Loading judgment…
Facts
The assessee, a multi-state co-operative society providing credit facilities, earned interest income from deposits kept with nationalized banks, claiming deduction under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer disallowed this deduction, treating the interest as 'Income From Other Sources'. The Ld CIT(A) allowed the deduction, which the Revenue challenged in this appeal.
Held
The Income Tax Appellate Tribunal upheld the CIT(A)'s decision, confirming that the issue is covered by various High Court and Coordinate Bench decisions. It reiterated that interest income earned by a co-operative society from investing surplus funds in banks, not immediately required for lending to members, is attributable to its business and is eligible for deduction under Section 80P. The Tribunal distinguished the Supreme Court's Totgars' case, noting it involved retained amounts as liabilities rather than surplus funds.
Key Issues
Whether interest income earned by a co-operative society from deposits in nationalized banks, derived from surplus funds not immediately required for lending to members, is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act as business income.
Sections Cited
80P, 80P(1), 80P(2)(a), 80P(2)(a)(i), 80P(2)(d), 56
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
The Revenue has filed this appeal challenging the order dated 13-09-2023 passed by the Ld CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY.) 2018-19. The Revenue is aggrieved by the decision of Ld CIT(A) in granting the deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961 („the Act‟) in respect of interest income earned from bank deposits.
The assessee is a multi state co-operative society. It is engaged in the business of accepting deposits from and providing credit facilities to its members. The assessee used to keep deposits with certain nationalized banks and accordingly earned interest income. The amount of deduction claimed u/s 80P(2)(a)(i) was Rs.58.36 crores. The deduction u/s 80P(2)(a)(i) of the Act is allowed to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members.
During the course of assessment proceedings, the AO took the view that the interest earned from deposits kept with nationalized banks cannot be considered as business income of the assessee and hence the same is not eligible for deduction u/s 80P(2)(a)(i) of the Act. The relevant discussions made by the AO in this regard are extracted below:- “The contention of the assessee as stated above is not correct. It is pertinent to mention here that, in the light of the decision of the Hon‟ble Apex Court, the Parliament has included specifically „Business Profits‟ into the definition of the word „income‟. Therefore precise meaning to the words „profits and gains of business‟ mentioned in section 80(P)(2) of the Act are to be considered. In the instant case, the assessee society regularly invested funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression ‘profits & gains of business’. Such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of its members, it is earning interest income. As stated above, interest held as ineligible for deduction under section 80(P)(2)(a) of I.T.Act is not in respect of interest received from members. As stated above, interest held as ineligible for deduction under section 80(P)(2)(a) is not in respect of interest received from the members. Moreover, as per statute, deduction under section 80P of I.T.Act is allowable on interest and dividends derived by the Co-operative society from its investments with any other Co-operative society. The intention of the legislature behind enactment of this particular section is, perhaps to foster the co-operative society from its investments with any other Co-operative society and also to foster the Co-operative spirit of the country.. Even if the justification placed by the assessee support of fetch in income out of the idle fund is followed, it could easily be argued that the assessee could very well kept the fund with the state Co-operative bank or any other Cooperative bank to earn interest deductible under section 80P. Since the assessee failed to do so, such interest income is not allowable for deduction u/s 80(P)(2)(d) of the I.T. Act.. As regard expenses on other income, such expenses has already been claimed in the financials of account which has been allowed. Hence, no more expenses are allowable as attributable to earning interest on fixed deposits with other banks. Nexus of income derived by the assessee from investment in banks, other than Co-Operative banks, with its business activities couldn‟t be established by the assessee. It is a fact that the assessee had put its idle fund in FD with nationalised banks, other than Co-operative banks, with a motive to earn interest income. In this context, reliance is placed on the decision of the Hon‟ble Apex Court in the case of the Totgars‟ Co-operative sale society Ltd. vs. ITO [322 ITR 283(SC)]‟ in which it was held that interest earned by appellant co-operative society on surplus funds invested in short-term deposits with banks and in govt. securities is not eligible for deduction u/s 80P of I.T.Act. The above decision of the Hon‟ble Apex Court in the case of „The Totgars‟ Cooperative Sale Society Ltd. vs. ITO [322 ITR 283(SC)]‟ is also interrelated in this case. Considering the facts as stated above, interest either realised or accrued from deposits with nationalised banks for an amount of Rs.6,32,49,10,603/- is not allowed as eligible for deduction u/s 80(p)(2)(a) of the I.T. Act and should be charged to tax under the head income from other sources. Since, the assessee has claimed deduction U/s 80P of Rs. 58,36,19,480/- only in its Return of Income, a sum of Rs. 58,36,19,480/- is disallowed u/s 80(P)(2)(a) of the I.T. Act and it must be charged to tax under the head income from other sources instead of Rs.6,32,49,10,603/-. As discussed above, the assessee has claimed deduction u/s 80(P) of I.T.Act in respect of ineligible incomes. The details along with the relevant facts has been filed by the assessee through ITBA System during the course of assessment proceedings. Thus, it is clear that assessee has misreported the income. As such Rs. 58,36,19,480/- is disallowed and added back to the total income for the FY.2017-18 relevant to A.Y. 2018-19 under the head “Income From Other Sources” on this issue.” It is pertinent to note that the assessee had earned interest income from investments to the tune of Rs.75.21 crores and interest income on advances to the tune of Rs.557.28 crores, both aggregating to Rs.632.49 crores. It appears that the AO considered entire gross income of Rs.632.49 crores as having been earned from the deposits kept with nationalized banks. Since it was less than the amount of Rs.58.36 crores claimed as deduction u/s 80P(2)(a)(i) of the Act, the AO disallowed entire deduction of Rs.58.36 crores.
The Ld CIT(A), however, agreed with the contentions of the assessee that the interest income earned from deposits kept with nationalized banks is part of its business income and hence eligible for deduction u/s 80P(a)(i) of the Act. The relevant observations made by the Ld CIT(A) are extracted below:-
“Hon‟ble Karnataka High Court in the case of Guttigedarara Cooperative Society Ltd (377 ITR 464) has also held that the interest income derived on the capital, which cannot be immediately lent to members and which is deposited in banks, is attributable to the profits and gains of the business of providing credit facilities to its members. The relevant extracts are as under: "7.From the aforesaid facts and rival contentions, the undisputed facts which emerge are, certain sums of interest were earned from short-term deposits and from savings bank account. The Appellant is a Co-operative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the Appellant by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question" 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 Co-operative 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, the society 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.” 7.8 The Hon‟ble Mumbai ITAT in the case of Yashomandir Sahakari Patpedhi Ltd. v. ITO [2016 Tax Pub (DT) 0923(Mum-Trib)]also held that where surplus funds not due to members, by a Credit Co-operative Society, were invested, the resultant interest income would constitute business income and deduction u/s 80P would be allowed on the same” The Revenue is aggrieved.
We heard the parties and perused the record. We notice that the ld CIT(A) has followed the decision rendered by the Hon‟ble High Courts and the Tribunal in order to decide the issue in favour of the assessee. Before us, the Ld A.R also placed reliance on the decision rendered by the SMC Bench of Mumbai ITAT in the case of Jaoli Taluka Sahakaripatpedhi Maryadit vs. ITO (ITA No.6627/Mum/2014) (2015) (043 ITR (Trib) 0138) and submitted that an identical issue has been decided by the Tribunal following the decision rendered by the Hon‟ble Karnataka High Court in the case of Tumkur Mechants Souharda Credit Cooperative Ltd vs. ITO (2015) (230 Taxman 309)(Kar).
We have gone through the above said decisions and we notice that the issue contested before us is squarely covered by the above said decision rendered in the case of Jaoli Taluka Sahakaripatpedhi Maryadit (supra). We extract below the operative portion of the decision rendered by the Tribunal in the above said case:-
9. I heard the parties and perused the record. In my view, the decision rendered by Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd (supra) squarely applies to the facts of the present case. In the case before the Hon'ble Karnataka High Court also, the assessee claimed deduction u/s 80P(2)(a)(i) on the interest income earned from deposits kept with banks on the reasoning that the same shall form part of its business income. The Hon'ble High Court upheld the said view by duly considering the decision rendered by Hon'ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd (supra). For the sake of convenience, I extract below the observations made by the Hon'ble Karnataka High Court:- "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 6 I T A N o . 6 6 2 7 / Mu m / 2 0 1 4 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 Co-operative 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 bought, 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 7 I T A N o . 6 6 2 7 / Mu m / 2 0 1 4 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 co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com66. 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:"
10. Respectfully following the decision rendered by Hon'ble Karnataka High Court, referred above, I set aside the order of Ld CIT(A) on this issue and direct the AO to allow deduction u/s 80P of the Act.” 7. In the instant case also, we noticed that the Ld CIT(A) has followed the decisions rendered by the Hon‟ble High Courts and the Co-ordinate Benches in order to decide this issue in favour of the assessee. Before us, no contrary decision was placed by the Revenue. Accordingly, we uphold the order passed by the Ld CIT(A).
In the result, the appeal filed by the Revenue is dismissed.