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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Shri Mahavir Prasad & Shri Amarjit Singh
आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This assessee’s appeal for A.Y. 2013-14, arises from order of the CIT(A)- 3, Vadodara dated 12-08-2016, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”. 2. The assessee has raised following grounds of appeal:- “1. The learned Commissioner of Income Tax (Appeals) - 3, Vadodara ["the CIT(A)"] erred in fact and in law in confirming the action of Income Tax Officer, Ward 3(1)(1), Baroda ["the AO"] in not allowing the deduction u/s 80P(2)(a)(i) of Rs. 1,62,990/- claimed by the appellant. 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO holding that the interest earned by the appellant from deposits made with nationalized banks is assessable u/s 56 and not eligible for deduction u/s.80P(2)(a)(i) as it is not related to the business of providing credit facilities to the members of the appellant.
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The learned CIT(A) erred in fact and in law in ignoring the provisions of section 80P(2)(a)(i) with clearly provides that the deduction is available to a Co Operative society which is engaged in carrying on the business of banking or providing credit facilities to its members. 4. The learned CIT(A) erred in fact and in law in confirming the action of AO in charging interest u/s. 234B of the Act. 5. The learned CIT(A) erred in fact and in law in confirming the action of the AO in initiating penalty proceeding u/s 271(1)(c) of the Income Tax Act, 1961 ("the Act).” In this case, return of income declaring income of Rs. nil was filed on 13th 3. August, 2013. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) on 2nd September, 2001. During the course of assessment proceedings, the assessing officer noticed that asessee has earned interest income to the amount of Rs. 19,34,862/- from nationalized bank and co-operative bank i.e. Rs. 6,43,096/- nationalized banks and Rs. 12,91,766/- from co- operative bank. The assessee has claimed deduction u/s. 80P of the act of Rs. 1,62,993/-. On scrutiny the assessing officer observed that assessee has not derived interest income from its activities of providing credit facilities to its member or from its investment in any other co-operative society, therefore, interest income earned from banks amounting to Rs. 19,34,862/- was assessed under the head income from other sources on which deduction u/s. 80P(2) of the act was also denied.
Aggrieved assessee preferred appeal before the ld. CIT(A). The ld. CIT(A) sustained the disallowance made by the assessing officer by observing as under:- “5. I have considered the facts of the case, submissions of the appellant and the AO's observations. The entire submission dated 11.08.2016 of the appellant as reproduced in earlier paragraph of this appeal order cannot be accepted in view of recent judgment of Hon'ble High Court of Gujarat as given in the case of State Bank of India (SBI) vs. Commissioner of Income tax (2016) 72 Taxmann.com 64. In this referred case, the assessee was a Co-Operative Society registered with the object of accepting deposits from salaried persons of State Bank of India, Gujarat region with a view to encourage thrift and providing credit facility to them. This assessee for AY 2009-10 had declared Nil income after claiming deduction u/s 80P. The AO allowed this claim of deduction of the appellant. Subsequently, the Commissioner invoked powers u/s 263 of the Act on the ground that interest income from the State Bank of India was not exempt u/s 80P(2)(d). On appeal, the tribunal held that interest income earned on extending credit facilities by the assesse to its members would be business income as there existed nexus between the income and the business of the society, which was extending credit facilities to its members. The Tribunal further held that however it could not be said that there was such
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nexus between the interest earned on deposits made in State Bank of India and therefore such interest would not be exempt u/s 80P. The assessee filed an appeal to the High Court of Gujarat against the order of the Tribunal. The question arose before the Hon'ble High Court of Gujarat as to whether in the case of Society engaged in providing credit facilities to its members, it is only interest derived from credit provided to its members which is deductible u/s 80P(2)(a)(i) and interest derived by depositing surplus funds with the bank not being attributable to business carried on by the society, cannot be deducted u/s 80P(2)(a)(i). The answer of the Hon'ble High Court of Gujarat was 'yes'. In other words, as per the Hon'ble High Court of Gujarat interest derived by the Co-Operative society by depositing surplus fund with the bank not being attributable to business carried on by the society cannot be deducted u/s 80P. 5.1 The Hon'ble High Court of Gujarat in the case of SBI vs. CIT as referred to in just earlier paragraph of this appeal order has discussed the decision of Hon'ble Supreme Court as given in the case of Totgar's Co-Operative sale society vs. ITO (2010) 233 ITR 383 and in the light of observation of Hon'ble Supreme Court it has held that in the case of society engaged in providing credit facilities to its members, income from investments made in the banks does not fall in any of the categories mentioned u/s 80P(2)(a). The Hon'ble High Court of Gujarat has held that in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in bainks does not fall within any of the categories mentioned in section 80P(2)(a). As per the Hon'ble High Court of Gujarat however, section 80P(2.)(d) specifically exempts interest earned from funds invested in co-operative societies. As per the Hon'ble High Court of Gujarat therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d). As per the Hon'ble High Court of Gujarat however, interest earned from investment made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d). 5.2 In view of decision of Hon'ble High Court of Gujarat as given in the case of State Bank of India vs. Commissioner of Income Tax, 72 Taxmann.com 64, it is held that the AO has correctly made disallowance of claim of deduction of Rs.1,62,993/- of the appellant as made u/s 80P(2)(a)(i) of the IT Act by treating the same as part of interest earned from other sources on the ground that this amount of interest income as earned on deposits with Banks is not the business income which is eligible; for deduction u/s SOP and therefore such disallowance is hereby confirmed. Thus, the grounds of appeal of the appellant as reproduced in initial paragraph of this appeal order are dismissed.” 5. After considering the above facts we observe that the ld. CIT(A) has correctly decided the issue after taking into consideration the above referred judicial pronouncements. However, we observe that on identical issues in respect of pro rata expenses for earning interest income, the co-ordinate Bench of the ITAT in the case of Dhan Laxmi Credit Co-operative Society vide ITA No. 2426/Ahd/2013 dated 24th Jan, 2017 held as under:- “10. We further observe that during the course of hearing before us, Id. AR accepted that assessee is not eligible to claim deduction u/s 80P(2)(a)(i) of the Act on the interest earned on surplus deposits/investments held with Scheduled/Nationalized bank but urged for allowing deduction on pro rata expenses incurred for earning the interest income and also for allowing statutory deduction of Rs.50,000/- u/s 80P(2)(c)(ii) of the Act. Ld. AR
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also submitted that a total expenses incurred for the year stood at Rs.28,60,298/- and pro rata expenses for earning interest income of Rs.8,55,854/- as against total interest income of Rs.42,39,515/- will be calculated at Rs.5,77,423/-. 11. We observe that Id. AR has referred to the decision of the Co-ordinate Bench in the case of Kherava Co-op. Credit Society Ltd. vs.lTO, Ward-4, Mehsana in ITA No.2704/Ahd/2015 for Asst. Year 2012-13 wherein similar issue of allowing pro rata expenses and allowing statutory deduction of Rs.50,000/- u/s 80P(2)©(ii) of the Act has been adjudicated by the Co-ordinate Bench by observing as under :- 10. From going through the alternate submissions made by the assessee we find that major portion of interest income is from government securities and are not in the nature of short term deposits. Therefore, the facts of the case are clearly distinguishable from the facts discussed in the case of Totagars Co-op. Sale Society Ltd. vs. ITO (supra) and that of co-ordinate bench in the case of Jafari Momin Vikas Co-op. Credit Society Ltd. (supra) as well as in the case of Dhanalaxmi Credit Co-op. Society Ltd. vs. ITO (supra). This interest income is on investments not of short term nature except bank interest which too includes interest on Fixed Deposits. In these circumstances, we are of the view that as the assessee suo moto has given a proposition of taxing the interest and commission income on investments to be taxed u/s 56 of the Act and has also shown that proportionate expenses of Rs.3,31,828/- have been incurred to earn the above income and the same has duly been accepted by the assessing authority, so we find it justified that Assessing Officer has rightly taxed the interest income of Rs.2,16,689/- as income from other sources. However, deduction u/s 80P(2)(c) ought to have been allowed to the assessee as section 80P(2)(c) reads as under:- Section 8oP(2)(c) (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;] From going through the above provisions it is very clear that the assessee is eligible for deduction of Rs.50,000/- u/s 80P(2)(a)(i) of the Act and the same should have been allowed by the Assessing authority.. 11. Therefore, in view of our above discussion, we quash the order of Id. CIT(A) enhancing the addition and also partly allow the appeal of assessee and accordingly the addition made by Assessing Officer shall be reduced to Rs.1,68,305/- [Rs.2,16,689/- minus Rs.50,000/- deduction u/s 80P(2)(c)]. 11. Respectfully following the judgment of Hon. Jurisdictional High Court and examining the facts of the case as also in the light of decision of the Co-ordinate Bench discussed in the above paragraphs, we are of following view :- (1) Assessee is not eligible for deduction u/s 80P(2)(a)(i) of the Act on the interest income earned from surplus deposits held with Nationalized/Scheduled banks. (2) Assessee will be eligible to statutory deduction of Rs.50,000/-u/s 80P(2)©(ii) of the Act. (3) Assessee will also be eligible to claim pro rata expenses for earning interest income of Rs.8,55,854/- assessee's claim of pro rata expenses of Rs.5,77,423/- against the interest income of Rs.8,55,854/- after due verification by the learned Assessing Officer. We, therefore, direct the Assessing Officer to verify assessee's claim of pro rata expenses by examining the record to be shown for verification by the assessee. Needless to mention proper opportunity of being heard is to be given to the assessee.
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We order accordingly. The appeal of the assessee is partly allowed for statistical purposes.”
In view of the above mentioned facts and decision of the Co-ordinate Bench of ITAT, we direct the assessing officer to verify assessee’s claim on pro rata expenses by examining/recording and affording adequate opportunity to allow it pro rata expenses for computing the deduction u/s. 80P in respect of interest earned from deposit held with nationalized bank.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 14-02-2018
Sd/- Sd/- (MAHAVIR PRASAD) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 14/02/2018 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद