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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SRI MAHAVIR SINGH
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-40, Mumbai [in short CIT(A)], in appeal No. CIT(A)-40/IT-2/2015-16 dated 10.08.2017. The Assessment was framed by the Income Tax Officer, Ward 29(1)(5), Mumbai (in short ‘ITO’) for the A.Y. 2012-13 vide order dated 19.02.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making addition interest earned on statutory reserve fund as income from other sources under section 56 of the Act. For this assessee has raised the following ground No.1: -
“Rejecting the genuine and admissible claim of Rs. 6,94,581/- out of total claim of Rs. 29,99,933/- of our appellant Credit Society u/s - 80 P (2) (a) (i) of the Act The rejected amount of Rs. 6,94,581/- being the interest earned on Statutory Reserve Fund assessed as Income from Other Sources u/s. 56 of the Act. This rejection is without considering the fact that same has been earned by the appellant Society from the source attributable to the activity of providing credit facilities to its members and same is deductible u/s 80P (2) (a) (i) of the income Tax Act, 1961. The various case laws submitted in Society's favour at the time of Appeal hearings were not considered and negated by the Ld. CIT (A)..”
Briefly stated facts are that the assessee is a co-operative credit society engaged in providing credit facility to its members. The assessee is mainly engage in advancing loans, advances to security guards who are members of the credit society. The AO during the course of assessment proceedings notice from the audit report and annual accounts that the assessee has kept statutory reserve in the FDRS of bank, which falls as under: -
Nature of fund Amount in ₹ Statutory Reserves 75,06,086 Building Fund (kept as 6,00,000 investment the Bank) Bad & Doubtful debts 10,62,580 Dividend Equalization fund 69,951 Members Development Fund 2,34,210
Member Welfare Fund 68,119 Total 95,40,946
The AO require the assessee as to why the FDRS kept in bank and interest earned to the extent of ₹ 6,94,581/- on statutory reserve of ₹ 75,06,086/- be not added to the total income of the assessee in view of the provisions of section 80(P)(2)(a) of the Act. The AO was of the view that the interest earned from FDRS in bank on statutory reserve fund cannot be treated as business income of the assessee’s society and hence, he added the same to the returned income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO by observing in Para 5.3 and 5.4 as under : -
“5.3 In is very clear from the above that regardless of the nature of the activity, Reserve Fund is to be created by any cooperative society which derives profit or can derive profit from its transactions. Thus, the fact of deriving profit is the reason for the creation of Reserve Fund and not to the activity per se. Amount to be transferred to the Reserve Fund is also linked to the profit earned. The Reserve Fund is to be invested and utilized in a particular manner and cannot be utilized for day to day business of the assessee. In view of these facts, I am of the opinion that Reserve Fund cannot be considered a part of working capital or circulating capital of the assessee and income derived therefrom cannot be considered to be income derived from business of providing credit facilities to its members. Therefore, the AO has rightly taxed the interest from investment of Reserve Fund as income under the heard “other sources”. The action of the AO in this regard is upheld and this ground of appeal is dismissed.
5.4 The assessee has itself admitted that it is not carrying on the business of banking because it has not received any license for carrying out banking business from the RBI which is a mandatory requirement for carrying out the banking business. Therefore, decision of honourable Supreme Court in the case of Karnataka State Bank Co-operative Apex Bank (supra) cannot be applied to the case of the assessee.”
Aggrieved, assessee is in second appeal before Tribunal.
I have heard the learned Sr. Departmental Representative and gone through the facts and circumstances of the case. The Society's business is to provide credit facilities to its members and making investments of its statutory and idle funds in Bank is a legal, statutorily required and integral & indivisible part of the Business of the Society. It is registered under Maharashtra Co-operative Societies Act 1960 and classified as Resource Society u/s 12 of the Maharashtra Co-operative Societies Act 1960. In the course of Business of Society, it has statutorily required to make the investments of the Reserve Funds and Other Funds u/s 70 of the Maharashtra Coop. Societies Act. Similarly, as per the Bye- laws and Circulars of the Co-op. Departments, the society is required to maintain minimum liquidity in form of Bank Balances and bank deposits to the extent of 20% to 25 % of its deposits from members, so that it can legally and smoothly carry on its objectives of making credits to its members. The Co-op. department of Govt. of Maharashtra has not prescribed maximum liquidity to be maintained but, any investment above minimum liquidity may increase the loss of the society at the cost of idle fund. Due to above all, the placement of such funds and maintenance of liquidity being imperative or having close nexus for the purpose of carrying on the business of the assessee, the income derived there from would be income from assessee’s business, as held in case of CIT vs. Karnataka State co-op. Apex Bank (2001) 251 ITR 194 (SC). Hence, the interest of Rs. 6,94,581/- earned on Investment of funds with the banks claimed as the income of business of the society. In view of this clear position, the Society being a Registered Co-operative Credit Society not failing in the definition in Co-operative Bank as per Part V of the Banking Regulation Act 1949, and it has rightly claimed deduction under Sec. 8OP (2) (a) (i) of the Act.
6. In view of the given facts above, I find that Hon’ble Supreme Court in Karnataka State co-op. Apex Bank (supra) as held as under:-
The question is whether we agree with the reasoning in M.P. Co-operative Bank Ltd.'s case (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)( i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of M.P. Co- operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within
section 80P(2)(a)( i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.”
In view of the above proposition and the facts of the case, I allow the claim of deduction and the appeal of assessee is allowed.
In the result, the appeal Assessee is allowed.
Order pronounced in the open court on 09-05-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 09.05.2018 kao kI ga[- .