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Facts
The assessee, a consumer cooperative society, claimed deduction under Section 80P on interest income earned from investments with a cooperative bank. The Assessing Officer (AO) disallowed this claim, and the CIT(A) upheld the disallowance.
Held
The Tribunal held that interest income earned by a cooperative society from investments with a cooperative bank is not eligible for deduction under Section 80P(2)(d) of the Act, citing relevant case law and the provisions of Section 80P(4). However, the assessee is allowed to claim proportionate expenses incurred in earning this income.
Key Issues
Whether interest income earned by a cooperative society from a cooperative bank is eligible for deduction under Section 80P(2)(d) of the Income Tax Act, and if not, whether expenses incurred in earning such income are deductible.
Sections Cited
80P, 80P(2)(d), 80P(2)(c), 143(1), 154, 57, 194A, 194A(3)(v)
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Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the Addl/JCIT(A)-2, Mumbai dated 31/05/2024 in DIN No.ITBA/APL/S/250/2024-25/1065307716(1) for the assessment year 2020-21.
The interconnected issue raised by the assessee is that the learned CIT(A) erred in not allowing the deduction under section 80P of the Act on the interest income earned from investment with SCDCC Bank and SB Interest.
The facts in brief are that the assessee is a consumer cooperative society and registered under the Karnataka Cooperative Societies Act. The assessee is in the business of providing/supplying academic books, stationery, xerox facility etc. to the students of SDM Group of institutions who are all the members of the assessee society in accordance with its bye-laws. The assessee for the year under consideration declared gross total income of Rs. 7,50,150/- out which an amount of Rs. 3,49,500/- was claimed as deduction under section 80P(2)(d) of the Act and further an amount of Rs. 1 lakh was claimed as deduction under section 80P(2)(c) of the Act. The amount of Rs. 3,49500/- represent interest income South Canara District Central Cooperative Bank.
The CPC, while processing the return under section 143(1) of the Act, disallowed the assessee’s claim of deduction under section 80P(2)(d) of the Act for Rs. 3,49,500/-. The rectification application filed under section 154 of the Act was also rejected by the CPC.
The aggrieved assessee preferred an appeal before the learned CIT(A).
The assessee before the learned CIT(A) submitted that being a consumer cooperative society, it transacts with the members only. The business income earned from carrying out the transaction with members only is eligible for deduction under section 80P of the Act. The interest income of Rs. 3,49,500/- earned from investment made with cooperative bank is in the ordinary course of business which is included in business income and therefore, it qualifies for deduction under section 80P(2)(d) of the Act. The assessee further submitted that being a cooperative . society, it requires to maintain fluid resources as per rule 28 of the Karnataka Cooperative Societies Rules 1960. Therefore, the interest income earned from statutory deposit qualifies as business income eligible for deduction.
However, the learned CIT(A) dismissed the contention of the assessee by holding that interest income earned by cooperative society on account of term deposit is not eligible for deduction under section 80P(2)(i)(a) of the Act. Further, as per section 80P(2)(d) of the Act, only the interest or dividend income earned from the investment with another cooperative society is allowable for deduction. The cooperative bank is outside the scope of the cooperative society. As the assessee has earned interest income on term deposit with cooperative bank and not from cooperative society, hence the assessee is also not eligible for deduction under section 80P(2)(d) of the Act. The learned CIT(A) in holding so made reference to various case laws including the judgment of Hon’ble Karnataka High Court in the case of M/s Totagars Cooperative sales society reported in 395 ITR 611 and judgment of Hon’ble Gujarat High Court in the case of SBI vs. CIT reported in 389 ITR 578.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before the Tribunal.
The learned AR before me submitted that the interest on the deposits from co-operative society is eligible for deduction. Similarly, the interest earned on the compulsory deposits should also be allowed. Alternatively, the ld. AR sought deduction of the expenses against the impugned interest income under section 57 of the Act.
On the contrary, the learned DR vehemently supported the order of the lower authorities.
I have heard the rival contentions of both the parties and perused the materials available on record. Admittedly the assessee is a consumer cooperative society and supplying academic books, stationery and providing xerox facility etc to the students of SDM group of institutions and as per the byelaws of the assessee, the students are members of the assessee cooperative society. The activity of the assessee is not covered by the business activities specified under section 80P(2)(a) or 80P(2)(b) or 80P(2)(e) or 80P(2)(f) of the Act. Thus, in my considered opinion the appellant assessee can to claim the benefit of deduction specified under section 80P(2)(c) and 80P(2)(d) of the Act only which reads as under: (2) The sums referred to in sub-section (1) shall be the following, namely :— *********** (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 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; (d) in respect of any income by way of interest or dividends derived by the co- operative society from its investments with any other co-operative society, the whole of such income; 11.1 As per sub clause (i) of section 80P(2)(c) of the Act, the appellant assessee being a consumer cooperative is eligible to claim deduction up to Rs. 1 lakh which has already been allowed and there is no dispute in this regard.
Page 5 of 7 11.2 Now coming to availability of benefit to the assessee under section 80P(2)(d) of the Act which requires investment should be made with another cooperative societies then the whole of the interest or dividend accrued from such investment will be allowed as deduction. In the case on hand, the appellant assessee has earned an interest income of Rs. 3,49,500/- from investment with SCDCC Bank which is a cooperative bank. Hence, a question arises whether the income by way interest derived from investment with cooperative bank shall be eligible for deduction under section 80P(2)(d) of the Act. This question has been analyzed by the Hon’ble Jurisdictional High Court of Karnataka in case of PCIT vs. Totagars Co-operative Sales Society Ltd reported in 395 ITR 611 and it was held that the interest income derived from deposit/investment with cooperative bank is not eligible for deduction under section 80P(2)(d) of the Act. The relevant finding of the Hon’ble Court reads as under: 13. What Section 80P(2)(d) of the Act, which was though not specifically argued and canvassed before the Hon'ble Supreme Court, envisages is that such interest or dividend earned by an assessee co-operative society should be out of the investments with any other co-operative society. The words 'Co- operative Banks' are missing in clause (d) of subsection (2) of Section 80P of the Act. Even though a co- operative bank may have the corporate body or skeleton of a co-operative society but its business is entirely different and that is the banking business, which is governed and regulated by the provisions of the Banking Regulation Act, 1949. Only the Primary Agricultural Credit Societies with their limited work of providing credit facility to its members continued to be governed by the ambit and scope of deduction under Section 80P of the Act.
The banking business, even though run by a Co-operative bank is sought to be excluded from the beneficial provisions of exemption or deduction under Section 80P of the Act. The purpose of bringing on the statute book sub- section (4) in Section 80P of the Act was to exclude the applicability of Section 80P of the Act altogether to any co-operative bank and to exclude the normal banking business income from such exemption/deduction category. The words used in Section 80P(4) are significant. They are: "The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society …..". The words "in relation to" can include within its ambit and scope even the interest income earned by the respondent-assessee, a co-operative Society from a Co-operative Bank. This exclusion by Section .
Page 6 of 7 80P(4) of the Act even though without any amendment in Section 80P(2)(d) of the Act is sufficient to deny the claim of the respondent assessee for deduction under Section 80P(2)(d) of the Act. The only exception is that of a primary agricultural credit society. The depository Kanara District Central Bank Limited in the present case is admittedly not such a primary agricultural credit society.
The amendment of Section 194A(3)(v) of the Act excluding the Co- operative Banks from the definition of "Co- operative Society" by Finance Act, 2015 and requiring them to deduct income tax at source under Section 194A of the Act also makes the legislative intent clear that the Co-operative Banks are not that specie of genus co-operative society, which would be entitled to exemption or deduction under the special provisions of Chapter VIA in the form of Section 80P of the Act.
11.3 In view of the above discussion, I hold that the assessee is not eligible for deduction u/s 80P(2)(d) of the Act on the interest income of Rs. 3,49,500/- derived from investment with SCDCC Bank being a cooperative Bank.
11.4 However, I am conscious to fact that since the above-mentioned income is not eligible under section 80P of the Act, the assessee is entitled to claim deduction of corresponding expenditure incurred for earning such income. Therefore, I direct the AO to allow the assessee’s claim of any corresponding administrative or other expenses incurred to earn the interest income from SCDCC Bank after proper verification as per law. In view of the above detailed discussion, the grounds of appeal of the assessee are hereby partly allowed.