. Two substantive arguments are identified and preserved by the judgment without being decided: first, that interest on deposits a society is statutorily obliged to maintain is not interest on 'surplus not required for business purposes' within Totgars, and that Nawanshahar treats a statutory placement of funds as part of the business; second, that if the interest is taxed under s.56 the interest paid on borrowings used to fund the deposit must be netted. The Court also refused to shut the assessee out for defective pleadings in the writ affidavit where the stand was clear from the assessment record. Note the Court's own caution: the distinction it flagged is that Nawanshahar was a co-operative bank case while the petitioners were co-operative societies.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
A batch of thirty-four writ petitions was filed by entities claiming to be primary agricultural co-operative credit societies in Tamil Nadu against assessment orders denying s.80P deductions. Two issues ran through the batch. The first was the classification of interest received on deposits and investments of funds in banks: the Assessing Officer held such interest ineligible for s.80P and taxable under s.56, relying on Totgars' Cooperative Sale Society Ltd. v. ITO (322 ITR 283). The societies replied that Totgars concerned a sales society and surplus funds, whereas they were credit societies and the funds deposited were a mandatory statutory reserve — one petitioner pointing to a requirement to keep 25 per cent of total deposits with a district central co-operative bank — and that Nawanshahar Central Cooperative Bank therefore applied. In the case of the lead petitioner, Rs 12,57,23,490 of the Rs 15,51,18,027 invested had been borrowed from the Coimbatore District Central Cooperative Bank, and the society asked in the alternative for netting of interest paid against interest received. The Assessing Officer rejected these submissions in a single line, that 'statutory reserve can also be considered as surplus funds of the assessee', without discussing Nawanshahar or the netting plea. The second issue was mutuality, where the officer had drawn a distinction between A class shareholding members and B class non-shareholding members admitted only to take loans, relying on Citizen Co-operative Society Ltd. v. ACIT. The Revenue objected that the writ affidavits, which were largely a cut and paste exercise about mutuality, did not raise the classification of interest income at all.
On the classification of interest generated by investments held as a statutory reserve, the assessments were set aside as non-speaking and remanded for de novo consideration, with a direction that the petitioners be heard specifically on that question and that Nawanshahar and Totgars be taken into account in a speaking and detailed order within six weeks (paras 19 to 21). W.P. Nos. 17, 20, 22, 23, 26, 29, 1150, 1155 and 1161 of 2020 were allowed (para 22). On mutuality and the associate member question, the Court declined to decide, directing the petitioners to file statutory appeals within three weeks with recovery stayed meanwhile, since the questions of law were still at large and were expected to be decided in higher-stake cases the Revenue proposed to carry to the Supreme Court (paras 31 to 33).
The Court held that the four arguments the societies had put to the Assessing Officer — that the investments were not surplus funds, that they were a statutory reserve mandated by the Tamil Nadu Co-operative Societies Act, 1983, that the interest was therefore deductible on the authority of Nawanshahar, and that at worst the interest received should be netted against interest paid — ought at least to have been considered, and that brushing them aside despite noting them in the order itself was a fatal flaw rendering the assessment non-speaking (paras 18 and 19). It rejected the Revenue's objection based on the deficiencies of the writ affidavits, holding that the petitioners should not suffer for lacunae in drafting where their stand was clear from the materials on record (para 19). It set out the competing authorities without resolving them: Nawanshahar held that income from investments made by a banking concern is attributable to the business of banking and deductible under s.80P(2)(a)(i), and covers the case of a co-operative bank statutorily required to place part of its funds in approved securities, while Totgars concerned surplus not required immediately for business purposes and was framed as a question about taxing interest under s.56 without any deduction for cost of funds and proportionate administrative expenses under s.57 (paras 9, 10, 14 and 15). The Court noted at first blush the distinction that Nawanshahar was a co-operative bank case whereas the petitioners were co-operative societies, and that Citizen Co-operative Society had drawn the line between a co-operative bank governed by the Banking Regulation Act, 1949 whose operations extend to the general public and a co-operative society whose operations are confined to its members, which is the distinction s.80P(2)(a)(i) itself draws between carrying on the business of banking and providing credit facilities to members (paras 11 and 12). On mutuality, the Court recorded the Division Bench decision in the Ammapet case, which had held that under the Tamil Nadu Act the definition of 'members' includes an associate member so that the Assessing Officer erred in distinguishing A class from B class members, and that the departmental special leave petition against it had been withdrawn on 17 January 2020 for low tax effect with the question of law kept open, so that the Division Bench decision held the field (paras 28 to 30). It nonetheless left the question at large and sent the petitioners to the appellate authority (paras 31 and 32).
In my considered view, this amounts to a fatal flaw as it renders the impugned order entirely non-speaking and passed without application of mind.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Madras High Court set aside the assessments as non-speaking and passed without application of mind, holding it a fatal flaw that the Assessing Officer had brushed aside, in a single line, the society's arguments that the deposits were a statutory reserve and not surplus funds, that Nawanshahar Central Cooperative Bank applied, and that at worst the interest received should be netted against the interest paid. The Court expressed no opinion on the merits and remanded for a speaking order. This was decided by the High Court (Dr. Anita Sumanth J) and bears on section 80P, section 80P(2)(a)(i), section 80P(4), section 56, section 57, section 143(3) of the Income Tax Act 1961. It is reported as W.P. Nos. 17, 20, 22, 23, 26, 29, 1107, 1118, 1121, 1123, 1124, 1125, 1127, 1129, 1131, 1133, 1136, 1138, 1139, 1141, 1143, 1145, 1146, 1149, 1150, 1152, 1155, 1161, 1166, 1169, 1171, 1293, 1299 and 1420 of 2020 (Madras High Court, common order). This is the practical answer to the assessment that consists of one citation and no reasoning, which is how most co-operative society interest additions are made. Two substantive arguments are identified and preserved by the judgment without being decided: first, that interest on deposits a society is statutorily obliged to maintain is not interest on 'surplus not required for business purposes' within Totgars, and that Nawanshahar treats a statutory placement of funds as part of the business; second, that if the interest is taxed under s.56 the interest paid on borrowings used to fund the deposit must be netted. The Court also refused to shut the assessee out for defective pleadings in the writ affidavit where the stand was clear from the assessment record. Note the Court's own caution: the distinction it flagged is that Nawanshahar was a co-operative bank case while the petitioners were co-operative societies. If it applies to you, the first step is this: Put the source and the statutory compulsion of the deposit on record at the assessment stage: the provision of the State co-operative societies Act or the rules requiring the reserve, and the percentage.
A batch of thirty-four writ petitions was filed by entities claiming to be primary agricultural co-operative credit societies in Tamil Nadu against assessment orders denying s.80P deductions. Two issues ran through the batch. The first was the classification of interest received on deposits and investments of funds in banks: the Assessing Officer held such interest ineligible for s.80P and taxable under s.56, relying on Totgars' Cooperative Sale Society Ltd. v. ITO (322 ITR 283). The societies replied that Totgars concerned a sales society and surplus funds, whereas they were credit societies and the funds deposited were a mandatory statutory reserve — one petitioner pointing to a requirement to keep 25 per cent of total deposits with a district central co-operative bank — and that Nawanshahar Central Cooperative Bank therefore applied. In the case of the lead petitioner, Rs 12,57,23,490 of the Rs 15,51,18,027 invested had been borrowed from the Coimbatore District Central Cooperative Bank, and the society asked in the alternative for netting of interest paid against interest received. The Assessing Officer rejected these submissions in a single line, that 'statutory reserve can also be considered as surplus funds of the assessee', without discussing Nawanshahar or the netting plea. The second issue was mutuality, where the officer had drawn a distinction between A class shareholding members and B class non-shareholding members admitted only to take loans, relying on Citizen Co-operative Society Ltd. v. ACIT. The Revenue objected that the writ affidavits, which were largely a cut and paste exercise about mutuality, did not raise the classification of interest income at all. The matter was decided on 2020-01-31 by the High Court (Dr. Anita Sumanth J). On those facts the High Court held as follows. On the classification of interest generated by investments held as a statutory reserve, the assessments were set aside as non-speaking and remanded for de novo consideration, with a direction that the petitioners be heard specifically on that question and that Nawanshahar and Totgars be taken into account in a speaking and detailed order within six weeks (paras 19 to 21). W.P. Nos. 17, 20, 22, 23, 26, 29, 1150, 1155 and 1161 of 2020 were allowed (para 22). On mutuality and the associate member question, the Court declined to decide, directing the petitioners to file statutory appeals within three weeks with recovery stayed meanwhile, since the questions of law were still at large and were expected to be decided in higher-stake cases the Revenue proposed to carry to the Supreme Court (paras 31 to 33).
The Court held that the four arguments the societies had put to the Assessing Officer — that the investments were not surplus funds, that they were a statutory reserve mandated by the Tamil Nadu Co-operative Societies Act, 1983, that the interest was therefore deductible on the authority of Nawanshahar, and that at worst the interest received should be netted against interest paid — ought at least to have been considered, and that brushing them aside despite noting them in the order itself was a fatal flaw rendering the assessment non-speaking (paras 18 and 19). It rejected the Revenue's objection based on the deficiencies of the writ affidavits, holding that the petitioners should not suffer for lacunae in drafting where their stand was clear from the materials on record (para 19). It set out the competing authorities without resolving them: Nawanshahar held that income from investments made by a banking concern is attributable to the business of banking and deductible under s.80P(2)(a)(i), and covers the case of a co-operative bank statutorily required to place part of its funds in approved securities, while Totgars concerned surplus not required immediately for business purposes and was framed as a question about taxing interest under s.56 without any deduction for cost of funds and proportionate administrative expenses under s.57 (paras 9, 10, 14 and 15). The Court noted at first blush the distinction that Nawanshahar was a co-operative bank case whereas the petitioners were co-operative societies, and that Citizen Co-operative Society had drawn the line between a co-operative bank governed by the Banking Regulation Act, 1949 whose operations extend to the general public and a co-operative society whose operations are confined to its members, which is the distinction s.80P(2)(a)(i) itself draws between carrying on the business of banking and providing credit facilities to members (paras 11 and 12). On mutuality, the Court recorded the Division Bench decision in the Ammapet case, which had held that under the Tamil Nadu Act the definition of 'members' includes an associate member so that the Assessing Officer erred in distinguishing A class from B class members, and that the departmental special leave petition against it had been withdrawn on 17 January 2020 for low tax effect with the question of law kept open, so that the Division Bench decision held the field (paras 28 to 30). It nonetheless left the question at large and sent the petitioners to the appellate authority (paras 31 and 32). In the words reproduced by the source cited on this page: "In my considered view, this amounts to a fatal flaw as it renders the impugned order entirely non-speaking and passed without application of mind." The decision followed or applied Commissioner of Income Tax, Jalandhar v. Nawanshahar Central Cooperative Bank Limited, (2007) 15 SCC 611 — set out and left for the Assessing Officer to apply; Totgars' Cooperative Sale Society Limited v. ITO, Karnataka, (2010) 322 ITR 283 (SC) — set out and distinguished on the facts pleaded; Citizen Co-operative Society Limited v. ACIT, Circle-9(1), Hyderabad, (2017) 397 ITR 1 (SC) — referred to for the distinction between a co-operative bank and a co-operative society; Pr. Commissioner of Income Tax, Salem v. M/s. S-1303 Ammapet Primary Agricultural Cooperative Bank Ltd., T.C.(A) Nos. 882 and 891 of 2018, decided 6 December 2018 (Madras, Division Bench) — summarised at para 28; the departmental SLP against it (SLP(C) No. 17745 of 2019) was withdrawn on 17 January 2020 on account of low tax effect (para 30), and the Court recorded at paras 31 and 32 that the questions of law remain at large and are expected to be decided in higher-stake matters.
It was decided by the High Court on 2020-01-31 and is reported as W.P. Nos. 17, 20, 22, 23, 26, 29, 1107, 1118, 1121, 1123, 1124, 1125, 1127, 1129, 1131, 1133, 1136, 1138, 1139, 1141, 1143, 1145, 1146, 1149, 1150, 1152, 1155, 1161, 1166, 1169, 1171, 1293, 1299 and 1420 of 2020 (Madras High Court, common order). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 80P, section 80P(2)(a)(i), section 80P(4), section 56, section 57, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. On the classification of interest generated by investments held as a statutory reserve, the assessments were set aside as non-speaking and remanded for de novo consideration, with a direction that the petitioners be heard specifically on that question and that Nawanshahar and Totgars be taken into account in a speaking and detailed order within six weeks (paras 19 to 21). W.P. Nos. 17, 20, 22, 23, 26, 29, 1150, 1155 and 1161 of 2020 were allowed (para 22). On mutuality and the associate member question, the Court declined to decide, directing the petitioners to file statutory appeals within three weeks with recovery stayed meanwhile, since the questions of law were still at large and were expected to be decided in higher-stake cases the Revenue proposed to carry to the Supreme Court (paras 31 to 33). It arises in Co-operative Societies, Deductions & Disallowances and Assessment & Scrutiny matters, on section 80P, section 80P(2)(a)(i), section 80P(4), section 56, section 57, section 143(3) of the Income Tax Act 1961, and was decided by Dr. Anita Sumanth J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show where the deposited money came from. Here Rs 12,57,23,490 of the Rs 15,51,18,027 invested was borrowed from the district central co-operative bank, which is what made the netting argument real. Make the netting claim in the alternative, in writing, before the Assessing Officer and again before the Tribunal, with the interest paid quantified. If the assessment order records your arguments and then does not deal with them, take the non-speaking order point as an independent ground — that, not the merits, is what succeeded here. Do not treat a favourable remand as a decision on classification. The Court said expressly that the officer is at liberty to conclude the issue in any manner he thinks fit after proper discussion.
Validity check could not be completed. Followed by the same judge in K.441 Brammadesam Primary Agricultural Co-operative Credit Society Limited v. ITO, W.P. Nos. 3761, 3763, 3767 and 3771 of 2020, decided 17 February 2020, where the reasoning was reproduced and applied. No wider citator check was carried out. The decision predates Mavilayi Service Co-operative Bank (SC, 12 January 2021); the mutuality and associate member question the Court left at large has since been affected by Mavilayi, which holds that a registered primary agricultural credit society is entitled to the deduction notwithstanding that its loans to members are not agricultural, while profits attributable to loans given to non-members cannot be deducted, and that the Assessing Officer may conduct a fact finding enquiry into whether credit facilities are in fact being provided to members. The statutory reserve and netting points remain undecided by the Supreme Court so far as could be seen. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment has 37 numbered paragraphs and is divided into three groups of writ petitions, I, II and III, disposed of differently: group I was allowed and remanded (paras 21 and 22), group II was directed to the statutory appellate route with a stay of recovery (paras 32 and 33), and group III was split between the two (paras 35 to 37). Locator warning: the block numbered 1 to 5 that appears between paragraphs 17 and 18 is the Supreme Court's order in CIT v. Ramanathapuram Distt. Co-op. Central Bank, reproduced inside an assessee's reply which the Court in turn extracted from the assessment order; the header of the Madras High Court's judgment in CIT v. Veerakeralam Primary Agricultural Co-operative Credit Society dated 5 July 2016 appears in the same extract. Neither is this Court's own text. The Ammapet Division Bench decision is summarised by this Court in its own words at paragraph 28 and is not block-quoted anywhere, so no paragraph number of Ammapet can be taken from this report. A discrepancy in the report: paragraph 26 records that the Assessing Officer relied on paragraph 24 of Citizen Co-operative Society for the distinction between nominal and ordinary members, but the text of paragraph 24 as reproduced immediately afterwards is about whether the appellant fell within the definition of co-operative bank and s.80P(4), not about nominal members; the underlying Citizen judgment was not opened to resolve this and the point is not relied on here. This decision predates Mavilayi Service Co-operative Bank (SC, 12 January 2021), which has since held that a registered primary agricultural credit society is not excluded by s.80P(4) and that profits attributable to loans to non-members cannot be deducted. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
On the classification of interest generated by investments held as a statutory reserve, the assessments were set aside as non-speaking and remanded for de novo consideration, with a direction that the petitioners be heard specifically on that question and that Nawanshahar and Totgars be taken into account in a speaking and detailed order within six weeks (paras 19 to 21). W.P. Nos. 17, 20, 22, 23, 26, 29, 1150, 1155 and 1161 of 2020 were allowed (para 22). On mutuality and the associate member question, the Court declined to decide, directing the petitioners to file statutory appeals within three weeks with recovery stayed meanwhile, since the questions of law were still at large and were expected to be decided in higher-stake cases the Revenue proposed to carry to the Supreme Court (paras 31 to 33).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
My return was only processed under 143(1). Does that stop the department reopening it later?
No s.143(2) notice was issued at all. Does s.292BB save the assessment?
The AO cites Citizen Co-operative Society to deny my 80P claim. How far does it go?