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Facts
The assessee, a Co-operative Credit Society, claimed deduction under Section 80P(2)(a)(i) for interest income earned on deposits with other banks. The Assessing Officer (AO) and Commissioner (Appeals) disallowed the deduction, relying on Supreme Court decisions regarding interest on fixed deposits. The assessee also claimed depreciation at 60% on computers, which was disallowed by the AO for AY 2017-18 as the rate should have been 40%.
Held
The Tribunal held that interest income earned on deposits made in compliance with statutory requirements for reserve funds and SLR, and for carrying on the business of providing credit facilities, is attributable to the business activity and eligible for deduction. However, interest received from commercial banks was remitted back to the AO for verification regarding the nature of the payer bank.
Key Issues
Whether interest income earned by a co-operative society on its surplus funds deposited in banks is eligible for deduction under Section 80P(2)(a)(i) as business income, or is to be treated as income from other sources. Also, the issue of depreciation rate on computers.
Sections Cited
80P(2)(a)(i), 143(1), 143(2), 142(1), 32, 80P(2)(d), 56, 57(iii)
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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI OMKARESHWAR CHIDARA
Per: Smt. Beena Pillai, J.M.: The Present appeal filed by the assessee arise out of order dated 19/09/2024, passed by NFAC Delhi for assessment year 2017-18 on following grounds of appeal:
1. On the facts and in the circumstances of the case and in law the Ld. Assessing Officer has erred and denying the claim of deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961, observing that there is A.Y. 2017-18 Janpriya Sahakari Patsanstha Maryadit no concept of mutuality as the contributors and participators in the surplus are not same. However, in fact, the appellant has not claimed deduction under the concept of mutuality.
2. On the facts and in the circumstances of the case and in law the Ld. Assessing Officer and Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) has wrongly relied on the Hon'ble Apex Court decision in the case of Totgars Co- operative Sale Society Ltd. vs. Income Tax Officer, Karnataka (2010) 188 Taxman 282 (SC) while disallowing the claim of deduction u/s 80P(2)(a)(i) of the Act. The said decision is with regard to interest on fixed deposits made out of surplus funds however, in Appellant's case, the Assessing Officer has disallowed the claim of deduction in respect of income received by providing credit facilities to the members.
3. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer and CIT (A) has wrongly disallowed the depreciation assuming the rate of depreciation on Plant and Machinery (Computer) at 40%, however, the actual depreciation rate for AY 2017-18 on computer was 60%.
4. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) has failed to consider the bonafide submission made by the Appellant Society and summarily rejected the appeal.
5. The appellant craves leave to add, amend, alter, modify, substitute, vary, delete, and rescind all or any of the above ground(s) of appeal before or at the time hearing.” Brief facts of the case are as under:
2. The assessee is a Co-operative Credit Society registered under Maharashtra Co-operative Societies Act, 1960 and Classified as Resource Society u/s. 12 of the Maharashtra Co- operative Societies Act, 1960. It is submitted to be exclusively engaged in providing credit facilities to its members and no business is transacted with a person other than member of that A.Y. 2017-18 Janpriya Sahakari Patsanstha Maryadit society. It was also submitted that the assessee is working as a self-help group under the concept of mutuality. 2.1. It filed its return of income for year under consideration on 23.10.2017 declaring total income at Rs. NIL after claiming chapter-VI-A deduction of Rs.26,17,320/-. The return of income was processed u/s. 143(1) of the Income Tax Act, 1961 . The case was selected for scrutiny under CASS. Accordingly, notice u/s. 143(2) and s.142(1) of the Act was issued. 2.2. During the assessment proceedings, the Ld.AO noted that the assessee claimed deduction under section 80P of the Act amounting to Rs.26,17,320/-. The Ld.AO noted that the interest received by the assessee was from parking surplus in other Co- operative Bank. The assessee did not submit any reply in response to the show cause notice. In view of this, deduction claimed by the assessee u/s.80P of the Act amounting to Rs.26,17,320/- was disallowed. 2.3. During the assessment proceedings, Ld.AO further found that, the assessee claimed depreciation @ 60% on Plant & machinery (Computer) at Rs.49,131/-. Ld. AO noted that as per the provisions of section 32 of the Act, the depreciation rate for A.Y.2017-18 was 40%. Accordingly, the depreciation amount on Plant and Machinery was reduced @ 40%. In view of this the difference amount of depreciation claimed by the assessee (49,131-32,754) = Rs.16,377/- was disallowed.
Aggrieved by the order of the Ld.AO, the assessee preferred appeal before the Ld.CIT(A).
A.Y. 2017-18 Janpriya Sahakari Patsanstha Maryadit 3. The Ld.CIT(A), relied on decision of Hon’ble Supreme Court in the case of M/s Citizen Co-operative Society Ltd Vs Assistant Commissioner of Income Tax, Circle -9(1),Hyderabad reported in in Civil Appeal No. 10245 of 2017 dated 08/08/2017 and decision in case of Totgars Co-Operative Sale Society Ltd. v. ITO reported in (2010) 188 Taxman 282 held that, interest income earned by assessee on money invested in fixed deposits of bank could not possess same character of mutuality as surplus fund derived by assessee from contribution of the members. The ld. CIT(A) thus held that same could be eligible to tax as income from other sources. 3.1. The Ld.CIT(A) also confirmed the depreciation disallowed by the Ld.AO. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
Ground No.1-2 raised by the assessee is on disallowance of deduction claimed under section 80P(2)(a)(i) of the Act. The Ld.AR submitted that assessee received total interest of Rs.18,50,636/- for the year under consideration from investments in Fixed Deposits in Co-operative Banks. It was submitted that, as per the provisions of section 66 the Maharashtra Co-operative Societies Act, 1960, the Society is required appropriate 25% of the net profit to Reserve fund. In addition to this, as per section 144-10A of the MCS Act, 1960, Co-operative Credit Societies are required to maintain the Statutory Liquidity Ratio (SLR) of not less than 25% of the deposits accepted from members.
A.Y. 2017-18 Janpriya Sahakari Patsanstha Maryadit 4.1. In view of this, he submitted that in order to comply with the provisions of said Act, the Society is required to make mandatory investment of Reserve Fund & SLR in the securities specified in section 70 of the MCS Act, 1960. It is thus submitted that these investments are mandatorily required to carry on business of providing credit facilities to the members. Further, Ld. AR submitted that as per the Bye-laws of the Society, providing credit facilities and making investment is core business activity. It is submitted that making investment is a core business activity, at par with providing credit facilities to the members. The Ld. AR submitted that assessee has not made investment of surplus funds, but all investments are made as per the statutory compliance and provisions of Bye-laws of the Society. 4.2. He thus submitted that interest received on such investment is attributable to providing credit facilities to members and same is Income from business and the same is eligible for deduction on u/s 80P(2)(a)(1) of the Income Tax Act, 1961. 4.3. The Ld.AR placing reliance on CBDT Circular No.18/2015 dated 02/11/2015 submitted that, after decision of Hon’ble Supreme Court in the case of CIT vs Nawanshahar Central Co- operative Bank Ltd reported in (2007) 160 TAXMAN 48, the income arising from investment made by the banking and financial institutions is held to be attributable to the business of banking (ie, acceptance of deposits and providing credit facilties) shall be the taxed under the head "profit and gains from business and profession".
4.4. The Ld.AR submitted that, interest income received by assessee is also attributable to providing credit facilities to the members and therefore, the said income is Income from Business and is eligible for deduction u/s 80P(2)(a)(i) of the Act and not under u/s 80P(2)(d) of the Act. In support he placed reliance on the decision of coordinate bench of this Tribunal in case of NPC Employees Co-operative Credit Society Ltd, vs.ITO, in for assessment year 2020-21 vide order dated 27/06/2024. The Ld.AR also relied on following decisions in support: S.No. Name of the Assessee ITAT 1. Shri Tatyasaheb Mohite Nagari Sahakari Income Tax Appellate Tribunal Patpedhi Ltd. v/s. ITO, ITA No. 412/Mum.2018 2. ITO 26(2)(5), Mumbai vs. Ramaraja Khsatriya Income Tax Co-operative Credit Society Ltd. Tribunal 4896/Mum/2019 AY 2014-15 & ITA no 4897/Mum/2019 AY 2015-16. ΙΤΟ 20(2)(1), Mumbai vs. Mumbai Sales Tax Income Tax 3. Co-operative Credit Society Ltd. Appellate Tribunal 4. Indraprastha Nagari Sahakari Patsanstha vs Income Tax Appellate Tribunal ITO Sangli (ITA No. 184/PUN/2022 4.5. He submitted that the authorities below wrongly relied on the decision of Hon'ble Supreme Court in case of Totgar's Co- operative Sales Society Ltd reported in 322 ITR 283 and held that the interest received on fixed deposits is not eligible for deduction u/s 80P of the Income Tax Act, 1961.
We have perused submissions advanced by both sides in light of records placed before this Tribunal.
The assessee is a co-operative society and claimed deduction u/s 80P(2)(a)(i) of the Act on a sum of Rs. 18,50,636/- during the year under consideration. The sum on which deduction was claimed was interest income earned on deposits by the assessee with other cooperative banks. The deduction claimed by the assessee was not allowed by the revenue for the reason that interest income was earned by the assessee on deposits and in view of the decision of the Hon'ble Supreme Court in the case of Pr. CIT v. Toagars Co-operative Sale Society Ltd.(supra) interest income had to be regarded as 'income from other sources'. 5.1. The plea of the assessee is that the fixed deposits on which interest income was earned were made in compliance with the legal requirements of maintaining statutory reserves as mandated in the law relating to co-operative societies applicable to the assessee and therefore is attributable to the main business activity of the assessee. In support various decision of coordinate bench of this Tribunal has been relied by Ld.AR. 5.1.1. We differ with this argument of assessee for following reasons:- Hon’ble Punjab & Haryana High Court in CIT-I, Chandigarh vs. Punjab State Cooperative Agricultural Development Bank Ltd. Reported in (2016) 76 taxmann.com 307 had an occasion to analyse similar issue in the light of decision of Hon’ble Karnataka High Court in case of Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO reported in (2015) 55 taxmann.com 447, wherein interest income earned from fixed deposits was claimed as deduction under 80P(2)(a)(i) that was denied by the revenue. Relevant extract of the decision by Hon’ble Punjab & Haryana High Court(supra) are as under: 32. Mr. Bansal relied upon the judgment of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO [2015] 55 taxmann.com 447/230 Taxman 309 (Karnataka) . In that case, the assessee-Cooperative Society provided credit facilities to its members and earned interest from short term deposits with banks and from savings bank accounts. The interest income earned by the assessee by providing credit facilities to its members was deposited in banks for a short duration which earned interest. The question was whether this interest was attributable to the business of providing credit facilities to the members. The Division Bench held as follows:— '8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.
In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Cooperative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was brought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee-Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2) (a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State Cooperative Bank Ltd.,[2011] 12 taxmann.com 66/200 Taxman 220. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order. Appeal is allowed.' (The reproduction is from the original website of the Karnataka High Court). There is an important distinction. The Division Bench expressly held in paragraph 10 that interest income was attributable to the business of banking and, therefore, liable to be deducted under Section 80P(2)(a)(i) of the Act. At the cost of repetition, we have not considered whether the assessee carries on the business of banking. If it is established upon remand that the assessee carries on the business of banking the result may be different. In any event assuming that the judgment is not distinguishable on this ground, we would with respect disagree with the same in view of the judgments that we have already referred to and on the basis of our interpretation of Totgar's case. In any event, we are with respect unable to agree with the observations that the Supreme Court in Totgar's case (supra) did not lay down any law.
A.Y. 2017-18 Janpriya Sahakari Patsanstha Maryadit (emphasis supplied) We therefore do not find any support to the assessee in regards to its claim of deduction under 80P(2)(a)(i) of the Act. 5.1.2. It is noted from the submissions of the assessee that, it has invested its fund in commercial bank earned interest thereon. Section 80P(2)(d) describes that if the assessee has received interest from the co-operative society, then the assessee is eligible for claim of deduction on such interest received. In the judgment of Hon’ble Supreme Court in case of Kerala State Co- Operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer reported in [2023] 154 taxmann.com 305 has discussed in detail the definition of co-operative banks and co- operative society. Hon’ble Court held that, if the payer bank falls under the definition of bank then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income received from co-operative banks. In addition, the judgment of Apex Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. KSCARDB (supra) in which it has been discussed in detail the definition of co-operative banks and co- operative society. Hon’ble Court observed that all co-operatives are not co-operative societies. 5.13. The section 80P(2)(d) describes that if the assessee received interest/dividend is a co-operative society, then the assessee is eligible for claim of deduction on such interest/dividend. The assessee in present facts received interest from co-operative bank, but it is not clear whether the interest payer co-operative bank is a bank and registered with Reserve Bank of India and holding licence from RBI for carrying out A.Y. 2017-18 Janpriya Sahakari Patsanstha Maryadit banking business as per RBI Act. If the payer bank falls under the definition of a bank in the light of the decision of Hon’ble Supreme Court then the assessee is not eligible to get deduction u/s. 80P(2)(d) on such interest income received from co operative banks. Therefore this issue is remitted back to Ld.AO for verification of interest received from co-operative bank in above terms. The Ld. AO is directed to verify if payer Bank being a co- operative Bank falls into the category of co-operative society and to allow the claim if found so.
If Ld.AO finds that payer bank is carrying banking business activities as observed by Hon’ble Supreme Court, the deduction u/s. 80P(2)(d) on such interest income should not be granted. Only then, such interest can be considered as Income from other sources u/s.56 and the assessee is eligible for claim of its cost of funds on such interest under section 57(iii). Accordingly, ground no.1-2 raised by the assessee stands partly allowed for statistical purposes. In respect of Ground no.3 the Ld.CIT(A)/AR did not make any submissions. Accordingly this ground is not adjudicated. In the result appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 28/02/2025