SHRIRAM COOPERATIVE BANK LIMITED,NASHIK vs. INCOME-TAX OFFICER, WARD - 1(3), NASHIK

This appeal is filed by the assessee against the order of the CIT(A)-1, Nashik dated 03.04.2017 for the assessment year 2014-15.

In this appeal, the assessee filed the following revised grounds :- “1. The Hon’ble Commissioner of Income Tax (Appeals) - 1, Nasik (Hereinafter referred to as CIT(A)) is not justified in upholding disallowance of deduction claimed u/s 80P(2)(a) of the Income Tax Act, 1961 (Henceforth ‘the Act’) relating to interest earned on deposits with Banks made during the course of business of banking by the appellant. For this appellant placed reliance on the decisions reported at 39 ITR 114 (SC), 289 ITR 6 (SC), 29 DTR 158 (Bom), 229 CTR 73 (Bom). Therefore, it is prayed to direct the AO to treat the interest earned on deposit with State Bank of India as income earned from the business eligible for deduction u/s 80P(2) (a) of the Act. 2. The AO erred in calculating the deduction available u/s 80P and also erred in determining the total income of the appellant. Therefore, it is prayed to direct the AO to determine the correct total income. 3. Appellant craves leave to add/amend/alter any or all grounds of appeal before or at the time of hearing.”

Being aggrieved with the decision of the CIT(A), the assessee is in appeal before the Tribunal with the above extracted grounds.

Before me, at the outset, ld. Counsel for the assessee submitted that an identical issue already decided in favour of the assessee by the Co- ordinate Bench of the Tribunal in assessee’s own case in for the assessment year 2009-10 order dated 19.02.2014. Copy of the said decision (supra) is placed on record. Further, ld. Counsel for the assessee relied on para 3 onwards of the said order of the Tribunal (supra) in support of the case of the present case.

On the other hand, ld. DR for the Revenue heavily relied on the orders of the revenue authorities. 7. On hearing both the sides, I find, the issue involved in this appeal is covered one by the order of the Tribunal (supra). On perusing of the said order of the Tribunal (supra), I find the contents of para 3 onwards of the said order of the Tribunal (supra) are relevant and the same are extracted hereunder :- “3. The matter was carried before the first appellate authority wherein, the order of Assessing Officer was confirmed. Same has been opposed before us on behalf of assessee. The learned Authorized Representative has pointed out that the issue before us is covered in favour of assessee by the decision of Tribunal in ITA No.1336/PN/2011 in the case of ITO Vs. Niphad Nagari Sahakari Patsanstha Ltd., wherein, the Tribunal has decided the issue in favour of assessee as under: “11. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case there is no dispute to the fact that the assessee is a cooperative society engaged in the business activity of credit cooperative society, i.e. providing credit facility to its members. According to the Revenue the income of the society on account of interest from banks other than cooperative banks, interest on mutual funds, long term and short term capital gain on sale of mutual funds etc. are not covered by the activity of providing credit facilities to its members and hence not eligible for deduction u/s.80P(2)(a)(i) of the Income Tax Act in view of the decision of Hon’ble Supreme Court in the case of Totagar’s Cooperative Sale -4- Society Ltd. (Supra). We find the Ld. CIT(A) allowed the claim of the assessee on the ground that the assessee is entitled to deduction u/s.80P(2)(a)(i) on account of interest from banks other than cooperative banks, interest on mutual funds long term and short term capital gain on mutual funds etc. While doing so, he held that the decision in the case of Totagar’s Cooperative Sale Society Ltd. (Supra) is not applicable to the facts of the present case since in that case the amount invested in short term deposits and securities was not out of interest bearing deposits collected from members but out of sale proceeds of agricultural produce of farmer members marketed by the society. Further, the Hon’ble Apex Court has considered only the latter part of section 80P(2)(a)(i), i.e. income of a cooperative society engaged in providing credit facilities to its members is eligible for deduction and has not considered the earlier part of section 80P(2)(a)(i), i.e. income of a cooperative society engaged in carrying on the business of banking is eligible for deduction. 11.1 We find the Ahmedabad Bench of the Tribunal in the case of M/s. Jafari Momin Vikas Cooperative Credit Society Ltd. (Supra) after considering the decision of Hon’ble Supreme Court in the case of Totagar’s Cooperative Sale Society Ltd. (Supra) has observed as under : “17. We have carefully considered the submissions of the either party, perused the relevant records and also the case law on which the learned AR had reservation in it’s applicably in the circumstances of the assessee's case.

It was the stand of the learned CIT (A) that the entire income was not exempt and that it was to be examined as to whether there was any interest income on the short term bank deposits and securities included in the total income of this society which has been claimed as exempt. According to the CIT (A), a similar issue to that of the present one was dealt with by the Hon'ble Supreme Court in the case of Totgars Co-op. Sale Society Ltd v. ITO (supra). The issue before the Hon'ble Court for determination was whether interest income on short term bank deposits and securities would be qualified as business income u/s 80P (2)(a)(i) of the Act.

The issue dealt with by the Hon'ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts, as under: "What is sought to be taxed under section 56 of the Act is the interest income arising on the surplus invested in short term deposits and securities which surplus was not required for business purposes? The assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is-whether interest on -5- such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under section 28 of the Act? in our view, such interest income would come in the category of 'income from other sources', hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer..." 19.1 However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon'ble Supreme Court - "(On page 286) 7............Before the assessing officer, it was argued by the assessee(s) that it had invested the funds on short term basis as the funds were not required immediately for business purposes and, consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence, these civil appeals have been filed by the assessee(s)." 19.2 From the above, it emerges that – (a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits; (b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members; (c) that assessee carried on two activities, namely, (i) acceptance of deposit and lending by way of deposits to the members; and (ii) marketing the agricultural produce; and (d) that the surplus had arisen emphatically from marketing of agricultural produces. 19.3 In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds. 19.4 While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely: