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Facts
The assessee, a Co-operative Society, filed a NIL return of income after claiming a deduction under Section 80P(2)(a)(i). The Assessing Officer reopened the assessment, believing that interest income from nationalized banks was not eligible for deduction and should be taxed. The CIT(A) upheld the Assessing Officer's order.
Held
The Tribunal, following its own previous decision and other High Court judgments, held that the interest income earned by the assessee from its investments, which were maintained as liquid funds for operational needs and to meet contingencies, is eligible for deduction under Section 80P(2)(a)(i) as income derived from its banking business.
Key Issues
Whether interest income earned by a co-operative society from its investments is eligible for deduction under Section 80P(2)(a)(i) as business income or taxable as income from other sources.
Sections Cited
80P(2)(a)(i), 80P(2)(d), 147, 148, 142(1), 144B, 250, 56, 28
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, NAGPUR “SMC” BENCH : NAGPUR
Before: SHRI V. DURGA RAO
ORDER
PER V. DURGA RAO, J.M. : This appeal has been filed by the assessee against the order dated 15.03.2024, of the learned CIT(A)-National Faceless Appeal Centre, Delhi, relating to assessment year 2013-2014. 2. Briefly stated facts of the case are that the assessee is a Co-operative Society and engaged in the business of providing credit facilities to it’s member s. It is 2 ITA.No.599/NAG./2024 registered under the Maharashtra Co-Operative Societies Act, 1960. It filed it’s return of income on 27.09.2013 declaring total income at Rs.NIL by claiming deduction of Rs.36,29,660/- u/sec.80P(2)(a)(i) of the Act. Subsequently, the case of the assessee society was selected for scrutiny under CASS. During the course of assessment proceedings, the Assessing Officer noted that the assessee society has gross total income of Rs.36,29,660/- and claimed entire income as deduction u/sec.80P(2)(a)(i) of the Act and filed it’s Rs.NIL return of income. The Assessing Officer noted that the assessee society has received interest income from it’s investments with nationalized bank i.e., Canara Bank, Union Bank of India and Central Bank of India to the tune of Rs.29,10,794/- which is not eligible for deduction u/sec.80P(2)(a)(i) and 80P(2)(d) of the Act. In this factual backdrop, the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment to the tune of Rs.35,79,660/- being interest income received from nationalized banks and accordingly reopened the assessment of the assessee u/sec.147 of the Act after taking necessary 3 ITA.No.599/NAG./2024 approval from the Competent Authority. The Assessing Officer issued notice u/sec.148 as well as statutory notices u/sec.142(1) of the Act. In response to the said notice(s), the assessee filed it’s reply. However, the Assessing Officer has not satisfied with the explanation offered by the assessee and determined the total income of the assessee at Rs.35,79,660/- vide order dated 29.03.2022 passed u/sec.147 r.w.s.144B of the Act.
On being aggrieved, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) issued notices u/sec.250 of the Act to the assessee. Since, there were no response from the side of assessee, the learned CIT(A) confirmed the order passed by the Assessing Officer.
During the course of hearing, both the parties agree 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 4 ITA.No.599/NAG./2024 interest income earned by the assessee trust is eligible for 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 5 ITA.No.599/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 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 6. ITA.No.599/NAG./2024 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 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 ITA No.
7 ITA.No.599/NAG./2024 1491/Ahd/2012 (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 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 8 ITA.No.599/NAG./2024 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 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, 9 ITA.No.599/NAG./2024 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 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.
10 ITA.No.599/NAG./2024 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; (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; 11 ITA.No.599/NAG./2024 - 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 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 12 ITA.No.599/NAG./2024 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 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 13 ITA.No.599/NAG./2024 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. “ 4. 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).”
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.36,29,660/- earned by the assessee Co– 14 ITA.No.599/NAG./2024 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 Ismailia Urban Co–operative Society v/s 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.
6. In the result, appeal filed by the assessee is allowed. Order pronounced in the open Court on 03.02.2025.