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Facts
The assessee, a co-operative society engaged in banking and credit facilities, filed its return of income. The Assessing Officer selected the case for limited scrutiny and disallowed a claim for deduction under Section 80P, treating interest income from investments as 'income from other sources'. The CIT(A) confirmed the Assessing Officer's order.
Held
The Tribunal held that the interest income earned by the assessee from its investments, made from surplus operational funds not immediately required for business, constituted income from its banking business and was eligible for deduction under Section 80P(2)(a)(i) of the Act. The ratio of the Supreme Court's decision in the Totgars' case was held to be distinguishable.
Key Issues
Whether interest income earned by the assessee society from its investments in fixed deposits and other securities is eligible for deduction under Section 80P(2)(a)(i) or taxable under Section 56 of the Income Tax Act.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 56, 28, 143(3)
AI-generated summary — verify with the full judgment below
ORDER PER V. DURGA RAO, J.M. : This appeal has been filed by the assessee against the order dated 31.03.2024, of the learned CIT(A)-National Faceless Appeal Centre, Delhi, relating to assessment year 2018-2019.
2 ITA.No.571/NAG./2024
Briefly stated facts of the case are that the assessee is a co-op society engaged in the business of banking and providing credit facilities to it’s members and registered under Maharashtra Co-operative Societies Act, 1960. During the assessment year 2018-2019, it filed it’s return of income declaring total income at Rs.49,56,006/-. The case of the assessee society was selected for limited scrutiny on two issues i.e., (i) Investments/Advances/Loans and (ii) deduction from total income under Chapter-VIA. The Assessing Officer issued statutory notices to the assessee calling for explanation. In response thereto, the Authorised Representative of the assessee society appeared before the Assessing Officer and furnished requisite details from time to time. On perusal of the details furnished by the assessee, the Assessing Officer noted that the assessee society had invested large amounts in Yavatmal District Central Co.op Bank in fixed deposits/bank share/reserve fund and earned interest income out of these funds. The Assessing Officer noted that the assessee earned income of Rs.33,50,742/- from such investments/deposits. The Assessing Officer
3 ITA.No.571/NAG./2024 issued show cause notice dated 18.01.2021 to the assessee calling for it explanation. After examining the submissions of the assessee the Assessing Officer noted that the assessee has earned interest income out of it’s surplus funds and not did any business activity and, therefore, the assessee society is not eligible for exemption u/sec.80P(2)(a)(i) / 80P(2)(d) of the Act. The Assessing Officer accordingly determined the total income of assessee at Rs.34,18,310/- [i.e., Income from business of Rs.16,05,294/- + Income from other sources of Rs.33,50,742/- = 49,56,036/- (-) Deduction u/sec.80P(2) of Rs.15,37,699 = Rs.34,18,337 rounded to Rs.34,18,310/-] vide order dated 15.02.2021 passed u/sec.143(3) r.w.s.143(3A) and 143(3B) of the Act.
On being aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) issued notices for explanation of the assessee during appellate proceedings. In response to the said notices, the assessee filed written submissions. After examining the written submissions, assessment order of the Assessing Officer and case laws, the 4 ITA.No.571/NAG./2024 learned CIT(A) disinclined to accept the request of the assessee to allow it’s claim u/sec.80P of the Act by observing that the interest earned by deposit or investment does not change it’s character irrespective of the fact whether such income of interest is earned from a scheduled bank or a cooperative bank and thus, the claim of assessee would not be eligible for deduction u/sec.80P of the Act. The learned CIT(A) accordingly confirmed the order of the Assessing Officer.
4. Aggrieved by the order of the learned CIT(A), the assessee carried the matter in appeal before the Tribunal and reiterated it’s submissions made before the lower authorities.
During the course of hearing, both the parties agreed before us that the issue in hand is covered by the decision of the Co–ordinate Bench of the Tribunal (the very same Bench was a party to that order), rendered in The Ismailia Urban Co–operative Society v/s ITO, ITA no.122/Nag./2023, order dated 18/06/2024, wherein the Tribunal has considered this issue in detail and held that interest income earned by the assessee-society is eligible for 5 ITA.No.571/NAG./2024 deduction under section 80P(2)(a)(i) / 80P2(d) of the Act. The relevant portion of the order reproduced below:– “9. Upon hearing both the counsel and perusing the record, we find that the issue involved is covered in favour of the assessee by a catena of decisions from ITAT as well as a decision of jurisdictional High Court. In this regard we may gainfully refer the Hon’ble Jurisdictional High Court decision in the case of CIT vs. Solapur Nagri Audyogik Sahakari Bank Ltd. 182 Taxman 231 wherein the following question was raised.
Whether the interest income received by a Co- operative Bank from investments made in Kisan Vikas Patra (‘KVP’ for short) and Indira Vikas Patra (‘IVP’ for short) out of voluntary reserves is income from banking business exempt under Section 80P(2)(a)(i) of the Income Tax Act, 1961?
After considering the issue, the Hon’ble Jurisdictional High Court has concluded as under :
“12. Therefore, in all these cases, where the surplus funds not immediately required for day-to-day banking were kept in voluntary reserves and invested in KVP/IVP, the interest income received from KVP/IVP would be income from banking
6 ITA.No.571/NAG./2024 business eligible for deduction under section 80P(2)(i) of the Act.
In the result, there being no dispute that the funds in the voluntary reserves which were utilized for investment in KVP/IVP by the co-operative banks were the funds generated from the banking business, we hold that in all these cases the Tribunal was justified in holding that the interest income received by the co-operative banks from the investments in KVP/IVP made out of the funds in the voluntary reserves were eligible for deduction under section 80P(2)(a)(i) of the Act.”
The above case law fully supports the assessee’s case. Here also surplus funds not immediately required for day to day banking were kept in Bank deposits. The income earned there from thus would be income from banking business eligible for deduction u/s 80P(2)(a)(i).
Similarly we find that similar issue was considered by this Tribunal on similar grounds raised by the Revenue in the case of MSEB Engineers Co-Op. Credit Society Ltd., wherein the ITAT, Nagpur Bench, vide order dated 05/05/2016 held as under :
“Upon hearing both the counsel and perusing the records, we find that the above issue is covered in 7 ITA.No.571/NAG./2024 favour of the assessee by the decision of this ITA, referred by the Ld. CIT(A) in his appellate order. The distinction mentioned in the grounds of appeal is not at all sustainable. We further find that this Tribunal again in the case of Chattisgarh Urban Sahakari Sanstha Maryadit Vs. ITO in vide order dated 27.05.2015 has adjudicated similar issue as under:-
“11. Upon careful consideration, we not that identical issue was the subject matter of consideration by ITAT, Ahmedabad Bench decision in the case of Dhanlaxmi Credit Cooperative Society Ltd (supra), in which one of us, learned Judicial Member, was a party. The concluding portion of the Tribunal’s decision is as under:
“4. With this brief background, we have heard both the sides. It was explained that the Co-operative Society is maintaining “operations funds” and to meet any eventuality towards repayment of deposit, the Co-operative society is maintaining some liquidated funds as a short term deposit with the banks. This issue was thoroughly
8 ITA.No.571/NAG./2024 discussed by the ITAT “B” Bench Ahmedabad in the case of The Income Tax Officer vs. M/s.Jafari Momin Vikas Co-op Credit Society Ltd., bearing (for A.Y. 2009-10) and CO No. 138/Ahd/2012 (by Assessee) order dated 31/10/2012. The relevant portion is reproduced below :-
“19. The issue dealt with by the Hon’ble Supreme Court in the case of Totgars (supra) is extracted, for appreciation of facts as under :
What is sought to be taxed under section 56 of the Act is interest income arising on the surplus invested in short term deposits and securities, which surplus was not required for business purposes? The assesse(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question before
9 ITA.No.571/NAG./2024 us, is whether interest on such deposits/securities, which strictly speaking accrues to the members’ account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of ‘income from other sources’ hence, such interest income would be taxable under section 56 of the Act, as rightly held by the assessing officer…..”
19.1 However, in the present case, on verification of the balance sheet of the assessee as on 31.3.2009, it was observed that the fixed deposits made were to maintain liquidity and that there was no surplus funds with the assessee as attributed by the Revenue. However, in regard to the case before the Hon’ble Supreme Court – “(on page 286) 7 …….. Before the assessing officer, it was argued by the assesse(s) that it had invested the funds on short term basis as the funds were not required immediately for business
10 ITA.No.571/NAG./2024 purposes and consequently, such act of investment constituted a business activity by a prudent businessman; therefore, such interest income was liable to be taxed under section 28 and not under section 56 of the Act and, consequently, the assessee(s) was entitled to deduction under section 80P(2)(a)(i) of the Act. The argument was rejected by the assessing officer as also by the Tribunal and the High Court, hence these civil appeals have been filed by the assessee(s). 19.2 From the above, it emerges that (a) that assessee (issue before the Supreme Court) had admitted before the AO that it had invested surplus funds, which were not immediately required for the purpose of its business, in short term deposits; (b) that the surplus funds arose out of the amount retained from marketing the agricultural produce of the members; (c) that assessee carried on two activities, namely, (i) acceptance of 11 ITA.No.571/NAG./2024 deposit and lending by way of deposits to the members; and (ii)marketing the agricultural produce; and (d) that the surplus had arisen emphatically from marketing of agricultural produces.
19.3 In the present case under consideration, the entire funds were utilized for the purposes of business and there were no surplus funds.
19.4 While comparing the state of affairs of the present assessee with that assessee (before the Supreme Court), the following clinching dissimilarities emerge, namely:
(1) in the case of assessee, the entire funds were utilized for the purposes of business and that there were no surplus funds:-
- in the case of Totgars, it had surplus funds, as admitted before the AO, out of retained amounts on marketing of agricultural produce of its members;
12 ITA.No.571/NAG./2024 (2) in the case of present assessee, it had not carry out any activity except in providing credit facilities to its members and that the funds were of operational funds. The only fund available with the assessee was deposits from its members and, thus, there was no surplus funds as such; - in the case of Totgars, the Hon’ble Supreme Court had not spelt out anything with regard to operational funds; 19.5 Considering the above facts, we find that there is force in the argument of the assessee that the assessee not a co- operative bank, but its nature of business was coupled with banking with its members, as it accepts deposits from and lends the same to its members. To meet any eventuality, the assessee was required to maintain some liquid funds. That was why, it was submitted by the assessee that it had invested in short- term deposits. Furthermore, the assessee had maintained overdraft
13 ITA.No.571/NAG./2024 facility with Dena Bank and the balance as at 31.3.2009 was Rs.13,69,955/- [source : Balance Sheet of the assessee available on record].
19.6 In overall consideration of all the aspects, we are of the considered view that the ratio laid down by the Hon’ble Supreme Court in the case of Totgars Co- op Sale Society Ltd (supra) cannot in any way come to the rescue of either the Ld. CIT (A) or the Revenue. In view of the above facts, we are of the firm view that the learned CIT (A) was not justified in coming to a conclusion that the sum of Rs.9,40,639/- was to be taxed u/s 56 of the Act. It is ordered accordingly.”
5. Respectfully following the above decision of the Co-ordinate Bench, we hereby hold that the benefit of deduction u/s 80P(2)(a)(i) was rightly granted by ld. CIT(A), however, he has wrongly held that the interest income is taxable u/s 56 of the Act so do not fall under the category of exempted income u/s 80P of the Act. The adverse portion of the view, which is against the assessee, of ld. CIT(A) is hereby
14 ITA.No.571/NAG./2024 reversed following the decision of the Tribunal cited supra, resultantly ground is allowed.
We find that the ratio of above case also applies to the present case. As observed in the above case law, in this case also the submissions of the assessee’s counsel is that the assessee society is maintaining operational funds and to meet any eventuality towards repayment of deposit the cooperative society is maintaining some liquidated funds as short term deposits with banks. Hence adhering to the doctrine stair desises, we hold that the assessee should be granted benefit of deduction under section 80P(2)(a)(i). Accordingly, the interest on deposits would qualify for deduction under the said section. Accordingly, we set aside the order of authorities below and decide the issue in favour of assessee. “
We further find that batch of similar appeals decided by the ITAT in favour of the assessee has also been considered by the Jurisdictional High Court. The Hon’ble Jurisdictional High Court has duly affirmed of this Tribunal. Accordingly, in the background aforesaid discussion, we do not find infirmity in the order of Ld. CIT(A).”
15 ITA.No.571/NAG./2024
In the background of aforesaid discussion and decisions, we find that CIT (A) has erred in upholding the assessment order. The Appellant Co-operative society is entitled for deduction u/s 80P as claimed in the return.”
In the above decision, the Co–ordinate Bench has already considered the judgment of the Hon’ble Supreme Court in The Totgars’ Co–operative Sale Society Ltd. (supra) and held that the facts of this case is distinguishable and not applicable to the facts of the present case. The interest income of Rs.33,50,742/- , earned by the assessee Co– operative Society from their investments made with Co– operative Bank is an income derived by it from its business activities which is assessable under the head “Income From Business” and not under the head ”Income From Other Sources”. I, therefore, respectfully following the decision of the Co–ordinate Bench in the case of The Ismailia Urban Co– operative Society vs., ITO, ITA no.122/Nag./2023, order dated 18.06.2024, set aside the impugned order passed by the learned CIT(A) and allow the grounds raised by the assessee.
16 ITA.No.571/NAG./2024
In the result, appeal filed by the assessee is allowed. Order pronounced in the open Court on 03.02.2025.