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Facts
The assessee, a co-operative credit society, claimed deduction under Section 80P(2)(a)(i) for interest income earned from investments in a cooperative bank. The Assessing Officer (AO) disallowed this deduction, treating the interest income as income from 'other sources' and not business income eligible for deduction. The CIT(A) upheld the AO's order.
Held
The Tribunal, relying on the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-operative Ltd. vs. ITO, held that interest earned from the deposit of surplus funds in banks is attributable to the business of providing credit facilities to members and thus eligible for deduction under Section 80P(2)(a)(i). The addition made under Section 68 for unsecured loans was restored to the AO for fresh adjudication.
Key Issues
Whether interest income earned from investments in banks by a co-operative society engaged in providing credit facilities to its members is eligible for deduction under Section 80P(2)(a)(i)? Whether unsecured loans, alleged to be deposits from members, can be treated as unexplained cash credits under Section 68?
Sections Cited
80P(2)(a)(i), 68, 250
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned order dated 02/02/2024 passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2018-19.
In this appeal, the assessee has raised the following grounds:-
“1.The Ld. CIT(A) has erred in confirming the addition made by Ld. AO by considering interest income earned by a co-operative society engaged in its due course of business as income from other sources, thereby denying deduction u/s 80P(2)(a)(i).
2. The Ld. CIT(A) has erred in confirming the addition made by Ld. AO by disallowing deduction u/s 80P(2)(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society.
3. The Ld. CIT(A) has erred in confirming the addition made by Ld. AO by considering deposits accepted from its members as unexplained cash credits u/s 68.”
The issue arising in ground no. 1, raised in assessee’s appeal, pertains to denial of deduction claimed under section 80P(2)(a)(i) of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a Co-operative Credit Society registered under the Maharashtra Co-operative Societies Act, 1960. The assessee is engaged in accepting deposits and lending money to the members of the society. For the year under consideration, the assessee filed its return of income on 01/10/2018 declaring a total income of Rs. Nil, inter alia, after claiming deduction of Rs.25,36,032/- under section 80P(2)(a)(i) of the Act. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served upon the assessee. During the assessment proceedings, it was observed that the assessee received interest amounting to Rs.29,69,196/- from the Co- operative Bank and after disallowing certain expenditures arrived at a net income of Rs. 25,36,032/-, which was claimed as deduction under section 80P(2)(a)(i) of the Act. Accordingly, the assessee was asked to show cause as to why the deduction claimed under section 80P(2)(a)(i) of the Act be not disallowed. The Assessing Officer (“AO”) vide order dated 25/06/2021 passed under section 143(3) read with section 144B of the Act, after considering the submission of the assessee, held that the interest income received from banks or Co-operative Societies should not be treated as income from main activities, therefore, the same is not eligible for deduction under section 80P(2)(a)(i) of the Act. The AO by placing reliance upon the decision of the Hon’ble Supreme Court in Totgar’s Co-operative Sale Society Ltd vs ITO., [2010] 322 ITR 283 (SC), held that the activity of depositing funds into banks and other Co- operative Bank cannot be said to the business activity of the assessee, as its business activity is only to provide credit facility to its members. Accordingly, the AO denied the deduction under section 80P(2)(a)(i) of the Act and made the addition of Rs.25,36,032/- under section 56 of the Act.
The learned CIT(A), vide impugned order, dismissed the grounds raised by the assessee on this issue, and held that the interest earned from deposits in other banks/Co-operative Society cannot be equated with its core income, i.e. business income eligible for deduction under section 80P(2)(a)(i) of the Act. Being aggrieved, the assessee is in appeal before us.
We have considered the submission of both sides and perused the material available on record. In the present case, the business of the assessee is to provide credit facilities to its members. The assessee collects/accepts/raise funds in the form of share capital, deposit from members, and provide credit facilities to the members only. The total funds which are contributed/collected from the members are utilised in the following manner: -
(a) To provide credit facility to its members within the frame work of the Act, Rules and bye laws of the society. (b) To invest the statutory reserves and funds as per the provisions of section 66 and 70 of the Maharashtra Co-operative Societies Act, 1960, and Rules 54 and 55 and provisions of bye laws of the society (c) To keep cash, bank balances and liquid investments to meet the working capital requirements of the society.
7. As per the assessee, the interest income so derived from the credit given to the members and also the capital cannot be made to remain idle, and their subsequent investment in other banks etc., will give rise to further interest which is attributable to the profit and gains of the business of providing credit facilities to the members only. In the present case, it is undisputed that the assessee is not carrying on any separate business for earning such interest income. Therefore, in view of the aforesaid facts, the issue arises whether such interest earned by the assessee from investments in the Co-operative Bank is attributable to the business of providing credit facilities to its members, and thus is covered under the provisions of section 80P(2)(a)(i) of the Act. We find that while deciding a similar issue the Hon’ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd. Vs. ITO, Ward-V, Tumkur, (2015) 55 taxmann.com 447 (Kar), after considering the decision of the Hon’ble Supreme Court in Totgar’s Co-operative Sale Society Ltd (supra), held that the interest earned by the Co-operative Society, which is engaged in the business of providing credit facilities to its members, from deposit of excess amount for short term in bank is eligible for deduction under section 80P(2)(a)(i) of the Act. The relevant findings of the Hon’ble Karnataka High court in the aforesaid decision, are as follows:- “6. From the aforesaid facts and rival contentions, the undisputed facts which emerges is, the sum of Rs. 1,77,305/- represents the interest earned from short-term deposits and from savings bank account. The assessee is a Cooperative Society providing credit facilities to its members. It is not carrying on any other business. The interest income earned by the assessee by providing credit facilities to its members is deposited in the banks for a short duration which has earned interest. Therefore, whether this interest is attributable to the business of providing credit facilities to its members, is the question. In this regard, it is necessary to notice the relevant provision of law i.e., Section 80P(2)(a)(i): "Deduction in respect of income of co-operative societies: 80P (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: (a) in the case of co-operative society engaged in— carrying on the business of banking or providing credit facilities to its members, or (i) (ii) to (vii)
the whole of the amount of profits and gains of business attributable to any one or more of such activities."
The word 'attributable' used in the said section is of great importance. The Apex Court had an occasion to consider the meaning of the word 'attributable' as supposed to derive from its use in various other provisions of the statute in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) as under: 'As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor- General relied, it will be pertinent to observe that the legislature, has deliberately used the expression "attributable to" and not the expression "derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression ''derived from", as, for instance, in section-80J. In our view, since the expression of wider import, namely, "attributable to'', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.' 8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted Page | 5 meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the business. A Cooperative Society which is carrying on the business of providing credit facilities to its members, earns profits and gains of business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, they cannot keep the said amount idle. If they deposit this amount in bank so as to earn interest, the said interest income is attributable to the profits and gains of the business of providing credit facilities to its members only. The society is not carrying on any separate business for earning such interest income. The income so derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act.
In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Co-operative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was bought, was invested in a short-term deposit/security. Such an amount which was retained by the assessee - Society was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or under Section 80P(2)(a)(iii) of the Act. Therefore in the facts of the said case, the Apex Court held the assessing officer was right in taxing the interest income indicated above under Section 56 of the Act. Further they made it clear that they are confining the said judgment to the facts of that case. Therefore it is clear, Supreme Court was not laying down any law.
In the instant case, the amount which was invested in banks to earn interest was not an amount due to any members. It was not the liability. It was not shown as liability in their account. In fact this amount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh State co-operative Bank Ltd., [2011] 200 Taxman 220/12 taxmann.com 66. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue.”
Therefore, respectfully following the aforesaid decision of the Hon’ble Karnataka High Court, we set aside the impugned order on this issue, and direct the AO to allow the deduction claimed under section 80P(2)(a)(i) of the Act. As a result, the ground no. 1 raised in assessee’s appeal is allowed.
9. The issue arising in ground no.2 pertains to claim of deduction under section 80P(2)(d) of the Act. We find that during the assessment proceedings as well as before the learned CIT(A), the assessee raised an alternative claim of deduction under section 80P(2)(d) of the Act in respect of interest earned from deposits in the Co-operative Banks. Since we have already allowed the claim of deduction under section 80P(2)(a)(i) of the Act, therefore, the alternative claim under section 80P(2)(d) of the Act is rendered academic, and thus is left open.
10. The issue arising in ground no. 3, raised in assessee’s appeal pertains to addition under section 68 of the Act.
We have considered the submission of both sides and perused the material available on record. The brief facts of the case pertaining to this issue are that during the assessment proceedings, it was noticed that unsecured loan of Rs.10,00,09,106/- was shown as on 31/03/2017, and as on 31/03/2018, the same has been shown as Rs.13,49,47,157/-. Since there was an increase of unsecured loan amounting to Rs.3,49,38,051/-, during the year under consideration, the assessee was asked to furnish the details of unsecured loan. In response thereto, the assessee submitted that the unsecured loan of Rs.3,49,38,051/- are deposits accepted by the assessee from its members in the form of fixed deposit, daily deposit, minor deposit, minor saving account, saving account, and member retirement benefit deposit.
Since the assessee did not furnish any evidence in support of its submission that above increase in unsecured loan reflects deposits accepted from its members, and also neither furnished ledger copies of above transaction nor bank account statement explaining the increase in unsecured loan amounting to Rs. 3,49,38,051/-, the AO considered the unsecured loan as unexplained cash credit under section 68 of the Act and added the same to the total income of the assessee. The learned CIT(A), vide impugned order, upheld the addition made under section 68 of the Act in absence of proof of creditworthiness and identity of the depositors, and the genuineness of the transaction. During the hearing, the learned AR submitted that the complete details could not be furnished before the AO due to multiple reasons, and agreed that the assessee will furnish all the details regarding the depositors if this issue is restored for consideration afresh. Since the addition has been made due to lack of evidence and in view of the undertaking given by the learned AR, in the interest of justice and fair play, we deem it appropriate to the restore this issue to the file of the jurisdictional AO for de novo adjudication, with a direction to the assessee to furnish complete details in respect of the increase in unsecured loan amounting to Rs.3,49,38,051/- during the year under consideration. Needless to mention no order shall pass without affording reasonable and adequate opportunity of hearing to the assessee. With the above directions, the impugned order on this issue is set aside, and ground no. 3 raised in assessee’s appeal is allowed for statistical purposes.
In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 25/07/2024