SAUNSHI URBAN C-OP CREDIT SOCIETY LIMITED,SAUNSHI vs. INCOME TAX OFFICER, WARD-1(1), HUBLI

The brief facts of the case are that the assessee is a co-operative society and filed their return of income and claimed the entire income as deduction under Chapter VIA of the Act. The said return was processed u/s. 143(1) of the Act and the said return was accepted as such. Subsequently, the case was selected for scrutiny under CASS and notice u/s. 143(2) as well as u/s. 142(1) were issued calling for various details. The assessee responded to the said notices and filed the various details called for by the AO. The assessee submitted before the AO that they are carrying on the business with the members and therefore, the income earned by the assessee would be eligible for deduction u/s. 80P(2)(a)(i) of the Act. The assessee also relied on some orders as well as the judgments of the Hon’ble High Court. The AO not satisfied with the said reply and treated the assessee as a bank since they are accepting deposits and granting loans and therefore, by relying on some judgments had held that the assessee is not eligible to claim the deduction in view of section 80P(4) of the Act. The AO finally bifurcated the interest income earned by the assessee as income from business and income from other sources at Rs. 14,58,609/- and Rs. 9,68,876/- respectively.

As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) also in ITA No. CIT(A), Hubli/10193/2016-17 dated 26/11/2018, held that the interest income earned from other than the regular members would not be eligible for deduction u/s. 80P(2)(a)(i) of the Act and also held that the interest income earned from the members would be eligible for deduction. The Ld.CIT(A) on the basis of the figures submitted by the assessee that they have given loans to associate and nominal members out of the total interest received from the loans of Rs. 78,80,781/-. Therefore, the Ld.CIT(A) had concluded that the interest income earned from the associate and nominal members were not entitled for deduction u/s. 80P(2)(a)(i) of the Act on the premise that the said members are not members of the society. However, the Ld.CIT(A) had observed that the assessee would be entitled to claim expenditure directly related to the earning of such business income. Similarly, the Ld.CIT(A) had allowed the deduction claimed u/s. 80P(2)(a)(i) of the Act on the interest income received from the Savings Bank account as business income. The Ld.CIT(A) also held that the interest earned on deposits / investments on the idle funds could be treated as “attributable to business” and eligible for deduction u/s. 80P(2)(a)(i) of the Act. The other income earned on the investment / deposit was to be treated as income from other sources by the Ld.CIT(A). The Ld.CIT(A) also observed that the assessee was not able to produce a cash flow statement showing the sources of funds available and therefore treated the said income as income from other sources and not eligible for deduction. The Ld.CIT(A) however held that the expenditure directly linked to earning income from other sources would be allowable and not the expenditure related to the earning of business income. The Ld.CIT(A) after giving the findings on merits had also observed that the AO while giving effect to this order would verify and allow the expenditure wholly and exclusively incurred to earn the income from other sources. In effect, the Ld.CIT(A) had confirmed the disallowance made u/s. 80P(2)(a)(i) of the Act and directed to work out the actual expenditure incurred by the assessee for earning the income from other sources and deduct the same and assess the balance income as income from other sources.

Thereafter, the AO had passed an order giving effect to the Ld.CIT(A) order and worked out the income from other sources and recalculated the income from other sources at Rs. 18,44,650/- as against the earlier addition of Rs. 24,27,485/- as per the order made u/s. 143(3) of the Act dated 15/12/2016. The assessee challenged the said order giving effect before the Ld.CIT(A) by way of second round of litigation. The Ld.CIT(A) had considered the earlier order of the Ld.CIT(A) dated 26/11/2018 and the order giving effect to CIT(A) order dated 17/02/2020 and found that the AO had correctly followed the directions of the Ld.CIT(A) and allowed the proportionate expenditure incurred by the assessee for earning the income from other sources and therefore, dismissed the appeal filed by the assessee.

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the Ld.AR submitted that the assessee is entitled for deduction on the whole of the income earned by way of interest since the said income is not liable to be taxed under the provisions of the Act. The Ld.AR also submitted that the Ld.CIT(A) had erred in upholding the order giving effect passed by the AO wherein income from loans given to associate or nominal members was taxed as income from other sources. The Ld.AR also relied on the judgment of the Hon’ble Supreme Court reported in 431 ITR 1 in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT and contended that the deduction is available even though the assessee is having nominal / associate members. The Ld.AR further submitted that the District / Urban Co-operative Banks are also Co-operative Societies and therefore, the interest income earned from such deposits are eligible for deduction u/s. 80P(2)(d) of the Act.

The Ld.DR submitted that the present appeal has been filed against the order of the order giving effect to the CIT(A) order by the AO and therefore, the other grounds raised against eligibility of deduction u/s. 80P could not be raised in this appeal. The Ld.DR further submitted that the AO had passed the order giving effect to the order of the Ld.CIT(A) pursuant to the order of the Ld.CIT(A) in which the Ld.CIT(A) had upheld the denial of deduction claimed u/s. 80P(2) of the Act and therefore, the said order of the Ld.CIT(A) had attained finality and therefore, at this stage, the assessee could not raise the issue on merits except the expenditure allowed by the AO towards the interest income earned from other sources.

We have heard the arguments of both sides and perused the materials available on record.

We have perused the assessment order dated 15/12/2016 in which the AO had denied the deduction claimed by the assessee since the interest income was earned when the nominal / associate members are present in the society. While denying the said deduction, the AO had assessed the entire income as taxable. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and the Ld.CIT(A) had also confirmed the said disallowance but granted the relief of deducting the expenditure incurred towards earning the interest income from other sources. To quantify the expenditure alone, the Ld.CIT(A) had directed the AO to arrive the said expenditure relating to the interest income from other sources and deduct the said expenditure from the total income from other sources while making the order giving effect to the order of the Ld.CIT(A). From the perusal of the records, we do not find that the assessee had challenged the said order of the Ld.CIT(A) before this forum and therefore, they allowed the order to attain finality. Now the assessee in the present appeal, has challenged the disallowance which was confirmed by the Ld.CIT(A) in its order dated 26/11/2018 which in our opinion is not sustainable. In the order giving effect to the order of the Ld.CIT(A), the AO had worked out the expenditure incurred to earn the interest income from other sources and deducted the same from the income from other sources and computed the income from other sources and therefore, the said order is in order and also in accordance with the direction given by the Ld.CIT(A). Therefore, the ground no. 2 raised by the assessee is not an entertainable one and therefore, we dismiss the same.

Insofar as the ground no. 3 is concerned, we do not find that the Ld.CIT(A) had not granted sufficient opportunity of being heard and therefore this ground is also not sustainable.

Similarly, the ground no. 4 raised by the assessee is also not sustainable since the issue was confirmed by the Ld.CIT(A) in the earlier round and therefore the said dispute in ground no. 4 cannot be raised at this point of time. On the very same logic, the ground no. 5 also does not require any consideration since the assessee had challenged the order giving effect to the order of CIT(A). In the ground no. 6, the assessee had claimed that the interest income earned from the District / Urban Co-operative Banks are eligible for deduction u/s. 80P(2)(d) of the Act since they are also a co-operative society. This issue was covered by the judgment of the Hon’ble Jurisdictional High Court reported in 395 ITR 611 in the case of Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society in which the Hon’ble High Court had denied the deduction claimed u/s. 80P(2)(d) on the interest income earned from the deposits with the co-operative banks. Therefore, this ground is also not sustainable and also this ground could not be raised in the proceedings challenging the order giving effect to the order of the CIT(A).

In ground no. 9, the assessee had raised an alternative plea and prayed to grant the cost of funds u/s. 57 of the Act if the interest income is taxed u/s. 56 of the Act as income from other sources. This ground is also not sustainable since the AO as well as the Ld.CIT(A) had considered the said fact and granted the expenditure incurred for earning the interest income from other sources while computing the income from other sources. To take a different view, no further details were provided by the assessee to show that the AO had not granted the cost of funds except raised a ground. Further, the AO had followed the directions of the Ld.CIT(A) and therefore, unless and until the said order has been reversed or modified, the order giving effect to the order of the Ld.CIT(A) by the AO is in order and therefore this ground is also liable to be dismissed.

The other grounds raised by the assessee are only consequential one and therefore we are not adjudicating the said grounds.

In the result, both the appeals filed by the assessee are dismissed.