THE MEHLAV PEOPLES CO-OP. CREDIT SOCIETY LTD.,PETLAD vs. THE DCIT, CIRCLE-1(3),, VADODARA

“1. The learned CIT(A)-1, Vadodara erred in law and/or on fats in treating the Interest Income of Rs.17,20,310/- (on FDR’s with Banks) as Income from other sources instead of business income of the appellant.

SMC-ITA No. 2089/Ahd/2017 The Mahlav Peoples Co-op Credit Society Ltd Vs. DCIT Assessment year: 2012-13 Page 2 of 6 3. Learned representatives fairly agree that the issues in appeal are covered, in principle against the assessee – subject to a statutory deduction of Rs.50,000/- being allowed to the assessee under section 80P(2)(c)(ii), by a decision of the Tribunal in the case of Dhanlaxmi Credit Co-op Society Ltd vs. ITO (ITA No.2426/Ahd/2013; order dated 24.01.2017), wherein it has been held as follows:-

“7. We have heard rival contentions and perused the material placed on record and gone through the judgment and decision quoted by ld. AR. After going through the grounds and the submissions made by ld. AR and after considering the issue in the light of ratio laid down in the judgment of Hon. Jurisdictional High Court in the case of SBI vs. CIT (supra), the grievance remains to be adjudicated is towards allowing of pro rata expenses for earning interest income of Rs.8,55,854/- earned from deposits with nationalized/scheduled banks and also allowing statutory deduction of Rs.50,000/- u/s 80P(2)(c) of the Act.

Held, dismissing-the appeals, (i) that the assessee had claimed deduction under section 80P and not specifically under section 80P(2)(a)(i). The assessee had also not shown any bifurcation of the income derived from providing credit facilities to its members and the interest earned by depositing surplus funds with the bank. In response to the notice under section 263, the assessee had contended that the reason for treating the interest income received from deposits as business income was that the funds of the business were kept in interest earning account with facility to withdraw the fund as and when necessary to earn interest for and on behalf of its members and that it was one of its activities as provided in section 80P(2)(a) and that the gains of business attributable to such activity were exempted from taxable income. The contention of the assessee that the Commissioner had not held that the interest derived from the deposits in the bank was income from other sources did not merit consideration for the reason

SMC-ITA No. 2089/Ahd/2017 The Mahlav Peoples Co-op Credit Society Ltd Vs. DCIT Assessment year: 2012-13 Page 3 of 6 that it was for the Assessing Officer, pursuant to the order under section 263 to examine the nature of the income and tax it accordingly. Having regard to the stand adopted by the assessee in response to the notice under section 263, it could not be said that the Commissioner had travelled beyond the scope of the notice under section 263, inasmuch as, he had only dealt with the contention raised by the assessee. The Appellate Tribunal was justified in upholding the invocation of powers under section 263 of the Act by the Commissioner and that the order did not suffer from any legal infirmity.

(ii) That the assessee did not carry on any banking business and its objects did not contemplate investment of surplus funds received from its members. The business of a credit society like that of the assessee was limited to providing credit to its members and the income that was earned by providing such credit facilities to its members was deductible under section 80P(2)(a)(i). The character of interest was different from the income attributable to the business of the assessee-society providing credit facilities to its members. The interest income derived from investing surplus funds with the bank must be closely linked with the business of providing credit facilities for it to be held attributable to the business of the assessee. Therefore, the profits and gains could be said to be directly attributable to the business of providing credit facilities to its members if there was a direct and proximate connection between the profits and gains and the business of the assessee. There was no obligation on the assessee to invest its surplus funds with the bank. Investing surplus funds in a bank was no part of the business of the assessee providing credit facilities to its members and hence it could not be said that the interest derived from depositing its surplus funds with the bank was profits and gains of business attributable to the activities of the assessee. It was only the interest income derived from the credit provided to its members which was deductible under section 80P(2)(a)(i) and the interest income derived by depositing the surplus funds with the bank not being attributable to the business carried on by the assessee could not be deducted under section 80P(2)(a)(i). There was no infirmity in the orders of the Appellate Tribunal warranting interference.

SMC-ITA No. 2089/Ahd/2017 The Mahlav Peoples Co-op Credit Society Ltd Vs. DCIT Assessment year: 2012-13 Page 4 of 6 issue of allowing pro rata expenses and allowing statutory deduction of Rs.50,000/- u/s 80P(2)©(ii) of the Act has been adjudicated by the Co- ordinate Bench by observing as under :-

Section 80P(2)(c) (c) in the case of a co- operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as 1 does not exceed,-

(i) where such co- operative society is a consumers' co- operative society, one hundred thousand rupees; and

(ii) in any other case, fifty thousand rupees. Explanation.- In this clause," consumers" co- operative society" means a society for the benefit of the consumers;]

From going through the above provisions it is very clear that the assessee is eligible for deduction of Rs.50,000/- u/s 80P(2)(a)(i) of the Act and the same should have been allowed by the Assessing authority.

SMC-ITA No. 2089/Ahd/2017 The Mahlav Peoples Co-op Credit Society Ltd Vs. DCIT Assessment year: 2012-13 Page 5 of 6 11. Respectfully following the judgment of Hon. Jurisdictional High Court and examining the facts of the case as also in the light of decision of the Co- ordinate Bench discussed in the above paragraphs, we are of following view :- (1) Assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act on the interest income earned from surplus deposits held with Nationalized/Scheduled banks. (2) Assessee will be eligible to statutory deduction of Rs.50,000/- u/s 80P(2)(c)(ii) of the Act. (3) Assessee will also be eligible to claim pro rata expenses for earning interest income of Rs.8,55,854/- assessee’s claim of pro rata expenses of Rs.5,77,423/- against the interest income of Rs.8,55,854/- after due verification by the learned Assessing Officer. We, therefore, direct the Assessing Officer to verify assessee’s claim of pro rata expenses by examining the record to be shown for verification by the assessee. Needless to mention proper opportunity of being heard is to be given to the assessee. We order accordingly. The appeal of the assessee is partly allowed for statistical purposes.”

Pramod Kumar (Vice President) Ahmedabad, the 26th day of February, 2019 **bt

Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order TRUE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad