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Facts
The assessee, a co-operative society, claimed deduction under Section 80P for interest income earned from deposits made in other banks. The Assessing Officer and CIT(A) disallowed this deduction, treating the interest as income from other sources taxable under Section 56. The assessee contended that this interest income was earned during its banking activities and was eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
Held
The tribunal, relying on a Jurisdictional High Court judgment, held that the interest income received by the co-operative society from depositing its surplus funds with other banks is eligible for deduction under Section 80P(2)(a) of the Act. It concluded that such prudent financial conduct, where surplus funds are invested and generate interest, constitutes income attributable to the main business of providing credit facilities to its members.
Key Issues
Whether interest income earned by a co-operative society from depositing surplus funds in other banks is eligible for deduction under Section 80P(2)(a) of the Income Tax Act.
Sections Cited
80P, 80P(2)(a)(i), 56
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Income Tax Appellate Tribunal, COCHIN BENCH : COCHIN
Before: SHRI INTURI RAMA RAO & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 24/04/2024 in respect of the A.Y. 2020-21 and raised the following grounds .
1. The Order of the Assessing Officer as well as that of the appellate authority to the extent of objections made hereinafter are against the facts and circumstances of the case under consideration and are opposed to the provisions of law.
2. The learned assessing authority as well as the appellate authority ought to have considered the claim of Section 80P(2)(a)(i) in as much as the interest is earned by the appellant during the course of banking business and the reasoning given by themin this connection is opposed to the facts and law.
3. The assessing authority as well as the appellate authority had given a narrow interpretation to the provisions in Section 801) (2)(a)(i). Once it is found that the appellant is a PACS and doing banking activities, which is permissible under Section 80P(2)(a)(i), there is no justification to deny the deduction with respect to the income received during the carrying on of such banking activity.
4. The appellant is bound to maintain liquidity and the appellant had deposited amounts based on business prudence. Apart from this, the surplus fund available in the banking activities cannot be kept idle and hence it is usual that such surplus amounts are deposited in other banks nearby.
5. The learned Assessing Authority is not justified in disallowing the entire amount of deduction claimed aggregating to Rs.129,71,670/- for the fact that the gross total income included interest received from other banks- Rs.164,1O,077/-.The assumption taken in this regard is pretty wrong and the learned Assessing Officer cannot take such a conclusion.
Though the Assessing Officer had admitted the appellant's eligibility to get the deduction under Section 80P, it is denied to the appellant simply because the appellant received some interest income during the course of banking business, which is authorised by its bye-laws.
7. The Authorities below have utterly failed to compute the correct total income of the appellant, in the manner prescribed and the appellate Commissioner ought to have negated the roneous computation of total income taken by the Assessing U Ricer.
It is the settled law that eligibility for deduction/exemption cannot be overlooked on technical grounds, if the assessee otherwise proves entitlement for deduction/exemption. In the facts of the case under consideration, the appellant is entitled for deduction under Section SOP (2)(a)(i) on the entire income but only on technical grounds, the deduction is denied, which is unreasonable and highly discriminatory.
9. The case-laws (except that of The Mavilayil SCI3) relied upon in the Appellate Order are inapplicable in the context of the case. The interpretation given by the Appellate Commissioner, for the decision of the Apex Court in the case of the Mavilayil SCB &Ors. Vs. CIT, is erroneous and it is based on a shallow observation of the case-law. In fact, the verdict is very specific in this matter and the appellant is eligible to get deduction.
Section 80(P) clearly enables the co-operative society to claim deduction from its gross total income, when their gross total income included any income referred to in sub- section (2) of section 80P. As -per clause (i) (a) of sub- section (2) above, a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members is eligible for deduction. Thus the claim of the appellant is fully justified by going by the provisions of law and the law settled by the lion'ble Supreme Court in the case of Mavilayil Service Cooperative Bank Ltd. And Others Vs. The Commissioner of Income Tax, Calicut and Another. For the reasons stated in the above and also the grounds urged at the time of final hearing, it is just and necessary to set aside the Assessment Order as well as the Order in Appeal to the extent of objections made herein above.”
The assessee is a co-operative society registered under the provisions of the Kerala Co-operative Societies Act and filed their return of income on 08/02/2021 declaring a Nil income after claiming deduction u/s. 80P of the Act. Thereafter, the case was selected for scrutiny and the assessment has been made by disallowing the interest income earned from the deposits made in the banks as income from other sources taxable u/s. 56 of the Act. As against the said order, the assessee field an appeal before the Ld.CIT(A) and contended that the interest income earned by the assessee is in the course of their banking activity and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act.
The assessee also submitted that bifurcating the gross interest receipts as receipts from banking activities and also from other sources is
The Ld.CIT(A) had dismissed the appeal on the ground that the interest income earned from the deposits in banks are not eligible for deduction u/s. 80P of the Act. As against the said order, the assessee is in appeal before this Tribunal.
We have perused the order of the AO in which the AO had treated the interest income of Rs. 1,29,71,670/- received from the deposits made with the banks as incomes not eligible for deduction u/s. 80P(2)(a) of the Act but the said income is from other sources liable to be taxed u/s. 56 of the Act. It is not in dispute that the assessee is a co-operative society and received interest income from the members as well as the banks and claimed the said income eligible for deduction u/s. 80P(2)(a) of the Act. No doubt, the assessee is carrying on the activities of banking activities of providing credit facilities to its members and earned interest income. The assessee in order to utilise the surplus funds available with them, had wisely deposited the said excess / surplus income into the bank accounts and earned interest income out of it which is utilised in the banking activities carried on by the assessee. The deposits made by the assessee are not related to the members but only the excess income available with the assessee, which would be kept in idle if the same was not utilised, and claimed the said interest income as deduction u/s. 80P(2)(a) of the Act on the ground that it is also a part of the banking activity carried on by the assessee. We are also in agreement with the submissions made by the Ld.AR and the assessee is entitled to claim deduction u/s. 80P(2)(a) of the Act, if they had received the interest income from the deposits of the surplus funds available with them. The finding of the AO and the Ld.CIT(A) that the interest income is received from the cooperative banks and not from the co-operative societies and therefore not entitled for deduction u/s 80P of the Act is also not correct, in the facts and circumstances of the present case.
6. In support of our view, we relied on the judgement of the Hon’ble Jurisdictional High Court dated 04/09/2024 in in the case of PCIT vs. Sahayadri Co-operative Credit Society Ltd. wherein it is held as under: “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
In the above judgment, the Hon’ble Jurisdictional High Court also distinguished the judgment relied on by the AO as well as the Ld.CIT(A) in the case of Totgars Co-operative Sales Society Ltd. vs. ITO cited supra and therefore the issue was decided by the Hon’ble Jurisdictional High Court in favour of the assessee.
8. Respectfully following the above said judgment of Hon’ble Jurisdictional High Court, we are also of the view that the interest income received from the deposits of surplus funds with the other banks are also eligible for deduction u/s. 80P(2)(a) of the Act and therefore we are setting aside the orders of the AO as well as the Ld.CIT(A).
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 19th February, 2025.