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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI C.M.GARG & SHRI O.P.MEENA
आदेश /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. This appeal filed by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)-1, Surat(in short “the CIT (A)”) dated 16.07.2015 pertaining to Assessment Year 2012-13, which in turn has arisen from the order passed by the Deputy Commissioner of Income Tax, Circle-2(2), Surat(in short
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 2 of 12 “the AO”) dated 02.02.2015 under section 143(3) of Income Tax Act, 1961 (in short ‘the Act’).
Ground No.I (1) states that on the facts and circumstances of the case and as per law, the learned Commissioner of Income-tax (Appeals) erred in holding that the appellant co-operative credit society is not entitled to deduction u/s.80P(2)(a)(i) of the Act.
Briefly stated facts of the case are that the assessee is a co- operative society engaged in the business of providing credit facility to its members. The perusal of the Profit and Loss Account reflected that the assessee has credited interest income of Rs.56,01,880/- which inter-alia included interest of Rs.15,00,820/- from State Bank of India (SBI), Ring Road, Surat and Rs.3,78,230/- from SBI Begumpura, Surat and Rs.2153 as interest on Income Tax Refund. The AO was of the view that interest income received from SBI and interest on Income Tax Refund aggregating to Rs.18,79,050/- is not attributable to the activities of the bank or providing credit facility to the members, hence, the same are not allowed for deduction u/s.80P(2) of the Act as the deduction is restricted to the business income of the Co-operative
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 3 of 12 Society attributable to the activities of the banking or providing credit facility to the members. The contention of the assessee that fixed deposits are placed with SBI as per by-laws of the society is not acceptable as a surplus funds are not utilised for providing credit facilities and surplus fund placed in fixed deposit for earning interest not business income. Further, the assessee’s contention that such deposits are accounted for under the head Cash and Bank, and not under the head investment does not make any difference as fixed deposits is clearly an investment and interest is earned on it income from other source. The AO further observed that deduction will be allowable only when there is a direct or proximate connection with nexus to the income and the business carried on by the society. The AO further placed reliance on the decision of Hon'ble Supreme Court in the case of Totgars CSS Ltd. wherein it was held that interest income earned by investing funds, which were not immediately required for business purpose cannot fall within the meaning of the expression profit and gains of the business. Such interest income cannot be said also to be attributable to the activities of the society, namely carrying on the business of providing credit facilities to its member or marketing
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 4 of 12 of the agriculture produce of its members. In view of these facts, the AO disallowed interest income of Rs.18,79,050/- u/s.80(P)(2) of the Act.
Being aggrieved, the assessee carried the matter before the CIT(A) wherein the CIT(A) observed that the appellant has tried to distinguish the facts of Totgars CSS Ltd. [2010] 188 taxmann 282 (SC) by saying that the said society was doing business of providing credit facilities to its members and to market their agricultural produce and society was not doing purely banking business, hence, as per AR the ratio of said decision is of the Act applicable to the assessee who is purely engaged in the banking business. However, the CIT(A) observed that the finding of the Hon'ble Supreme Court is very much crystal clear and as clinched the issue under consideration. It is held that such interest income earned from funds invested in bank FDR’s is taxable as income from other source u/s.56 of the Act and not u/s.28 of the Act. Consequently, the assessee society would not be entitled for deduction u/s.80P(2)(a)(i) of the Act. It was also observed that after the decision of Totgars CSS Ltd. case the ITAT, Cochin Bench in similar issue in the case of Mutholy Services Co-operative Bank Ltd. vs.
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 5 of 12 ITO (ITA NO.11/Coch/2014) held that interest income of fixed deposit made by the assessee in a Co-operative Bank and the interest income earned on the surplus fund of the assessee cannot be considered as business income so as to be entitled for deduction u/s.80P(2)(a)(i) of the Act. The CIT(A) has also distinguished the various case laws relied by the appellant on the ground that these cases were pertaining to societies engaged in the banking activity and not relating to Co-operative Society engaged in the business of providing credit facilities.
Being aggrieved, the assessee filed this appeal before the Tribunal. The ld.Counsel for the assessee submitted that the assessee society is carrying on business from providing credit facilities to its members. The society is governed by the Gujarat Co-operative Societies Act and the by-laws of the society as per the Gujarat Co-operative Society Act. The AO has disallowed interest income of FD’s with nationalized bank of Rs.18,79,050/-. It was submitted that the maintenance of the deposit with nationalized bank is not an investment for getting interest, but it is completion as per the by-laws of the society as approved by the Registrar of Co-operatives. Hence, such interest on such deposit
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 6 of 12 are part and parcel of the activities of the society, namely, carrying on the business of providing credit facilities to its members and same shall be falling within the ambit of section 80P(2)(a)(i) of the Act. The decision in the case of Totgars CSS Ltd. (supra) is not applicable in our case, because the Co-operative Society was engaged in the business of marketing of agricultural produce of its members, whereas the society is engaged in providing credit facilities to its members. The ld.Counsel referred PB, Page 33 by-laws of the society according to which a society may invest or deposit its funds with the SBI. Accordingly, the society has parked its funds in accordance with section 71 of the Gujarat Co-operative Societies Act 1961 as well as in accordance with Clause 7 of the by-laws of the society, hence, interest earned from SBI would not result in denial of relief u/s.80P(2)(a)(i) of the Act on the ground that such income constitute income from other sources and not part of the activity of the society. The ld.Counsel further placed reliance in the case of Tumkur Mercants Sogharada Credit Co-operative Ltd. 55 taxmann.com 447 (KARN) and Andhra Pradesh State Co-operative Bank Ltd. [2011] 336 ITR 516 (AP), Surat Vankar Sahkari Sangh Ltd. vs. ACIT [2016] 72 taxmann.com
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 7 of 12 169 (Gujarat), Surat District Co-operative Bank Ltd. 78 TTJ 1 (Ahd) and CIT vs. The Baroda Peoples Co-operative Bank Ltd. [2006] 280 ITR 282 (Guj) in support of his contention wherein the decision of Totgars CSS Ltd. (supra) was distinguished it was submitted that decision of Hon'ble Supreme Court in the case of Totgars CSS Ltd. is distinguishable as in the said case the assessee was Co-operative 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 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 to the activity mentioned in the section 80P(2)(a)(i) of the Act or u/s.80P(2)(a)(iii) of the Act. Therefore, in the facts of the said case, the Apex Court held that the AO was right in taxing the interest income indicated above u/s.56 of the Act. Further, they made it clear that they are
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 8 of 12 confining the said judgment to the facts of that case. Therefore, it is clear that Hon'ble Supreme Court was not laying down any law.
On the other hand, the ld.DR has relied on the orders of the CIT(A).
We have heard the rival submissions and perused the material on record. We find that the assessee is a Co-operative Society registered under Gujarat Co-operative Societies Act, 1961 with the main object of providing credit to its members out of funds collected from members. When the surplus amount is available with the society, these funds are parked in accordance with section 71 of the Gujarat Co-operative Societies Act 1961 read with Clause 7 of the by-laws of the society with the SBI on which the assessee has earned an interest amount of Rs.18,79,050/-. Thus, the assessee is a Co-operative Society i.e. providing credit facilities to its members. According to Revenue, the interest earned on FD’s from SBI are not covered by the activity of providing credit facilities to its members, hence, not eligible for deduction u/s.80P(2)(a)(i) of the Act, in view of the decision of Hon'ble Supreme Court in the case Totgars CCS Ltd. (supra).
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 9 of 12 However, the said decision in the case of Totgars CCS Ltd.(supra) is not applicable as admittedly in that case the investment was made out of retained amounts on marketing of agricultural produce of its members whereas in the present case of the assessee it did not carried out any activity except in providing credit facility to its members and that the funds were of operational funds. Therefore, we are of the considered opinion that the judgment of Apex Court in Totgars CCS Ltd.is not applicable in respect of the Co-operative Society whose business is banking. The ld.Counsel has placed reliance on the decision of Hon'ble Gujarat High Court in the case of Surat Vankar Sahakari Sangh Ltd. vs. ACIT (supra) wherein it was held that the assessee Co-operative Society was eligible for deduction u/s.80P(2)(d) in repsect of gross profit received from Co-operative Bank without adjusting interest paid to said bank. The ld.Counsel has placed reliance in the case of CIT vs Andhra Pradesh State Co-operative Bank Ltd. [2011] 336 ITR 516 (AP) wherein after considering the decision of Totgars CCS Ltd.(supra) it was observed that the deposits of the surplus is in other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 10 of 12 statitute the income is certainly attributable to the business of banking. It was further submitted that if section 80P(2)(a) of the Act is given a restrictive meaning as including the interest earned only on the statutory deposits made by a Co-operative Society, it would amount to supplying a casus-omissus and has to be avoided by the court. Investment of funds by banks including the non- reserve is part of banking activities since no bank would like its reserve funds to remain ideal and not earn any interest. Therefore, the interest earned on such deposits is directly attributable to the business of banking and therefore exemption u/s.80P(2)(a)(i) of the Act. Similarly, the Hon'ble Gujarat High Court in the case of CIT vs. Baroda Peoples Co-operative Bank Ltd.(supra) has held that on a plain reading of the Gujarat Co- operative Societies Act 1961, the claim which unfolds is that in the case of a society carrying on a business of banking, it would be permissible to make investment or deposits in any of the specified investments as provided in section 71 of the Gujarat Co-operative Societies Act including in any of the modes specified in section 20 of Indian Trust Act 1882, without there being any upper limit as to the amount that can be invested, once the statutory requirement
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 11 of 12 of reserve fund as stipulated in section 67(2) of the Gujarat Co- operative Societies Act is satisfied. Therefore, it was held that the assessee would be eligible for deduction in terms of section 80P(2)(a)(i) of the Act.
In the light of above facts and circumstances, we are of the view that interest earned on FD’s placed with SBI is eligible for deduction u/s.80P(2)(a)(i) of the Act, accordingly we direct the AO to allow the same by respectfully following the aforesaid decision of various Hon'ble High Courts and various Co-ordinate Benches, accordingly Ground No.I (1) of the appeal is allowed.
Ground No.I (2) states that the assessee is also entitled to deduction u/s.80P(2)(d) of the Act in respect of other Co-operative Scoieties.
The ld.Counsel for the assessee has drawn our attention that from Form No.35 of appeal in ground no.8 wherein the assessee has raised a ground of deduction u/s.80P(2)(d) of the Act. However, the ld.CIT(A) has not dealt with the said ground in his appellate order. Therefore, this issue may be set-aside to the file
Begumpura Nagrik Dhiran Sahakari Mandli Ltd Vs. DCIT, Cir.-2(2),Surat/ITA No.2799/AHD/2015/AY:2012-13 Page 12 of 12 of the CIT(A) for adjudicating the said ground has not been dealt with by the CIT(A) while passing the appellate order.
On the other hand, the ld.DR has no objection to the contention of the ld.Counsel.
We have heard the parties and found that these ground of deduction u/s.80P(2)(d) of the Act was duly raised by the assessee in its appeal before ld.CIT(A) by way of ground no.8 as mentioned in Form No.35 placed before us. We, therefore set-aside this issue to the file of the ld.CIT(A) to adjudicate this ground of appeal, accordingly this ground of appeal is allowed for statistical purpose.
In the result, appeal of the assessee is allowed.
The order pronounced in the open Court on 04-10-2018.
Sd/- Sd/- (सी.एम.गग� /C.M. GARG) (ओ.पी.मीना/O.P.MEENA) �याियकसद�यतथा/JUDICIAL MEMBER लेखासद�यकेसम� /ACCOUNTANT MEMBER सुरत/ Surat, �दनांक Dated: 4th October, 2018/ S.Gangadhara Rao, Sr.PS Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat