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Facts
The assessee, a credit society, declared NIL income after claiming deductions under Section 80P. The AO disallowed deductions for interest income earned from deposits with cooperative banks and other banks, holding it was not derived from the primary business activity. The assessee appealed the disallowance.
Held
The Tribunal held that interest income earned from deposits with another cooperative society is eligible for deduction under Section 80P(2)(d). However, interest income from deposits with commercial banks and cooperative banks (other than the primary one) is not eligible for deduction under Section 80P but is taxable as 'Income from Other Sources' with a deduction for expenses under Section 57.
Key Issues
Whether interest income earned by a cooperative society from deposits with other cooperative societies and commercial banks is eligible for deduction under Section 80P of the Income Tax Act.
Sections Cited
80P, 143(2), 80P(2)(d), 80P(2)(c), 80P(2)(a)(i), 57, 56
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Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
These appeals filed by the assessee are against the order passed by the NFAC, Delhi dated 19/09/2024 & 26/09/2024 for the assessment years 2018-19 and 2020-21.
The relevant facts are that the assessee, a credit society, is engaged in accepting deposit from and providing credit facilities to members. The assessee for the year under consideration declared total income at Rs. NIL after claiming deduction of Rs. 43,87,523/- under section 80P of the Act. The case of the assessee was selected for scrutiny assessment by issuing notice under section 143(2) of the Act.
3. The AO during the assessment proceedings found that the assessee has earned interest income of Rs. 1,87,46,364/- from the loan or credit facilities provided to the member. Likewise, the assessee earned interest income of Rs. 20,39,365/- from investments made with South Canara District Central Cooperative Bank and others. The impugned interest income of Rs. 20,39,365/- was claimed as deduction under section 80P(2)(d) and 80P(2)(c) of the Act amounting to Rs. 19,91,495/- and Rs. 47,870/- respectively.
The AO disallowed the claim of deduction for Rs. 20,39,365/- by holding that the impugned income earned from deposit with cooperative bank and other bank, hence the same was not derived from the activity of the providing credit facility to members and lack the principle of mutuality.
The aggrieved assessee preferred an appeal before the learned CIT(A).
The assessee before the learned CIT(A) submitted that interest income of Rs. 20,39,365/- was earned in the ordinary course of carrying on banking business with the members and providing credit facilities to the members and the same qualifies for deduction under section 80P(2)(a)(i) of the Act as held by Hon’ble High Court of Andhra Pradesh . and Telangana in the case of Vavveru Co-operative Rural Bank Ltd vs. CCIT in W.P. No. 12727 of 2016, reported in 88 taxmann.com 728. The assessee also placed reliance on the judgment of Hon’ble Jurisdictional High Court of Karnataka in the case of Tumkur Merchant Souharda Credit Cooperative Ltd vs. ITO reported in 55 taxmann.com 447.
However, the learned CIT(A) found that the assessee in the return of income itself declared impugned interest income of Rs. 20,39,365/- under the head income from other sources as it was earned from investment or deposit with cooperative bank/other banks. However, the same was claimed as deduction under section 80P(2)(c) and (2)(d) of the Act. The learned CIT(A) noted that the questioned whether the incomes earned from deposit or investment of surplus funds with banks or cooperative banks are eligible for deduction under section 80P of the Act or not has been examined by Hon’ble Jurisdictional High Court in the case of PCIT vs. Totagars Cooperative Sales Society Ltd reported in 83 taxmann.com 140 and it was held that such income is not eligible for deduction. Hence, the learned CIT(A) following the ratio of Hon’ble High Court in the case of PCIT vs. Totagars Cooperative Sales Society Ltd (supra) confirmed the disallowances made by the AO.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before the Tribunal.
The learned AR before me contended that the as per the provisions of Karnataka state cooperative Act the assessee is required to maintain certain amount of deposits and therefore, the interest earned thereon should be allowed as deduction. Similarly, the amount of . interest received from co-operative society should be allowed as deduction under section (2)(d) of the Act. Without prejudice to the above, the learned AR also submitted that if the impugned interest income is classified as income under the head other sources, then the assessee should be allowed the benefit of deduction under section 57 of the Act as per the provisions of law.
Per contra, the learned DR before me vehemently supported the order of the authorities below.
I have heard the rival contentions of both the parties and perused the materials on record. From the preceding discussion, I note that the assessee is a cooperative society carrying on banking business for the members, i.e. accepting deposits from the members and providing credit facilities to the members. The assessee from the activity of accepting deposit or providing credit facilities from or to the members earned income of Rs. 23,48,158/- only. The assessee further earned interest income of Rs. 20,39,365/- from the various types of deposits (i.e. FDR, SB, Security deposits etc) with cooperative society, cooperative bank and with other banks. The entire income was claimed as deduction under section 80P(2)(a)(i), 80P(2)(c) and 80P(2)(d) of the Act.
11.1 The revenue authorities disallowed the assessee’s claim of deduction with respect to interest income of Rs. 20,39,365/- by holding that income earned from deposit of idle funds, not immediately required for business i.e. providing credit facilities to the members is not eligible for deduction under section 80P(2)(a)(i) of the Act. In holding so, the revenue authorities followed the ratio laid by the Hon’ble Karnataka High .
Court in the case of PCIT vs. Totagars Cooperative Sales Society Ltd (supra) which intern followed the view taken by the Hon’ble Supreme Court in case of Totagars Cooperative Sales Society Ltd vs. ITO reported in 322 ITR 283. From the order of the authorities below, I find that the interest income of Rs. 20,39,365/- was accrued/earned from the following sources: 1. From Vyavasaya Seva Sahkari Sangha Ltd. a. FD Interest Rs. 16,13,043/- b. SB Interest Rs. 22,589/- Total Rs. 16,35,612/-
2. From South Canara District Central Bank (SCDCC Bank) a. FD Interest Rs. 3,36,373/- b. SB Interest Rs. 19,414/- c. CCL Interest Rs. 96/- Total Rs. 3,55,883/-
SB Interest from other banks a. IDBI Bank Rs. 36,198/- b. Corporation Bank Rs. 11,672/- Total Rs. 47,870/- 11.2 The provision of section 80P(2)(a)(i) of the Act provides that the gross total income of a cooperative society includes any income referred under subsection (2) of section 80P of the Act, such sum shall be allowed as deduction while computing total income. The clause (d) of subsection (2) specifies the income being interest or dividend earned by cooperative society on investment with any other cooperative society .
shall be allowed as deduction. I note that the assessee has interest income of Rs. 16,35,612/- from fixed deposits and saving account deposits with “Vyavasaya Seva Sahakari Sangha Ltd. which is indeed a registered cooperative society. Therefore, the interest income earned by the assessee from FDs and SB account with this cooperative society qualifies for deduction under section 80P(2)(d).
11.3 The Revenue’s reliance on the decision in Totagars Cooperative Sales Society Ltd. case is misplaced to this extent, as the Hon’ble Courts have consistently held that interest income derived from investments with another cooperative society falls within the purview of section 80P(2)(d), and is eligible for deduction. Accordingly, I hold that the assessee is entitled to deduction of ₹16,35,612/- under section 80P(2)(d) of the Act.
11.4 Now coming to the balance interest income of Rs. 4,03,753/- which were earned from fixed deposits and savings bank accounts with SCDCC Bank, a cooperative bank and with IDBI Bank and Corporation Bank, which are cooperative and scheduled commercial banks. In this context, I find these incomes are neither from the business activity of providing credit facility to member nor earned from investment with other cooperative society. Therefore in line with the jurisdictional High Court decision in the case of PCIT v. Totagars Cooperative Sales Society Ltd. (83 taxmann.com 140) and the Hon’ble Supreme Court decision in Totagars Co-op. Sales Society Ltd. v. ITO (322 ITR 283), interest income earned by a cooperative society from investments made out of surplus funds with cooperative banks or commercial banks is not eligible for deduction under section 80P(2)(a)(i) or section 80P(2)(d) of the Act, as . such income is not attributable to the business of providing credit facilities to its members. Accordingly, I uphold the denial of deduction claimed in respect of ₹3,55,883/- and ₹47,870/- only.
11.5 However, since the above-mentioned income is not eligible under section 80P of the Act and has been rightly assessed under the head ‘Income from Other Sources’, the assessee is entitled to claim deduction of expenditure incurred for earning such income as per section 57 of the Act. 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 and scheduled banks, in accordance with the provisions of section 56 and 57 of the Act, after proper verification as per law. In view of the above detailed discussion, the grounds of appeal of the assessee are hereby partly allowed.
In the result, the appeal of the assessee is hereby partly allowed. an appeal by the assessee for A.Y. 2020-21
At the outset, I note that the issues raised by the assessee in the captioned appeal for the AY 2020-21 is identical to the issue raised by the assessee in 2018- 19. Therefore, the findings given in shall also be applicable for the assessment years 2020-21. The appeal of the assessee for the A.Y. 2018-19 has been decided by me vide paragraph No. 11of this order partly in favour of the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment . year 2018-19 shall also be applied for the assessment year 2020-21. Hence, the ground of appeal filed by the assessee is hereby partly allowed.
In the result, the appeal of the assessee is hereby partly allowed.
In the combined result, both the appeals of the assessee are hereby partly allowed.