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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘SMC’
Before: SHRI RAJPAL YADAV, VICE-
सुनवाई क� तार�ख/Date of Hearing : 04/02/2020 घोषणा क� तार�ख /Date of Pronouncement : 05/02/2020 O R D E R Present two appeals are directed at the instance of Assessee against order of the ld.CIT(A), Gandhinagar, Ahmedabad passed for the Asstt.Year 2013-14 and 2014-15 of even dated i.e. 26.12.2017. Since issues raised in both the appeals are similar, for the sake of convenience we dispose of both the appeals by this consolidated order.
In ground no.1, the grievance of assessee is that the ld.CIT(A) has erred in confirming disallowance made by the AO of the assessee’s claim of deduction under section 80P(2)(a)(i) of Rs.15,94,748/- for the Asstt.Year 2013-14 and Rs.11,90,581/- for the Asstt.Year 2014-15 being the interest income earned from scheduled banks. In ground no.2, assessee is further aggrieved in not allowing proportionate expenditure from earning such interest income from scheduled bank. and 613/Ahd/2018 - 2 -
Brief facts of the case are that the assessee is a cooperative society engaged in providing credit facilities to its members. It has filed returns of income for both the assessments declaring NIL income. The case of the assessee was selected for scrutiny assessment by issuance of notice under section1 43(2) of the Act. During the scrutiny assessment it was noticed by the AO that the assessee has earned interest income on fixed deposits and saving interest from Bank of Baroda at Rs.15,94,748/- and Rs.11,90,581/- respective for the Asstt.Years 2013-14 and 2014-15, which the assessee has claimed as deduction under section 80P(2)(d) of the Act. According to the AO, since the assessee being a cooperative society, income earned from its members would only qualify for the deduction, and the Bank of Baroda not being member of the cooperative credit society, the assessee would not be eligible for the claim of deduction. To the show cause notice, the assessee interalia explained that since activity of providing credit facilities to its members was in nature of banking activities, and has wider meaning whatever surplus funds deposited with the scheduled bank shall be qualified for deduction under section 80P(2)(d) of the Act. This explanation of the assessee was not accepted by the AO. He made addition of interest income earned from scheduled bank in the respective assessment years. Dissatisfied with the disallowance, assessee carried the matter in appeal before the ld.CIT(A), who on the basis of judgment of Hon’ble Gujarat High Court in the case of State Bank of India Employees Cooperative Credit Society Ltd. Vs. CIT confirmed action of the AO. Thus, assessee is now before the Tribunal.
Before us, the ld.counsel counsel for the assessee reiterated submissions made before the lower authorities. However, the ld.counsel and 613/Ahd/2018 - 3 - for the assessee does not contest judgment of Hon’ble Gujarat High Court relied on by the ld.CIT(A) in the impugned order, but submitted that in case claim of the assessee is not found to be admissible, then proportionate administrative and financial expenses incurred for earning such interest/investment income be allowed to the assessee. On the other hand, the ld.DR supported orders of the Revenue authorities below.
With the assistance of the ld.representatives, I have gone through the record carefully. A perusal of the record would show that the ld.CIT(A) has mainly put reliance upon recent judgment of Hon’ble jurisdictional High Court in the case of State Bank of India Employees Co-op Credit Society, 72 taxmann.com 64 wherein the Hon’ble Court held as under:
“In the case of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, what is deductible under section 80P is the whole of the amount of profits and gains of business attributable to any one or more such activities. The Supreme Court in Totgars Co-operative Sale Society v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC) has, while giving a precise meaning to the words 'profits and gains of business' mentioned in section 80P(2), observed that the assessee in that case regularly invested funds not immediately required for business purposes and was of the view that interest on such investments, therefore, cannot fall within the meaning of the expression 'profits and gains of business'. It was held that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce to its members. The court further held that the words 'the whole of the amount of profits and gains of business' emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. The court observed that in that particular case, the evidence showed that the assessee-society earned interest on funds which were not required for business purpose at the given point of time. Therefore, in the facts and circumstances of the case, the court was of the view that such interest and 613/Ahd/2018 - 4 - income falls in the category of 'Other income' which had rightly been taxed by the department under section 56. [Para 12]
Thus, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned under section 80P(2)(a). In the case of Totgars Co-operative Sale Society (supra), the court was dealing with two kinds of activities: interest income earned from the amount retained from the amount payable to the members from whom produce was bought and which was invested in short- term deposits/securities; and the interest derived from the surplus funds that the assessee therein invested in short-term deposits with the Government securities. This is further clear when one peruses the decision of the Karnataka High Court from which the matter travelled to the Supreme Court wherein it was the case of the assessee that it was carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. Therefore, the above decision is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression 'profits and gains of business' and that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. The court has held that when the assessee-society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purposes and which has been invested in specified securities as 'investment' are ineligible for deduction under section 80P(2)(a)(i). [Para 13]
Thus, in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a). However, section 80P(2)(d) specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d). However, interest earned from investments made in any bank, not being a co- operative society, is not deductible under section 80P(2)(d). [Para 14]” and 613/Ahd/2018 - 5 -
In the present case, the assessee has earned income from the saving bank account maintained with Bank of Baroda. Bank of Baroda is not a cooperative bank, therefore, any interest income from this bank will not qualify for grant of deduction under section 80P(2)(a)(i) in view of the above judgment of Hon’ble Gujarat High Court as well as under section 80P(2)(d) because it is not cooperative society. Therefore, the ld.CIT(A) has rightly disallowed claim of the assessee for grant of exemption under section 80P(2)(d) of the Act. However, we find merit in the second contention of the assessee that proportionate expenditure should be allowed in respect of interest income earned from the scheduled bank. Therefore, I direct the AO to allow proportionate expenditure for earning such interest income. In other words, the ld.AO has to determine the net interest income earned by the assessee, and only thereafter that income has to be excluded from the admissibility of deduction under section 80P(2) of the Act.
In the result, both the appeals of the assessee are partly allowed. Pronounced in the Open Court on 5th February, 2020.