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Facts
The assessee, a co-operative society, earned interest income on FDRs which was claimed as exempt. The AO added this interest to the income, relying on the Supreme Court decision in Totgars Co-Operative Sale Society Ltd. The CIT(A) sustained the addition.
Held
The Tribunal held that the interest income from investments made from statutory reserve funds and other required funds under the U.P. Cooperative Societies Act is attributable to the main business activity of the society and is therefore eligible for deduction under Section 80P. The AO did not examine the breakup of investments in this regard.
Key Issues
Whether interest income earned on FDRs from funds maintained as per statutory requirements of a cooperative society is attributable to its main business activity and eligible for deduction under Section 80P of the Income Tax Act.
Sections Cited
80P(2)(a)(iii), 80P
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Income Tax Appellate Tribunal, LUCKNOW BENCH “SMC”, LUCKNOW
Before: SHRI KUL BHARAT
O R D E R
PER KUL BHARAT, VICE PRESIDENT.
: This appeal, by the assessee, is directed against the order of the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi dated 29.06.2024 pertaining to the assessment year 2020-21. The assessee has raised the following grounds of appeal: - “1. That the Authorities below erred on facts and in law in not allowing deduction u/s 80P(2)(a)(iii) of 1. T. Act on Interest received on Investments held with Banks in form of FDR’s Rs. 30,08,496/-.
2. That the Authorities below erred in relying on the decision of Hon'ble Supreme Court in the case of Totgars Co-Operative Sale Society Ltd. Vs. ITO without appreciating that it was a sale society and the facts of the case of the assesse are distinguishable from the facts prevailing in the case of Totgars Co-operative Sale Society and hence reliance placed on the said judgement is misplaced.
Page 2 of 8 3. That the Ld. C.1.T. (A) erred on facts and in law in not considering that the A. O. has nowhere demonstrated in the Assessment Order that the Interest Income on FDR’s and Saving Bank Accounts was on account of surplus funds of the Society and in absence of such finding the decision of Hon’ble Supreme Court In case of Totgars cannot be relied upon in Appellant’s Case.
4. That the Ld. C.1.T. (A) erred on facts and in law in not considering that the Law has used the word “attributable” and not the word “derived” in section 80P so as to include income from sources other than the actual conduct of the Business of the Society and thus Interest Income on FDR’s & S. B. A/c is attributable to the business of providing credit facilities and providing assistance to cane growers for better development cane crops.
5. The Ld. C.1.T.(A) erred on facts and in law in not considering that the funds of the Society in form of Share Capital from members and the society being co-operative Society is statutorily required to maintain a Reserve Fund of a minimum 25% of its Profit and thus the investments in form of deposits with Banks to the extent of the Share Capital and Reserve Funds cannot be said to be made out of surplus funds.
6. That Ld. C.I.T. (A) erred on facts and in law in not considering that the P. F. Balance of seasonal employees of society which is held in the form of deposits are not the investments of the society and accordingly interest accruing on the said amount cannot be said to be the Income of the Society. WITHOUT PREJUDICE TO ABOVE - (7) That the Authorities below erred on facts and in law in not allowing proportionate deduction for ‘Management Expenses and ‘Interest paid debited in the Profit and. Loss Account from the gross interest of Rs. 30,08,496/-. (8) That the Authorities erred on facts and in law in not considering that only the real income/profit can be Taxed and accordingly, the expenses incurred in earning the said income has to be determined and deducted from the Gross Income. (9) That the addition made is highly excessive, contrary to the facts, law and principle of natural justice and without providing sufficient time and opportunity to have its say on the reasons relied upon by CIT (A).”
The present appeal is barred by 46 days. The assessee has filed an application seeking condonation of delay in filing of this appeal. The Ld. Counsel for the assessee reiterated the submissions as made in the application seeking condonation of delay and also the contents of the supporting affidavit. The Ld. Counsel for the assessee contended that, owing to a medical exigency, the appeal could not be filed within the prescribed time.
On the other hand, the Ld. Departmental Representative for the Revenue opposed the submissions and contended that the assessee ought to have filed the appeal within the prescribed time. It was further submitted that the facts of the case do not warrant for taking a liberal view in the matter. Therefore, he submitted that the appeal may be dismissed on the ground of limitation alone.
Heard the Ld. Representatives of the parties and perused the materials available on record. The reasons for not filing the appeal are stated to be medical exigency arising out of the serious terminal illness of the brother of the Ld. Counsel, who was diagnosed with cancer. Under these circumstances, the Ld. AR who had been instructed to file the appeal, could not do so within the stipulated period. Looking to the averments made in the application for condonation of delay along with the supporting affidavit, I am of the considered view that there was a reasonable and sufficient cause which prevented the assessee from filing the present appeal within the prescribed limitation period. We, therefore, respectfully following the judgment of the Hon'ble Supreme Court in the case of Collector of Land Acquisition Vs. MST. Katiji & Ors 167 ITR 471 (SC) hereby condone the delay and admit the appeal for hearing on merits.
The facts in brief are that the assessee is a co-operative society engaged in the business of supplying sugar cane of members/farmers to various sugar mills and also providing credit facilities to its members in addition to marketing of seeds and fertilizers to its members. During the year under Page 4 of 8 consideration, the assessee filed its return of income declaring total income at Rs. Nil after claiming the deduction u/s 80P(2)(a)(iii) of the Income Tax Act, 1961 (“Act”, for short). The case was selected for scrutiny and statutory notices were issued to the assessee. In response to the notices, the assessee society filed its replies. During the course of the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had earned income in the form of interest on fixed deposit receipts with nationalized banks amounting to Rs.30,08,496/-. The assessee claimed the said interest income as exempt. However, the AO did not accept the contention of the assessee and made an addition of the said amount, placing reliance on the judgment of the Hon’ble Supreme Court in the case of Totgar’s Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (SC). On appeal, the said addition was sustained. Aggrieved by the same, the assessee is in appeal before this Tribunal.
In the present appeal, the assessee has raised multiple grounds as much as six grounds challenging the action of the Assessing Authority for making the addition of the interest income which otherwise the assessee has claimed to be income out of the business activity of the assessee society. Apropos the grounds of appeal
, the Ld. Counsel for the assessee, at the outset, submitted that on identical facts and under similar circumstances, the addition made by the Assessing Authority was deleted by the Tribunal in the case of Co-operative Cane Development Union Ltd. vs. ACIT in 166 & 168/LKW/2023 vide order dated 30.09.2024. It was contended that the impugned addition in the present case was also made on the identical basis. It was further contended that all the objections raised by the Revenue were duly considered by the Page 5 of 8. Division Bench of this Tribunal and the issue was decided in favour of the assessee. He, therefore, prayed that the impugned addition be deleted.
7. On the other hand, the Ld. Departmental Representative for the Revenue opposed the submissions and supported the orders of the lower authorities. He further contended that the issue has been decided against the assessee. It was submitted that the assessee had earned interest income from fixed deposits, which does not constitute business income of the assessee society. Therefore, in view of the judgment of the Hon’ble Supreme Court rendered in the case of Totgar’s Cooperative Sale Society Ltd vs ITO (2010) 322 ITR 283 (SC) has been rightly disallowed.
8. I have heard the rival contention and perused the materials available on records. The assessee is a co-operative society and in Ground No. 5 of the appeal, has contended that being a cooperative society is statutorily required to maintain a Reserve Fund of a minimum 25% of its profit and thus the investments in form of deposits with banks to the extent of the share capital and reserve funds cannot be said to be made out of surplus funds. The assessee was required to maintain reserve fund under this statutory mandate. The fact is not controverted by the Revenue. The division bench of this Tribunal in 166 and 168/LKW/2023 considered the entire law on this point and decided the issue by observing as under: - “15. Thus, the principle that interest income arising from investments in statutory reserve funds and other funds as per the provisions of sections 58 and 59 of the U.P. Cooperative Societies Act is “attributable” to the main activities of that Society, has been accepted by the Revenue. The assessee is governed by the same U.P. Cooperative Societies Act and Rules as the Cooperative Cane Development Council, Lakhimpur and therefore, in its case also, it must be held that interest earned from investment made by it Page 6 of 8 as per sections 58 and 59 of the U.P. Cooperative Societies Act r.w.r.173 of the U.P. State Cooperative Rules, is attributable to the activity in which the assessee is engaged and therefore, is eligible to be deducted under section 80P(2)(a) of the Act.
16. We have further observed that the Hon’ble Madras High Court in the case of K. 2058, Saravanampatti Primary Agricultural Co-Operative Credit Societies Ltd. v. Income Tax Officer 426 ITR 251 (Mad), after considering that the Societies was required to maintain a statutory reserve of 25% under the Tamilnadu Cooperative Societies Act held that the same could not be regarded as the surplus funds of the Society as decided in M/s Totgars Cooperative Sale Society Limited (supra) and therefore, it set aside the assessment of the ld. Assessing Officer in the light of the decision of the Hon’ble Supreme Court in CIT vs. Nawanshahar Central Cooperative Bank Ltd. 289 ITR 6 (SC) ‘.Therefore, in view of the arguments made by the learned Authorized Representative, that the investment in fixed deposits and other securities or on account of the provisions of sections 58 and 59 of the U.P. Cooperative Societies Act, 1965 and section 173 of the U.P. Cooperative Societies Rules, 1968, it is quite clear that since it has been held that interest on such investment is attributable to the main activity of the assessee cooperative society, the interest earned from such investments ought not to be regarded as a surplus within the meaning of Totgar’s Case, but an interest attributable to the main activity of the assessee cooperative and therefore, deductible under section 80P. The assessee has submitted copies of its byelaws and the detailed breakup of investments and interest arising on the same. However, we observe that the ld. Assessing Officer has not examined the breakup of such investments and the interest earned on the same, with reference to the byelaws or sections 58 and 59 of the U.P. Cooperative Societies Act, 1965 and 173 of the U.P. Cooperative SocietiesRules, 1968 as he was of the view that no such interest was deductible in view of the decision of Hon’ble Supreme Court in the case of Totgars (supra). Now that the position with regard to such investments has been clarified by the Hon’ble ITAT in the case of Cooperative Cane Development Council, Lakhimpur and accepted by the Revenue in the consequent assessment, we deem it appropriate to restore the matter in all three cases back to the file of the ld. Assessing Officer for the limited purpose of re-computing the admissible deduction under section 80P with reference to the interest earned on investments made in accordance with sections 58 and 59 of the U.P. Cooperative Societies Act, 1965 and 173 of the U.P. Cooperative Societies Rules, 1968 . Ground numbers 1 to 5 are accordingly allowed. With regard to Ground no 6 on the issue of adding back the interest on PF balance of the seasonal employees of the society, we observe that the same cannot be considered to be the investments of the society and accordingly the interest accruing on the said amount cannot be said to be income of the society. Therefore, any adding back of such interest income to the income of the society is not maintainable and accordingly, additions made on this account in A.Ys. 2017-18 and 2020-21 are deleted. In view of the fact that we have allowed Ground numbers 1 to 5, Ground numbers 7 to 9 are rendered infructuous and are dismissed as such.”
9. In the light of the above binding precedents, the impugned addition cannot be sustained. I, therefore, direct the Assessing Officer to delete the impugned addition. The grounds raised in this regard are allowed.