DEEPALAXMI NAGARI PATSANSTHA MARYADIT,SANGAMNAGAR vs. ITO WARD 2, AHMEDNAGAR

Accordingly statutory notice u/s 143(2) of the Act was issued. Subsequently notice u/s 142(1) along with a questionnaire was issued to the assessee in response to which the assessee filed the requisite details from time to time.

During the course of assessment proceedings the Assessing Officer observed from the information submitted by the assessee that the assessee has earned interest income of Rs.62,26,079/- (interest on fixed deposits Rs.61,83,470/-, ADCC dividend of Rs.450, other income of Rs.4,060/-, small savings commission of Rs.21,640/-, bank commission of Rs.11,659/- and form fee of Rs.4,800/-) from various Co-operative banks/commercial banks and other financial institutions and has claimed the entire interest income as deduction u/s 80P(2)(a)(i)/80P(2)(c) of the Act. The Assessing Officer noted that the aforesaid deposits/investments in co- operative banks / commercial banks are out of the surplus funds of the society. He was of the opinion that any interest income arising from deposit / investment of funds in banks is in the nature of income from other sources taxable u/s 56 of the Act and cannot be categorized as the income from the 'profits and gains of business' of the assessee. Since the deduction u/s 80P is available only for the profits and gains of the business of assessee (providing credit facilities to the members), the said deduction is not available to the interest income which is in the nature of ‘other income’ or ‘income from other sources’. Rejecting the various explanations given by the assessee and relying on the decision of Hon’ble Supreme Taxmann 282 (SC) and various other decisions the Assessing Officer rejected the claim of deduction u/s 80P(2) of the Act in respect of interest income of Rs.61,83,470/-.

The Assessing Officer also disallowed the deduction claimed u/s 80P(2)(c) of the Act amounting to Rs.42,609/- being ADCC dividend of Rs.450/-, other income of Rs.4,060/-, small savings commission of Rs.21,640/-, bank commission of Rs.11,659/- and form fee of Rs.4,800/-. However, the assessee is not in appeal on this issue, therefore, we are not concerned with the same.

In appeal the Ld. CIT(A) / NFAC upheld the disallowance of Rs.61,83,470/- made by the Assessing Officer rejecting the claim of deduction u/s 80P(1)(a)(i).

Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: 1. The ld CIT-A (NFAC) erred in denying claim for deduction u/s 80P(2)(a)(i) of Rs.61,83,470/- (CIT-A has wrongly considered the amount as Rs.88,93,220/-) in respect of interest income from Deposits held with Cooperative Banks.

1 The ld. CTT-A (NFAC) failed to appreciate that such interest income from its investment in deposits with co-operative banks which was operational income and not taxable as "Other Income" u/s 56 of the ITA.

2 The ld. CIT-A(NFAC) failed to appreciate that such interest income was attributable to the carrying on of business specified in Sec 80P(2)(a)(i) of the ITA.

The ld. CIT-A(NFAC) failed to deal with appellants specific ground that the interest income of Rs.61,83,470/- earned from Co-operative banks was eligible for deduction u/s 80P (2) (d) of the ITA.

The ld. CIT-A(NFAC) failed to deal with appellants specific ground that they be granted proportionate interest expenditure attributable to the interest income of Rs.61,83,470/- earned on deposits with cooperative banks.

The appellant prays leave to adduce such further evidence to substantiate the case as and when the occasion demands.

The appellant craves leave to add/amend/modify/delete all/any of the grounds of appeal.

The Ld. Counsel for the assessee at the outset relying on a series of decisions submitted that the issue stands decided in favour of the assessee by the decisions of the Co-ordinate Benches of the Tribunal according to which interest income received from the cooperative banks is allowed as deduction u/s 80P(2)(a)(i) of the Act. For the above proposition, he relied on the following decisions:

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC. 10. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case, relying on the decision of Hon’ble Supreme Court in the case of Totgars Cooperative Sale Society Ltd. Vs. ITO and various other decisions, rejected the claim of deduction u/s 80P(2)(a)(i) of the Act in respect of interest income of Rs.61,83,470/- received by the assessee from various cooperative banks. We find the Ld. CIT(A) / NFAC sustained the disallowance made by the Assessing Officer. It is the submission of the Ld. Counsel for the assessee that in view of various decisions filed in the paper book, the interest income received by the assessee from various cooperative banks is allowable as deduction u/s 80P(2)(a)(i) of the Act.

We find some force in the above arguments of the Ld. Counsel for the assessee. We find the issue of allowability of deduction u/s 80P(2)(a)(i) in respect of income from cooperative banks and cooperative societies stands decided in favour of the assessee by various decisions.

We find the Hon’ble Supreme Court in the case of Mavilayi Service Co- operative Bank Ltd. Vs. CIT reported in (2021) 431 ITR 1 (SC) has held that where the assessee was registered as primary agricultural credit society, it was entitled to benefit of deduction under section 80P(2)(a)(i) notwithstanding that it was also giving loans to its members which were not related to agriculture. The relevant observations of Hon’ble Supreme Court read as under: “45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co- operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.

It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 referred to section 80P of the IT Act and then held:

Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows: