SHARADCHANDRA NAGARI SAHAKARI PATSANSTHA MARYADIT,PUNE vs. ITO WARD 10(1), PUNE

6. The reassessment proceedings initiated against the assessee are bad in law since there is no fresh and tangible material before the AO to reopen the case, no satisfaction has been recorded, copy of the reasons recorded was not shared, and due to divergent views on the issue of deduction u/s 80P2d, no income has escaped the tax as per section 147 in our case. 7 The assessee hereby requests for allowing any other relief as available under the law.

.” Findings & Analysis :

2. We have heard both the parties and perused the records. It is observed from the Assessment Record that Assessee is a Co- operative Credit Society registered under Maharashtra Co-operative Societies Act, 1960. Assessee is engaged in the business of providing credit facilities to its members and accepts deposits from its members. The Assessee filed Return of Income for A.Y.2011-12 declaring total income at Rs.NIL and claiming deduction u/s.80P of the Act, of Rs.35,18,577/-. The Assessing Officer issued notice u/s.148 of the Act, on 27.03.2018. Assessee made elaborate submission in the reassessment proceedings. In para 14.15 of the Assessment Order, the AO held that Assessee should be treated as Co-operative Bank which are not eligible for deduction u/s.80P of the Act. The Paragraph 14.15 of the Assessment Order is reproduced here as under : “14.15 Thus the conditions essential to qualify as a cooperative banks are satisfied by t assessee i.e. (1) the primary object or principal business of which is the transaction of banking business; (2) the paid up share capital and reserves of the assessee are not less than one lakh of rupees; and (3) the bye-laws of which do not permit deposits of any nominal members Therefore, it is clear that assessee society can be treated as a Co-operative Bank and also nature of the activity shows that it has taken the character of the Co-operative banks which are n eligible for deduction u/s 80P by virtue of share capital and surplus reserves and surpluse which are invested in banks other than mentioned in section 80P(2)(d).” 2.1 Therefore, AO held that Assessee is not eligible for deduction u/s.80P of the Act.

3. Aggrieved by the assessment order, assessee filed appeal before the ld.CIT(A). Para 6.8 of the ld.CIT(A)’s order is as under : “6.8 Hence, the income by way of interest earned by deposit or investment does not change its character irrespective of the fact whether such income of interest is earned from a scheduled bank or a co-operative bank and, thus would not be eligible to claim deduction under Section 80P of the Act. Thus, I do not find any infirmity in the decision of the AO and I am not inclined to interfere with the decision of the AO.” 3.1 Thus, the main contention of the Assessing Officer is that Assessee should be treated as a Co-operative Bank, because the paid-up share capital and reserve of the Assessee are not less than One Lakh Rupees. According to Assessing Officer, Assessee’s primary object was profiteering.

3.2 However, the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd., vs. CIT 431 ITR 1 (SC) has observed that the entity which has got banking license issued by Reserve Bank of India can be held as Bank. In this case, it is not the allegation of the Assessing Officer that Assessee has got Banking License issued by Reserve Bank of India. Rather, Assessee is registered as Co-operative Society under the Co-operative Societies Act, therefore, Assessee is Co-operative Credit Society. The income earned by assessee is from its activity of providing credit facility to its members and nominal members. As per Maharashtra Co- operative Societies Act, Nominal Members are also Members.

3.3 It is also mentioned by the Assessing Officer in the assessment order that assessee has earned interest income from Surplus Funds kept with PDCC Bank. Assessing Officer further observed that PDCC i.e.Pune District Central Co-operative Bank is a Bank and hence interest earned from PDCC will not be eligible for deduction u/s.80P of the Act, as per Explanation to Section 80P(4) of the Act.

Quote “7. On a consideration of the rival submissions, we are of the view that for the reasons stated hereinafter, the question of law that arises for consideration before us must be answered against the Revenue and in favour of the assessee. The permissible deduction that is envisaged under Section 80P(2) of the I.T. Act for a Co-operative Society that is assessed to tax under the head of 'Profits and Gains of Business or Profession' is of the whole of the amount of profits and gains of business attributable to any one or more of its activities. Thus, all amounts as can be attributable to the conduct of the specified businesses by a Co-operative Society will be eligible for the deduction envisaged under the statutory provision. The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns interest on such deposits, such interest would cease to form part of its profits and gains attributable to its business of providing credit facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount [the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co- operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members. Under those circumstances, if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains that it made from its principal activity of providing credit facilities to its members. The nature and character of the principal income [profits earned by the assessee from its lending activity] does not change merely because the assessee acted in a prudent manner by depositing that income in a bank, instead of keeping it in hand. The provisions of the I.T. Act cannot be seen as intended to discourage prudent financial conduct on the part of an assessee.” Unquote 6.1 Thus, Hon’ble Kerala High Court has held that the character of income does not change. The Hon’ble Kerala High Court held that interest earned from deposits in permitted banks will be eligible for deduction u/s.80P of the Act. The Hon’ble Kerala High Court’s decision is dated 04.09.2024 means, after the decision of Hon’ble Supreme Court in the case of Totagar’s Co.operative Sales Society Ltd.

6.2 Accordingly, respectfully following the judicial precedents, we hold that assessee is eligible for deduction u/s.80P of the Act, on the interest income earned by the assessee from Co-operative Banks and Nationalized Banks.

5.3 Respectfully following the judicial precedent, we direct the Assessing Officer to allow deduction u/sec.80P(2)(a)(i) of the Act on the interest earned. Accordingly, Grounds of appeal raised by the assessee are allowed.