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Income Tax Appellate Tribunal, ‘’ SMC’’ BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned two appeals have been filed at the instance of the Assessee for the different assessment years against the separate orders of the Learned Commissioner of Income Tax (Appeals)-5, Vadodara, arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in- after referred to as "the Act") relevant to the Assessment Years 2013-14 & 2014-15.
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The assessee has raised following grounds of appeal: 1. The assessee is a co-operative credit society carrying on the business of banking and providing credit facilities to its members and is covered u/s. SOP of the I.T. Act, 1961. 2. The assessee has filed its return of income on 07.01.2014 declaring total income at Rs. Nil/-. The return was processed u/s, 143(1) of the I.T. Act 1961. The case was selected for scrutiny assessment and accordingly notice u/s 143(2) was issued to the assessee. 3. The Ld. AO has not allowed deduction under section 80P(2)(a)(i) of the I.T. Act, 1961. 4. The Hon. CIT (Appeals) -5 has also not allowed deduction under section 80P(2)(a)(i) of the I.T. Act, 1961.
The interconnected issue raised by the assessee is that the learned CIT-A erred in confirming the order of the AO by sustaining the addition of ₹ 7,74,110/- by disallowing the deduction claimed under section 80P(2)(a)(i) of the Act. Without prejudice to the above, the ld. CIT-A erred in not allowing proportionate expenses of ₹ 4,50,585/- against the income of ₹ 7,74,110/-
The facts in brief are that the assessee in the present case is a co-operative society and engaged in the activity of providing credit facilities to the members. In the year under consideration the assessee apart from interest income earned from credit facilities provided to its member also earned interest of Rs. 7,74,110/- from the fixed deposit made with State Bank of India. The surplus fund was deposited with the banks in order to generate the interest income as well as to maintain the liquidity for the repayment of the deposits accepted from the members. As per the AO, the impugned amount of interest income was not arising to the assessee from the activities of providing credit facility to the members. Thus the AO held that the interest income of ₹ 7,74,110/-/- earned on the fixed deposits with SBI is not eligible for deduction under section 80P(2)(a)(i) of the Act and the same is taxable as income from other source under section 56 of the Act.
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Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned DR before us vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The provisions of section 80P(2)(a)(i) of the Act provides the deduction to a co-operative society engaged in the business of banking or providing credit facilities to its members. The provisions of the section are without any ambiguity. In other words, the income from the activity of financing from the members is only eligible for deduction under section 80P(2)(a)(i) of the Act. If there is any income arising to the co-operative society from the non-members that will not be subject to deduction under section 80P(2)(a)(i) of the Act. In holding so we draw support and guidance from the judgment of the Hon’ble Gujarat High Court in the case of State Bank of India versus CIT reported in 72 Taxmann.com 64 wherein it was held as under: The Income Tax Appellate Tribunal was also justified in holding that interest income of Rs.16,14,579/- and Rs.32,83,410/-respectively on deposits placed with State Bank of India was not exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961.
8.1 In view of the above, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the Banks other than cooperative bank is not being attributable to the business as envisaged under the provisions of the Act. Thus the same cannot be deducted under section 80P(2)(a)(i) of the Act.
8.2 We also note that Hon'ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. v. CIT reported in 123 taxmann.com 161 observed that the
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primary agricultural credit societies were held to be entitled to the benefit of the deduction contained in Section 80P(2)(a)(i) of the Act, notwithstanding the fact that the society may also be giving loans to its members which are not related to agriculture. However, if it is found that there are instances of loans being given to the non-members, profits attributable to such loans obviously were not liable to be deducted. The essence of this decision is that absolute denial of deduction under Section 80P(2)(a)(i) of the Act to the assessee's (cooperative societies) engaged in the providing credit facilities to the non-members along with its members is not warranted under the Act and only that part of profit and gains that is attributable and/or pertains to the non-members shall not be allowed as deduction under Section 80P(2)(a)(i) of the Act. The pertinent observation of the Hon'ble Court is reproduced as under: “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.”
8.3 Thus, the profits and gains attributable to non-members arising as a result of advancement of loans was held to be not an allowable deduction under Section 80P(2)(a)(i) of the Act. In view of the above, we do not find any merits in the argument advanced by the learned counsel for the assessee.
8.4 Now coming to alternate appeal of the assessee. The assessee in the ground of appeal before us has submitted that the total income of appellant assessee for the year under consider is of Rs. 32,06,688/- against which it incurred expenses of Rs. 18,66,512/- only. If interest income of Rs. 7,74,110/- treated as separately then proportionate expenses of Rs. 4,50,585/- should be allowed as deduction.
8.5 The question arises how to determine the income which is not eligible for deduction under section 80P(2)(a)(i) of the Act. It is for the reason that the assessee is not maintaining any separate books of accounts qua the income on the deposits
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from the bank as discussed above. The income on the deposits from the bank has been treated as income from other sources but the gross income cannot be excluded from the deduction available to the assessee under the provisions of section 80P(2)(a)(i) of the Act. It is the net interest income on the deposits from the bank which needs to be excluded from the amount of deduction claimed under section 80P(2)(a)(i) of the Act and the same should be brought to tax under the head income from other sources under the provisions of section 56 of the Act. To determine, the net income on the deposits from the bank, amount of expenses incurred in generating such interest income should be allowed as deduction from the gross income of interest in pursuance to the provisions of section 57(iii) of the Act. The provisions of section 57 of the Act reads as under: (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;
8.6 The above provisions require to deduct the expenses from the income which have been incurred wholly and exclusively for the purpose of earning such income. There is no concept of proportionate expenses envisaged under the provisions of section 57 of the Act as discussed above. The provisions require to deduct only those expenses which have been incurred wholly and exclusively for the purpose of earning such income. Thus in such facts and circumstances we are of the view the expenses which have been erred directly by the assessee in the earning of such income should only be eligible for deduction under section 57 of the Act. To put it differently, the expenses such as electricity, rental, audits, printing and stationery which cannot be said to have been incurred wholly and exclusively for the purpose of earning the interest income. Thus, we are not in agreement with the contention of the assessee. But it is also equally important to note that there is no mechanism provided under the provisions of section 57 of the Act for making the disallowance on ad hoc manner. Thus we direct the AO to work out the interest income on the deposits from the bank after deducting the corresponding expenses incurred by the assessee in generating the interest income. To our understanding such expenses have to be brought on record by the assessee based on cogent materials.
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Furthermore, if the assessee has made deposits in the banks out of the money borrowed from the members, then the corresponding interest cost borne by the assessee should be allowed as deduction.
8.7 Thus, in view of above discussion the appeal of the assessee is partially allowed subject to the discussion made in previous paragraph.
8.8 Coming to next issue with regard to basic deduction of Rs. 50000 as prayed by the assessee in the ground of appeal before us. The provisions of section 80P(2)(c) of the Act, provides that a co-operative society engaged in activities other than those specified in clause (a) or clause (b) of section 80P(2) (either independently of or in addition to all or any of the activities so specified), following deduction shall be allowed from its profits and gains attributable to such activities: (i) Rs. 1,00,000 in case of consumers' co-operative society (ii) Rs. 50,000 in any other case
8.9 The expression 'profits and gains' in clause (c) of sub-section (2) of section 80P of the Act is not confined to 'Profits and gains of business'. The Bombay High Court in the case of CIT v. Ratanabad Co-operative Housing Society Ltd. reported in 81 Taxman 257 (Bom.) has held as under:
“Letting out of the shops of the assessee-society to persons other than its members did not fall as an activity of the assessee-society either in clause (a) or clause (b) of sub-section (2) of section 80P. It was an activity of the assessee-society other than those specified in clauses (a) and (b) of sub-section (2) of section 80P and as such, the question arose whether the income derived by the assessee-society from letting out the shops to persons other than its members was exempt from tax under section 80P(2)(c).”
8.10 Thus, in case of co-operative credit society, income to which benefit of section 80P(2)(a)(i) is not allowed, e.g., rental income, interest income from surplus
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funds kept in FDs' of banks, etc., basic exemption of Rs. 50,000 as provided for in section 80P(2)(c)(ii) must be granted.
8.11 It also appears that, though the word 'activity' is not defined, yet the investment activity, activity of renting of immovable property, etc., and the consequent income attributable to such activities would be covered under section 80P(2)(c). Hence, we direct the AO to allow the deduction under section 80P(2)(c) of the Act. Thus the ground of appeal of the assessee is allowed.
8.12 In the result, the appeal filed by the assessee is partially allowed.
Coming to ITA No. 1051/Ahd/2019 an appeal by the assessee corresponding to A.Y. 2014-15
The assessee has raised following grounds of appeal 1. The assessee is a co-operative credit society carrying on the business of banking and providing credit facilities to its members and is covered u/s. SOP of the I.T. Act, 1961. 2. The assessee has filed its return of income on 17.09.2014 declaring total income at Rs. Nil/-. The return was processed u/s. 143(1) of the I.T. Act 1961. The case was selected for scrutiny assessment and accordingly notice u/s 143(2) was issued to the assessee. 3. The Ld. AO has not allowed deduction under section 80P(2)(a)(i) of the I.T. Act, 1961. 4. The Hon. GIT (Appeals) -5 has also not allowed deduction under section 80P(2)(a)(i) of the I.T. Act, 1961.
At the outset we note that the issues raised by the Assessee in its ground of appeal for the A.Y 2014-15 are identical to the issues raised by the Assessee in ITA No. 996/AHD/2019 for the assessment year 2013-14. Therefore, the findings given in ITA No. 996/AHD/2019 shall also be applicable for the year under consideration i.e. A.Y 2014-15. The appeal of the Assessee for the assessment 2013-14 has been decided by us vide paragraph Nos. 8 to 8.12 of this order partially in favour of the Assessee for detail discussion refer the aforementioned paragraph. The ld. DR also agreed that whatever will be the findings for the assessment year 2013-14 shall also
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be applied for the year under consideration i.e. AY 2014-15. Hence, the ground of appeal filed by the Assessee is partly allowed.
In the combined result, both the appeal of the assessee are partly allowed.
Order pronounced in the Court on 01/12/2021 at Ahmedabad.
Sd/- Sd/- (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 01/12/2021 Manish