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Facts
The assessee, a Co-operative Credit Society, earned interest income from fixed deposits. The Assessing Officer disallowed the deduction claimed under Section 80P(2)(a) of the Income Tax Act, holding that the interest was not earned from the primary business activity of providing credit facilities to its members.
Held
The Tribunal held that interest income earned by a Co-operative Society on deposits made out of surplus funds, even with cooperative banks, qualifies for deduction under Section 80P(2)(a)(i) and 80P(2)(d). The decision followed judicial precedents from the High Court and ITAT.
Key Issues
Whether interest income earned by a Co-operative Society on its fixed deposits is eligible for deduction under Section 80P(2)(a) of the Income Tax Act, 1961.
Sections Cited
80P(2)(a), 250, 80P(2)(a)(i), 80P(2)(d), 271(1)(c)
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by the Assessee directed against the order of ld.Commissioner of Income Tax(Appeal)[NFAC], under section 250 of the Income tax Act, 1961 dated 01.05.2024 for A.Y.2017-18. The Assessee has raised the following grounds of appeal :
1. On the facts and circumstances of the case and in law the CIT(A), NFAC erred in confirming the addition made by the AO Rs.22,19,140/- representing the total of cash deposits during demonetization period, rejecting the submissions made by the appellant.”
[A] Submission of ld.AR: 2. Ld.Authorised Representative for the Assessee filed an elaborate paper book which contains synopsis and case laws relied. Ld.AR explained that Assessee has earned interest income from Shri Panchganga Nagari Sahakari Bank Limited. Ld.AR further explained that the AO disallowed assessee’s claim of deduction under section 80P(2)(a) on the ground that the impugned interest is not earned from activity of providing credit facility to its members. Ld.AR further submitted that the AO has erred as the interest income has been earned from the main activity of assessee of providing credit facility to its members. As per Provisions of Maharashtra State Co-operative Societies Act, Assessee has to maintain the fixed deposits with Regional Sahakari Banks. Ld.AR further relied on following case laws : o ITAT Pune Decision in Jankalyan Multistate co-operative Credit Society Limited. o ITAT Pune Decision in Sant Motiram Maharaj Sahakari Pat Sanstha Ltd., o ITAT Pune Decision in Nashik Road Nagari SahkariPatsanstha Limited. [A] Submission of ld.DR: 3. The ld.DR for the Revenue relied on the order of Assessing Officer(AO) and ld.CIT(A).
Findings & Analysis : 4. We have heard both the parties and perused the records. As per the assessment order, Assessee is Co-operative Credit Society registered under Maharashtra Co-operative Societies Act. Ld.AR filed copy of the Registration Certificate dated 19.04.2001 issued by Deputy Registrar, Co-operatives, under Maharashtra Co- operative Societies Act, 1960(Page 24 of the paper book). Assessee claimed deduction under section 80P(2)(a) of the Act. The Assessing Officer disallowed assessee’s claim. The relevant paragraphs of the assessment order are reproduced as under : “4.2 From the perusal of the reply of the assessee society, it is noticed that the said society has received the interest income of Rs.11,42,735/- on account of time deposit with the different banks. These income are not earned from the business of providing the credit facilities to its members and the same are not eligible for claiming the deduction u/s 80P(2)(a)(i) of the Act. The assessee society was required to declare this income under the head “Income from other sources”. In this connection, it may be pointed-out that in case, the interest income of Rs.11,42,738/- on FDRs with the above coop. Bank is reduced from the NP of Rs.1,92,693/-, then it would turn into a loss [A] case i.e. loss of Rs.9,50,042/- (Rs.1,92,693-11,42,735) would be there and in that case no deduction U/s 80P would be allowable, being “No Income, No deduction”. Hence, the deduction claimed u/s 80P(2)(a)(i) on the interest from the fixed deposit with co-op banks amounting Rs.1,92,693/- in the return of income is not allowable to the assessee society.
………………….. 4.11 Further, show cause notice proposing the additions to be made in this case has been issued to the assessee on 25.01.2024 to furnish its reply along with documentary evidences to this office by 01.02.2024. But till date no reply has been furnished by the assessee meaning thereby that the assessee has no objections to the proposed additions to be made in its case In view of the detailed discussion in the preceding paragraphs, it is clear that a co-operative banks are at par with the other Banks carrying out banking activities, who are also having banking licence from the RBI, hence FDRs made with the Coop. Banks out of surplus funds year-after-year cannot be termed as deposits with the coop. Societies. In view of the above facts, the deduction claimed by the assessee u/s 80P(2)(a) of the Act on FDRs with the Coop. Banks at Rs.1,92,693/- does not qualify for deduction U/s 80P(2)(a) of the Act. Accordingly the deduction of Rs.1,92,693/- is hereby disallowed and added back to the income of the assessee. As the assessee has concealed particulars of its income, therefore, penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961 is initiated in this case.”
4.1 Thus, Assessing Officer held that interest earned by assessee is taxable as income from other sources. Aggrieved by assessment order, assessee filed appeal before the ld.CIT(A). [A] 4.2 Thus, the issue before us is whether assessee is eligible for deduction under section 80P(2)(a) of the Act, on the interest earned from Co-operative Banks or not! 4.2.1 This issue has been dealt in various decision of ITAT Pune in favour of assessee.
The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371 analysed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagars Cooperative Sale Society, and held as under : Quote,“8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub- section (2) of section 80P or not. 9. While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co- operative Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283. …………………… 34. The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co-operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of [A] the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.
But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to".
Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest income as something not allowable as a deduction under section 80P(2)(a), is set aside.”Unquote. 5.1 Thus, the Hon’ble High Court of AP &TS held that Interest Income earned by investing Income derived from Business and Profession by a Co-Operative Society was eligible for deduction u/sec.80P(2)(a) of the Act. [A] 5.2 No contrary decision of the Hon’ble jurisdictional High Court has been brought to our notice. Therefore, as per rule of precedence, the proposition of law laid down by the Hon’ble High Court of AP & TS (supra) are binding precedents for us.
The Hon’ble ITAT Pune Bench in the case of Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd. Vs. Income-tax Officer 158 taxmann.com 322 (Pune Tribunal) has held as under : Quote “7………………………..I am of the considered opinion that even the interest income earned by cooperative society on deposits made out of surplus funds with cooperative banks as well as schedule bank qualifies for deduction both under the provisions of section 80P(2)(a)(i) and section 80P(2)(d) of the Act, therefore, the reasoning given by the lower authorities on this issue cannot be accepted. Therefore, I direct the Assessing Officer to allow deduction u/s 80P(2)(a)(i) and 80P(2)(d) in respect of interest income earned from cooperative bank/scheduled bank. Thus, the ground of appeal filed by the assessee stands allowed.”Unquote 6.1 The Hon’ble ITAT Pune Bench in the case of Yashwant Nagari Sahakari Patsanstha Maryadit Vs. ITO in dated 04.06.2024 held that the assessee was [A] eligible for deduction u/sec.80P(2)(a) of the Act on the Interest earned by assessee.
7. 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 amount of Rs.11,42,735/-. Accordingly, the only Ground raised by the Assessee is allowed.
In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 29th January, 2025.